China Reinvents Itself
By Tom Lassiter
Chaos theory holds that a butterfly flapping its wings in Indonesia can alter the path of a hurricane in the Atlantic. In essence, everything’s connected.
That’s surely the case when it comes to the casual furniture industry.
Individual retailers naturally tend to give utmost importance to the state of the economy in their local trading area. For them, the health of the local economy often is the greatest influence on annual sales and profits.
Yet it’s also true that economic conditions thousands of miles away may influence the casual furniture season for a North American specialty retailer.
Case in point: The economy in many nations of the European Union is soft. Retail sales for many goods, including casual furniture, are sluggish.
Lackluster economic times in the Eurozone contribute to better times in North America.
How so? What’s the connection?
If you’re reading this magazine, you know that much of the casual furniture sold throughout Western Europe and North America – from promotionally-priced goods to high-end designer lines – is made in China.
The region along China’s south coast, where tens of thousands of factories make all sorts of goods and employ millions of workers, has been experiencing a long-term labor shortage. It’s a difficult concept to grasp, considering that China – with 1.4 billion people – is the world’s most populous nation.
Factories making outdoor living products have been able to keep up with North American orders this season because demand from Europe has been soft.
When boom times return to Europe and North America, China’s casual furniture factories will be stretched even more thinly.
|Tom Murray, NorthCape.|
“It doesn’t take a rocket scientist to see this could be a problem in a couple of years,” says Tom Murray, president of NorthCape. “For the last few years, the expansion that we’ve had in capacity, to meet demand, is that we’ve been getting workers that had traditionally worked for factories that supplied product to Europe.”
The challenge of finding dependable skilled or trainable workers in China, sometimes called “factory to the world,” was unimaginable 25 years ago.
When Western companies first started to set up manufacturing relationships in China, “It was pretty easy to do business,” recalls Bob Gaylord, president of Agio. “If you ran an ad for employees, 5,000 people would show up at any one of our factories.”
Now, he says, “All of that is ancient memories.”
An Ongoing Problem
China’s labor issues are not new, and they are worsening.
In 2010, Hearth & Home reported extensively on the challenges that China’s evolving economy and society place on manufacturing. Other factors then pressuring businesses included government-mandated increases in the minimum wage (designed to increase the standard of living and create greater consumer-buying power) and a better-educated generation of new workers.
The nation six years ago was in the midst of a massive transformation, with huge infrastructure projects under way to open up the interior provinces. Eight high-speed rail lines were under construction, designed to stimulate development in inland regions long neglected by China’s boom, which was concentrated in southern coastal areas.
The scheme to spread development inland would have a corresponding effect on China’s huge population of migratory workers. Casual furniture factories, as well as most other factories in the industrialized coastal areas, filled their positions with migratory workers. Factory wages, seemingly low by Western standards, might be double the annual income available in their rural and largely agricultural home regions.
Given the opportunity to make a better living in their home regions, workers would have less reason to travel great distances to find jobs.
|Bob Gaylord, Agio.|
The plan by China’s leadership to remake the nation and alter the long-standing practice of a migratory workforce now is bearing fruit. Workers in interior provinces found employment building the new rail lines, highways, and factories made possible by access to ports. As opportunities inland opened up, factories along the industrialized coast have had a more difficult time filling positions.
“Unfortunately, as in so many cases, the pendulum swings too far the other way, and people just stop coming” to seek jobs, Gaylord says.
Margaret Chang, president of Treasure Garden, agrees. “The structure of labor in China has changed dramatically” from just a few years ago, she says.
Dependence on a migratory workforce places particular pressures on the casual furniture industry. The weeks-long Chinese New Year holiday usually falls in late January or early February. This coincides with peak production demands to meet North American and European orders for the launch of the spring and summer season.
Tight labor supplies make the holiday break even more challenging.
People coming into the workforce now are much better educated than those who showed up to learn furniture trades 25 years ago. As in Western nations, they aspire to join the middle class, buy smartphones and cars, and seek white-collar jobs. The strenuous, often dirty work of building furniture is less appealing than it once was.
“Young people averse to demanding, low-paying factory work tend to search for jobs at Internet companies or in similar industries,” the Japanese publication Nikkei reported earlier this year.
|Albert Lord, Patio Renaissance.|
Those new to the labor force, says Albert Lord, “would rather make less and work at McDonald’s, which is a symbol of fashion and a new lifestyle in China.” Lord is owner and vice president of Marketing for Sunlord Leisure Products, maker of Patio Renaissance furniture.
Other factors contributing to the labor shortage, Chang says, include China’s policy of “one child per couple,” plus tax incentives and low-interest loans for start-up businesses. Entrepreneurs create jobs; they don’t like to work for others.
As a result, the average age of skilled workers in furniture factories is going up. This is especially true of those who hand-weave hundreds of yards of resin fiber onto a metal frame to make one item of outdoor wicker furniture.
“My partner jokes that most of the weavers he sees are the same people he saw 25 years ago,” says Murray. “We’re just not seeing people take to that job.”
