Indonesia makes gains
Thomas Russell -- Furniture Today, October 8, 2012
JAKARTA, Indonesia - On a narrow piece of land outside the Ligna Furniture headquarters here, workers planted several rows of teak about five years ago. The trees, officials say, will take another few decades to reach full maturity.
Given the length of time, some older workers and management might not be around to see that happen. Instead, the company planted them primarily for aesthetic reasons for the next generation of Ligna workers and management who will carry the company forward.
Like other wood furniture manufacturers, Ligna is working hard to ensure the company's success in the years and decades ahead. Yet it h asn't been easy in a recessionary environment that has plagued the United States, its largest export market.
Since the financial crisis in 2008, sales to the U.S. market have fallen 45%-50%, according to Susilo Alexander Hadinoto, director. In early August, the plant was running at about 50% capacity.
"It is still very soft out there," he said. "I can see some light ahead, and some hope at the end of the tunnel, but it is a matter of how strong we are."
To combat the downturn, the company is looking to do some OEM work and hospitality furniture. In August, it was working at a fast pace to complete its first hotel project.
"Hopefully that will help us fill up our capacity," he said, adding that the company is still seeking the right OEM partners for residential furniture.
Given the country's large population and supply of plantation-grown hardwoods, he believes Indonesia is well positioned to capture future growth. But he admits there are challenges too. For one, he doesn't believe the infrastructure is as good as in China.
"The roads and ports, those things can be improved," he said, noting that the government spends a relatively small part of its budget on infrastructure. "They are investing more compared to five years ago, but it is not enough to support the economy. Roads could be widened - it takes an hour to an hour and a half to get from my factory to the port."
While Ligna and some other manufacturers interviewed for this story can ship inline goods in 60 days or less, they also face longer transit times. That's because goods shipped from Surabaya ports have to be routed to either Singapore or Hong Kong, where they are transferred to larger vessels, which can add several days to the shipping time compared with China, Singapore or even Vietnam, which have large port facilities.
Hadinoto said it is also a challenge for Indonesian manufacturers to predict what types of styles will sell at a given point in time, and relies heavily on U.S. marketing arm Ligna U.S.A. for guidance.
In early August, bedroom and dining room producer Iga Abadi in the Surabaya region further east was shipping about 50 to 60 containe rs per month, which is about half of its 120-container-per-month capacity.
While it still gets a good amount of business from core U.S. customers such as A-America and Progressive, it too has been affected by the global economy. In August, its plant had 950 workers, down from about 1,200 in 2003. Even the number of carvers was down to about 25, compared with as many as 100 to 150 in years past, figures based on the piece work available at a given time.
On top of that, the company said it has faced higher materials and energy costs, which has in turn put pressure on profits. Officials said the company has kept these costs under control through a combination of layoffs, equipment purchases and regular maintenance on machines.
As a result, plant officials said, they only have passed along small price increases since 2005, which they believe makes them more competitive. And they continue to look for ways to bring higher value to their core product categories, ranging from added function to the use of higher quality veneers.
Other companies are also being proactive as they look to secure growth opportunities as the economy rebounds.
That includes bedroom producer Domusindo Perdana, which primarily sells through its U.S. marketing arm Modus Furniture. In August, the plant was running at about 20% less than its 150-container-per-month capacity, according to officials at the Surabaya area facility.
To combat the soft economy, the company has invested in its plant, including a 20% increase in building space on its 28-acre campus roughly five years ago. It also installed a roller conveyor system that eliminated the need to move product around on the factory floor via hand pallets. This reduced defects caused by handling by about 30%, officials said.
In addition, the company has invested in other new equipment to improve its efficiencies, which has helped it maintain competitive price points on its bedrooms. Today, four piece sets are priced at $400-$500 FOB Surabaya, which officials said is a 10-15% drop since 2008.
"Every factory got hit since 2009, so we tried to get more orders by getting a better price," said Hendry Liando, export manager. "We tried to be more efficient in our finishing line and get a better yield on our wood."
He also said the company has secured new suppliers to get better prices on materials ranging from hardware out of China to MDF and particleboard from Malaysia and Thailand.
