China emerges as major furniture player.

The Asian financial crisis has done little to alter China's long-term goals for expanding its furniture industry.

A structured economy, heavily directed by the central government, pent-up demand, underdeveloped markets far away from diminishing returns, and cautious liberalization plans have enabled China to avoid the Asian financial crisis.

Some economists believe China will continue to avoid the fate of its neighbors for the near future if the gradual streamlining of state-owned enterprises and banking continue. Now, even as it seeks solutions to short-term conditions affected by its neighbors' downfall and the trade imbalances with the United States resulting from its export-led growth strategies, China continues to drive toward long-term goals of developing the its basic industrial sectors.

"China knows where it wants to go," says Frederic de Bernard, president of Globexpo, a Maryland-based company which represents Furniture China, a trade show held annually in Shanghai. "It wants to acquire technology and management techniques."

In order to do that, China has cut down on tariffs and let foreign money into the market, de Bernard explains. "Even Western countries with liberal political climates have protective commercial climates. Importing upholstery to England is a pain in the neck, but you can travel there as much as you want. China has slashed its tariffs from 50 to 22 percent, in an effort to encourage foreign trade," he says. He believes that exhibitions such as Furniture China indicate that the Chinese are interested in having more foreign companies trade with China. To this end, some 40 U.S. companies exhibited at Furniture China '98.

"China's ultimate goal is extensive market development," de Bernard says.

The quickest way to develop the Chinese market is with foreign capital investment. At Furniture China '98 last September in Shanghai, Jia Qingwen, president of China National Furniture Assn. (CNFA), told an assembly of foreign and domestic manufacturers and distributors that China wants to import high-end furniture that will not compete with the country's own production. Qingwen says he envisions the creation of more joint ventures with foreign firms to build factories in China to produce that furniture. Simply put, the Chinese argument is: Why ship containers, when furniture can be manufactured locally for half the price? Further, de Bernard points out, "China is saying, 'Here is a market. Come and build here, not just for this market, but for the rest of the world.'"

Because of its current economic stability and tremendous growth potential, China offers peculiar opportunities for America's wood and wood products businesses. But, two questions loom large. First, how has the Asian crisis impacted the Chinese furniture manufacturing industry and its ability to export to the U.S.? Second, how has the crisis impacted the U.S. furniture export opportunities to China?

China's Furniture Industry

The financial crisis affecting the Far East has had very little impact on domestic manufacturing of furniture, according to Wang Mingliang, international exhibition department director of the CNFA. He points out that China's annual furniture production and sales have increased by 20 percent for the last few years.

Most manufacturers have increased their production capacity in the past three years. As with all industries, almost all consumer and industrial goods demand exceeds supply. But, price drops and stock increases are the facts in all industries, including furniture. After initiating its open door policy, China has changed from commodity shortage to surplus for the first time in its history. Production is catching up with both demand and the excess of currency in circulation or monetary "over hang." China's slow liberalization process is avoiding the pitfalls of Eastern Europe and their rapid "shock therapy" conversion to the market system.

Mingliang says, "Chinese furniture manufacturers had a very difficult year because of slow market demand, but starting in August, the market began picking up very quickly. We can expect an increase of more than 10 percent in 1998."

Mingliang says that the stable Yuan is encouraging foreign imports, and Chinese consumers are spending money to buy furniture, thus expanding the domestic market. Bejing is encouraging consumer spending via the government's new housing policies which allow the Chinese to own homes for the first tune in 50 years. "The still booming housing industry stimulates the buying force of urban families," says Mingliang. "The bank savings of Chinese people exceed almost $500 billion."

In response to the new housing situation and the perception of pent-up consumer demand, new furniture stores are rapidly being built in Beijing, Shanghai and other large, style-conscious urban centers. Foreign manufacturers are competing for high-end furniture business. The Italians are promoting not just well-designed products but are working hard to establish a reputation as the design leader. France is following Italy's lead. But the excitement in the marketplace reportedly is "buy American." An example of young, well-to-do Chinese's penchant for things American is seen in the chic Thomasville store established early in '98 in a swank Shanghai shopping area. Co-owners Tony Phua of Shanghai and Lam Lee International, a Dallas, TX-based accessories source, opened it in February 1998. Shortly after the grand opening in May, the store was out of furniture.

China's U.S. Export Plan

China has emerged in recent years as second only to Canada as a source of U.S. furniture imports. In 1997, the U.S. imported $865 million of Chinese wood and upholstered furniture and parts. That number was easily on a pace to be exceeded in 1998, as China had already shipped $835 million worth by September.

The strong Chinese Yuan is affecting Chinese furniture exports. If Bejing were to devalue the Yuan, short-term export business would be aided at the expense of foreign imports, exasperating the trade and current account imbalances with the United States. Trade and currency imbalances were some of the issues which caused the U.S. Congress to revoke China's most favored nation trading status. China is ostensibly attempting to improve trade relations with the U.S. because hindering trade relations would slow China's long-term program to encourage joint-ventures and expand its domestic market.

