China Focus  

A New Business Model

By Dr CS Lim

Some weeks ago while in Chengdu, I talked about the scale of furniture enterprises in Sichuan during a local interview. Sichuan has some of the world’s largest panel furniture manufacturers such as Quan You, Ming Zhu, Shuang Hu, Nan Fang. This is worth discussing as there does not seem to be any other manufacturers of such scale elsewhere in the world.

Doing business is an investment with the hope to gain the maximum return with every dollar put in. As a result, return on investment would be a key consideration. It is not always the case that the greater the investment, the higher the return. Every industry, every market and every product, has different scale requirements and limitations. Economies of scale sometimes cannot be achieved if investments are too low and in turn provide little return. The investment size has to be right. Theoretically, the point of diminishing returns marks the best investment scale. Exceeding this point maximum return will be lost.

I reckon few in the Chinese furniture industry would study this. Perhaps some would expand incessantly due to the encouragement by other leaders, which leads to inefficient, even futile investments.

In the manufacturing of panel furniture, the production equipment used are not complex. Some Sichuan entrepreneurs complicate the simple things. We may say in no exaggeration that panel furniture should be close to the market and be market-oriented. However, our Sichuan friends have turned the business into production-oriented, setting up a large factory in Sichuan and distributing products nationwide. In the process, money is lost on the road. The logistics cost in China takes up 13% of sales cost, 5% higher than that of America on average.

Instead, panel furniture enterprises should scatter their production in every corner of the country. Production via numeric-controlled machinery need not be that large scale and complicated and certainly should not be built not for show. Production should be close to the market for a variety of reasons:

* Saving distribution cost: it is quite unlikely that logistics cost would be lower in future unless price of energy prices falls substantially.

* Serving customers nearby: If a factory is close to the market, it will have a better appreciation of the needs of local consumers, and at the same time, is able to supply furniture made to order. Most custom made furniture are panel furniture. With the rise in the income of the Chinese, the demand for customized furniture would grow.

* Different cultures: With differing cultures in the different regions, the need for furniture in areas such as functions, appearances and sizes would differ. It cannot be the same throughout the country.

* After-sale service: Occasional damages are unavoidable during transportation and improper use by customers etc give rise to repair work needed. Only close proximity can address this. While local contractors can also deal with such scenarios, it is never as good or prompt as services provided by own factories.

* Local protectionism: Even within a country, some form of local protectionism may exists. Take tendering of projects as an example, project owners would take logistics cost and after-sale service into account, with tendancy towards factories within the province or nearby.

The larger the scale of panel furniture production, the higher cost of production than that of an ideal scale. Dr. Schuler, an expert from the Ministry of Agriculture in America, criticized that in the furniture industry, the majority of producers lack communication with the end consumers. They often rely excessively on retailers to establish the demands and expectations of the customers.

He believes there should be a new business model in which manufacturers can learn to get close to end consumers to better meet consumers’ needs for profitability. This depends on better marketing ability and better sales network, efficient and flexible production capabilities, and timely supply.

What he said refers to the competitive theory of Michael Porter. Although somewhat theoretical, his perspective is right. Factories have to be close to market, especially panel furniture and customized furniture (which majority are panel furniture).

In his article entitled “Past and present of the American furniture industry... will there be tomorrow?” concerning competitive tactics of American furniture industry, Schuler emphasized repeatedly some obvious negligence: lack of effective market analysis, lack of communications with the customers and inflexible manufacturing strategies.

This is correct. It is the same in the Chinese furniture industry. Take for example, how do gigantic panel furniture manufacturers located in remote Chongzhou, Sichuan, understand the national market? How do they communicate with the customers? And how do they respond to the different demands of the various markets? This new business model is certainly worth pondering over, not only for panel furniture manufacturers, but also for us all.

President, Council of Asian Furniture Associations Professor, Beijing forestry University , currently the Chairman of the Council of Asian Furniture Association (CAFA). He read at Nanyang University in Singapore and completed his PHD at Beijing University of Forestry. He holds a Post Doctorate from Michigan State University and is a visiting scholar there. Dr Lim has been active in the Singapore furniture industry, chairing both the Singapore Furniture Association and Furniture Association of Asia and Pacific previously.