Occasional importers like China's strengths

By Thomas Russell -- Furniture Today, May 6, 2007

High Point — Rising labor and raw materials costs and uncertainties about the value of the yuan aren't causing a mass exodus out of China on the part of U.S. occasional and accent furniture sources.

On the contrary, some companies see the values — represented in hand-painted looks, hand-carved elements and complex finishes — as a big reason to stay put.

Stein World, a promotional occasional and accent resource, now sources 100% of its mix from southern China. Chief Operating Officer David MacIntosh said the company has no plans to move sourcing to other Asian countries.

"At the moment, there are no plans to source in other places," he said, noting that he also doesn't expect to make any price hikes this year. "We feel we have so much more to accomplish in China

"It's obvious to everyone that there are extreme pressures, but the partnerships we have with our factories and the fact that we provide so much volume helps us in that area."

Occasional and accent specialist AA Importing sources about 60% of its mix in China, according to President Richard Tallin. He also doesn't plan to change that mix anytime soon.

"We will keep the 60% in China," he said, noting that the company also sources in India, the Philippines and Egypt. "There would have to be some real drastic changes to move it. They are efficient and they meet deadlines."

Sarreid, an upper-middle to high-end resource for case goods, accent and occasional furniture, sources 55% of its product mix in China. Another 30% comes out of India, and the rest is split between Vietnam and the Philippines.

President Alex Sarratt said he is not expecting to change the sourcing mix this year.

"That is pretty settled in," he said of the percentages. "I find the Chinese very easy to get along with and very competent. The business attitude and can-do attitude of the Chinese shows that the Chinese live to make money. That's kind of evident."

Dan Sumner, vice president of sales and marketing for accent and occasional specialist Butler Specialty Co., said most of his dollar volume comes out of China, with the balance coming out of the Philippines.

The length of the relationships with the 10 factories Butler sources from in China range from 5 to 15 years, he said. As a result, that helps diminish, if not eliminate pricing pressure.

In fact, he touts the fact that since early 2006, the company has lowered prices an average of 15% to 20% on 1,000 of the 1,100 pieces in its line.

"All of this was done with zero change to the product," he said, without revealing specifics of how Butler achieved those reductions. "This is just Butler working very diligently to keep our costs down and pass it (the savings) along to the retailer."

He doesn't deny the ongoing pricing pressures, but notes that Butler is poised to be competitive this year with its Asian-sourced goods.

"While there may be some fluctuating costs over there, they are not significant," he said, adding that there is an overall tremendous pressure in the market "to be as sharp and as competitive as possible."

"Fortunately for us, we have some huge advantages over our competition to keep costs down."

With price pressures on their Chinese sources growing, several companies interviewed for this story admitted they expect to pass along price increases to retailers in the low to mid single digits. In some cases, these could be limited to specific items requiring more engineering or time to manufacture.

But some believe the answer is not to simply move to a new source country.

Instead, they continue to seek efficiencies in the way the product is made or shipped.

Sarratt said his company works with its sources to cut costs on various items without sacrificing quality. For instance, a casting can be engineered to be thinner. A plant also can put a brass cover over a knob or pull instead of a solid-brass piece of hardware.

Tallin, of AA Importing, said the size of individual items can be made slightly smaller. That not only saves in raw materials costs, but also enables an importer to save on ocean freight by fitting more items in a container.

"You try to do those kinds of things and reconstruct the piece," he said, noting that pricing pressures remain a challenge particularly with the fluctuation of the yuan and proposed changes to rebates on a 17% value-added tax charged on goods made in China. The rebates are being shifted from 13% to 11%, but that 11% is slated to be eliminated by year end, according to sources familiar with the issue. "The last resort is to raise the price because you don't want to upset the apple cart on a good seller."

Still, Tallin said, it will likely be difficult for many importers to avoid any price increases on certain item.

"You can't absorb it all," he said.

In fairness to China, other source countries face the same pricing pressure, particularly on items such as rubberwood, MDF, packaging materials and petroleum-based finishes that are affected by worldwide oil prices.

But on top of the other issues facing China, some importers could move more of their business to other source countries.

Dan Angus, senior vice president of sales and marketing for occasional and casual dining specialist Ligo Products, said the company gets a small amount of product out of south China, but does most of its business in Thailand, Indonesia and Malaysia. It also gets about 10% out of Vietnam and is looking to do more sourcing there in both occasional and casual dining.

"In Vietnam, a lot of it is about their willingness to partner up with distributors and have deliveries made on time and do what they say they are going to do," he said. "They are also willing to do new things. It's just a very hungry country right now and is growing, so it is definitely a bigger destination than it was a year ago."

Joff Roy, president of occasional and casual dining importer Jofran, said his company imports more than 90% of its occasional from China, with the remainder coming from Vietnam and Thailand. This year, he said, the company will increase its occasional sourcing in Thailand and Vietnam. However, it will not switch inline groups from one factory to another, meaning the percentages made in China will not necessarily change that dramatically.

Ray Steele, vice president of sales for occasional and accent resource Ultimate Accents, said that his company now gets 98% of its goods out of China and the rest out of the Philippines. It will still source from the Philippines, but this year plans to get as much as 30% of its product mix from Vietnam.

"China has a real problem with labor and it's more critical now than it's ever been," Steele said, noting that the Chinese furniture factories continue to compete with auto and electronics factories for workers. This competitive situation has pushed labor costs from about $70 to $100 per month a year ago to $100 to $150 per month today, according to one source who operates furniture plants of his own in Tianjin.

Steele said the benefits of Vietnam furniture factories include their ability to mix containers and to make product with mixed-media elements.

"In Vietnam, they are more creative like the Filipinos," he said noting that he will likely concentrate on factories in the Ho Chi Minh City area. "They are more attuned to mixed media than China is."

China, he said, remains a leader in terms of capacity, artistry and craftsmanship. But he also believes China has caused a deflationary environment in furniture that his company has tried to counterbalance by adding more value.

He also believes the spread between China and Vietnam is narrowing "as more and more vendors realize you can buy specific items in Vietnam that you can't in China."

Others agree. That includes Jeff Dilley, president and CEO of Exsero Ltd., a firm that provides consulting and support for furniture companies looking to source in Vietnam. Having seen Vietnam's rise in outdoor and bedroom furniture, he views occasional as the next level of opportunity for both manufacturers and importers.

And given Vietnam's low labor costs and its experience in the handicraft industry, he sees it being able to handle both the medium and high end.

"Moving into home accents, both in home furnishings and home décor, is where Vietnam has strength as a source," he said. "Vietnam has a strong background in handicrafts and people are going there for new, eclectic things."

Magnussen Home is another key occasional resource that plans to do more sourcing in Vietnam, a factor that will be enhanced by its recent opening of a warehouse in Ho Chi Minh City. Earlier this year, Vice President of Merchandising and Design Nathan Cressman said the company was doing about 85% of its occasional sourcing in China with another 10% in Cebu and 5% in Vietnam.

While it plans to keep doing business in its same source factories in China, it doesn't want its eggs sitting in one basket. That same strategy occurred when it shifted most of its bedroom to other countries, including Vietnam, Malaysia and Indonesia.

"We like to have that other country that is competitive," said Cressman.