Today’s headlines claim the end is near for China as the cheap workshop for the world. Costs there are rising, and other factors such as fast delivery are calling for the manufacture of many products in the United States. As a result, companies like Caterpillar, GE, and Apple are re-shoring processes and jobs to the U.S. According to The Economist, sending work offshore is maturing, tailing off, and to some extent being reversed. Is it time to consider bringing wood furniture manufacturing back to the U.S.?
Before giving the last rites to Chinese manufacturing, especially for products like wood furniture, take a look at recent economic data. While China’s share of total U.S. wood furniture imports fell from a high of 47.5 percent in 2007 to 43.7 percent in 3Q2012, producers there remain the number one source country. While growing at a faster pace than China, second place Vietnam accounts for only 19.4 percent.
In spite of improving U.S. furniture sales through three quarters of 2012, domestic production of wood furniture declined 1.4 percent. Imports from all countries grew nearly 6 percent. U.S. factories’ share of the wood furniture market here continues to fall. Wood furniture imports hold just under 74 percent of our market, up from 71.5 percent a year earlier.
In the face of this falling market share, more U.S. wood furniture producers like Henkel Harris, Craftique, and Thornwood recently closed shop. Lincolnton Furniture, a 2012 start-up with the latest in equipment, lasted less than a year. The U.S. wood furniture industry, in spite of the hype of increased re-shoring, is far from healthy.
Labor cost shift
The shift of manufacturing out of the U.S. over the last 15 years was driven by the arbitrage of labor costs. When Chinese workers cost $0.50 per hour in the early 2000s vs. an average of $13 or so for a U.S. furniture worker, the latter’s superior productivity was insufficient to stem the outflow of jobs. According to the Boston Consulting Group, Chinese wage rates have risen by 10 percent annually from 2000 to 2005 and by 19 percent per year from 2006 through 2010. During that period the annual increase in U.S. wages was in the low single digits. The wage gap is closing.
The results of China’s declining competitiveness have been plant closures and a shift from exporting to supplying their domestic market. Savvy factory owners there are correctly shifting from reliance on low wages to investing in labor saving equipment and manufacturing products that feature unique, difficult-to- copy attributes. Also don’t forget labor productivity in China trumps that of other foreign countries. Plenty of headroom exists for cost reduction. Combined with the country’s excellent infrastructure and network of well-developed material/component suppliers, China should remain an important producer of wood furniture for the world’s consumers for years to come.
Even if you believe China is losing its competitive edge, other developing countries are increasing their share of global furniture production. Beyond Vietnam, countries like Indonesia and Malaysia are growing their export wood furniture industries. In 3Q2012 shipments to the U.S. from these countries rose by 5.3 and 8.4 percent respectively. Viable alternatives to China do exist. Should the U.S. be considered?
The search for reliable, competitive sources for wood furniture continues. No one seems to know where the industry will move next. Without question, the location decision is becoming more complicated. Many strategic elements beyond wage rates must be considered in that analysis:
1. Length of the supply chain – Orders to Asian factories often take 120 to 150 days to land in the U.S. Significant inventory investment is often required to satisfy consumers now expecting Amazon-like fast delivery. Long lead times also increase the risk of obsolescence.
2. Sensitivity to transport costs and disruptions – Supply chains beginning offshore depend on containerized ocean transport. Presently the cost of shipping a 40-foot container from the Far East to the U.S. is relatively stable. However in 2010 the rate jumped by a third as capacity tightened. Last November’s unforeseen dock strike at the ports serving Los Angeles reminded importers of the vulnerability of supply chain disruption. Similar disruption at East and Gulf Coast ports was averted earlier this year only through federal mediation.
3. Product development time – With designers and factories separated by thousands of miles, the time required to develop new products is lengthened. The inevitable tweaking of details, especially the finish, often requires face time at the manufacturer.
4. Required level of customization – Offering choices of fabric, finish, hardware, and other product attributes is now part of many companies’ marketing strategy. The scope of customization options can depend on a supplier’s capabilities and the time required to deliver them.
5. Reliance on independent factories – Without an ownership interest, little, if any control, can be exerted on suppliers’ cost efficiency and delivery reliability. Often you will find competitors buying from the same plants that you use.
6. Risk of disintermediation – Many foreign factories are selling direct to retailers. Importers who now link foreign factories to U.S. resellers can find themselves squeezed out of the value chain tomorrow.
Those considering re-shoring to the U.S. must also face the shortage of competitive U.S. capacity for wood furniture production. Remember that over 250 U.S. furniture factories have been shuttered since 2000. Few efficient plants remain. And building new facilities here can be hindered by a myriad of regulations not to mention the high cost of construction and equipment. The scarcity of skilled workers who can man today’s sophisticated machinery is also a major concern.
Bottom Line: Offshoring is no longer a no-brainer. Re-shoring to the U.S. is only one choice. The optimal alternative is not always obvious and depends on more than just comparative wage rates. Proceed with caution and keep an open, inquisitive mind.
Have something to say? Share your thoughts with us in the comments below.