It is not only the Asian crisis but also the market economy that's painful for Chinese companies. China's furniture industry is in the process of changing by reducing costs and initiating quality control, improving design, updating management and increasing marketing and sales effectiveness. "Since the furniture sector is dominated by private or joint venture enterprises, it will adjust quickly to market competition," says Mingliang.

Exporting more furniture to the U.S. is a part of market competition strategy. This is especially true of mid-size companies headed by young, energetic and entrepreneurial 30- to 40-year-olds, who sell domestically, doing from $20 million to $40 million in annual sales. If they export at all to the U.S., it is usually to one or two companies to which these sub-contractors supply about 2,000 pieces per month. The Chinese have no control over anything but production. This is very limiting. These companies must look to manufacturing abroad for technology and to develop market savvy.

Last October about 100 of these Chinese manufacturers toured the International Home Furnishings Market in High Point, NC. Their mission was to determine whether to exhibit and when. Most probably, a spokesman says, some will show in October '99, with more joining them in 2000. Each will hope to sell to three or four big customers who will order two or three container loads per month. While they are enthusiastic, they are being warned that not all that glitters is gold in the U.S. and to "bring money." Participating in the U.S. market will be costly, they are being told.

"In another two or three years," says Mingliang, "China's furniture industry will have a new look." Selling more furniture to the U.S. to gain capital for expansion as well as gaining experience in the marketplace and avoiding the problems of rapid market conversion is all part of China's long-term goals. The main objective is to lure manufacturers and manufacturing back to China. This seems inevitable, de Bernard says. "More furniture will be built in China and exported to the U.S. That's fine, provided that more American wood and particleboard will be used" so the trade imbalances will be reduced while China builds its furniture industry, he adds.

American Wood Goes to China

The tune is ripe for selling more wood to China. Because of extensive logging, which is blamed for the 1998 flooding in China's northern provinces and subsequent bans on logging, there is a new demand for U.S. wood supplies.

Three U.S. lumber companies - Ellis Lumber, Northwest Hardwoods and PJ Lumber - exhibited at Furniture China in September. Seymour Ellis reported that the show went exceptionally well for Ellis Lumber, who describes the Chinese market as "enormous." Company representative John Pehler adds, "We're exploring the possibilities. We're still in the learning stage."

Mark Hayes, international sales and marketing manager for Northwest Hardwoods, says that China is a must market for his firm. "We anticipate big sales growth," he says in noting that the Chinese economy continues to get stronger. "A 6 to 7 percent GNP growth rate is impressive. The economy is continuing to expand, and it is not as difficult to do business as it was five years ago."

American Furniture Exports To China

China's long-term goals are clearly stated. But will the current crisis necessitate short-term moves that will be difficult to live with later on? What, for example, will happen to American furniture companies currently exporting to China if the Yuan is devalued? Those exports totalled a comparatively meager $9.5 million in 1997.

According to Arthur Negin, a representative of Rowe Furniture, which exports from the U.S. to China and imports no product from Asia or elsewhere, devaluing the Chinese currency could be devastating to Rowe. "Prices would go up, making buying more difficult for the customer. Chinese exports would be helped, at the expensive of my product and that of other economies' goods, creating the downward spiral we look to avoid."

Ironically, business with some of Rowe's Chinese customers has actually risen during the '98 crisis aided by tariff reduction on high-end goods, but it has happened at a slower pace than previously experienced, Negrin reports. And, because of a change in currency rates, Rowe customers have raised prices to the consumer. "We're having some increase," he says, "at the expense of the end-user."

Would devaluing the Chinese currency - a move Bejing emphatically says will not happen - increase the pace of current structural trade and capital imbalances? Negin says, "The key is further dropping of the exchange rate and stabilizing at a certain level. It can help the imbalances, as long as the dollar finds its real level and then maintains itself at or near that level. Any major jump, one way or another, causes uncertainty. And the one thing markets do not like is uncertainty." Negin adds that the Chinese he deals with are still very uncertain and "are sitting on the fence, waiting for something to happen."

Whether the Yuan is devalued or not, Negrin says that short-term export sales will not be affected. "The problem is long-term in nature, and our business is built upon meaningful programs with customers that take time to develop and grow. A weakening U.S. dollar will need to drop further and stabilize itself at a lower rate, something that takes time. Customers will not come knocking and place orders because of a short-term change in exchange rates. Their economies are suffering. A short-term boost is not going to fix their ailments and increase orders." The only thing that will increase the orders of American companies is an expanded industrial base and the creation of a consumer market with disposable income.

Despite or perhaps because of the financial crisis, China is seen as a huge potential market to many American firms. The 40 who showed in Shanghai in September '98 (up from three or four in '97) plan to return in 1999. Many, such as Exim and Bassett, have doubled and even tripled show space. And new companies are signing up to show, according to de Bernard of Globexpo.

George McMillan III, a freelance writer, is completing a graduate degree in International Relations and Political Theory at St. John University of New York, NY. Pat McMillan, former editor-in-chief of 20/20 Magazine, a leading optical industry marketing publication, is co-author of "Home Decorating for Dummies."