Explore the Chinese furniture industry
Xu Meiqi│許美琪 / Translated by Greg Niederhaus
2013 OUTLOOK: Chinese Furniture Industry
The Real Problem with the Chinese Furniture Industry
2013 OUTLOOK: Chinese Furniture Industry
In 2013, The Chinese furniture industry and other domestic industries are facing new and key historical growth patterns and industrial restructuring. For Chinese furniture industry entrepreneurs, the real problem is an urgent need to modernize and become enlightened. There is a need for more entrepreneurial spirit and a modern sense of business ethics. It is also necessary to improve perspective on changes in the global economy, and there is an urgent need for strengthening the modern knowledge of enterprise management and experiential learning. Basically, industry on the whole in China needs to transform. Therefore, output and export growth is not the priority anymore, rather; sustainable development is the industry's most significant and pressing issue.
If we measure quantitative growth by resource consumption, environmental constraints and limited resources become problems. If labor productivity is not vigorously improved, industry as it stands will not be able to handle sharp labor cost rises and the pressure of rising raw material costs. Sustainable development of the industry will be greatly reduced, a huge industry will become vastly stagnant.
Accordingly, outlook in 2013 shows that China's furniture industry will undergo tremendous changes:
— Capacity in manufacturing will reduce and a large number of enterprises producing inefficient products that are not marketable will be eliminated. There will also be a lot of mergers and consolidation, to optimize the structure of the industry. This is a positive factor.
Exports to China's traditional markets in developed countries will face problems such as "U.S. wood products formaldehyde regulations," "European Timber Rules", the "Lacey Act" and other non-trade barriers, thus losing some market share. Exports will face more obvious comparative advantages in emerging countries such as Vietnam, Malaysia, Thailand and other Southeast Asian countries. Also, Central Asian countries such as Turkey, Eastern European countries such as Poland and Romania, and South American countries such as Mexico present strong competition. These are forcing China's furniture export producers to improve labor productivity.
The furniture retail industry will undergo major changes as well. With the emergence of Chinese furniture malls and a serious excess of capacity, the professional market will face a "big reshuffle" of structuring. No longer will "a dominant" monopoly be sustainable. With the emergence of a variety of new forms of e-commerce, O to O furniture marketing (online and offline combined) will be popular. Adding to this is a variety of furniture retail models such as community stores, supermarkets, shops and so on. Trends show that Chinese furniture retail will become more diverse and personalized.
Furniture is a part of everyone's daily life, so it is a perpetual industry. China's industrialization and urbanization is expanding deeply, so there is a long term market ahead. China has the largest domestic market in the world. In this sense, the Chinese furniture industry has a better opportunity than any other country in the world.
The Problem of "Capacity Reduction”
Currently, the Chinese furniture industry is facing a crisis of extreme market downturn. The deep-seated problem is serious excess capacity. The most fundamental solution is a restructuring of production capacity.
What exactly is this so-called "excess capacity" in the Chinese furniture industry? Initially it comes down to simple quantitative industrial growth and exportation of low end products in the global industrial chain. Secondly, domestic sales are subject to clamping by "commercial real estate". Manufacturing and retail sales of value-added products and services are adding to exploitation, causing losses in endogenous self-development.
From 1988 to 2007, value of furniture production increased by 130 times in 19 years, an increase of 29.27% per year. Furniture export grew by 294 times, an increase of 34.90% yearly. Subsequently, between 2008 and 2011, the Chinese furniture industry output and export continued to grow at high speed, and in 2011 China's furniture industry output reached RMB$ 1,010 billion. This is an increase of 16.09%. Exports reached 38.882 billion U.S. dollars, an increase of 15.31%. This quantitative growth has put China's furniture industry output and export to the extreme.
Between January and April in 2011, the output value of larger enterprises producing furniture was RMB$137.34 billion, and the total amount of furniture pieces reached 209.39 million. That is an average of RMB$655.90 per piece. During the same period in 2012, the output value of larger enterprises producing furniture totaled RMB$161.25 billion. Production of furniture rose to 219.11 billion pieces with an average of RMB$735.93 per piece. The unit price increased by 12%. However, if taking into account that the average price of raw materials rose by about 20% and that the price of labor increased about 20%, judging by price per piece of furniture, there was no increase in the value of Chinese furniture, rather a decline (Note: furniture raw materials accounted for about 50-60% of production costs, and wage costs accounted for about 10-15%. Hence, due to the above two increases, overall costs increased by about 30%, which is much higher than 12% of the above prices).
