WENZHOU, China (Reuters) - The furniture factories outside this manufacturing hub are eerily quiet, victims of a housing crisis half a world away in the United States that is sapping demand for everything from beds to bookcases.
Wenzhou is the entrepreneurial heart of Zhejiang, a thriving eastern province that was the country’s biggest exporter of furniture in the first five months of the year.
China sells about 40 percent of its furniture output overseas, with half its exports shipped to the United States, according to the China National Furniture Association.
“Business is poor this year, especially since May,” said Liu Yongcheng, a senior executive at Zhejiang Adwin Furniture Co Ltd, which is running well below capacity.
When order books are full, the company can churn out $1 million worth of furniture a month.
The difficulties facing Liu and countless other exporters up and down China’s coast have grabbed the attention of the leadership in Beijing.
Officials from President Hu Jintao down have carried out a series of high-profile inspection visits, including to Wenzhou, to see for themselves how the still-unfolding global credit crunch is hitting Chinese industry.
Seen from Wenzhou, a major producer of garments, shoes, lighters and even sex-toys, the picture isn’t pretty.
Liu’s company was the first to move into an industrial estate about 90 minutes outside Wenzhou set up in 2005 to specialize in furniture manufacturing.
Many firms in the cut-throat sector have since come and gone, but Liu said this year’s burst of bankruptcies was unprecedented.
Apart from weakening U.S. demand, companies are having to cope with tight credit and reduced tax rebates. Many are shedding staff to survive. Liu says he has reduced his own workforce by one fifth to around 400.
Furniture companies around the globe have faced challenges in recent times.
U.S.-based Stanley Furniture Co Inc posted a surprise second-quarter loss and announced this month it was cutting 350 jobs. Italy’s Natuzzi SpA is relaunching itself with a new business plan as it deals with a strong euro, slowdown in North American and Europe, and low-cost competitors.
Zhu Changling, vice-president of the China National Furniture Association, said U.S. importers were cutting orders as America’s housing crisis deepened, while Chinese factories were reluctant to accept the currency risk entailed by long-term orders because of the steadily rising yuan.
Manufacturers are also having to absorb surging input costs, especially high oil and metal prices.
Cheng Zhe, a director at Zhejiang Haozhonghao Health Product Co Ltd, said raw material and labour costs had risen 20 percent and 10 percent respectively so far this year, squeezing the plump 30 percent profit margin the firm used to enjoy.
His firm, which sells a range of orthopaedic chairs, sofas and beds, exports about 80 percent of its production to the United States, the Middle East and neighboring Asian nations.
“We companies are undertaking bigger risks while our profit margin is shrinking,” Cheng grumbled.
The gravity of the sector’s ills are hard to judge from official figures.
Furniture exports in the first six months of 2008 were still up 28.5 percent in dollar terms from a year earlier, almost as strong as the 29.3 percent gain in all of 2007.
But a report to the cabinet by the Ministry of Commerce said the average profit margin of firms it surveys fell to only 1.1 percent in the first five months from 3.2 percent in the same period last year, a source told Reuters.
The ministry recommended slowing the yuan’s pace of appreciation and increasing rebates of value added tax (VAT) to exporters to prevent a sharp drop in overseas shipments.
Chinese furniture makers are still very cautious about trying to pass on fast-rising costs to their customers.
“We are in dilemma,” said Adwin’s Liu. “If we raise prices, our clients will leave. But if we don‘t, we are going to suffer.”
While his firm still hesitates, many others have already increased their prices. Some are losing export orders as a result and are having to focus more on the domestic market.
Hou Xiaojing, a sales executive at Zhejiang Fudebao Furniture Co Ltd, which makes sofas, desks and beds, said one of its big customers had switched business to Vietnam, where prices are lower.
But Wenzhou is nothing if not resilient.
The free-wheeling city is a cradle of capitalism and its traders are often in the vanguard when China carves out new markets in tough parts of the world.
As well as cutting staff, companies are trying to use energy and raw materials more efficiently, and seeking out alternative, lower-cost suppliers.
“We’re confident that things will get better in the second half,” Liu said, adding he was counting on October’s Canton Fair and other trade shows to win fresh orders.
Cheng at Haozhonghao said he believed Beijing would raise VAT rebates for selected exporters and keep a lid on input costs for the rest of the year.
“I think the government is ready to make some policy changes,” he said.
Jun Ma, chief China economist at Deutsche Bank in Hong Kong, expects Beijing to increase VAT rebates by 2 percentage points on textiles and by 4 percentage points on apparel in coming weeks.
“This policy should help improve profit margin of the beneficiaries by 1-2 percent,” he said in a note to clients.
Reporting by Langi Chiang; Editing by Alan Wheatley and Jerry Norton