Outsourcing in North Carolinas Furniture Industry

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Outsourcing in North Carolinas Furniture Industry

• Meenu Tewari
• UNC Chapel Hill
• April 13, 2004

2
The Facts Manufacturing lost 31,100 jobs in 2003

• The decline in several of North Carolinas
  traditional manufacturing industries has grabbed
  headlines recently
• In the last year alone (since 2003), NC lost 5
  of its total manufacturing employment, a loss of
  31,000 jobs in old and new industries
• Textiles 7,700 (21.4)
• Furniture 5,300 (8.4)
• Apparel 5,200 (16.5)
• Computers and Electronics 3,500 (8.3)

3
Facts

• Furniture makes up nearly 10 of NCs employment,
  second only after Textiles which has a share of
  13.5
• Recently, both industries have been hemorrhaging

4
Job losses in furniture are real

• The furniture industry lost 5,300 jobs between
  Jan 2003 and Jan 2004, a decline of 8.4, and
  Textiles lost 21.4 of its employment (or 7,700
  jobs)
• 75 of wood and metal furniture sold in the US in
  2002 was imported.
• Even as firms merged, downsized and shut down,
  furniture sales rose by 5 in 2003.
• Thus, the fortunes of firms and of workers in the
  industry are diverging

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The losses have had variable spatial impacts

• Some regions are hurting more than others
• E.g., Davidson county the heart of wooden
  furniture (case-goods) manufacturing in NC, with
  branch plants of all the big players has lost
  over 8200 jobs in wood products since 1992
  pushing unemployment to 9
• Wooden furniture is the segment hardest hit by
  imports. In 2002 nearly half of all case goods
  sold in the US were imported.
• But Davidson also gained 8000 service jobs.

6
The debate

• Not unreasonably, in popular and policy circles
  this erosion of NCs traditional industries has
  been linked to trade, especially NAFTA, and to
  rising immigration, especially from Mexico.

7
There are a growing number of Hispanics in the
Furniture Industry
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But the rise of Hispanic workers in NC predates
NAFTA.

• Rather than a result of looser immigration laws
  after NAFTA, it was in part a result of a tight
  labor market in furniture in the early 1990s that
  drove furniture firms to recruit skilled workers
  from Mexico
• The tight labor market was the result of
  successful efforts by NC counties to diversify
  their base beyond furniture
• As white-collar jobs arrived with slightly higher
  wages than furniture, and absorbed the labor
  pools younger workers away from furniture, local
  furniture firms began to recruit whole
  villages of skilled Mexican workers (rather than
  raise wages)
• Source personal interviews in High Point

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Is it NAFTA?

• 1990-1994 (Pre-NAFTA)
• Employment in furniture fell by 9 in NC, while
  the number of firms grew by 1
• 1994-1999 (Post-NAFTA)
• Employment fell by only 2, and there was no
  change in number of establishments
• 1999-2003
• Employment fell by 25, and number of firms by 7
• What happened in 1999-2003? China

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The sharpest declines in furniture firms in NC
came after 2000, 6 years after NAFTA was passed
11
The sharpest employment declines in NC furniture
also came after 2000
12
Thus, the Changes in the NC furniture market were
underway well before trade barriers fell

• Tight labor market in the 1990s pushed US firms
  to recruit skilled woodworkers in Mexico
• Changes in the structure of the industrys supply
  chain throughout the 1980s and early 1990s -
  rising demand led to growing capacity utilization
  and even inefficient plants were profitable
• When the cresting demand abated in the recession
  of the early 1990s, the lowest margin firms went
  under.
• When tariffs fell, intensifying competition added
  to the pressure on the bottom line, leading firms
  to find ways to cut costs. Strategies
• Mergers,
• Takeovers
• And a growing number of firms began to turn to
  China for cheaper imports

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Why China? (Why not Mexico?)

• 1. Massive investment in manufacturing capacity
  in furniture in the early 1990s
• A bulk of this came from Taiwanese investors and
  contract brokers in the early 1990s
• Taiwan was the largest exporter of furniture to
  US till about 1992.
• Gradually Taiwanese exporters shifted their
  capacity shifted to China

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Why China?

• 2. Training by key US firms during the industrys
  consolidation stage (1990s) helped move Chinese
  producers up a learning curve from cue sticks and
  bar-stools and carved furniture to dining rooms
  and bedrooms in modern styles.
• By 1996 we had a decent selection of formal
  dining room. In the last two years bedroom has
  come of age. Now all of a sudden a customer has
  to buy only 20 sets of a bedroom to bring in a
  container.

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Why China?

• 3. Meanwhile, as buyers began to ratchet up
  imports and off-shore sourcing, a key turning
  point cemented the rise of the Chinese product in
  the US
• Massive investment by two of the largest varnish
  and resin producers in China
• Technical training to local firms in the critical
  aspect of finishing

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Why China?

• 4. At the same time, key innovations were taking
  place in the shipping industry
• Containerization mixed containers
• Overseas warehousing
• Sophisticated logistics
• Investment in shipping is coming from firms
  completely unrelated to furniture the goal
  appears to be to increase shipping traffic and
  profitability on this route (China-US/west),
  rather than any industry per se.
• Outcome in furniture Even with 100-200 per
  bedroom group, the margin for landed imports is
  55 rel. to 43 for the industry as a whole

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Why China?

• 5. New investment and actors at the retail end in
  the US furniture industry are intensifying
  competition
• A traditional producer-driven industry, furniture
  in the US is turning into a quasi-buyer-driven
  industry
• Driven by a rise in innovative branding,
  retailing and marketing, new trends like
  ife-style branding are creating whole new
  niches at the retail end
• With innovations in retail, low shipping import
  costs, even small retailers are entering the
  furniture business providing new designs and
  variety this puts pressure on trad. producers.

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How are local firms responding?

• Consolidating or closing down
• Manufacturers getting involved with franchise
  stores
• Outsourcing ever wider segments of their product
  lines to China
• Focusing on the high or low end of the market.
• The middle price points are hurting the most
• Lowest price points are automating to increase
  productivity
• The highest quality segments are adopting
  innovative training and human resource practices
  to retain a versatile and skilled workforce
• Segments like upholstered furniture, custom
  designs are doing quite well competition with
  China is mainly in wood products

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What to do about this?

• The regions history is a guide to sources of
  revitalization
• Its own early success was a result not only of
  low wages, but of creating new institutional
  bases of resilience and dynamism
• Created institutions in NC that provided firms
  with access to trained labor and technologies
• Sold their success to the media the power of
  image
• Sate invested in infrastructure rails and roads

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What to do? (contd)

• Collective action, refocusing on creating new
  alliances
• The first serious setback came in 1910 mergers
  and bankruptcies were rampant
• Set of industry leaders emerged to revamp the
  industry
• Improvements in own plants and product quality
• Support and service industry access to finishes
  and input services
• Revamped distribution the package car express
• Improved labor relations group life insurance
  plan (1917) and monthly bonuses (1916)

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Finally

• Several key competitive advantages remain in US
  hands
• Design
• Domestic distribution, branding and marketing
• Catering to segments where timely delivery of
  high quality, customized products is key
• Servicing (after market)
• Even in imports, US manufacturers and retailers
  are controlling the flow of goods and designs.
• Finally, there exists a strong case for a new
  New Deal around novel partnerships between the
  state, business, labor and civic society that
  will deepen local capacities in dealing with
  uncertainty and volatility innovatively,
• including developing alternative mechanisms
  Pragmatic collaborations - for delivering
  social insurance (health-care, benefits) and
  training to workers in a volatile world.