Chinese sources face variety of cost pressures
By Thomas Russell -- Furniture Today, April 6, 2008
High Point — To find the roots of this spring's price hikes, retailers need look no further than the manufacturers producing the merchandise that ends up on their sales floors.
Interviews with Chinese manufacturers at furniture shows in southern China last month gave a glimpse into some of the pressures their businesses are facing.
Those pressures range from rising raw materials and labor costs to the weakening of the dollar against the yuan. In addition, many companies are facing the reduction and planned elimination of the Value Added Tax rebate the government has been giving to exporters — which in effect is a significant tax increase for the producers.
Ying Zhu, U.S. and European market manager for upholstery producer Beijing Qumei Furniture Co., said his raw materials costs rose 30% in 2007. In addition, the dollar has dropped 6.5% against the yuan since last September, meaning that Chinese-made goods are that much more expensive in dollars.
In response, the company raised prices to its U.S customers 8% last year.
Labor costs also have risen, largely because China's government has begun enforcing minimum wage and overtime rules. That essentially cuts into profits of companies that didn't play by those rules before. Food costs also are rising, a factor that affects companies that house and feed their employees.
Upholstery and occasional producer Densing Furniture Development said it saw a 10%-15% increase in labor costs in the past year, which brought the average monthly pay up to $200, including medical insurance.
Accent and dining furniture specialist Guangzhou Magnet Handicraft Co. Ltd has seen its costs rise about 20% in the past year-and-a-half, said spokeswoman Sabrina Wang. It passed along 3% to 5% of that increase to its U.S. customers in the past year, she said, noting that the company has attempted to absorb as much of the increase as possible by boosting efficiency.
"If we only increase the cost to our customers it is no good," she said. "It decreases our competitive advantage."
She added that cost pressures will continue this year, particularly for companies not used to new labor regulations.
Other Chinese manufacturers interviewed at the shows claimed that their costs have risen between 60% and 75% since the start of this year alone.
Rising costs also affect companies with production in and outside China. Case goods producer Koda, which has production facilities in China, Malaysia and Vietnam, has seen its costs rise 15% to 20% over the past two years, said Ernie Koh, senior vice president of marketing. As a result, it has had to raise prices between 4% and 11% over the same period.
"It's a tough market," Koh said, although he added that the pricing issue hasn't slowed his company's U.S. sales. "You must work harder to get business, but there is still business to be had."
Still, cost issues have caused some Asian manufacturers to lose U.S. business and shift their emphasis to other markets including Europe, where the currency has shown more stability against the dollar.
"The Euro is going stronger (than the dollar) and (European buyers) are looking for quality and style," said Sam Wong, vice president of leather upholstery producer Novo Sofa Ltd. "Americans come in and look for one thing — price."
Many companies also are focusing more of their efforts on the domestic Chinese market, which in some cases also affords them a chance to sell at higher price points than in the U.S. market.
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