At present, the changing and competitive global economy has had significant impact on the Chinese furniture industry in both domestic and export markets.

International situation: On one hand, influenced by the rise in oil prices and the US financial crisis caused by subprime loans, the global economy is showing clear signs of a slowdown; economists forecast global growth in 2008 will be lower than in 2007 and will decelerate further in 2009. On the other hand, with the speed up of the process of global warming, the whole world has to face more and more severe international pressure to protect the environment, including the worlds forests.

Domestic situation: influenced by the continuing rise of the trade surplus, high foreign exchange reserves, and the rise of the RMB, the Chinese government has had to adjust its external trade policy. All these events, as well as the rise of the price of raw materials on the Chinese wood market have built pressure on the position of the Chinese furniture industry.

Chinese furniture industry faces great pressure

The shaky US financial situation resulting from the subprime crisis has led to a depression in US home building markets. Annual home sales have dropped for two years, and are yet to bottom. Consequently, there has been a major decrease in the demand for furniture. Based on feedback from large furniture exporters in China, furniture sales in the American furniture market declined by 30%-40% in 2007. According to a report from the Shenzhen Furniture Association, Shenzhen furniture exports declined by 40% in 2007, and about 1000 furniture companies closed.

New US environmental protection regulations are also taking effect in the near future. In June 2007, two events involving the release of possibly harmful substances from wood products will have a great impact on the wood products industry. One event was the issuance of new regulations by the California Air Resources Board (CARB) which set the strictest standards in the world on the formaldehyde emissions from woodbased panels. All panels produced, as well as those traded or consumed in California will need to come up to this standard.

The second event was the Appeal Court order to the Environmental Protection Agency to widen the number of chemical to be regulated as harmful substances. The implementation of all the new regulations will greatly influence the exports of Chinese furniture and wood products to America, especially after 2008.

In China, foreign exchange reserves have already exceeded US$15,000 billion and the surplus continues to grow. A major consequence of this rise has been an acceleration in the exchange rate value of the RMB, particularly against the US dollar. The RMB exchange rate against the USD rose to 7.13 at the beginning of 2008 and by May 2008 was below 7RMB/USD. The RMB is expected to continue to appreciate over at least the near-term.

The adjustment of Chinas external trade policies continues. In June 2007, the Treasury and the State Administration of Taxation issued a Notice decreasing the export tax rebates for certain products. The notice was implemented in July 1st 2007. According to the notice, the export tax rebates for parts of wood boards and one-off wood products were abolished; the export tax rebates rate for furniture were reduced to 11% or 9%; and certain other wood products export tax rebates rate were dropped to 5%.

In the Restricted Products Catalogue of Processing and Trade, about 17 kinds of furniture products were listed as restricted products, including metal office furniture, lacquered bedroom furniture and other bedroom rosewood furniture.

The rise in raw materials prices accelerates. Since April 2007, Russia has implemented new tax rates on log exports. The export tariff for logs increased to 6.5%, or a minimum of 4 Euro/m3; however, the export tariff increased to 10% in Jul. 1st 2007, a minimum of 6 Euro/m3. The rise of wood export tariff from Russia has influenced the development of Chinas forest products industry. Its reported that, Russia will further increase export tariff for logs to about 50 Euro/m3.

The implementation of the new Labor Law at the beginning of 2008 further caused an increase in labor costs. It is reported that, the implementation of the new Labor Law led the increase of about 2.4 million labor cost. This raised production costs for companies and reduced wood product company profits.

Certain developing countries with a new furniture industry, such as Malaysia, have obvious comparative advantage in factors of production compared with China. It’s said that, the average daily wages per person is US$4 in Malaysia and US$3.2 in Southeast Asia, which is lower compared with the average daily wages per person of US$5.4 in East China. In addition, land costs are much lower in Malaysia than in China, and the usage of land in many cases is even free. This can reduce the production cost of companies that invest in furniture operations in Malaysia.

Strategies

To meet those challenges, the Chinese furniture industry needs to speed up the adjustment of its production structure as well as upgrading manufacturing processes. The Chinese furniture industrys responses are as follows:

Product Design and innovation With innovative design, products will distinguish themselves from the competition, creating consumer interest, and encourage purchases of Chinese produced furniture.

Speed up the modernization of management systems Large companies should raise more funds by listing on the stock market in order to utilize modern technologies, as well as facilitating purchases of small and medium-sized companies and thus consolidate the industry. Large companies can acquire famous brands, sales and distribution channels to speed up turnover. Small and medium-sized companies will need to accelerate the change from family to modern management operations and actively open up international markets, including Europe, the Middle East, Africa and Oceania for Chinese furniture.

Accelerate the consolidation and centralization process in the furniture industry The furniture industry should be further re-located to the Central and Western regions of China in order to reduce costs. For example, furniture companies in the Pearl River Delta may be transferred to North Guangdong province, Jiangxi province and North Jiangsu. Speed up the construction of a Chengdu-based furniture industry area to boost the regional furniture industry.

Change the export patterns of the furniture export companies. Furniture companies need to place great emphasis on foreign as well as domestic markets to develop an integrated business pattern which includes both export and domestic sales. The entrance of export companies into domestic markets will greatly improve the quality of domestic products and the operating efficiencies of companies, as well as intensifying healthy competition among furniture companies.