After being involved in import and export for over a quarter of a century, I had just returned from a consulting job in China and stopped by a friend's office for a visit. My friend related how he felt his company could no longer compete with Chinese labor costs, so he had decided to pare his manufacturing operations and increase his import program. He was going to become a marketer of imports. He said he was going to avoid the larger retailers, as most of them were directly importing more and more themselves. He asked me what I thought.
I told him that I hated to burst his hopes, but during my visit to China I had been asked by a Chinese furniture manufacturer to set up a sales force to call on small- to medium-sized U.S. retailers - the same group of customers his new strategy was targeting.
After my return to the United States, two more Chinese companies currently selling through manufacturers contacted me. They felt that their products would be 25 percent cheaper in the marketplace if they did not have the expense of selling through American manufacturers. I had also heard a number of Chinese companies were planning to start their own showrooms at the High Point Furniture Market . This move would totally cut American manufacturers out of the distribution system.
For a long minute my friend sat quietly. Then he said words to the effect that the Chinese were born out-of-wedlock and that their mothers were old female dogs. "How long do you think they have been planning this?" he asked. I said I thought since shortly after they sold the very first table legs into this country.
"You mean companies like mine are dead?" my friend asked. My answer to him - and to any of you who are simply becoming marketing fronts for Asian companies - is that you may well be closed within a few years. Foreign companies have no loyalty to any American manufacturer.
My message is that you need to be adding a lot of value to imported products as they pass through your factories. Or you better be providing exceptional service to your dealers. Or you better have a niche market. Unless you are manufacturing internationally competitive products, you are dead. Radical problems, like many in our industry are facing, require radical solutions, and not just the mundane conventional reactions that got by in the past.
Why the problem?
Our industry has not reacted quickly and appropriately to imports. Other industries have been in our situation and survived, even grown as the result of the competition. Most people in our industry say the furniture industry's problem is cheap Chinese labor. I say the problem is simply that many leaders in our industry do not know how to tackle this problem effectively.
I once read a study of organizational efficiency done at a business school. The student who did the study looked at all kinds of organizations. He looked at different kinds of business organizations, sports organizations, governmental organizations, entertainment organizations and so forth. He concluded that the most inefficient kinds of organizations were armies. One of the committee members reviewing his dissertation asked him, "If armies are so inefficient, how do they win wars?" The student answered, "They fight other armies."
That is how it has been in the furniture industry. We have been competing with other Americans for generations. We have all played more or less by the same rules and lived in the same culture. All American furniture manufacturers have similar wage structures, OSHA , air pollution laws, fair trade rules and so on. The international economy we have been forcibly dragged into has few rules. The playing field is not level. There are no wage rules, no safety rules, no air pollution rules and no fair trade agreements that are universal.
The first reaction is that everything is stacked against us. That is simply not true. American woodworkers can compete internationally, but they have to quit thinking like businesspeople who compete only in America, and start thinking like international businesspeople.
Historically, we have been more or less equal in manufacturing ability, and therefore, have concentrated our dollars on sales and marketing. We have not been organized to compete in the manufacturing arena, but the marketing arena. Manufacturing efficiencies have been treated as secondary, less important than marketing. Furniture manufacturers have not spent their dollars on manufacturing advancements, but on samples and markets.
I remember reading a number of years ago that 92 percent of the presidents of AFMA companies come out of sales and marketing. I doubt that number has changed much. Any business school will tell you that if you have a manufacturing company with manufacturing problems, you should have leadership from that arena. We are not doing that. The people in the driver's seats of our companies most often spend only a few minutes a week with their vice president of manufacturing. They often spend even less time with our workers or in our plants.
Most of our company presidents think like the sales and marketing people they are. They spend their time with customers, designers and sales reps. We spend thousands of dollars a year on products and markets and little by comparison on improved efficiency or updating our antiquated plants. We still concentrate on marketing our way out of problems rather than demanding more from our manufacturing people.
