Wooden Furniture Manufacturers Use Product Differentiation To Compete With Low-Cost Rivals

Taiwan's wood-furniture manufacturers have responded to the rising threat of competition from mainland China and other low-cost countries in two ways. Some have joined the low-cost makers by moving offshore, to mainland China or elsewhere, in search of cheaper materials and labor. Others have adopted a small-volume, large-variety mode of operation that is much different from the mass-production mode used in the low-cost economies.

In addition, many Taiwanese manufacturers, especially those with mainland operations specializing in living-room furniture, have begun developing markets in Europe since the imposition by the United States government of anti-dumping taxes on wooden living-room furniture from China.

While they cannot match the low prices enjoyed by their Chinese counterparts, manufacturers in Taiwan still have a number of advantages such as strong design and marketing capabilities. Some of them, in fact, have evolved from purely contract manufacturing based on customer designs to original design manufacturing (ODM) based on their own designs.

They have also become more skillful at using non-wood materials such as glass panels and metal tubes in their products, making them more attractive.


No Style, No Future


It is vital for Taiwanese manufacturers to establish their own identifiable styles, stresses Jesse Kou, chairman of Hampton Castle Co., Ltd. To differentiate themselves from OEM suppliers that focus on big-volume products.

"These styles can include designs, brand names, and even product strategies, " Kou explains. "If you don't have any of those, you can never escape from the price-cutting game." He has seen many local manufacturers fail despite fairly good business, he says, because they engaged in cutthroat competition, while others succeeded despite difficult business conditions because they differentiated their products.
Kou's own company specializes in furniture made of solid wood or artificial wood boards. For him, "style" means design and brand name. This strategy has helped the firm grow at an annual rate of about 20% during the past few years.

The chairman had worked in the industry for about 15 years before setting up his own company in 1994; and, he recalls, "From the very beginning we offered our own designs to attract ODM (original design manufacturing) orders from big suppliers in the U.S. and Europe."

The firm's original products were nostalgic solid-wood pieces, and it still offers solid-wood dining-room furniture, chests, and computer desks made mostly of oak, pine, and rubber wood. Many of these items go to big-name suppliers in the U.S. and Europe, who, Kou comments, "tend to give you orders if you have what they don't-like good designs and competitive production costs."

Like most other Taiwanese makers of solid-wood furniture, Hampton Castle has moved its production to mainland China because of the intensive labor involved in the required carving work.

Some manufacturers have also moved to Vietnam, where production costs are even lower than in mainland China. Kou notes, however, that China retains the greatest advantage because, in Vietnam, "The language gap, weak infrastructure, poorly educated workers, and higher shipping costs are major shortcomings."

The move to Vietnam has become more apparent than ever over the past year, following the U.S. announcement of anti-dumping tariffs on Chinese furniture. Kou says that the American move was directed mainly against suppliers of living-room furniture and suppliers from mainland China. "So far, " he goes on, "the American authorities haven't given Taiwanese suppliers much trouble so long as we can prove that we don't dump our products."

In Taiwan, Hampton Castle produces knock-down (K/D) furniture pieces made of artificial wood, which, Kou points out, comes in flat boards that are suitable for use with automated production lines. Much of the K/D production goes to mail-order suppliers in the U.S.

The company began promoting its own "Hampton Castle" branded products five years ago, but these products still account for only 5% of its total revenue.

The company's reliance on mainland China has deepened, not only for production but also for design work. It maintains two designers in Taiwan and is cultivating more of them in the mainland because of the much lower manpower costs there. "Cost concerns, " Kou comments, "are changing our long-standing model of taking orders and designing products in Taiwan while producing and exporting them in the mainland."


Cutting Costs


Hung Sheng Wood Processing Co., Ltd. Also supplies furniture made of solid wood and man-made wood boards such as medium-density fiber (MDF) boards. The company specializes in occasional tables, cabinets, and teapoys.

