Tariff Pressure: Anxiety and Self-help of American Furniture Retailers

Tariff Pressure: Anxiety and Self-help of American Furniture Retailers

U.S. President Trump announced on May 10 that tariffs on $200 billion worth of goods imported from China would be raised from 10% to 25%.

The Office of the United States Trade Representative announced on May 31 that it would extend the entry period for some Chinese imports to the United States, and maintain a 10% tax rate on Chinese exports from China before May 10 and imports into the United States before June 15. But that hasn’t reversed the tension.

Behind the populist carnival is the real anxiety of American furniture retailers.

anxious

There is no optimal solution for price increase, cost allocation and order cancellation.

Raising prices is the “no choice” for American furniture retailers.

American furniture retailers purchased from China have adopted strategies to mitigate the negative impact of tariffs. At present, raising prices, canceling orders and opening negotiations with Chinese furniture manufacturers to seek cost sharing are the mainstream practices in the industry. However, no matter which one to choose, it must face the negative effects of rising costs, labor and wealth, and the destruction of cooperative relations. Tariffs bring about an all-round blow, from manufacturers, American furniture retailers to American consumers are unavoidable.

Earlier, Trump levied a 10% tariff on furniture and other Chinese goods for the first time, when some U.S. furniture retailers and Chinese manufacturers had reached an agreement to over-share costs. For example, Minhua Holdings supplies furniture retailers in the United States, with both sides agreeing to bear half of their tariffs.

Now, with tariffs rising to 25%, Minhua Holdings is renegotiating with retailers. A spokesman for Minhua said in an e-mail: “Minhua Holdings promises to increase the amount of tariff sharing, but the specific amount will be determined in separate negotiations with customers.” But in fact, preferential policies such as shared tariffs are usually only likely to turn on the green light for major customers, whether for Minhua or other manufacturers, which means that more small and medium-sized furniture retailers will face great pressure.

Moreover, not all Chinese manufacturers are willing to share tariffs because of cost considerations.

RC Willey Home Furnishings, a subsidiary of Berkshire Hathaway, one of the top 10 furniture retailers in the United States, was in the middle of negotiations with manufacturers. The manufacturer refused to share tariffs and negotiations broke down. RC Willey had to cancel the sofa order.

Some people in the furniture industry in the United States still had the illusion that “tariff increases should keep prices unchanged” at first, but facts have proved that “price unchanged” is just a fantasy.

Rising prices have become an inevitable choice.

Major customers of Chinese furniture manufacturers, including Wal-Mart, Target, Amazon, Home Depot, IKEA and Haodoo, declined to elaborate on the impact of tariffs on the company in an interview with Reuters. But Delta Children, who provides baby furniture for Wal-Mart, Wayfair and Williams-Sonoma, is witnessing a shift in buying patterns. Joe Shamie, president of Delta Children, said that when tariffs rose to 10%, the price of Delta Children’s products increased by only 3%, and sales still plunged by about $10 million.

What about the purchasing power of consumers when tariffs are 10% fashionable and raised to 25%?

Anxiety is rife in the $100 billion American furniture retail business.

Save oneself

Vietnam is the next destination

Vietnam has become the “next destination” for Chinese furniture manufacturers and American furniture retailers.

According to data from Vietnam Customs General Administration, in the first four months of 2019, exports of timber and wood products reached nearly US$3.12 billion, an increase of 18.3% over the same period last year. The United States ranks first in its top 10 import markets, with timber and wood products exports to the United States rising 34.6% year-on-year to $1.42 billion.

Moreover, the Vietnamese government has set targets to achieve furniture export revenue of $20-30 billion in the next five to ten years.

At present, Vietnam is a typical furniture exporter.

According to the data of Zhiming Handicraft and Wood Industry Association, in 2018, Vietnam’s revenue from wood and wood products reached nearly 9.4 billion US dollars, and its trade surplus in the wood processing sector also exceeded 7 billion US dollars. By the end of 2017, Vietnam had about 7,000 furniture companies, of which 3,000 focused on exports. Among them, small factories that produce affordable furniture account for more than 90%, while the high-end furniture market still relies on imported and well-known foreign brands to open factories in Vietnam.

Therefore, in order to support local enterprises and promote investment attraction, the Vietnamese government has built industrial parks and design parks, such as the Hanoi Design Center co-founded by Vietcraft and Lund University (Sweden).

In 2016, Vietnam’s exports of wood products and wooden furniture reached nearly 7 billion US dollars, of which foreign direct investment companies accounted for nearly 60% of the total export value. The United States is an important partner in Vietnam’s furniture manufacturing industry and a destination for 41% of its exports. Japan is also one of Vietnam’s important export destinations.

In addition, free trade agreements have brought many advantages to Vietnam. Thanks to the Vietnam-South Korea Free Trade Agreement, the total value of imports and exports of the two countries has increased steadily since 2015.

Furniture manufacturing industry is a typical labor-intensive industry, Vietnam’s biggest competitiveness lies in low labor prices. The average wage level of Vietnamese workers is only 1/3 of that of China and 1/2 of that of Thailand. This helps to promote the trend of relocating manufacturing plants from other countries to Vietnam.

While U.S. furniture retailers choose to import from Vietnam, some Chinese furniture companies (whether for the consideration of cheap labor or for the consideration of avoiding tariffs) have also shifted their factories to Vietnam.

As early as 2013, Home A invested 450 mu of raw material production base in Vietnam to participate in the global home industry chain competition. In 2018, Minhua Holdings acquired a Vietnamese company engaged in sand production and sales for US$68 million; Yongyi shares invested US$9.5 million to build office furniture production base in Vietnam; Mike Meijia announced additional capital for three factories in Vietnam; and Henglin shares also announced the establishment of a wholly-owned subsidiary company in Vietnam for US$48 million to build Vietnam Office and civil furniture manufacturing. Base.

For those Chinese manufacturers with export business as their main business, bypass Vietnam can not only take advantage of Vietnam’s low labor cost, but also benefit their international market layout.

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