Sofa kings look to upgrade

Foshan’s renowned furniture industry is at a crossroads, caught in the crossfire of the US-China trade war that came along just as structural factors were causing a slowdown. But this is a resilient, creative place, and it is working hard on taking the next step up. 

Anyone who thinks that Causeway Bay’s IKEA showroom is the pinnacle of a shopping experience for affordable furniture has not yet visited the Louvre. No, this is not the world’s most famous art gallery: it is the Louvre Furniture Mall in Lecong, a town in Foshan’s Shunde district.

The 380,000 sqm Louvre Furniture Mall is without doubt the crown jewel of Lecong, which is without doubt the Greater Bay Area’s champion of discounted furniture. The six-story structure houses around 2,000 original Chinese and more than 100 international furniture brands in carefully arranged showrooms. Like IKEA, they are laid out not by brand, but by bedroom, living room, bathroom, kitchen, etc.

But the Louvre is facing an uncertain future. The furniture industry here, which is heavily geared toward exports, has been caught squarely in the crossfire of the US-China trade war. It is casting around for ways to reinvent itself. Having already been through one remarkable transition thanks to the advent of online shopping, now it needs another boost.

On the day we visited, a Tuesday afternoon, the enormous building was largely empty. A few eager sales staff stood near the door to try and capture some unsuspecting passers-by, while colleagues were sitting around, idle and disinterested, playing on their phones. “It will probably take an entire week if you wish to see every shop in the mall,” our guide chirped, cheerfully. 

The Louvre was only the biggest. Outside on the street, for kilometers stretching into the distance, lay more than 50,000 furniture stores, small, medium and large. 

Humble beginnings

Today the capital of south China’s furniture industry, Lecong began its rapid expansion in the early 1980s from humble beginnings. Most were simple, family-run workshops that made tables and chairs that were sold by the roadside. 

Business started to really take off around 1996, by which time the town had 90,000 permanent residents and 100,000 “floating” residents. That was when it established a proper furniture wholesale market, covering an area of one million square meters. In 2000, the town brought in around RMB2 billion of private capital, dismantled the original wholesale market and rebuilt a 20-kilometer long production/sales/marketing belt, including the Louvre Furniture Mall, along the highway. 

According to data provided by the town’s furniture industry association, Lecong has more than 6,000 furniture manufacturing plants, accounting for half of the total in Guangdong and a quarter of China’s. It also has a total of 6.5 million square meter exhibition space dedicated to the industry, housing as many as 50,000 stores. At the peak of its growth in 2006, half of Lecong’s furniture were sold domestically, half exported, with an annual output value of RMB200 billion. Not bad for a bunch of families that started out selling by the side of the road.

However, as in many industries, furniture was a low-cost, low-margin business. The glory days couldn’t last once the cost of labor started to rise. And rise it did, starting in the early years of this decade, as Lecong, Shunde, and Foshan began to reap the fruits of their earlier efforts while workers from the inland provinces started to seek higher wages. 

“I remember back in 2014, the average salary of a factory worker was around RMB4,000, then it rose to RMB5,000 and now it’s already RMB7,000,” said Yi Yang, general manager of Foshan Mingpin Furniture. According to Yi, the company used to enjoy a 10 percent profit margin on its exports, but rising costs in labor, raw material and logistics had been eating away at that steadily over the years. And then came the biggest shock of all. The US-China trade war erupted, raising not only the costs of exporting to its biggest market, but making raw materials more expensive, too.

Last September, in retaliation to the US Administration’s tariffs on US$200 billion of Chinese products, China imposed US$60 billion in tariffs on U.S goods. Sadly, for Yi and his fellow furniture makers, this included a multitude of wood products. In Yi’s case, this meant for every square meter of ashwood he purchased from the US, he had to start paying an additional RMB600. His costs for this particular raw material suddenly jumped by 8%. 

It got worse. “Starting from last year, the government has begun to impose limits on the height and weight of a shipment, which pushed up shipping costs by 5-18%,” Yi said. And to support the old saying that it never rains until it pours, the industry has also been hit by a slowdown in the region’s property market since 2016, coupled with increasingly tougher environmental protection compliance. Sales have been sliding.

Next act?

