Furniture makers mull moving back home

HIGH POINT, North Carolina Mon Jul 28, 2008 11:34am BST

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HIGH POINT, North Carolina (Reuters) - Furniture maker Carol Gregg got some puzzled looks when she went looking for a U.S. factory to make her Chinese antique reproductions.

"They said, 'Honey, don't you know everyone is going to China?"' Gregg said. "It took a while to get people on board."

She used to ship American wood to a factory in China, which would make the furniture and then ship it back to the United States. Three years ago, even before oil hit $140 per barrel, she decided that was "really silly" and decided to move manufacturing back to the United States.

Now, a network of small U.S. factories produces 10 or 20 units at a time for her company, red egg resources, based in High Point, North Carolina. And other furniture makers are coming to her for advice on how to leave China.

Since 2000, scores of U.S. factories have shut down as furniture companies shifted manufacturing to China in search of lower costs. But as rising inflation drives up factory wages in China and high oil prices make shipping costlier, some companies are considering moving back home.

Like Gregg, many furniture makers are finding it hard to return, primarily because of steep factory start-up costs and lack of skilled labor. The credit crisis that began with failing mortgages but has now led to tighter terms on virtually all loans also makes it tougher to finance a new plant.

However, the cost differences are narrowing, particularly for smaller companies that never could match the big players' negotiating power in China. Gregg said three years ago, it was about 40 percent more expensive to manufacture in the United States than in China.

"Today, with inflation in China and ocean freight, we're about even," she said.

LABOR SHORTAGE

Ikea, the Swedish retailer known for its low-priced, flat-packed furniture, opened its first U.S. manufacturing plant about 50 miles north of High Point earlier this year. The Danville, Virginia, factory makes book shelves, coffee tables and side tables for sale at Ikea's U.S. and Canadian stores.

"The most expensive part of the home furnishings business is actually transport," said Ikea spokesman Joseph Roth. "For us this (move) makes total sense."

Rebecca Smothers, the mayor of High Point, hopes others will come to the same conclusion. The city, known for its twice-yearly home furnishings trade show that draws tens of thousands of visitors, has been hit hard by factory closures.

She said some European companies have expressed interest in setting up shop here. The euro's rise to a record high against the U.S. dollar this year has hurt European exporters.

But for many of the major U.S. manufacturers, China still holds a formidable advantage on both price and infrastructure.

Paul Toms Jr., chairman and chief executive of Hooker Furniture Corp (HOFT.O), said he was surprised by the swift spike in oil prices and the pace of wage increases in China, and was looking for other places to manufacture. The United States was not an option for the company, which has shut five U.S. factories in recent years.

"As we closed those plants, we sold the real estate and sold off the machinery and equipment," he said in a telephone interview. "The work force has dispersed, not only the hourly workers but the supervision, had generally moved into other industries. There's not enough need for skilled wood workers for everybody to be able to stay in this industry."

"So it's not feasible even if we thought we could produce a better value product here than we could in Asia," he added.

Instead, the company is switching some manufacturing to other developing countries, including Vietnam, Indonesia, the Philippines and Honduras.

TIME AND DISTANCE

In addition to cost, distance is also becoming an factor. Jobi Blachy, president of upscale furniture makers Edward Ferrell and Lewis Mittman, said one reason why his company manufactures in the United States is speed. Custom orders would take weeks longer if he had to ship them from overseas.

Blachy's customers spend as much as $26,000 for a dining room table, so paying a bit more for U.S. labor is no big deal. But even for lower-priced furniture retailers, which have scant pricing power when demand is weak, distance is starting to factor into the sourcing decision.

Alan Cole, who overseas the upholstery business at Hooker Furniture, said retailers were increasingly interested in domestic-made goods as a way to keep a tighter grip on inventory when demand is unpredictable.

If they place a large order from China and the economy remains weak, they may be stuck with the big stockpiles. And if it rebounds, they could be too slow to stock up.

"Retailers are trying to figure out how they can buy more products domestically and still not lose some of the economic value that imports bring to them," he said.

"That's quite a shift in some of the retail thinking because up until probably within the last year or two years, the retailers were continuing to import more and more directly from Asia and to be less dependent on domestic products."

(With additional reporting by Karen Jacobs in Atlanta)

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