In 1997 Chinese wood furniture makers exported $572 million of their products to the U.S. Those shipments represented only 16 percent of total wood furniture imports that year. Overall total wood furniture imports that year were only 35 percent of U.S. domestic production.

 By 2006, a mere nine years later, producers around the world had mastered the design execution and quality needed to penetrate the U.S. market in depth. Imports had jumped to 125 percent of domestic output. In the face of that import tidal wave, over 250 U.S. wood furniture plants had been shuttered. China took over the number one ranking among source countries for imported wood furniture and alone accounted for over 47 percent of the import market with $5.16 billion in shipments. The second ranked supplier, Canada, held only a 12 percent share. The center of the furniture universe had shifted to China.

 What competitive advantages did China hold that enabled this dramatic shift?

 The critical impetus behind China’s development was not only its wage rates relative to those in the U.S. but also to Taiwan. Producers in Taiwan were the first to introduce low-cost, foreign-made wood furniture to the U.S. market. In the early 1990s that country was the leading source of imported wood furniture for the U.S. By 1995, however, a Taiwanese worker’s wage had risen to 35 percent of that earned by his counterpart in the U.S. Factories in Taiwan rapidly became uncompetitive. Seeing their revenues shrink, Taiwanese furniture entrepreneurs began relocating their factories to the Chinese mainland and found four key factors for success:

 1.Productive Labor – Furniture making always migrates to where labor rates are cheap. It stays where labor is productive as compared to other locations. China’s wages combined with their native productivity resulted in a labor cost as low as five percent of selling price versus 25 percent in the U.S.

 2.Low Cost of Entry – Land and buildings were cheap, low labor costs enabled the use of less costly process machinery, and safety/environmental regulations were less stringent. The result: the capital investment required to set up a furniture plant in China was two thirds lower than in the U.S.

 3.Government Incentives – The Chinese government offered low cost plant sites, provided rebates of value-added taxes on export sales, and enabled a steady flow of workers for the new plants.

 4.Fixed Currency Exchange Rate – For the decade prior to July 2005, China pegged its renminbi to the U.S. dollar. This condition eliminated all foreign exchange risk from purchase contracts/agreements.

Taiwanese entrepreneurs

 Other success factors included, first, the availability of efficient ocean transport that allowed fast, inexpensive delivery of finished products and receipt of popular North American veneers and lumber and, second, the advent of internet which enabled the ready exchange of drawings and photographs. And don’t underestimate the importance of the full-fledged infrastructure of coatings, machinery, tooling, and materials suppliers that quickly developed to support the producers.

 These Taiwanese entrepreneurs also held one other critical advantage: Willing U.S. customers. By the mid-1990s Taiwan and other source countries had proven the benefits of importing: design-rich products at 20 to 30 percent lower costs featuring carving and marquetry that could not be duplicated by U.S. plants. Our industry and its customers fast became addicted to these products. The die was cast. The blow that brought the death of U.S. wood furniture had been struck.

 Without the momentum brought to China by that initial group of Taiwanese producers, China’s furniture industry would undoubtedly have started slower and experienced a lower growth trajectory.

 So what’s happened to China’s wood furniture industry since 2006?

 Starting in 2007 with the global recession, U.S. wood furniture imports fell 30 percent over three years. China’s share of those shipments dropped from 47 to 41 percent. Many experts say that share will continue to fall. The halcyon days of Chinese wood furniture production for exports seem to be over.

China's export decline

 Beyond the recession, three other factors have contributed to China’s furniture making decline:

 1.Inflation & Higher Wages – China has entered the tricky stage of economic development where a transition from investment-heavy, export-led growth must give way to more domestic consumption. Historically that change is rarely smooth and has brought inflation. Government policy is now encouraging the development of higher value-added industries in place of labor-intensive businesses like furniture making. That policy envisions annual increases of 15 percent in wages over the next five years on top of the 120 percent increase seen in the five years between 2003 and 2008.

 2.Lower Productivity Growth – Importantly this increase in wages has not been offset by productivity gains. The resulting higher labor costs are negatively hitting producers’ profitability. Their choices are to raise selling prices, absorb lower margins, or invest in equipment that improves productivity. Only the latter will recoup lost competitiveness.

 3.Falling U.S. Dollar – Since July 2005 our dollar has fallen 23 percent vs. the Chinese renminbi. This factor negatively impacts the producer’s revenues as each dollar of sales yields fewer renminbi.

 4.Anti-Dumping Duties – In 2005 our Department of Commerce began levying duties on Chinese wood bedroom imports at an average rate of 7.25 percent. China’s shipments of that product category fell by $700 million through 2010, a 50 percent drop. Last year these duties were renewed for five more years.

 Make no mistake. China is not disappearing as a key source of wood furniture for our market. Taiwan, the country whose furniture industry declined as China’s rose, remains among the top ten source countries. But the negative factors above have combined to open the U.S. market to other countries with an appetite for furniture making. Vietnam, for example, can thank the anti-dumping duties for the $560 million growth of its wood bedroom shipments since 2005.

 Bottom Line: The center of the furniture universe is shifting. Nothing lasts forever. The era when a single superpower completely dominated the top ten of wood furniture sources is passing. Opportunities now abound for producers everywhere, even in the U.S., to grow their shipments to our market. Who will take up that challenge?

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