April 28, 2015

The Ramifications of Globalization Through the Eyes of the Domestic Furniture Market

I’ve been thinking a lot about free trade, labor unions, American manufacturing, and free markets for the past few weeks.

Domestic Furniture Manufacturing Industry and Globalization

Even formerly great American brands now manufacture much of their furniture overseas.

You know that, on the whole, American manufacturing is still as strong as it was in 1960.  We still produce roughly $20 out of every $100 of world goods.  The difference?  Technology and, to a lesser degree, globalization have made it possible for a single worker to generate far more output than any of our ancestors could have imaged.  Our manufacturing base is as productive and strong as it ever was, it just requires a fraction of the workers.  American manufacturing profits remain the same on an inflation-adjusted basis, the world still gets our goods, but it creates an illusion of decline where none exists.

That said, it is true that a handful of specific domestic industries have been tremendously hurt by globalization.  What we’ve gained in aerospace engineering and defense applications, nuclear technology and pharmaceuticals, we have lost in industries that make things such as light bulbs and furniture.

It is the latter, furniture, that has been on my mind.  The recent home renovation project has resulted in me immersing myself completely in the furniture industry, to the point I now am working my way through the 10Ks of every major (and minor) furniture company, reading trade publications, and studying different manufacturing methods.  By the end of the summer, I’ll know as much about analyzing dovetail joint, mortise and tenon, and joinery construction as I do about balance sheets and income statements.

A Brief History of What Has Happened to the Domestic Furniture Manufacturing Industry

Over the past decade, the domestic furniture manufacturing industry has been nearly obliterated.  Although sales remain decent overall, despite a massive drop in the aftermath of the Great Recession of 2008, losses of hundreds of millions of dollars per annum are now the norm.  That is a situation that cannot go on forever.

To adjust, managements of various furniture companies shut down their American factories and shipped jobs overseas.  There was a great explanation I found on a message board about furniture and furniture quality.  I’m going to quote verbatim:

A trained American craftsperson in the furniture business earns about $ 25.00 per hour on average, which bills out in shop time hours to around $ 60.00 per hour after benefits added such as Workers Comp, Health Insurance, 401K, Social Security and Medicare – plus Unemplyment taxes and the like that the employer must pay. In China, the workers earn .50 an hour and there are no benefits per se. So obviously, the reduction in the labor costs is massive. This is the primary reason for the move to China.

Materials. There is a huge increase in exporting American lumber to Pacific Rim countries to take advantage of the cheap labor. Exports of both solids and veneers are up 13 to 15 % per year, every year, with Vietnam becoming a very aggressive buyer of raw lumber as they challenge the Chinese for a part of the finished American furniture market share. All in all, the wood used in much of the imports is not too bad, but its not the Selects and better that are being shipped to the Pacific Rim. Finishes are like wood as well, there are expensive ones, and cheap ones (raw cost). Guess what goes on price point furniture?

Production. Speed = profits. A highly skilled woodworker can only work so fast, so in order to get pieces out the door you have to modify how they are put together if you want a volume increase. Virtually every large shop now has CNC computer-controlled cutters that require a software person to program more than a woodworker. They run unattended and only require someone to load blanks in one end and remove the output later on. Backboards on furniture have been replaced by Masonite, because its faster to cut out a piece of Masonite than to fit individual backboards, saves about an hour in time. Hinges are moving to simple screw in kitchen-style that sit on the face of the piece (15 minutes) rather than those that have to be cut in and fit (2 hours). Drawer bottoms are Luan Plywood rather than pine of poplar not so much for material costs but its so much faster to fit them that way. Wood pulls get screwed on rather than bore and wedge fit, and finishes are shot with high-speed pigmented dyes/cheap topcoats rather the hand-applied anilines. The list goes on and on and on.

Its not that these companies don’t know how to make it correctly….they do. Rather the average American consumer has refused to support traditional USA-made furniture because they simply recoil at the prices.

