UK Firms Retreat From China
‘Many are now sourcing products from throughout Europe’
Alex Davidson, business development manager, Kahrs (UK), looks at why firms starting to source products from Europe rather than China and what the market implications are:
A NUMBER of large UK distributors and suppliers have told me recently that they’re no longer sourcing the majority of their wood flooring products from China. Instead, many are ‘nearshoring’ or ‘reshoring’ – sourcing products from throughout Europe – including Eastern European regions.
China had, for some time, been the default choice for offshore manufacturing and sourcing low cost products. For several decades, many businesses have made the move without even considering other countries. But things are starting to change and are being steered by several strong macro factors:
1. Labour costs and competition for talent are increasing in China. Cheap, plentiful labour used to be China’s biggest advantage, but that benefit is shrinking. A recent study by Deloitte found that rising labour costs and increased competition for labour are two of the biggest challenges for Chinese companies. In some regions, wage inflation has remained in the double digits for the past decade.
2. Other costs are also rising. In some sectors, China may no longer be the cheapest place for foreign businesses. Electricity rates, increases in freight costs, real estate costs, a rise in corporate income tax and a reduction in tax-related incentives all push up the factory gate prices.
3. Companies are shortening their supply times: Sourcing goods in China and shipping them half way across the world can be expensive, time-consuming and risky.
With an unpredictable economy causing supply fluctuations, being able to shorten supply chains and quicken response times, while reducing exposure to volatile fuel or currency fluctuations, is vital. That’s why some UK-based flooring distributors are now sourcing products from near shore or domestic locations. In doing so, they can reduce supply chain costs, cut risk and make their businesses easier to manage.
4. China’s manufacturing competitors are steadily improving. During the last five years, nations like India, Vietnam, Indonesia and Thailand have become increasingly competitive in the production and sourcing of certain goods.
One edge that China had over these nations was its ability to scale up its massive manufacturing operations and gain economies of scale. But, some parts of Eastern Europe now offer the flooring industry the same quality board at similar prices to the Chinese producers.
This is as a result of direct government investment grants, efficient manufacturing methods, access to low cost labour and reduced shipping costs.
5. Consistent quality issues. Whilst everyone agrees that the overall quality of Chinese hard wood flooring has improved over the past decade, the flooring industry (especially the timber sector) acknowledges that it is the inability to access the consistent quality, offered by Scandinavian producers like Kahrs, that lets down the overall perception of quality from China, exposing them to reputational and financial risk.
So, how has Eastern Europe become an alternative to China, for UK flooring distributors? With investment and export markets in the Eurozone stalling in the last five years, Eastern Europe has looked to shift its focus of growth toward higher value production and services.
A combination of low start-up costs due to local government grants, access to lower cost labour and raw materials and an established hardwood flooring market in Europe have allowed some producers to gain market share – at prices that are comparable to some Chinese producers.
Whilst Scandinavian and German heritage brands still have a differentiation strategy in terms of adding value – and deliver uncompromising quality and design – Eastern European producers have adopted a deliberate strategy of cost leadership.
So what implications does this major trend have for retailers and end users? As China has been a big producer of solid flooring, European manufacturers tend to favour engineered production.
Just three years ago, the market was equally divided in terms of solid and engineered floor sales in the UK. This year in the UK, it’s estimated to be around a 75/25 split, in favour of engineered boards, with further migration towards engineered expected. As more distributors source from Eastern Europe, then engineered flooring will become the default consumer choice – and feedback from many major retailers is that this wouldn’t necessarily be a bad thing.
At face value, nothing has really changed for Heritage European producers, like Kahrs. They’re still faced with new competition offering products at unsustainable low market prices. But, what they can be thankful to the Eastern European manufacturers for is their hand in changing the market towards selling and promoting the engineered board. At the end of the day, quality will still reign supreme in terms of the established brands.
Major trends usually affect industries and markets positively, as they force businesses to compete, innovate or die. We now operate in a marketplace that is much leaner and where consumers are more savvy. And, sometimes ‘coming home’ isn’t as bad as it sounds!
This article has been reproduced from the Contract Flooring Journal website. You can find them at www.contractflooringjournal.co.uk.