Two years ago, Shi Dan wondered if he would lose his job when his company Lacquer Craft, one of China’s largest furniture makers, saw a sharp fall in export orders. But today, Shi, who heads the domestic sales department of the company, is busier than ever.
Lacquer Craft, which has long supplied furniture to large retailers in the US, was hit hard by the global economic crisis. Worse still, the cost of labour and raw materials were rising sharply in China and the government also lowered or eliminated many export tax rebates. Many furniture makers were shedding staff to survive.
In desperation, Lacquer Craft decided to turn away from exports and focus on the domestic market. And there were reasons to be optimistic. Analysts expect the mainland furniture market to grow an annualised 15% in the next decade, says the China Building Decoration Association.
But changing course hasn’t been straightforward. Shi soon realised that Lacquer Craft had to completely redesign all of its products for Chinese consumers. For instance, beds are smaller in China compared with the Western world; sofas are also not as wide.
His biggest headaches, however, have been in branding and distribution. In the past Lacquer Craft has thrived on a bare-bones business model: using low-cost labour to assemble products on a contract basis for foreign distributors and retailers. By focusing on pure manufacturing, the company concentrated on keeping costs down and volumes up, without the distraction of sales and marketing.
But going local means the furniture maker has to sell under its own brand and designs, something it had not done in the past. In 2008, Lacquer Craft started hiring new designers and workers and setting up retail stores around the country. Domestic sales now account for 50% of business, compared to 10% before the crisis. Shi is now looking to open the 14th Lacquer Craft store in Guangzhou.
Shi warns against adopting a similar strategy without solid financial backing. For a start, setting up retail stores is costly. As a result, most furniture makers distribute their products through existing furniture retailers. Large retailer chains like Red Star Furniture and Easy Home also operate by leasing space to vendors.
But this model is hardly ideal as it leaves manufacturers at the mercy of the retailers. Shi told the Southern Weekly that, in the last few years, big chains like Red Star have squeezed up rents, cutting profit margins for small and mid-sized furniture makers.
And if sales are poor, retailers “will kick you out,” says another furniture maker.
And then there’s the problem of copycats. Shi complains that unscrupulous competitors are already flooding the market with cheap knock-offs of his products: “They copy our models faster than we can reproduce them ourselves,” he sighs.
Indeed, other companies have struggled to switch across to the domestic market. Huajian Group, one of China’s top women’s shoe exporters, also tried to establish its own brand in 2008, pinning its hopes on burgeoning business at home. So far it has invested Rmb100 million in opening stores but the result hasn’t been “so satisfactory,” says Zhang Huarong, the company chairman.
“To create brands and pay for adverting is a lot of money, and worse, you won’t even know when to stop,” Zhang complains.
But most exporters will continue to think about selling more at home, especially those worried that cost pressures will take the edge off export growth.
Recent minimum-wage increases have pushed up Chinese labour costs by 5% to 15% on average this year, says Rick Darling, president of LF USA, a unit of Hong Kong-based Li & Fung.
This week Beijing also announced that it will increase the flexibility of the yuan, a move that will further weigh on some exporters.
For some, it seems that going local may no longer be an option, and more of a necessity.
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