Slowing China's Inflation - Speeds U.S. Inflation

Article yesterday on Bloomberg.com about how the Chinese government has taken steps to slow down its overheated economy. Specifically the government is limiting bank lending, which immediately led to a slowdown in manufacturing (China's Purchasing Manager's Index shrank from 55.2 to 53.9 surprising most analysts).  

Good for China, but the direct impact on the U.S. (specifically the office furniture industry) will be a continued rise in the cost of imported office furniture. We've seen prices on imported furniture rise steadily since mid 2009 due primarily to transportation cost increases. Now add increased financing costs and a slow down in production, and I expect to see at least two wholesale price increases from our import  vendors in 2012.

China Costs Increase...Time To Look South?

Continuing cost increases (both wage increases and transportation increases) related to products sourced in China, are driving companies to look for alternate (read less expensive) countries. This will have an impact on the current low prices for office furniture.

Based on a story from Bloomberg.com, electronics makers are already beginning to look at Mexico as an alternate labor source. The story quotes Flextronics CEO; "As China moves up, up and up and up, for five straight years, it’s been moving up heading towards Mexican pricing...Mexico’s been the same labor cost for the past five years, it hasn’t moved up at all.”

Aside from direct imports which accounted for approximately 24% of the total office furniture market last year, every major domestic manufacturer sources components from abroad (primarily China). This is going to be an important story to watch over the next 18 - 24 months.

Read the Bloomberg.com story (HERE).

Import Inventory Shortages Persist

My June 18th post, Inventory Issues for Office Furniture Importers, highlighted a growing problem of inventory shortages with office furniture importers. Overall, my dealership has been pretty fortunate in being able to avoid any significant inventory outages, until today...

Today we went to pick up an order for a new client, and we were told that over 75% of the pedestals (the filing drawers within a workstation) were "out of stock". Our vendor is a major west coast importer, and the fact that they are out of a key component, illustrates that the supply chain problems are growing worse.

An article from the July 7th USA Today, Growing shipping bottlenecks delay deliveries to retailers, summarized the issue:

"Shipping companies idled vessels during the slump, and Chinese factories that make shipping containers shuttered or throttled back. Many ships are back in service, but the container crunch has worsened in recent weeks... Also, ships have been running at slower speeds to save fuel, effectively cutting capacity." The article also noted that transportation costs have been boosted as much as 150%.

If this problem persists (which it looks like it will), it could severely dampen the demand for imported office furniture. While this would be a boon for the domestic producers who have been hammered over the past five years by the onslaught of low cost imports, it also means a possible return to longer lead-times and higher prices.

China Inflation Watch Continues...

Article in Bloomberg Business Week regarding wage inflation in China. Why is this relevant to office interiors?? Because as wages in China go up, the cost spread between China products and US products goes down, and the value of importing products from China diminshes.

This is not going to happen overnight, but it will certainly have an impact (increased prices) over the next 36 months.

Costs on Imported Office Furniture Rising?

Very interesting article in Business Week's June 15, 2009 edition titled: China's Eroding Advantage. The article explains that the costs for products imported from China are rising and the price advantage versus domestically produced goods is shrinking.

This shrinking cost advantage may significantly impact the office furniture industry in a number of ways - currently there is an entire industry of "importers", which I define as companies that have their products built in China, shipped (flat-packed in a box) to the U.S., and then sold through distributors (including Sam Clar). These importers (companies like: Cherryman Industries, Office Star, and Mayline) have grown extremely rapidly over the past 5 years, primarily by providing product that was typically 25% to 40% less than comparable products manufactured domestically.

Cherryman Executive Desk

As the cost of imports begin to rise, the downside to imported products (the lack of choice and ability to customize, lack of consistent inventory, and extended lead-times) will begin to offset the shrinking price advantage, as buyers migrate back to domestically produced items.

This trend could then cause a quick negative spiral due to the tremendous capital required to import products (everything is paid in full prior to the order leaving the factory, and importers must carry a tremendous amount of inventory due to the 9-12 weeks it takes to receive an order). Because of these capital requirements (combined with the horrible credit markets in the U.S.) even a small "hiccup" in order flow (and cash-flow) could be catastrophic to some of the import players.

So what does this mean to the Office Furntiure buyer? -- Ultimately it could mean that the days of $99.00 full function ergonomic chairs, and $599 executive veneer desks will disappear, as prices migrate back to where they used to be (in the late 1990's and early 2000's).

When will this take place? Look for cost increases over the next two years, with the squeeze really taking place in about 18 months.