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Still, these are resilient, creative people. They have reinvented themselves once before. Indeed, five years ago, things were looking bleak for the business, and Yi knew he needed to experiment. He spent RMB1,000 to open an online shop on Taobao, China’s largest e-commerce portal, launching it in 2015. Today, online sales account for 40% of the company’s business – and are increasing every year. 

November is the best month for Lecong’s furniture makers. That is when Alibaba’s Double Eleven (11/11) shopping festival takes place. It is an annual event, akin to Black Friday and Cyber Monday in the US, but 2.5 times larger than both of those combined. Last November Yi’s online shop sold RMB8.9 million. This was small potatoes compared to some of the bigger brands. One of his neighbors, Lin’s Furniture, broke the RMB100 million mark within 27 seconds from the opening bell and went on to take the top spot in furniture with total sales of more than RMB500 million. 

Online sales have transformed the furniture industry, just as they have transformed every other traditional, low-cost manufacturing industry in China. People like Yi are digital natives now, spouting the vocabulary of any self-respecting Silicon Valley resident. “Ten days before the festival, we followed the real-time data and looked carefully at changes in behavior, especially the moment when items were put into a shopping cart during the pre-sale period. We compared the data with that from the previous year and projected how much of those reservations would turn into actual sales on the day of the festival. This way we were be able to get prepared well in advance.”

Today, most of Foshan’s furniture manufacturers have adopted an online sales strategy, although it hasn’t been easy. Online marketing costs have been growing. 

According to Yi, customer acquisition is getting more and more costly as competition has heated up. More stores are online now, and bigger discounts are being offered as incentives. “The more you sell no longer means the more you profit,” said Yi. 

To the Foshan furniture manufacturers, how to survive and adapt to an ever-changing market is becoming all the more crucial. 

Lin’s Furniture has been among the most successful, and the owner says building a brand value is the only way to differentiate from the other competitors and avoid an outright price war. 

Creative marketing is essential in this endeavor. Last August, for instance, the furniture maker launched a beach party in Shenzhen’s Dameisha district. It included a seven-meter tall shark installation as the stage for a rock band. The young audience casually lounged on more than 100 couches placed on the sand, against the backdrop of a colorful wall made of 1,500 hand painted beach sandals. 

The strategy seems to have worked so far; in 2017, Lin’s Furniture hit RMB5 billion in sales. 

It hasn’t been easy for its 33-year-old founder, Lin Zuoyi, who opened an online shop on Alibaba’s Tmall, a premium spinoff from Taobao, in 2008. The company built a supply chain system in 2009, and a logistics network in 2010. In the following two years, it established a multi-brand strategy for its various product lines. 

But now it is raking in the cash. Lin’s Furniture has been the top seller for five consecutive years during the Double Eleven festival. It is looking for sales of RMB7 billion in 2018. 

If you build it …

Clearly, Lecong needs to focus on leaping up the value-added chain. And it appears to be trying to. About five kilometers east of the Louvre Furniture Mall stands a cluster of brand new buildings surrounded by typical rural scenery: scattered houses and wild greenery. The Next City, a 330,000 square meter industrial park, aims to transform Foshan into the source of creativity for the furniture and homeware industry, instead of a mere manufacturing and wholesale base. 

The complex comprising office buildings, apartment buildings and an exhibition hall is the city’s latest attempt to “bring together the resources of policy, market, industry know-how, innovation and capital to facilitate the upgrade of Foshan’s pan-homeware industry,” according to its promotional material. 

Opened at the beginning of the year, Next City has its work cut out to attract tenants and talents. Reaching out to service providers, such as product design companies or interior design houses, has been a challenge so far. A main road linking it to a proposed wetland park has yet to be completed, and occupancy rates are not where they should be.

Still, there is hope. The Greater Bay Area masterplan envisages a surge in transportation infrastructure investment over the coming years, which should put places like Lecong – and Next City – into more convenient range of the region’s bigger cities. It will be places like this that benefit the most from this shrinkage of travel time, as white-collar workers and SMEs decamp for cheaper office and living spaces. Foshan, in particular, is working on having hi-speed links into Guangzhou to the north, Dongguan to the east, and Zhongshan, Zhuhai, and Jiangmen to the south and west.

We will check back in. In the meantime, if you are interested to visit Lecong, read our FAQ or contact usfor further details.

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