China’s program limiting couples to one child has led to an aging population. China Digital Times in July published estimates that the nation would see a 23 percent decrease in its workforce by 2050, a reduction of more than 210 million workers.
Although NorthCape has been diversifying its product line in recent seasons, the company’s products remain concentrated in woven resin. Murray sees challenges ahead, especially as Europe’s economy strengthens.
“Demand will probably go up as the woven categories continue to be strong,” he says, “and that is going to create a lot of pricing pressure.”
A casual furniture factory’s greatest assets are experienced employees. “Most factories are struggling to keep a steady workforce,” Lord says, which means “not losing older and experienced workers.”
|Margaret Chang, Treasure Garden.|
Impact of Higher Wages
Labor-related costs have risen 500 percent since 2005, says Treasure Garden’s Chang. Government-mandated minimum wages have gone up 15 percent annually since 2010.
This year’s increase was somewhat less – eight percent, says Lord.
The monthly minimum wage in Zhejiang, where Treasure Garden in September 2015 built its first factory in that province, was 1,860 yuan. That’s about US$280.
But Winston Tsang, a broker who helps U.S. casual companies find Chinese manufacturing partners, points out that wages for skilled furniture workers are quite a bit higher.
Weavers, framers and metal workers may earn between 3,000 yuan (US$452) and 5,000 yuan (US$753) a month, he says, “depending on what kind of work they do.”
Pay, he says, “is much higher than minimum wage, but that’s the only way you can keep them” from leaving for other employment.
Labor shortages put additional pressure on salaries already being pushed up by government increases in the minimum wage.
Better-paid employees also want more.
“Although the eight percent (raise) is on the basic wage,” Lord says, “Chinese workers are no longer shy about asking for increases as they see the news on TV.”
Wages for weavers have tripled over the last six years, Murray says, pushed higher by supply and demand.
The Japan External Trade Organization estimates that the average monthly pay for a Chinese factory worker is the equivalent of US$424, up 29 percent over three years ago, according to a report in China Digital Times.
Chinese employers also pay most of their employees’ social security payments, which include pensions and medical care, according to the South China Morning Post.
The trend in higher minimum wages may be slowing because of pressures from weakening demand and rising expenses. Reuters in July reported that several provinces have slowed or halted hikes in the minimum wage. Heavily industrialized Guangdong province, near Hong Kong, announced that it would freeze minimum wages for two years, Bloomberg News reported in March.
Furniture executives say there have been times when groups of skilled workers, such as weavers, would leave en mass for a better-paying situation. Those opportunities often turned out to be short-lived, as those jobs usually ended once production requirements were met.
Steady employment is as important to workers as a competitive wage. Factories that cannot keep employees on a full schedule do not earn loyalty from workers.
The seasonal nature of the casual furniture business and the accompanying wild swings in production challenge factories to keep employment rolls stable. Stability is what workers want.
Retaining employees “year to year, season to season, and as many as we can for 12 months, is a top priority,” Gaylord says. “In some cases, we paid them for not working.”
Patio Renaissance uses the summer months, “when there are not as many orders, to build inventory and fill up our warehouses like squirrels filling their nests with acorns to prepare for winter,” Lord says. The onslaught of winter orders means “we need to ship double our capacity,” he explains.
Agio now “can run production pretty much as long as we want to,” he says, though “maybe not full-bore production.” The strategy keeps the most desirable workers, such as weavers, on the payroll year-round and helps guarantee their presence when demand is highest.
Agio, Patio Renaissance, and other furniture companies plan obsessively to anticipate how to balance market economies, consumer demand, seasonal variations, and manufacturing capacity. “Ideally, you can manage production like this,” Lord says. “But reality often catches you by many surprises.”
|One of NorthCape’s skilled weavers at work.|
Alternatives to China
Bloomberg News reported in June the results of a survey of members of the American Chamber of Commerce in China. More than half of respondents said increased costs were the biggest challenge to doing business there. Some 25 percent of respondents said they had already moved production out of China or were planning a move.
The New York Times in July reported that Vietnamese factory workers earn less than half the wages of a Chinese worker. In Bangladesh, factory workers are paid less than 25 percent of a Chinese worker’s salary.
But furniture executives interviewed say moving production out of China is not a panacea. In fact, it may not be possible at all.
Labor costs and an adequate supply of workers are just one issue influencing relocation decisions. Other factors include access to supplies and components, infrastructure such as ports and highways, local and national regulations, the absence of social unrest, and stable governments. The list of viable alternatives to manufacturing in China quickly becomes quite short.
Some casual furniture makers have found manufacturing options in Vietnam. But, as Murray points out, the population is “only 90 million” and would be unable to handle a huge influx of factories from China.
Other factors make Vietnam less appealing. That nation has experienced labor unrest in recent years that has erupted into violence and destruction. Factories thought to belong to Chinese interests have been set ablaze. The violence and destruction has roots in long-standing animosity between China and Vietnam.