The author of this post then goes on to say, later:

Truth be told, you would probably recoil at what your bedroom suite would cost if you had it USA-made the proper way by American craftsmen. When you say $ 5,000 for the suite I think “Well, that about covers the bed” on high quality items. I’m not sure what all was in your suite, but add two chests, a pair of nightstands and a mirror to the mix and $ 12K to $ 15K is where you would be on properly made pieces done in America.

At the end of the day, your get what you pay for.

The Furniture Companies Can’t Be Blamed Entirely

In one sense, the domestic furniture companies can’t be blamed.  The average American, who lacks even the most cursory financial education, is behaving irrationally.  They don’t know how to properly amortize expenses and compare value and quality to purchase price.

What has been going through my mind, and what is worrying me in the back of my thoughts as I go through the manufacturer books to find products I love, is that the conclusion at which I arrive seems inevitable.  That conclusion?  The furniture industry, just like consumer products, is going to be a victim of the so-called consumer hourglass theory.  That is, we are fast approaching a world where there will be only high-end products for people with the knowledge, understand, and pocketbook to afford them, and low-end products that are designed to hit a price point.  The great middle will be hallowed out; emptied, like the shape of an hourglass.

I knew that time was on us when Procter & Gamble announced last year they were reshaping their entire marketing system to focus on the consumer hourglass theory.  This isn’t good for society.  But how can I argue with it?  Free people, making free choices, chose stupidly.  They bought cheap crap that didn’t last, thus forcing most of the quality furniture manufacturers out of business or overseas, and those who survived were those serving the high-end price points because the consumer base in that segment focuses on quality, longevity, and lifecycle cost, not the sticker price.

I don’t want to live in a two-class society, even though I’d be (thank God) fortunate enough to be among those who can afford the good stuff.  I cannot fathom a situation in which a two-class society doesn’t eventually devolve into a form of totalitarianism or feudalism, in some manifestation or another.  Then, meritocracy dies.

The domestic furniture manufacturing industry is a microcosm of what is happening the middle class.  It isn’t caused by corporate America, it is caused by the choices of the middle class itself.  You cannot “vote” with your dollars for cheap, inferior products and then expect the good quality folks to be around whenever you feel like it.

  • Gilvus

    How do you amortize items when it’s so difficult to figure out how long something lasts? People treat their possessions differently and live in different environments (e.g. a Honda in Alaska faces different climate and environmental factors from one in SoCal). It’s very hard to figure out a good time-adjusted value when there are too many wildcard variables in your equation.

    • Joshua Kennon

      That is the same problem a business man or investor faces when trying to calculate intrinsic value.  Life doesn’t work in neat little formulas ahead of time.  It requires a bit of art to the science.  People do this on a gut feeling basis every day.  A mother with five kids might look at really nice carpet and say, “No … not until the kids are out of the house.”  

      Bottom line: You have to guess.  You have know your lifestyle.  It will differ from person to person, which is part of the concept behind personal opportunity cost.  

      There is a little bit of safety net in that quite a few manufacturers account for this.  I would never buy a Yamaha grand piano that was seasoned for the Japanese market, even though it is considerable less expensive, and put it in a home or office in the United States.  The manufacturer treats the wood for the natural humidity levels of each nation so the lifespans are roughly the same.  When you move products from one market to another in which they were never intended, they are often called “grey” market goods, at least in the instrument world.  Likewise, I would never put an expensive grand piano in a home in Key West or Bora Bora.  I imagine the humidity levels would destroy it unless you created the perfect environment.

      With things like furniture, it shouldn’t matter if you are in Alaska, Georgia, San Diego, or Columbus.  In today’s world, most people have heating and air conditioning, creating a range of acceptable conditions that aren’t going to have a lot of variance like they would have before climate control became expected.  

      Still, the relationship to value should holdup.  If a cheap chair took a lot of damage, it will probably be destroyed.  If a higher quality chair took a lot of damage, it could probably be rebuilt for a fraction of the cost of buying it new.  Most of these good firms can do restoration work or point you to someone who can.  My late music teacher growing up had her Steinway & Sons grand pianos completely rebuilt every two decades or so throughout her life and by the time she passed away, the market value was higher than her purchase price and cost into each instrument.  It’s the same idea.