The company's solid-wood products are designed for American, European, and Japanese who like the nostalgic style. Artificial-wood products are made for consumers who want a sense of modernity.

Shao Chi-ching, the company's owner, feels that the most serious problem he faces today is the surging prices of materials, especially those materials such as steel and glass that are essential to the production of board-based furniture.

Shao has no intention of following other Taiwanese manufacturers to mainland China and Vietnam in the search for lower costs. "In terms of the costs of labor and solid wood, " he comments, "there is no doubt that production is cheaper in those countries than in Taiwan. But it costs a lot more to set up an operation there, because you have to equip yourself with an integrated production capability because there aren't enough dedicated parts suppliers." In addition, he continues, Taiwan has better quality, reliability, and delivery times.

Hung Sheng cuts costs by importing semi-finished and solid-wood parts that require large labor inputs from Vietnam and mainland China. The main material used is rubber wood.

Shao reports that the company's revenues have increased at an annual rate of about 10% ion recent years, but he also concedes that his profits have dropped, largely because of rising materials costs.


Grace Above All


Gracewood Co., Ltd. Specializes in European-style living-room furniture sets including curio cabinets, occasional tables, and chairs of solid wood or wood veneer. The company was long dependent on the American market, but last year it began working to penetrate the European market and has won a substantial order from a French supplier, reports marketing manager Tracy Hu. "It was the U.S. anti-dumping tax on Chinese wooden living-room furniture that prompted us to tap the European market, " she explains. "Also, we're nervous about the hazy outlook of the U.S. economy."

She points out that the European market has long been dominated by European suppliers and is difficult to penetrate because of its strict environmental regulations. However, she goes on, "In recent years the European dealers have been accepting Taiwan-made wooden living-room furniture, although the volume may not be very big."

Her products are delivered in K/D or assembled form, as the customer specifies. Hu notes that K/D furniture costs less than assembled products, making it more suitable for budget consumers.

Hu, who has been in the furniture business for around 20 years, says that the manufacture of wooden living-room furniture in Taiwan has matured since the 1980s, when American suppliers first began giving orders to Taiwanese manufacturers.

The marketing manager claims that Gracewood has numerous advantages over its domestic rivals. One of the advantages is the task-distribution among three plants in mainland China, which turn out different wood-furniture parts. "The division of labor among the three plants helps us to keep costs down, " Hu notes. "Together with the lower prices of wood materials in China, Indonesia, and Malaysia, this makes our products very competitive."

Most of the material used is beech wood from China and Southeast Asia. For American and European buyers, an oak or walnut veneer is applied.

Another of Gracewood's advantages is that it is able to accept orders of various sizes for different kinds of furniture, allowing it to react nimbly to market changes.

In light of the U.S. fiscal and trade deficits, Hu is not optimistic about business growth in 2005.


Bending With the Market


Chen Founder Enterprise Co., Ltd. Was founded 25 years ago and has always been focused on furniture made of bent MDF boards with a minor concentration on solid-wood products. It sometimes uses high-frequency machines to bend its wooden boards so as to assure high quality. "Manufacturers usually bend the boards with steam, " explains the firm's owner, Yu Chin-sung, "but that can leave humidity locked inside."

Bentwood furniture features a neat, modern look, Yu notes, adding that "Bentwood boards are an ideal material for making ergonomic furniture." His own company uses the MDF boards to make a wide variety of furniture, including dining tables and chairs, Japanese-style occasional tables and chairs, office automation chairs and desks, photo frames, file shelves, and TV tables. For solid-wood furniture, the material used is mostly beech and walnut.

Whatever the material, the products are aimed at consumers in Japan, the U.S., and Europe. Chen Founder has been hit by price-cutting competition from rising rivals in mainland China, and so Yu is planning to open a factory in Vietnam.

The company's annual revenues have amounted to NT$50 million (US$1.5 million at NT$32:US$1) to NT$80 million (US$2.5 million) over the past several years, and Yu expects an improvement this year. (Jan. 2005)