Indonesia, with a population of 249 million, would seem to offer manufacturers an option. But its population is scattered over hundreds of islands, creating logistical challenges. (Thousands more islands are not permanently inhabited.)
India and other developing nations in Asia are not often mentioned as options for relocating factories. “Challenges include corruption and constantly changing policy from the local government,” Chang says.
Gaylord expects that most casual companies will continue to manufacture in China for the foreseeable future. “Everybody is being smarter about how they recruit, hire and retain employees,” he says. “I really don’t see us going any place.”
But Lord, of Patio Renaissance, expects to see a gradual shift. Currently, he says, “There are only a few of us that have set up second factories in Vietnam and Indonesia. But once these factories start production in full power, it will bring large impacts to the food chain in China.
“This will first apply to the products for mass merchants, and eventually to the entire industry,” Lord says. “I think the situation will be totally different in 10 years.”
The most tantalizing option is to return elements of casual furniture manufacturing to the United States. “When does it become viable?” Gaylord asks. “I don’t have the answer to that. You can’t get skilled labor in this country. It’s at a real crisis level.”
“China will remain in its position of manufacturing powerhouse,” says Chang of Treasure Garden. The combined benefits available in the dense manufacturing region “cannot be simply transferred.”
When Treasure Garden looked to expand its manufacturing capacity in 2008, it chose to move within China.
The company built its second factory in an area 900 kilometers (560 miles) north of its original factory in Ningbo. The main reason, Chang says, was access to labor.
The prevailing wage in Qingdao, a world-class port city, is lower than in the south. Treasure Garden since has expanded its operations in Qingdao by constructing a third factory.
NorthCape’s Murray points out that moving a factory within China to take advantage of cheaper labor can present management problems. Seasoned managers may not want to relocate to more rural areas after living in a more developed region, with all its amenities. Relocation, he says, “can be a double-edged sword. It’s something we have to live with for however long I am doing this.”
Lord says he’s not aware of any major manufacturer of casual furniture shifting production to factories in inland China. Any advantage in lower labor expenses, he says, is more than offset by the additional cost of transporting bulky goods back to the coast for export.
|Inside a Treasure Garden facility in China.|
Automation is one strategy being adopted by Chinese manufacturers to reduce the impact of the labor shortage. In Dongguan, a city of more than 6.5 million in Guangdong Province, robots replaced nearly 44,000 workers last year. The machines cut factory costs by nearly 10 percent, the local government told Bloomberg News.
The provincial government pays incentives up to 50,000 yuan per robot to companies that buy a local manufacturer’s machines to replace workers.
A local mayor told Bloomberg News that “for society at large, some workers will be laid off. But it’s good for companies to improve their competitiveness.” A push is on to push out or transform “low-end factories” and attract new businesses to “campus-style, high-tech parks.”
Treasure Garden introduced “new industrial systems, including robotics” about 10 years ago, Chang says. These and other upgrades improved productivity by as much as 35 percent.
Chinese manufacturing facilities that achieve full automation are called “dark factories.” Robots don’t need light to carry out their tasks on the production line.
However, Nikkei reports that China’s slowing economy makes manufacturers reluctant to spend on capital improvements such as robotics. As a result, “Little progress has been made on this front.”
Robotics has limited applications in making most casual furniture. “Seventy percent of Patio Renaissance’s products are woven, which cannot be done by robotic machines,” Lord says. The company’s only robots handle welding chores.
The Bottom Line
Satisfying specialty retailers and North American consumers with outdoor furniture made in Chinese factories creates a constant juggling act for casual furniture companies.
Hikes in manufacturing costs have forced companies to seek efficiencies in production and elsewhere in order to protect margins, Murray says.
“We’re focusing more on efficiency,” he says, because almost non-existent inflation in the United States makes it difficult to pass along costs to consumers.
“There’s been a squeeze at every level on margins,” Murray says, “to deliver a product to the end-user in the U.S. that frankly is a little bit spoiled.”
The key to profitability in the wake of the Great Recession has been for manufacturers and retailers to concentrate on products that command a higher price. In outdoor furniture, these typically are products featuring better design, higher-quality materials, and higher-quality construction. Manufacturers for years have depended on Chinese factories to supply many of these products and likely will do so going forward.
“We are probably making 60 percent of the product (volume) that we were making 10 years ago,” says Agio’s Gaylord. Unit sales tend to follow housing sales, and the U.S. single-family home market is still in recovery mode following the housing bust.
However, Agio and many other makers of better-quality casual furniture are thriving. “Our dollars are up,” Gaylord says, “because we’re selling better goods.”
Average retail prices for Agio’s products, he says, probably have doubled in the last decade, pushed upward by the widespread popularity of luxurious deep seating and fireside chat groups.
“Consumers are no longer looking for simple, inexpensive dining sets,” Gaylord says, restating what specialty furniture dealers have known for years.
So, for one more season, China’s ability to produce what North American consumers want, at prices they can afford, has benefitted the casual furniture industry.
What will the myriad of global connections bring to the industry in 2017? Stay tuned.