      • Gilvus

        I guess I could figure out a lot of numbers by doing consumer research. But frankly, that takes too much time and detracts from me learning how to earn more money.

        Remember when you wrote about the refrigerator problem over at Investing for Beginners?. You taught me to think this way. Have you reneged on the lessons you try to teach your readers? :-p

        • Joshua Kennon

          Haha!  No.  Not at all.  Personally, I enjoy the process.  A lot.  Then again, I spent an hour or two building my character in Skyrim so I enjoy the creation process as much, if not more so, than the proceeds; the furniture designing is just a symptom or manifestation of that.  If you don’t get the same utility out of the process or end result, by all means, skip it.  Or, better yet, use a well-regarded shortcut like Consumer Reports, which does all of the work for you.  

          My father is the same way on lawn care.  Even though it’s a horrible financial use of his valuable time, he still likes to take care of his own lawn.  I pay to have mine done so I can focus on making more money and building my businesses.  Same idea.  

          Lawn care has no utility to me (though I would like to learn to cross-breed roses someday) so it’s a waste of my time.  Same thing.  Buying stuff for your house or office might be your emotional utility equivalent of my lawn care, in which case it’s perfectly rational and legit to say “forget about it” and buy the Target chair.  In such an event, go forth and buy cheaply made goods!  (I wish I could insert triumphant march music here with trumpets blaring … alas, limitations of the Internet.  Something like Verdi’s ‘Triumphant March': http://youtu.be/xrOrPTf_upQ)

        • Gilvus

          Okay, I like that. The “fridge problem” article is the reason I haven’t done Black Friday shopping for three years now, by the way.

  • http://profiles.google.com/crabhooves Ben Jones

    I think you’re putting too much of the blame onto consumer shopping habits – you made a terrific case for why it’s better to buy expensive furniture than furniture made cheaply. But if you are barely getting by you cannot afford to go out and put down $2000 on a chair. You need some place to sit when you get home from working your multiple jobs. So even though it’s more expensive in the long run, that’s the only viable option for the working poor. It doesn’t all come down to individual agency – there are many cases where the option just doesn’t exist.

    • Joshua Kennon

      I understand what you are saying.  

      Before free trade opened borders, the choice was effectively made for consumers – the idea of getting a $39 bookcase was ludicrous because those alternatives simply could not, mathematically, be produced using the domestic labor force.  Thus, people naturally waited until they could afford better stuff, and this is one of the reasons you see the homes of members of my parents’ generation filled with furniture they received from their parents and grandparents.  

      When free trade allowed labor to be sourced so that $39 bookcases were available, suddenly the people who might have bought $400 bookcases didn’t, anymore.  The people buying the best $5,000 bookcases just kept buying.  It was the middle market disappeared.  To try to survive, they cut corners, lowered materials, dropped some quality controls, and struggled to stay afloat.

      In the sense that raw sales figures are concerned, reading through the 10Ks of the manufacturers, I can’t come to any other conclusion than consumer choices are 100% to blame but – and this is an important caveat – I recognize that a lot of consumers feel as if they don’t have the option to buy the middle market or higher end stuff, especially when faced with an immediate solution to their problem (the $39 bookcase) when they are worried about food and heat.  

      I do tend to overweight people’s decision making abilities because it is an area in which I normally excel.  (I’m the guy who bought his first grandfather clock before his first car because I calculated the former should appreciated, while the latter would be worthless.  It is sometimes difficult for me to accept, even though I know it, that other people are not as rational.)  In the past, families simply went without the bookcase until they could afford it because, again, the choice was made for them.  Now, they get the $39 bookcase and the middle manufacturer goes bankrupt.  I would just wait.  I would stack the books on the floor until I could get what I wanted.  
      The only way out of this is to end free trade as it is currently structured.  I have a moral problem with that because I believe that any two people should have the right to contract among themselves to conduct any business that does not harm others.  