These same countries, particularly China, Vietnam and Malaysia, continue to compete with Indonesia. With shipments of $12 billion in furniture to the United States in 2011, China dwarfs its nearest Asian competitor, Vietnam, which had shipments of $1.7 billion in 2011, and Malaysia, which had shipments of $671.5 million, based on Furniture/Today research.
Indonesia, by comparison, shipped $520.8 million, placing it at number eight on the list of top 10 importers, just behind Taiwan.
Wood furniture, primarily bedroom, accounts for much of Indonesia's activity. This is partly because Indonesia, unlike China, doesn't have U.S. antidumping duties on the category. Vietnam has been the primary beneficiary of this business since it also doesn't have duties on bedroom. But Indonesia has secured some upper-middle to upper-end wood bedroom and dining room business from the likes of Bernhardt, Stanley, Hooker Furniture, Ethan Allen and Lexington Home Brands.
Surabaya-area case goods manufacturer Katwara lists Hooker, Bernhardt, Lexington and Kincaid as some of its major U.S. customers. Yet, despite the strength of such accounts, times have been challenging in the last several years due to the soft economy. In 2008 and 2009, sales dropped 50%, but have rebounded 20-25% in each of the past two years and are up again this year, said Cendekia Candranegara, owner.
"We have a lot of new samples and orders," he said, adding that the plant is running at about 80% of its estimated 100-container-per-month capacity. After an expansion to be completed later this year, this will rise to 150 containers per month, with the addition of a new finishing line.
With more orders, he also expects the plant to add a second shift.
While it gets most its wood primarily from Indonesia suppliers, Katwara, like other factories, imports some other materials such as hardware and MDF from other Asian countries, making it susceptible to price increases.
"In the future, we will use more local materials," Candranegara said. "That will help keep our costs competitive and our lead times too."
Surabaya area case goods producer Tjakrindo Mas names Bernhardt, Stanley and Lexington among its key customers. With one of the largest factories in Indonesia at 2.5 million square feet, it has room to grow with those and other customers.
"The door is open," said Kurnia Wan, export manager. "We also have land to grow. It depends on business."
But facing rising materials costs in the range of 20% alone in the past year - including goods sourced from countries like China, Malaysia and Thailand - it is challenged to come up with new ways to remain price competitive. MDF that is CARB Phase II compliant, he said, is 30% more expensive than regular board.
"Our problem is materials," Wan said.
The company already produces some of its own mixed media, including woven sea grass and metal accents. It also has 10 CNC machines and three finishing lines, making it one of the more automated facilities in the area. In the future, it plans to buy more high tech equipment, which officials said will further boost quality and efficiency.
Integra is another big indoor residential case goods producer with one of the largest plants in Indonesia at more than 2 million square feet. The $100 million company also does some outdoor furniture and hospitality.
Company executive Widjaja Karli said Integra hasn't been affected as much as some other producers during the recession, due largely to the growth in its customer base, which includes Casana, Coaster, Palmetto Home, Lexington, American Woodcrafters, Rooms To Go, Pier One and Target.
"We also got bedroom business from China and Vietnam, so we didn't lose too much business," he said. "Twenty to 30 percent growth a year has been consistent even during the recession. We managed to pick up new customers to avoid a drop in business."
He also believes Indonesia has an advantage in furniture production due to the availability of workers, wood supply and the stability of the currency.
Panca Wana, another Surabaya area case goods plant that produces primarily for Ethan Allen, said business was stagnant during the peak of the financial crisis in 2008. However, sales rose an estimated 20% a year from 2009 to 2011.
"We partner with the right people," said Kristanto Siswanto, director of marketing. "By partnering with a few select companies in the U.S., we can grow together.... It has worked well for us."
He added that the company continues to invest in high tech equipment. Its plant has 30 CNC routers - up from 12 seven years ago - some of which do complex carvings on chairs. It plans to add another three to five of these machines in the near future, according to Siswanto.
This has contributed to some reduction in headcount - the company has 800 workers compared with 1,600 seven years ago - but makes the plant more efficient and competitive, he said. For example, labor only represents about 6% of production costs, a low figure by any standards, U.S. or international.
While the company has room to grow - it was utilizing 80% of its 150-container-per-month capacity in August - it also wants to be careful not to grow too fast, Siswanto said.
"We want to pick and choose who we work with," he said.