Adjusting to changes in China
Marc Barnes -- Casual Living, July 20, 2010
Importing outdoor furniture from China involves two basic needs: Production and shipping. Both have become more challenging in the last two years and particularly worrisome this season.
At the very moment an improving economy and good weather have led many consumers to venture back into stores, both manufacturing output and inbound shipments have slowed.
"I don't know which is worse, to have product and nobody to buy it or to have people to buy it and no product," said veteran furniture industry analyst Jerry Epperson. "The casual business has such a short window - a bad four to six weeks can kill you."
Those who took a risk by ordering early in hopes of an improving economy will end up being rewarded, Epperson said, while those who took a more conservative approach and instead opted to sell down last season's inventory without replenishing stocks will be hurt.
"Retailers every day are telling me that they are losing a sale because they can't find product," Epperson said. "We spent most of 2009 reducing inventories and now for the most part, the pipeline is pretty clean, and it's going to be time consuming to fill it back up again."
That means this year is the year for adjustment, said Russ Sorenson, president of Hanamint.
"A lot of people are taking a wait-and-see approach, making minimum orders because they are nervous," said Sorenson. "And now business has picked up and they are scrambling to meet demand."
Analysts and manufacturers say the global downturn caused many plants to shut down. At the same time, the Chinese government directed many workers to go to work on needed infrastructure projects in internal provinces. That caused labor shortages and resulting slowdowns when demand began to return.
On the shipping front, prices have increased for two reasons. The downturn caused many shipping companies to idle what some accounts have placed at hundreds of vessels, which means there's now more demand than supply. Additionally, shipping companies lost money during the downturn and are looking for ways to offset the losses.
Bob Gaylord, president of Agio, said today's problems were foretold a year ago when idled plants meant unemployed workers. The government had no interest in idled workers perhaps staging an uprising and urged them to move west, where many of them were from because there a better chance for them to find jobs working in public works projects. By the time manufacturing returned, the workers had moved on.
Additionally, the Chinese government implemented new rules and regulations, including a minimum wage and a 40-hour workweek, along with social security.
Gaylord said bringing Chinese workers closer to Western standards in pay and working conditions will being changes in business dynamics.
"It's going to change the way we do business in China, but I think that overall, it is going to get rid of more fly-by-night operations," Gaylord said. "What I mean by that is companies that have no real investment in infrastructure, engineering, design or customer service. Fly-by-night companies run for four or five months and are gone. They're not going to be able to do that anymore."
Oliver Ma, president and CEO of Treasure Garden, agreed. Ma said those who are in business long term know that treating employees well and compensating them fairly ensures both loyalty and success, no matter whether the plant is in China or anywhere else in the world.
"When (workers) are looking for job security, they will try to find a good company," Ma said.
Bew White, president of Summer Classics, said he could see some wage inflation, prompted in part by mass merchandisers. "We have enough margin to do that; the mass (merchandisers) guys don't have as much room to play," White said. "The mass is causing the labor shortage - they need a lot of labor at low prices to make the product."
White said many employees compare notes on their earnings and then demand pay increases. He said manufacturers must pay the going rate or risk losing their employees for other employment.
Problems in shipping are another headache for importers. Sorenson said the shipping problems last year came about when the shipping companies began charging a special surcharge of $400 per shipment.
"If you had a signed contract, they couldn't stop the product from shipping and a lot of people called their bluff on it, but it would end up being delayed by a week or two weeks or four weeks," Sorenson said. "They were overbooking containers the same way that airlines overbook passengers."
To drive up costs further, the shipping companies parked ships to reduce capacity, justify rate increases and tighten up availability.
Gaylord said part of the problem has to do with the nature of furniture: Pay a surcharge if you are carrying a container full of iPods and the cost is spread out among hundreds of individual items and is therefore meaningless. Pay the same surcharge when a container holds 12 wicker sets and it raises the cost to the point where profit margins deteriorate or disappear.
Fred Ilse, president of Outdoor Lifestyle, said he is seeing some of the same shipping slowdowns, but his particular situation is different in that he uses some components from China that are small enough to ship by air.
"What has happened is that we have got a lot of dealers calling in here to get product because they can't get my competitor's products or they are quoted eight to 12 weeks," said Ilse. "Consumers won't wait that long."
Ma said that the smartest retailers intentionally follow the news, understand the world is changing and adjust the way they do business. "Some of these shops do not change and they still wait until the last minute to make a decision," Ma said. "You have to work smarter, not harder only, and the best way to work smarter is to understand the real situation and catch up to utilize all worldwide available resources and useful advantages ... (because) when some of them wake up, the world has passed them by and they cannot react and the business is gone."
The best idea might be to first consider whether China is the best location for manufacturing, said Daniel Harris, an expert on Chinese law with the Seattle, Wash.-based law firm HarrisMoure who has represented outdoor furniture manufacturers in China for years. If you aren't doing at least 20% better in China than you could be doing elsewhere, it might not be your best choice.