VZCZCXRO3864
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0437/01 2050552
ZNR UUUUU ZZH
R 230552Z JUL 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 7434
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
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UNCLAS SECTION 01 OF 02 GUANGZHOU 000437 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR CHINA OFFICE 
 
E.O. 12958: N/A 
TAGS: ETRD EIND ELAB ECON PGOV CH
SUBJECT: A Lighter Coat of Varnish: PRD Furniture Manufacturers 
Struggle in a Transitioning Industry 
 
REF: A) GUANGZHOU 228, B) GUANGZHOU 121 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly.  Not for release outside U.S. government channels.  Not 
for internet publication. 
 
¶1. (SBU) Summary: Hard times are here - and likely here to stay - 
for the Pearl River Delta's (PRD's) furniture makers.  The industry 
has been among the most affected by a local business environment 
that has become less friendly to labor-intensive, export-oriented 
firms.  As with other similarly oriented businesses, furniture firms 
are in the midst of consolidation, with pressure to make production 
processes more efficient and shift sales towards more profitable 
markets.  Rising labor costs, currency appreciation, higher inputs 
costs, and the after effects of U.S. anti-dumping ruling have forced 
firms to face difficult choices: close shop or re-structure to 
operate on shrinking profit margins.  End summary. 
 
¶2. (SBU) Labor-intensive manufacturing industries that have driven 
the Pearl River Delta's (PRD) dramatic growth over the past three 
decades are facing a tough new business environment with rising 
costs, a more challenging export environment (refs A and B) and a 
provincial government determined to move forward with its "double 
transfer" policy.  The furniture manufacturing industry has been 
particularly hard hit. Overall, furniture exports to the U.S. fell 
10 percent last year from the year before.  Many firms have been 
forced to shut down.  Although no reliable statistic for closures is 
available, some contacts put the figure in the thousands. 
 
Rising Labor Costs Bring Trouble 
-------------------------------- 
 
¶3. (SBU) China's new Labor Contract Law is the "biggest challenge 
for the furniture industry in Guangdong," according to Zhang 
Chengzi, Deputy Secretary General of the Guangdong Furniture 
Association.  Guan Yong Kang of Kinwai International Furniture said 
that some firms have seen labor costs rise by 10-15 percent since 
January when the law was first enacted.  As a result, some large 
furniture manufacturers are trying to brand themselves as "less" 
labor intensive to avoid being subject to government policies aimed 
at moving such industries out of the PRD.  In addition, some 
manufacturers have strived to enhance worker productivity as a means 
to reduce labor's percentage of overall costs. 
 
Inputs Costs Rising 
------------------- 
 
¶4. (SBU) Rising inflation has also caused great stress for PRD 
furniture makers.  LacquerCraft, a subsidiary of the Samson Group, 
which is the largest Chinese furniture exporter to the U.S., raised 
prices on products in the U.S. for the first time in April 2008 in 
order to maintain an operating profit.   The firm has seen wood and 
shipping costs rise dramatically over the last 2 years.  With wood 
costs up, more products are now made with particleboard, which is 
less expensive and reduces shipping costs because it is lighter. 
Despite rising costs, most manufacturers will continue importing raw 
hard woods from the United States and Canada because the quality of 
wood for production cannot be matched in China or Northeast Asia. 
However, shipping costs for U.S. and Canadian wood have also risen 
40 percent in the last year. 
 
Renminbi Appreciation Adds Heat to the Fire 
------------------------------------------- 
 
¶5. (SBU) The rising value of the renminbi has also dealt a harsh 
blow to PRD furniture manufacturers, which have depended primarily 
on exports.  While the industry has expected the renminbi to 
appreciate for quite some time, many firms complain that the Chinese 
monetary policy isn't transparent enough.  Several executives told 
us that they haven't had enough advance notice to re-structure their 
business models in preparation for renminbi appreciation.  However, 
Kinwai's Guan commented that his firm could benefit from faster 
appreciation of the renminbi, which would increase its buying power 
for U.S. forest products.  According to Guan, a stronger renminbi 
would allow the firm to buy more U.S. wood and increase production 
for both domestic and other overseas markets.  Kinwai would seek to 
continue exporting most output to U.S. markets, while expanding 
sales to markets in Europe, Asia and especially the Middle East. 
 
Lack of Financing Too 
--------------------- 
 
 
GUANGZHOU 00000437  002 OF 002 
 
 
¶6. (SBU) Further complicating the situation facing PRD furniture 
makers - credit is harder to get.  In a recent Shanghai Securities 
News article, Wang Jue, the small and medium enterprise loan manager 
of the Guangzhou branch of Shanghai Pufa Bank, said his bank was 
having a difficult time getting clear and accurate financial records 
from his furniture industry clients.  As a result, the bank had 
almost zero accounts on record with PRD-based furniture 
manufacturers.  Overall, the bank is now issuing a much smaller 
number of loans to enterprises in labor-intensive manufacturing. 
Local media reports have also recently highlighted credit-tightening 
as a factor that has driven PRD-based furniture manufacturing SME's 
to apply for loans from "underground banks." 
 
Anti-Dumping Duty Is More than Just a Pinch 
------------------------------------------- 
 
¶7.  (SBU) PRD furniture manufacturers repeatedly complained to us 
that the U.S. anti-dumping duty on furniture imports from China is 
one of the biggest obstacles to maintaining profits and expanding 
markets.  (Note: Wooden bedroom furniture from China has been 
subject to anti-dumping duties since 2004.  End note.) 
Manufacturers have adopted different strategies to respond to the 
duty.  Some have successfully shifted their focus to domestic 
Chinese sales, but many PRD furniture manufacturers lack research 
and marketing experience in the local market.  Kinwai's Guan said he 
expects the duty to rise soon, so his firm is currently negotiating 
with the U.S. Furniture Association to find a way to mitigate the 
impact of an increase.  Several executives told us that although 
they understood why the anti-dumping duty was put in place, they 
felt that the scheme would not help U.S. furniture manufacturers in 
the long run without additional U.S. subsidies.  They argued that 
most U.S. firms are "less cost efficient" because they use less 
advanced technology and have fewer workers than their PRD 
competitors. 
 
GOLDBERG