The most recent marketing innovation has been the use of name celebrities and brands such as Martha Stewart, Kathy Ireland, Ralph Lauren and Alexander Julian. This is a great marketing scheme. It really is. This approach has been used to effectively sell both imported and American made goods. However, if it is an effort to counter pressure from imports, then it only puts off the inevitable.
If you can't compete in manufacturing, the best marketing in the world is only a short-term solution. Being internationally competitive is the real issue for the furniture industry. We as an industry have historically thought in terms of a 1 or 2 percent increase in efficiency per year, if that. As manufacturers, we were fighting other armies. Along come the Asians, and suddenly we have to think in terms of a 20 percent decrease in price, and we don't know how to do that. We have met a new kind of competitor that is not an army.
Fine old furniture companies that once said they would not import now do. But many of these same companies have not taken the proven routes to improving output, better engineering and programs such as lean manufacturing. The furniture industry has the least number of engineers per capita of any American industry. Department of labor statistics in the year 2000 indicated that we had only 763 industrial engineers in the furniture industry nationwide. This figure represents 1,100 furniture companies in the United States. We have less than one truly qualified engineer per 1.4 companies.
The second point I would like to make has to do with comparing costs. I combined the cost sheets of three groups of furniture (two red oak and one cherry for a total of 31 pieces) made by a Chinese company for whom I was working. I used the cost system of an American company for whom I used to work and determined cost of the same product. This comparison was done with the product in the box in an American furniture manufacturer's warehouse.
The American-made group was calculated as if it came from the company's packing room into the warehouse. The Chinese pieces came from China and were delivered into the company's warehouse.
Many times when people compare prices of domestic products with imports, they do not have all of their costs considered. Here, costs were determined for all items in a box ready to ship to dealers. Note that overhead consists of factory overhead, selling, general and administrative cost. I did this comparison at what the accountants call the EBITDA line (earnings before interest, tax, depreciation and amortization).
That is profit; tax and certain other numbers are left out so as to have as nearly as possible apples-to-apples comparison. Please note, I make no assumption that what I am presenting here is universal. It is one sampling. Obviously, there are companies on both sides of the Pacific that do better and worse. I simply present this example as one I know to be real.
Note how close the overhead figures are. The electric cost at this Chinese facility, like many in China, is quite high. Many plants use diesel fuel to generate their own electricity. Further, their freight cost is higher than ours. Additional study yielded that if the product had hand carvings, the Chinese advantage increased. If the furniture had a style that came from high-production machines, the advantage shrunk.
Also, in the Chinese overhead area I have included the broker, whose costs run from as low as 1 percent to as high as 22 percent. Here I used 5 percent. I also put the cost of importing and interest expense into the overhead figures.
Lumber is very costly to the Chinese. I calculated what the same groups would be out of solid wood and the Chinese material was higher than the American. The last figures I saw indicated that the Chinese import approximately 70 percent of their lumber from the United States and New Zealand.
Because labor is the primary issue, I wanted to better understand its impact in more detail.
Here we see the effect of machine content versus labor content. Note, the Chinese advantage shrinks when we use high production machines rather than cheap labor. The Chinese do labor intensive operations, such as hand carving, quite cheaply.
American manufacturers should be jumping on reduced shipping times. The fact that so few companies have drastically reduced shipping times demonstrates how little we are doing to compete. The Chinese company I used in my cost comparison can get product through its plants in three weeks. Many American manufacturers still try to have the luxury of six to eight weeks manufacturing time. Therefore, the disadvantage the Chinese have in spending three to four weeks to get across the Pacific is lost.
Some dealers will pay more for quick ship and the lower inventory that will give them. Most American companies cannot realize that advantage as they are currently structured. Again, most American companies just keep on doing what they have always done in rough times. As Earl Knightingale says, "If you keep on doing what you have always done, you will keep on getting what you always got."
This article is based on a speech delivered to the Appalachian Hardwood Manufacturers Assn. and the Wood Component Manufacturers Association.
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