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China: The Road Ahead

By Professor Xu Meiqi

To keep up with uncertain changes ahead, China must be conform itself to international standards and regulations, and do so proficiently. At the same time, effort must be put it to upgrade all aspects of its industrial chain.

Since its economic reform 30 years ago, China’s furniture production has risen exponentially from RMB 1.08 billion (US$158.18 million) in 1978 to reach RMB 650 billion in 2008. Exports during the same period escalated to US$14.79 billion, from just US$2.75 million. One famous economist once said: What developed nations took a century to achieve; China completed the same in just three decades.

But when September 2008 marked the beginning of the global economic meltdown, China’s furniture industry, which had been propelled by exports, came under unprecedented pressures and sustainability was threatened.

In the first tier cities, the affluent Chinese consumers hankered after fashionable, western-style, and classical furniture. This blind following caused the industry’s product offering structure to become imbalanced and the high-end sector gradually grew saturated.

The second and third tier cities on the other hand emulated the sales model of those in the first tier cities. However, these products did not truly satisfy the needs of its consumers, and therefore could not build up a successful, structured demand base.

China’s domestic furniture market revealed the severe imbalances in the country’s economic development, as well as how immature and unstable the consumer market is.

All these only mean one thing: Despite our glorious attainments so far, we can no longer rest on our laurels. We need a brand new beginning!

1. A Deeper Understanding Of The Global Economy

Globalisation brings about a few challenges; one of them is global warming. Then, there is the problem of sustainability. Thirdly, we face threats from easily transmittable diseases, followed by bio-diversity and extinction; terrorism; and last but not least, world trade and the financial system.

The homogeneity of international standards has also increased due to globalisation, because they now involve more financial systems and people. International standards now also cover wider grounds (such as legally sourced wood and FSC certification). At the same time, the binding or restrictive power of these standards is enforced stronger.
Take the World Trade Organisation (WTO) for example. With the entrance of China and Vietnam, the scope of regulations has expanded a great deal.

I have to emphasise, that the formulation, explanation and execution of standards are of unsurpassed importance because they hold bearing to one’s competitiveness, among economies, enterprises and even individuals. On a national level, it speaks of a country’s international stature in terms of capability, and its power to steer the process of setting these standards.

In many instances, standards and rules can make or break someone. This is because often, these standards or systems are not completely neutral – they can work for or against either party. This is why it is vital that a country has directive influence in the formulation of international standards. And although China is rising at an enviable pace, it is still on the receiving end in this aspect, with little say. In view of this reality, all the more should we take the effort to fully understand the requirements of these standards and work very hard to meet them.

I refer to the case of the Lacey Act in the US as well as the proposed illegal logging regulation and eco-friendly design law in the EU. These regulations are all to be in force this year, forming tall barriers of entry against Chinese exports.

2. Looking Ahead In The Post-Crisis World: Changes In Spending And Production

It is unlikely that the overspending and spend-on-credit habits of the American will resurface soon. This is bad news for China’s furniture producers. Baby-boomers born between 1947 and 1964 have slowed down on spending. How will the next generation shop? It is going to be a huge challenge answering that.

Production will go through great change as well, at least in terms of resources used. The focus will be on sustainable timbers. Manufacturers might go for more modular designs that can suit a wide range of needs.

3. The Nature Of The Furniture Industry And China’s Unique Needs

The furniture industry is a lifestyle industry that serves the people’s basic living conditions. In order to meet the needs of contemporary living, furniture must satisfy both consumers materially and mentally. As the standard of living improves, it takes more to attain satisfaction – in functionality, environmental sustainability, and aesthetics. Currently in China, R&D for low- to mid-end products are driven by cost performance and is one of the main strategies used to increase domestic demand.

At the same time, urbanisation is rising on at an increasing rate. This leads to vast segmentation in spending levels. Suppliers must adapt to the different economic situations and living spaces in various local areas. To serve consumers in the city, suburbs and rural districts, suppliers must rework their market positioning as each of these locales develop.

4. Building The Industrial Chain

Furniture is a type of end product that relates directly to the public consumer. The industrial chain runs from raw material supply to marketing, and in between, it includes product development, raw material procurement, order processing, production, circulation, sales and services.

In the modern industry make-up, the competition is no longer limited to just one component in the industrial chain, but the entire set up – every link matters.

Chinese manufacturers’ production technology and capabilities are basically on par with international levels now but there still exists weak links in between, which is why in the international division of labour, Chinese products still fall within the low- to mid-end range.

The only way around this is to improve and upgrade the entire industrial chain, particularly in features such as product development, and how to grasp Proprietary Intellectual Property Rights. Industrial stewardship methods should be adopted to ensure procurement of environmentally friendly raw materials. Order processing should include customised services during pre-, post- and during sales. Outsourcing networks should also be built up. For logistics, information technology should be adopted to help lower costs and increase productivity. Brand building, customer service to the end-user and prompt delivery – these are among other important considerations.

5. Furniture Circulation And Creative Exhibition Models

In the past 30 years, China’s furniture circulation achieved vast improvement – I am referring to the wholesale and retail markets. Because the sales distribution channels were largely underdeveloped during these three decades, the professional market had the opportunity to thrive.

The professional markets are responsible for the wholesale and retail of furniture today and there is an inherent flaw in this: this operation model is based on property lease management and business administration, therefore sales strategies are mainly based on price competitiveness.

On one hand, because the property operator is not directly involved in the store, the company lacks the propensity to innovate in the retail strategies. On the other hand, as the business costs in the city rise, operators usually pass on this increase directly to the dealers and manufacturers. This trend poses great dangers and change must come.

The trade exhibition industry faces similar problems. Now that fairs in Guangdong and Shanghai are able to match those in Cologne, Milan and Paris in scale, their standards have risen too. They are another way of opening up distribution channels.

Today, trade exhibitions must be prudent in market positioning and dates. They are now challenged by permanent showrooms that serve both the trade and consumer markets. Exhibition organisers will have to step up on promotion, exhibitor sales, concurrent events, service levels, etc. E-commerce is also an upcoming trend that could impact the exhibition business. The future is uncertain with such competitions as several well known brands have their own online presence and extravagant store setup and have thus put less focus on trade exhibitions.

Being in the downstream, furniture exhibitions must base their competiveness upon service, i.e. send out a powerful statement on design trends; offer a comprehensive commercial package to exhibitors; sniff out the latest developments and strategies in the industry and draw up relevant seminar programmes; feed exhibitors and visitors with technical and market information; create a virtual exhibition online; and offer e-commerce facilities, etc.

The growth outlook in China is complex and full of changes. There is not a clear answer to what the future may seem. In sum, change is needed, and so creativity in making and managing it, is necessary.

ABOUT THE AUTHOR

Professor Xu Meiqi is a respected name in the furniture trade and research industry. He is currently Vice Director of China National Furniture Association’s Science and Technology Committee. Representing a prominent voice in the Chinese furniture industry, Xu presents his papers at major conferences and seminars around the world. He also pens articles regularly for publication.

The expert veteran also holds offices in several furniture-related institutes in China. He is Deputy Chief of the Shanghai Furniture Research Institute. As an academic, Xu is Visiting Professor at the College of Wood Science and Technlogy at both Nanjing Forestry University and Dongbei Forestry University.

Xu’s insights and articles often appear in China Furniture magazine, for which he is Editor-in-Chief, as well as in Furniture & Furnishing Export, International magazine, for which he is Editorial Advisor.

Xu was one of the judges for the Malaysian Furniture Leadership Award 2008.