There are about 50,000 Chinese furniture factories today, 91% being small and medium enterprises. About 40,500 of them produced an output value of RMB$730 billion in 2009. Output value of larger enterprises was RMB$340.911 billion, accounting for 46.7%. The output value of small and medium enterprises was 53.3%. This data shows that small and medium enterprises made a lower contribution to China's furniture industry. Many of them exhibit backward production capacity and their labor productivity is low. These tendencies must be properly eliminated to optimize the structure of the entire industry.
As far as high-end labor productivity, the Chinese furniture industry probably sees an output value of RMB$ 250,000-350,000 per person annually. More commonly, output value ranges from RMB$150,00-200,000 per person. Output value among advanced international furniture producers reached 100,000-150,000 USD per person. In other words, labor productivity in advanced countries is 5-6 fold compared to China's. On the other hand, timber utilization in large Chinese enterprises was 60%, while small and medium enterprises used only 50-55% of their stock. Compared with the 70 percent material usage of international furniture industries, production in China is very inefficient. Therefore, industrial upgrading through improved labor productivity, reduced material consumption is a major priority, thereby reducing production costs.
In furniture retail, the most important factor is marketing. In China there is very little effort towards developing marketing skills, and this needs to change. This will substantially lower "transaction costs", which will lead to lower prices for consumers. It will also facilitate development of the retailers. We look forward to the day professional retailers are consciously aware of the problem, which will implement change and transformation. If they improve their marketing skills, it won't require much investment and it is the most cost-effective way to lower their overhead costs. It will also greatly reduce turmoil in the industry.
Product Development to Meet China's Domestic Conditions
At the end of the year, Shanghai Furniture Association conducted an inspection gauging the integrity of furniture retailers in Shanghai. I was personally involved. I took this opportunity to visit the various major furniture stores and inspect their products. Shanghai is among the top-tier cities in China, and there are various furniture stores specializing in different grades of furniture. Some target high-end markets, while others offer products with price scales starting at the middle range on up. Still, others offer low-end furniture.
Retailers generally offer the following types of furniture domestically: international designs (like cabinets made of press board), European classical furniture (so-called "Neo-classical" designs), traditional Chinese style (furniture made of mahogany), Korean style which incorporates both Japanese and Chinese design called "Neo Chinese Style". This new style was developed to create a new market for solid wood furniture. In my opinion, most of these styles don't quite match up with typical Chinese consumers' needs. It is hard to imagine most of this furniture in a typical Chinese person's home, be it due to the shapes, dimensions or designs. All of the afore-mentioned styles of furniture suit the cultures and lifestyles of consumers in different countries. Furthermore, the Chinese mahogany furniture is all styled after the Ming and Qing Dynasty eras. It emits a type of "haunted house" feeling, or, so to speak, "recalling of the souls". What is considered "Neo-Chinese" furniture lacks the essence of China and imitates the bulkiness of the designs during Han and Tang Dynasties. They even incorporate characters that give off a feeling of ancient times. In a rapidly developing China, should modern furniture should be like this? I am confused. I think that furniture product development should meet China's current conditions, and I recommend the following to designers: They should take extreme measures in understanding the overall market and needs of the consumers. They should also examine changes that are occurring in Western furniture design, especially in Europe. In Europe furniture design is very mature and always developing, as is the sense of aesthetics. Chinese peoples' sense of aesthetics is evolving as well, and designers need to grasp these trends more accurately. They need to combine an awareness of traditional feeling with the modern needs of the consumer in their search for inspiration. Salaries are on the rise in China, so it is also important to consider this trend when it comes to pricing.
Overall, designers should understand what sort of furniture will both please the eye and fit the practical needs of the end user. They should focus more on designing for low to mid-range pricing, and aim to provide aesthetically pleasing, practical and affordable furniture. In developing high-end products, they should research post-modernist style and develop high aesthetic value and fashionable products. In short, get in touch with the needs of modern people, and design really good furniture for them.
