Economic Convergence

Samson/Laquercraft a very large furniture manufacturer originally from Taiwan is opening a factory in Bangladesh. The reason they chose Bangladesh?

It will be Samson's first plant outside China. The company says it can fill some of its product needs at a lower expense in Bangladesh.

The 500,000-square-foot plant will be in the port city of Chittagong in southeast Bangladesh, along the northern coast of the Bay of Bengal. Company officials have been working on the project for about two years. Construction began in October and initial production is set for July.

The plant will produce a line of lower-medium to medium-priced solid and veneer casual dining sets for Samson's U.S. marketing companies, Legacy Classic and Lacquer Craft USA. The company isn't currently producing such sets in China that hit the price points it can achieve in Bangladesh, said Lacquer Craft President Mohamad Amini.

While China remains its main manufacturing hub, the company said it chose Bangladesh because of its lower-cost labor. Amini estimated that labor costs are about 40% of what they are in China.

Of course, they are bringing over Chinese managers and technicians to start the plant up, but that's not new as they did that when they moved to China, too. Laquercraft was one of the first Taiwanese factories to move to China to take advantage of lower labor costs there.

Since furniture is a relatively new industry to Bangladesh, it will take time to train workers and also to get the supply chain in place, Amini said. This includes anything from finish to hardware suppliers.

"There is no furniture presence there," he said, adding that the lack of a furniture infrastructure reminds him of China 15 years ago. "Although we are very optimistic about what we can do there, we will have our share of challenges. But we have done this in China so we know what to do to accomplish our task."

Amini said a team of supervisors, technicians and engineers from China will help get the plant running and train workers.

Prediction: In 20 years, it will be Bangladeshi supervisors, technicians and engineers flying into Somalia to set up the next factory.

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Karl, my one reader, said I should blog more on business stuff.

Rising prices in China

We recently had to re-quote some wooden items we make in China. There was about a 40% increase in costs from all vendors across the board. Supposedly this is due to rising oil prices affecting the cost of finishing materials and the RMB appreciating.

Pure speculation, but this increase in the cost of paints and finishes coincidentally occurred at about the same time as the lead paint furore. Could it be that there were a lot of folks using lead paints, that now have to switch to non-lead paints which sent the price up?

Then again, oil is up US$ 10/ barrel, and the RMB has kept up its steady appreciation. On the other hand, the US housing market has tanked, and the demand for furniture should be much, much lower going forward. (Maybe Europe and China's domestic markets are still good, though.)

Regardless of my personal irritation with price hikes, I also wonder if they will affect global inflation. I have tried to find out about the possibility that inflation is being exported from China. Apparently, price hikes from actual supply and demand changes aren't as inflationary as monetary inflation (more money chasing less goods) so this shouldn't affect inflation in the US. However, wasn't it argued that those low, low China prices helped keep inflation in check for the past decade or so? (Despite rising commodity prices.) How can that be true, but big upswings in product prices wouldn't work the other way around?

A few disclaimers:

1. I am not an economist.

2. I thought the number of people using lead paint would be low, but I could be terribly wrong.

3. It could be that these price hikes are only happening in the Dongguan area and that the more remote areas of China can still offer those crazy below-material cost quotations we've all come to know and love. Anecdotally, Ikea is supposedly buying from interior provinces now. We will have quotations from Vietnam coming in soon, so that will be an interesting comparison, especially since their currency is not appreciating.

By the way, Ikea is known to be a very skinflint buyer and their philosophy is that their factories will not make a lot of money, but will survive. Gee Thanks! That's why people invest in multi-million dollar plants in China or Vietnam - to survive and eek out an existence. Anyway, be forewarned!