      Then again, the free market is an interesting phenomenon.  The backlash against furniture brands such as Stanley, which moved their production overseas, was so severe that many are considering moving back to the United States at great expense.  I imagine a few brands will actually thrive in the middle market as the few remaining “true” American companies.  

      Sorry, I’m just thinking out loud  … or typing silently, however you want to say it … right now.  I’ve gone off subject.  The whole situation has been bothering me, like a nagging indicator of what is to come for the low skill middle class.  I don’t like the implications.  I’m not sure how to avoid it.

    • Joshua Kennon

      P.S. I agree.  If you are barely getting by, it is stupid and foolish to buy a $2,000 chair.  You should be saving everything you can until it represents a small part of your income.  This, incidentally, is one of the reasons it is easier for the rich to get richer.  Their purchases are more economically productive.

      • http://profiles.google.com/crabhooves Ben Jones

        I think a lot of it comes down to defaults – before the middle class
        began its slow and seemingly irreversible collapse, the default was a
        local factory job, usually unionized with good pay and benefits – that sets you up for life. You didn’t have to go out of your way for it. The same
        principle applies for furniture, when you had no choice you were forced
        to make the smart decision – but now that there are other choices
        people make bad ones out of ignorance or are simply unable to make good

        I agree you do tend to overestimate other peoples decision making
        abilities – and their discretionary income, I mean that with no
        disrespect. Lord knows I have my blind spots too. For me it usually
        comes down to idealogy, I assume that people spend as much time as I do
        thinking about the best system and way to run the world. That they are
        constantly reassessing and trying to filter out bias – sadly they are

        I don’t know how I feel about free trade to be honest – it’s something that I wrestle with and haven’t made my mind up on. It’s a bit outside the scope of this comment, but sometimes I think free trade can act as a continuation of colonialism, but on the other hand it can drag poor countries up (China) and rich countries down (the US). Maybe it balances out in the end, I don’t know.

        I would be VERY interested to see if Stanley moves their manufacturing back to the US. I think that people vastly overestimate the importance and possibility of consumer boycotts/action, most people just don’t care, don’t know or can’t boycott a product because it’d involve radically changing their life style (try going without oil).

        You’re spot on about why the rich get richer – past a certain point (as you know better than anybody) your money works for you and it just snowballs from there. I’m not saying that the poor can’t do this, they can and do. But idealogies and wishful thinking aside social mobility in the US is low, lower than most advanced economies and I doubt it’ll get better. How to change that? I have no idea.

        The middle class thing bothers me…a lot. Probably more than anything except animal cruelty and the environment. I don’t see a solution, we can encourage people to save and to make do and to start their own businesses, but statistically most small businesses fail within their first year and I don’t think it’s going to get better as the power of compounding works in corporation’s favour and they become even more influential. It’s just a sad reality of the “game” we all play and I can’t see it as any one groups fault. I feel elitist saying this but…. there is a large segment of the population that will never be able to be knowledge workers, they don’t have the mental capacity. P & G is right, a two class society seems inevitable for America.

        I am really curious to see how the idealogical landscape changes as the middle class dies. Will we see a return to robber baron capitalism? Or its transnational equivalent? Commumism was born out of the mass of workers who led deeply unenviable lives. Will we see a modern equivalent? How will the conception of the American Dream change as it becomes more and more out of reach for more and more people? Will the diverging economic landscape see the birth of new countries and a return to main stream secessionalist sentiments? I don’t know, but I’d like to see.

        Don’t apologize for thinking out loud! I sometimes find it more valuable to see someones thought processes as they consider things than the actual end result.

  • arnuld uttre

    Well, this consumer-hourglass theroy is happening in India too, it started 2-3 years back with the explosion of online shppping in India. It is good in some ways but bad in more ways. I wanted to find out a good quality computer table designed with some common-sense of how one uses a computer table generally. Unfortunately I could not find one. Instead of a one with good design, made out of iron and/or wood I had to settle for half-good-design with of 1/4th cheaper quality material. It saddens me. Life is about quality and herds of sheep choose low price over a good quality.