1. Outsourcing in North Carolina’s Furniture Industry Meenu Tewari UNC Chapel Hill April 13, 2004

2. The Facts: Manufacturing lost 31,100 jobs in 2003 The decline in several of North Carolina’s traditional manufacturing industries has grabbed headlines recently In the last year alone (since 2003), NC lost 5% of its total manufacturing employment, a loss of 31,000 jobs – in old and new industries Textiles – 7,700 (21.4%) Furniture – 5,300 (8.4%) Apparel – 5,200 (16.5%) Computers and Electronics – 3,500 (8.3%)

3. Facts Furniture makes up nearly 10% of NC’s employment, second only after Textiles which has a share of 13.5% Recently, both industries have been hemorrhaging

4. Job losses in furniture are real: The furniture industry lost 5,300 jobs between Jan 2003 and Jan 2004, a decline of 8.4%, and Textiles lost 21.4% of its employment (or 7,700 jobs) 75% of wood and metal furniture sold in the US in 2002 was imported. Even as firms merged, downsized and shut down, furniture sales rose by 5% in 2003. Thus, the fortunes of firms and of workers in the industry are diverging

5. The losses have had variable spatial impacts Some regions are hurting more than others:  E.g., Davidson county – the heart of wooden furniture (case-goods) manufacturing in NC, with branch plants of all the big players – has lost over 8200 jobs in wood products since 1992 – pushing unemployment to 9%  Wooden furniture is the segment hardest hit by imports. In 2002 nearly half of all case goods sold in the US were imported.  But Davidson also gained 8000 service jobs.

6. The debate Not unreasonably, in popular and policy circles this erosion of NC’s traditional industries has been linked to trade, especially NAFTA, and to rising immigration, especially from Mexico.

7. There are a growing number of Hispanics in the Furniture Industry Size of the Hispanic Population in NC's furniture dominated Counties 1980-2000Source: NC Empl.Security Commission 198019902000 Burke 306 283 3,180 Catawba 657 687 7,886 Davidson 562 474 4,765 Forsyth 1,616 1,961 19,577 Guilford 2,202 2,525 15,985 Randolph 395 516 8,646

8. But the rise of Hispanic workers in NC predates NAFTA. Rather than a result of looser immigration laws after NAFTA, it was in part a result of a tight labor market in furniture in the early 1990s that drove furniture firms to recruit skilled workers from Mexico The tight labor market was the result of successful efforts by NC counties to diversify their base beyond furniture As white-collar jobs arrived with slightly higher wages than furniture, and absorbed the labor pool’s younger workers away from furniture, local furniture firms began to recruit “whole villages” of skilled Mexican workers (rather than raise wages) [Source: personal interviews in High Point]

9. Is it NAFTA? 1990-1994 (Pre-NAFTA):  Employment in furniture fell by 9% in NC, while the number of firms grew by 1% 1994-1999 (Post-NAFTA):  Employment fell by only 2%, and there was no change in number of establishments 1999-2003 :  Employment fell by 25%, and number of firms by 7%  What happened in 1999-2003? China

10. The sharpest declines in furniture firms in NC came after 2000, 6 years after NAFTA was passed

11. The sharpest employment declines in NC furniture also came after 2000

12. Thus, the Changes in the NC furniture market were underway well before trade barriers fell Tight labor market in the 1990s pushed US firms to recruit skilled woodworkers in Mexico Changes in the structure of the industry’s supply chain throughout the 1980s and early 1990s - rising demand led to growing capacity utilization and even inefficient plants were profitable; When the cresting demand abated in the recession of the early 1990s, the lowest margin firms went under. When tariffs fell, intensifying competition added to the pressure on the bottom line, leading firms to find ways to cut costs. Strategies:  Mergers,  Takeovers  And: a growing number of firms began to turn to China for cheaper imports

13. Why China? (Why not Mexico?) 1. Massive investment in manufacturing capacity in furniture in the early 1990s  A bulk of this came from Taiwanese investors and contract brokers in the early 1990s Taiwan was the largest exporter of furniture to US till about 1992. Gradually Taiwanese exporters shifted their capacity shifted to China

14. Why China? 2. Training by key US firms during the industry’s consolidation stage (1990s) helped move Chinese producers up a learning curve from cue sticks and bar- stools and carved furniture to dining rooms and bedrooms in modern styles.  “By 1996 we had a decent selection of formal dining room. In the last two years bedroom has come of age.” “Now all of a sudden a customer has to buy only 20 sets of a bedroom to bring in a container.”

15. Why China? 3. Meanwhile, as buyers began to ratchet up imports and off-shore sourcing, a key turning point cemented the rise of the Chinese product in the US  Massive investment by two of the largest varnish and resin producers in China  Technical training to local firms in the critical aspect of finishing

16. Why China? 4. At the same time, key innovations were taking place in the shipping industry Containerization – mixed containers Overseas warehousing Sophisticated logistics  Investment in shipping is coming from firms completely unrelated to furniture – the goal appears to be to increase shipping traffic and profitability on this route (China- US/west), rather than any industry per se.  Outcome in furniture: Even with $100-200 per bedroom group, the margin for landed imports is 55% rel. to 43% for the industry as a whole

17. Why China? 5. New investment and actors at the retail end in the US furniture industry are intensifying competition:  A traditional producer-driven industry, furniture in the US is turning into a quasi-buyer-driven industry  Driven by a rise in innovative branding, retailing and marketing, new trends like “ife-style branding” are creating whole new niches at the retail end  With innovations in retail, low shipping & import costs, even small retailers are entering the furniture business providing new designs and variety – this puts pressure on trad. producers.

18. How are local firms responding? Consolidating or closing down  Manufacturers getting involved with franchise stores Outsourcing ever wider segments of their product lines to China Focusing on the high or low end of the market.  The middle price points are hurting the most  Lowest price points are automating to increase productivity  The highest quality segments are adopting innovative training and human resource practices to retain a versatile and skilled workforce Segments like upholstered furniture, custom designs are doing quite well – competition with China is mainly in wood products

19. What to do about this? The region’s history is a guide to sources of revitalization  Its own early success was a result not only of low wages, but of creating new institutional bases of resilience and dynamism Created institutions in NC that provided firms with access to trained labor and technologies Sold their success to the media – the power of image Sate invested in infrastructure – rails and roads

20. What to do? (cont’d) Collective action, refocusing on creating new alliances  The first serious setback came in 1910 – mergers and bankruptcies were rampant  Set of industry leaders emerged to revamp the industry Improvements in own plants and product quality Support and service industry – access to finishes and input services Revamped distribution – the package car express Improved labor relations – group life insurance plan (1917) and monthly bonuses (1916)

21. Finally: Several key competitive advantages remain in US hands:  Design  Domestic distribution, branding and marketing  Catering to segments where timely delivery of high quality, customized products is key  Servicing (after market)  Even in imports, US manufacturers and retailers are controlling the flow of goods and designs.  Finally, there exists a strong case for a “new” New Deal around novel partnerships between the state, business, labor and civic society that will deepen local capacities in dealing with uncertainty and volatility innovatively, including developing alternative mechanisms – ‘Pragmatic collaborations’ - for delivering social insurance (health-care, benefits) and training to workers in a volatile world.