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Labor rates in Asia rising

Retail Editor 4, Thomas Russell -- Furniture Today, January 29, 2013

HIGH POINT - Furniture importers that have held off increasing prices in recent years may be forced to raise them in 2013 because of various factors, especially rising labor costs in Asia.
Governments in Malaysia, Indonesia and Vietnam - all major furniture producing countries - have enacted or are in the process of enacting minimum wage increases this year. China's minimum wage also is said to be going up 9.5%, but an industry source said the government has not yet taken action.
In the Vietnam and China, such increases are part of ongoing efforts to help workers cope with the rising cost of living.
A minimum wage the Malaysian government announced last year is just now taking effect. This rate has been set at nearly $300 a month. It's the country's first minimum wage, and it's higher than the $180-$200 per month sources said the industry has paid most furniture factory workers in that country.
The Indonesian government this year is proposing increases of between 22% and 44%, the biggest hikes in a decade, according to industry sources. In the previous five years, wage rate increases are reported to have averaged less than 12%. A mandated increase in Surabaya, Indonesia, would put the monthly wage rate at about $180, up from the current levels of around $113 per month.
If the government were to enact a 9.5% minimum wage hike in China this year, it would raise the minimum from the current $176 to nearly $193 per month. This does not include $50 companies pay individuals for medical insurance.
The effect on China's furniture industry may be minimal as typical furniture production workers already earn between $300 and $400 per month. This is said to have risen from an estimated $150 a month several years ago as the industry has tried to retain workers as wages in other sectors have risen.
Vietnam's government imposed a 16-18% increase in the minimum wage effective Jan. 1, raising the minimum wage to about $113 per month.
So how does the math work out for furniture manufacturers? Some producers have already been paying production workers more than the minimum wage, while some entry level or unskilled workers are making that rate or possibly less.
Harvey Dondero, CEO of Vietnam-based case goods manufacturer Theodore Alexander, estimated that based on their varying skill levels, the average furniture production worker in Ho Chi Minh City makes from $150 to $175 per month, well above the new minimum. Health insurance would add another 30% to these figures.
The issue of rising wages could affect both U.S. importers and retailers that purchase and sell imports. While labor is less of a factor than materials or the cost of new equipment, it's still a big part of the product cost. In China for example, it is said to be around 8% of total production costs.
Rising labor costs could also affect the prices of raw materials such as wood, glass or metal, if suppliers of those goods also must raise their workers' wages.
Some Asian manufacturers have already raised prices of finished goods, while others are still studying the issue to determine how to minimize the impact on their U.S. customers.
Indonesian case goods manufacturer Integra is asking its U.S. customers for a price increase of about 3%. Company executive Widjaja Karli said this has been held down thanks to a favorable exchange rate.
"This helps us in balancing the cost so that we do not have to request a big amount of increases," he said.
Ernie Koh, executive director of Singapore-based case goods manufacturer Koda, said the labor increases could result in a 5-12% price increase this year.
"With the increase, there may be items that will be priced out of the market," he said, noting that the increase in Malaysia is in some cases 50% higher than what the industry is paying and will raise manufacturing costs by about 10%. "As a result, we need to continuously develop new capabilities and innovative products in order to justify the cost/price increase," he said.
Lawrence Yen, president of Taiwanese case goods manufacturer Woodworth Wooden Inds., said he is studying the issue but could not say by how much of the rising costs he will be able to pass along.
"Everything is under study and to be negotiated with my customers," Yen told Furniture/Today.
Many manufacturers, including more than 100 Malaysian producers contacted via e-mail, did not respond to Furniture/Today's requests for comment.
But a number of importers said they could be forced to raise prices for U.S. customers this year based on what they are hearing from their overseas manufacturing partners. Materials and transportation cost hikes also could affect prices.
"As much as I don't want to pass along any price increases, at some point you can't help it," said Michael Ricks, president of solid wood dining and occasional furniture specialist Furniture Classics, which sources its line in Indonesia and China. He said the company hasn't yet decided if it will raise prices in 2013.
"We haven't had a price increase in two years, but with all the increases we have received from all conceivable sides of the business, it is time to look at it," Ricks said, noting that the company looks to minimize price changes through efficiencies in packaging and construction.
Stephen Giles, president of Palmetto Home, which sources its licensed Panama Jack line in Indonesia, said he has gotten a 3% increase from one of his source factories. While this affects about half his line, he said he won't pass along an increase to his customers for now.
"We absorbed it," he said, adding that the increases were on older goods in the line. "Forging relationships is more important than margin right now."
Mike Wurster, president of case goods importer Elements International, said in mid-January that he had not yet seen pricing of finished goods affected by the minimum wage issue in Malaysia, where it sources product.
"We have heard about the minimum wage and are waiting to see what the vendors come up with," he said, adding that the company has the ability to shop other factories should future increases become too much for its lower-middle to mid-priced line. "We are hopeful we can maintain prices where they are."
Hokeun Lee, vice president of sales for Sunny Designs, said the minimum wage in Jakarta has increased by about 42% this year. In Surabaya, where most of the company's supply partners and its new factory are located, Lee said factories have been able to negotiate with labor and work out smaller increases in the 3% to 6% range.
"Labor is still pretty cheap in Indonesia, it's still about half of what China is," Lee said. "Indonesia for us is still attractive."
Sunny Designs has been absorbing the price increases, but at some point will likely have to pass some of them on, he said.
Officials with Ligna USA and Modus Furniture, which each have dedicated factories that produce their lines in Indonesia, said they are hoping to avoid raising prices or at least keep the hikes to a minimum.
"We are discussing prices with them," said Jon Richey, vice president of operations at Modus. "We need to study the wage pattern and the productivity and see how it impacts the cost, but we don't expect anything major."
Gene Clark, president of Ligna USA, the marketing arm of Jakarta-based Ligna Furniture, said his company hasn't discussed price increases. He said the factory has gone through a government audit that gives the company and other smaller manufacturers leeway in terms of implementing the wage increase. The manufacturer also has had some layoffs that will help offset any increase.
Staff Writer Heath E. Combs contributed to this report.

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