Patterns Change Rules , Rules Change Patterns
One meaning of the word "pattern" refers to the current situation . "Rules" is a term that generally refers to jointly developed and publicly accepted rules and regulations developed by unified representatives of the group in compliance. An interactive relationship exists in which "patterns change the rules , and rules change the patterns." The Chinese furniture industry now has an output value of RMB$ 1,010 billion, or 38.882 billion U.S. dollars ( 2011 ) . Since GDP is the sum of values added from each industry sector, and considering that the increase in the value of China's furniture industry was about half of China's GDP growth in 2011 (approximately RMB$50 billion), so the Chinese furniture industry contributed about 1% of the national GDP for 2011 (approximately RMB$47 trillion ). Chinese furniture industry exports to the global furniture trade volume accounted for approximately 40% . However, the Chinese furniture industry is an inefficient industry because despite of its huge manufacturing capacity, there is no corresponding circulation domestically. Constantly changing regulations of the market economy and wholesale trade rules have changed the conditions for furniture retail. Similar fluctuating regulations of commercial real estate actually control a secondary market in the furniture retail channels. Some furniture brands rely on commercial real estate construction in which they open shops to cater to developing areas. Smaller manufacturers don't have the output capacity to compete, so they rely on the large brands to open up stores where their products can be sold. The whole furniture retail system seems to have only this way to exist. It's a quagmire. I believe that modernization of the Chinese furniture industry requires the separation of industry and commerce. China should cultivate independent furniture circulation (furniture distribution and retail) , and gradually create furniture manufacturing leaders. Cultivating relationships with circulation retailers will eventually put manufacturers' products closer to the market, closer to the consumer, and create a consumer oriented industry. Secondly, the whole industry should implement cultural transformation and modernization of business ethics. A social market economy requires a process of continuous improvement, including the areas of philosophy, science and technology, production standards, management and other aspects of furniture culture modernization. Meanwhile, contract methodology, credit management and other aspects of business ethics need to modernize. If the Chinese furniture industry is able to achieve this transformation and modernization, the patterns will change greatly, and corresponding rules will change accordingly. By this time, the rules will change the patterns. Because the new rules will be fairly standard rules in market economy, professional markets such as "commercial real estate" will not dominate and control forms of furniture retailing. That must not be tolerated. Issues such as copying intellectual property rights and commercial fraud will be curbed. As long as the whole industry acts towards modernization with the faith and courage to face this tough world of business, collectively industrial wisdom will reform away from outdated concepts. The obstacles the furniture industry faces now will be obsolete and development of new productive forces will prevail. With a new pattern and new rules, furniture faces a bright future.
The Real Problem with the Chinese Furniture Industry
The Chinese furniture industry now faces decreased exports and a domestic market slump. Production costs have risen sharply for manufacturers, distributors suffer heavy losses, and there is serious oversupply to the professional market and businesses due to excessive expansion. Additionally, rising rents and market risks are forcing dealers to close their stores.
Exports have slowed partly because of the slow U.S. economic recovery, a comprehensive European recession and economic stagnation or even recession in Japan. Lack of market demand in major developed countries is a problem while other emerging countries have a comparative advantage over the Chinese and are claiming more and more of the Chinese export market. Furthermore, the international community is placing constant emphasis on Environmentalism, and China needs to address this issue vigilantly in order to meet stricter standards set in The US and Europe.
The Chinese market is suffering an economic down cycle due to domestic macro-control measures. If we look introspectively, the Chinese furniture industry has not efficiently addressed issues related to low to middle end furniture consumers. In recent years, looking at products offered at exhibitions, we lack "rationally designed" furniture that is cost-effective. What we see is not appropriate; the furniture lacks certain aesthetic value, good functionality, ruggedness and environmentally friendly quality.
Rising costs for manufacturers are surfacing because of increases in raw material prices, wages and social security costs. But in essence, labor productivity has not improved to keep up with costs rising costs. Other logistics and transaction costs are rising, and one reason is because the construction industry chain is not complete, there are no corresponding ancillary production service sectors.
Dealers' losses have been caused by the depressed market and a decline in sales resulting shrinking profits. The "professional market" provides no mainstream sales model, there are no independent dealer sales channels, and blind expansion of the professional market have all led to additional costs for dealers.
There are gaps in the professional market, and its vast sprawling has had inevitable consequences. For example, within 10 kilometers from a given big city, they have built two 100,000 square meter large-scale shopping malls, which in itself is a violation of commercial logic. One particular home retail group has opened up a 4,000,000 square meter shopping mall, but it accounts for a share of less than RMB$20 billion per year in the Chinese furniture market. That figure is tantamount to sales of just RMB$5,000 per square meter a year. Adding this to increased utility costs and salesperson salary costs, businesses are doomed. Obviously, these business layout decisions impact retail hard, and only bare "real estate" interests in mind.
If we can identify the problems that the furniture industry in China is facing, we can certainly find solutions and fix the problems.
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