A Lighter Coat of Varnish: PRD Furniture Manufacturers

UNCLAS SECTION 01 OF 02 GUANGZHOU 000437

SENSITIVE
SIPDIS

STATE FOR EAP/CM
STATE PASS USTR CHINA OFFICE

E.O. 12958: N/A
TAGS: ETRD EIND ELAB ECON PGOV CH
SUBJECT: A Lighter Coat of Varnish: PRD Furniture Manufacturers
Struggle in a Transitioning Industry

REF: A) GUANGZHOU 228, B) GUANGZHOU 121

(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.


1. (SBU) Summary: Hard times are here - and likely here to stay -
for the Pearl River Delta's (PRD's) furniture makers. The industry
has been among the most affected by a local business environment
that has become less friendly to labor-intensive, export-oriented
firms. As with other similarly oriented businesses, furniture firms
are in the midst of consolidation, with pressure to make production
processes more efficient and shift sales towards more profitable
markets. Rising labor costs, currency appreciation, higher inputs
costs, and the after effects of U.S. anti-dumping ruling have forced
firms to face difficult choices: close shop or re-structure to
operate on shrinking profit margins. End summary.


2. (SBU) Labor-intensive manufacturing industries that have driven
the Pearl River Delta's (PRD) dramatic growth over the past three
decades are facing a tough new business environment with rising
costs, a more challenging export environment (refs A and B) and a
provincial government determined to move forward with its "double
transfer" policy. The furniture manufacturing industry has been
particularly hard hit. Overall, furniture exports to the U.S. fell
10 percent last year from the year before. Many firms have been
forced to shut down. Although no reliable statistic for closures is
available, some contacts put the figure in the thousands.

Rising Labor Costs Bring Trouble
--------------


3. (SBU) China's new Labor Contract Law is the "biggest challenge
for the furniture industry in Guangdong," according to Zhang
Chengzi, Deputy Secretary General of the Guangdong Furniture
Association. Guan Yong Kang of Kinwai International Furniture said
that some firms have seen labor costs rise by 10-15 percent since
January when the law was first enacted. As a result, some large
furniture manufacturers are trying to brand themselves as "less"
labor intensive to avoid being subject to government policies aimed
at moving such industries out of the PRD. In addition, some
manufacturers have strived to enhance worker productivity as a means
to reduce labor's percentage of overall costs.

Inputs Costs Rising
--------------


4. (SBU) Rising inflation has also caused great stress for PRD
furniture makers. LacquerCraft, a subsidiary of the Samson Group,
which is the largest Chinese furniture exporter to the U.S., raised
prices on products in the U.S. for the first time in April 2008 in
order to maintain an operating profit. The firm has seen wood and
shipping costs rise dramatically over the last 2 years. With wood
costs up, more products are now made with particleboard, which is
less expensive and reduces shipping costs because it is lighter.
Despite rising costs, most manufacturers will continue importing raw
hard woods from the United States and Canada because the quality of
wood for production cannot be matched in China or Northeast Asia.
However, shipping costs for U.S. and Canadian wood have also risen
40 percent in the last year.

Renminbi Appreciation Adds Heat to the Fire
--------------


5. (SBU) The rising value of the renminbi has also dealt a harsh
blow to PRD furniture manufacturers, which have depended primarily
on exports. While the industry has expected the renminbi to
appreciate for quite some time, many firms complain that the Chinese
monetary policy isn't transparent enough. Several executives told
us that they haven't had enough advance notice to re-structure their
business models in preparation for renminbi appreciation. However,
Kinwai's Guan commented that his firm could benefit from faster
appreciation of the renminbi, which would increase its buying power
for U.S. forest products. According to Guan, a stronger renminbi
would allow the firm to buy more U.S. wood and increase production
for both domestic and other overseas markets. Kinwai would seek to
continue exporting most output to U.S. markets, while expanding
sales to markets in Europe, Asia and especially the Middle East.

Lack of Financing Too
--------------


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6. (SBU) Further complicating the situation facing PRD furniture
makers - credit is harder to get. In a recent Shanghai Securities
News article, Wang Jue, the small and medium enterprise loan manager
of the Guangzhou branch of Shanghai Pufa Bank, said his bank was
having a difficult time getting clear and accurate financial records
from his furniture industry clients. As a result, the bank had
almost zero accounts on record with PRD-based furniture
manufacturers. Overall, the bank is now issuing a much smaller
number of loans to enterprises in labor-intensive manufacturing.
Local media reports have also recently highlighted credit-tightening
as a factor that has driven PRD-based furniture manufacturing SME's
to apply for loans from "underground banks."

Anti-Dumping Duty Is More than Just a Pinch
--------------


7. (SBU) PRD furniture manufacturers repeatedly complained to us
that the U.S. anti-dumping duty on furniture imports from China is
one of the biggest obstacles to maintaining profits and expanding
markets. (Note: Wooden bedroom furniture from China has been
subject to anti-dumping duties since 2004. End note.)
Manufacturers have adopted different strategies to respond to the
duty. Some have successfully shifted their focus to domestic
Chinese sales, but many PRD furniture manufacturers lack research
and marketing experience in the local market. Kinwai's Guan said he
expects the duty to rise soon, so his firm is currently negotiating
with the U.S. Furniture Association to find a way to mitigate the
impact of an increase. Several executives told us that although
they understood why the anti-dumping duty was put in place, they
felt that the scheme would not help U.S. furniture manufacturers in
the long run without additional U.S. subsidies. They argued that
most U.S. firms are "less cost efficient" because they use less
advanced technology and have fewer workers than their PRD
competitors.

GOLDBERG