Archives

2009: The Year Of The Domestic Market

By Michael Buckley

In March 2008, Csil, the respected economic research and consulting company in Italy, predicted world trade in furniture to have grown seven percent in 2007 and to grow by five percent in 2008 and beyond. That was of course based on the then anticipated expansion of furniture exports by many producing countries. Csil has subsequently revised its forecast to a reduction in the US market and said that in the main industrialised markets, “growth is now levelling off and no further increases are expected in 2009 as all major furniture importing countries will be in recession”.

Since the collapse of mortgage finance markets in 2008, and the start of a dramatic slowdown of housing in the US and Europe, furniture consumption has suffered enormously. It is yet too early to assess the results of recent trade shows across Southeast Asia and in China but sentiment has been very depressed. A keynote seminar at the recent Malaysian International Furniture Fair (MIFF) in Kuala Lumpur featured Joseph Carroll, veteran publisher of Furniture Today in the US. His subject was ‘Times are Tough – 10 tips for success’. Carroll suggested that people are still buying furniture but that manufacturers can do many things to enhance their chances, including going green, introducing product innovation and adopting sound marketing strategies. He could also have suggested that some Asian producers take a look closer to home.

Almost universally around the world, governments have tried to stimulate consumer spending with initiatives ranging from cash handouts in Singapore to the lowering of interest rates to almost zero in UK. The world awaits the effects of President Obama’s various recovery packages on the vital American market. It is questionable whether consumers can be forced to spend, although time will tell. Other initiatives to facilitate bank lending again have also augmented consumer stimulus programmes. But, consumers are nevertheless worried and many want to hold onto their cash and earnings in case the global crisis worsens – as promoted by the mass media. Importers and retail distributors of furniture are equally likely to minimise forward orders especially from suppliers overseas that require letters of credit and extend delivery periods by virtue of distance.

Buying Local in Terms of Crisis

In a leaner, meaner consumer market high-end branded products are already beginning to suffer. In markets such as the UK and Australia where local currencies have fallen dramatically, thus increasing the cost of imports, retailers and consumers may look to local domestic producers for supplies. There is already some anecdotal evidence that this may be happening in Australia. One might not go as far as to say that solidarity with one’s fellow workers will influence furniture purchasing but patriotism and nationalism are part of acknowledged consumer behaviour in times of crisis – as this now is. In the case of some countries, especially in the UK and parts of Europe as well as the US, there may no longer be manufacturers left to fulfil the opportunity.

On March 6, 2009 at its annual session of parliament, China announced that it will place greater emphasis on domestic consumption to shore up its economy. With eight percent growth in the economy, China will just stand still. With a 1.3 billion population, in which the government wishes to avoid unrest, it is going to great lengths to counter the effects of falling exports on unemployment. China too is introducing packages to stimulate domestic spending by investing mainly in infrastructure and job creation. Provided unemployment does not rise too high, those still employed could effectively provide demand for producers now being starved of export orders. Reports are that the recent furniture show in Shenzhen was highly focused on the domestic market.

There are some Asian countries however in which, for different reasons, producers cannot turn to the local population. In Malaysia’s Sabah and Sarawak, markets are too small, and in Singapore there is now insufficient production to offer domestic furniture. Even Vietnam’s large but mainly rural population cannot absorb the huge capacity recently built up, although it’s interesting to note that furniture imports in early 2009 fell by 45 percent - perhaps an indication that consumers are turning to local producers.

One curious side effect of the sudden downturn of international trade in furniture is the position which high-end designer/makers find themselves in. In the US and parts of Western Europe, notably the UK, and even in Australia, high-end designer/makers are the local suppliers as they always have been. Few are geared to exports and most are well tuned into the needs or requirements of their local domestic clients. They provide interior designers with small, and even individual pieces that many local projects require. In addition, in many parts of the Indian subcontinent craft makers were the only option until recently when import duties were reduced. The growing capacity of carpenter/furniture makers in some Middle Eastern countries also provides a domestic dimension to the market.

Growing Domestic Demand in Asia

Is all of this line of thought clutching at straws? Are lower freight costs, which are based on lower fuel costs and weak demand for space likely to encourage exports? With far fewer housing starts in countries like Spain, the UK and the US, will consumers divert their spending to renovation and furniture renewal – thus stimulating sales? Will export-starved mass producers of furniture simply lower prices and margins further to survive? The answers will not become clear for some time, if you believe the worst of the global economic downturn is not yet over. For the answers it may also be necessary to look at what is being called the ‘mid-prime’ financial crisis. ’Sub-prime’ was caused mainly by irresponsible mortgage lending by banks which then traded their “toxic financial products”. Mid-prime refers to the billions of loans to consumers against overvalued property-based equity and credit card over-extension which are both less of a problem in Asia than in Europe or the US. But in those industrialised markets they do contribute to falling demand for Asian exports. This scenario leads again to the hope that domestic demand may be able to grow in much of Asia and not least in China.

One thing is sure, that CSIL’s 2007 forecast of growth for 08/09 cannot be realised based on exports now. Nor is 2009 likely to be one of innovation for most producers despite Carroll’s appeal, because launching new products is always risky and often requires new investment. 2009 will be a year for survival, and that may be based on greater domestic sales for those who go looking. It will be especially difficult for some producers in Asia who only export, of which there are many. A case in point is found in the export industrial zone in Cebu, Philippines. Cebu-fil, under the management of Carlo Cordaro, has been successfully producing furniture with a European style and a touch of oriental flavour - exporting all of its products. At the recent Cebu furniture show, where buyers especially from the US were few and far between, the company’s sales staff confirmed a new interest in their domestic market. They expect, perhaps optimistically, to sell 20-30 percent of production this year to the local market through property developers and hotel outfitters.

The Cebu Furniture Industry Foundation recently confirmed that for the first time ever, on behalf of the industry, they are placing advertisements in local consumer media. At the opening of the MIFF in Kuala Lumpur the Deputy Minister for Trade and Industry said that furniture imports into Malaysia are rising – at least an indication of growing consumption. Even if Asian domestic consumers do not spend on furniture as hoped, it is certain that furniture producers can benefit from the stimulus to tourism that most Asian governments will make. In any case it is clear that world export markets will not recover until 2010 or later.

ABOUT THE AUTHOR

Michael Buckley (www.mibuckley@worldhardwoods.com) is an independent consultant based in Singapore, specialising in forest product research, marketing and promotion. He is well known for his knowledge of hardwood applications and related environmental issues. He works throughout North America, Europe and Asia. He has held senior positions in the forest products industry, both in Europe and Asia, and was responsible for the promotion and marketing campaigns of the American Hardwood Export Council (AHEC) in Europe for 12 years. He is a Fellow of the Institute of Wood Science and holds a Masters research degree in hardwoods from the University of Bath.