Following the rather quickly written post Why Layoffs in the US are a Bad Thing for China where I mentioned highlighted that these closures were likely to impact China’s real economy I thought it would be a good idea to spend a little more time looking at the real impacts to China’s economy. There have been a lot of “what if” and anecdotal evidence, but I thought rather than just leave my last post in the anecdotal, I would try and show how a single US firm closing its doors would reverberate through the supply chain.
So, beginning with the story Home Depot Layoffs: 7,000 Jobs Lost; Home Depot Expo to Close, I took a quick browse of the Expo Design Center site and found that the primary business model of Expo was to sell kitchen, bath, and flooring materials.to buyers who were looking to fit out their newly owned (or soon to be flipped) McMansions. It was a business model that 3 years ago provided Home Depot and others with strong earnings reports, high foot traffic, but as the recent economic crisis began to take hold of the mortgage and credit markets, these business began to see significant drops in business.
Where this business model, and more specifically its product line, strikes me as the most appropriate foundation for this series of posts is that it was an industry (wood products – furniture, home decor, etc) where Chinese products have penetrated the world markets very quickly, it is an industry that has several large geographic clusters that allows for a more focused geographic analysis, it is an industry that uses basic materials with minimal technology to create the finished products, it is an industry requiring high labor input.
Additionally, as you can see in the graphs, this was an industry whose products were seeing very high growth rates (thanks to lower cost of production) and while the indsutry istelf was highly fragmented, the primary economic centers were all located on the east coast by product clusters.
Quite typical of Chinese export model.
From the macro perspective, what the closure of the Expo Design Center (and others) could mean for the Chinese economy could be significant.
While the map above highlights the export manufacturing points, there are in fact long chains of activity supporting these groups. timber importers, ports, shipping companies, mills, equipment providers, and so on are all operating behind the exporters to provide goods that will become the finished product. There are an estimated 50,000 furniture manufactures who are operating in this space. and few if any of these firms have yet to achieve any real sense of scale or power within the industry.
Entire towns have developed as importers, others as processors, and others as assemblers… as can be seen the slides below.
That the economic shocks were going to happen at a much higher frequency, and severity, due to the fact that you had a large number of manufacturers who had little product differentiation packed together to supply firms whose business model proved unsustainable.. and with many of the firms who were buyers of finished products closing the stores (not simply slowing orders), the reality for policy makers and factory owners alike is that there is now a significant overcapacity will take hold, and that will mean a wider.. measurable.. impact on China’s economy as suppliers to these furniture/ cabinet/flooring manufacturers are forced to slow down their production…
Which of course will of course result in a further slow down at the ports, and in other countries – As you can see in the slides below.
Taking a different angle for the moment, a couple of examples of how this recently impacted several of our suppliers.
While visiting a kitchen cabinet maker with a client in the first half of 2008, we were already hearing that orders were off. A factory that was once adding capacity and enjoying the fruits of their product lines expansion, were now looking at finding alternative uses for idle space and staff. It was a scary turnaround for management, and as a sign of just how desperate they were for business, they were willing to work with our client on a basis that provided little upside for them other than some quick orders.
In perhaps a more ominous sign, when another supplier came to Shanghai to discuss the plans for the year, the mayor of his town came along with him to oversee things. It was clear that orders were being lost, and that even though we have been maintaining a good relationship with him for the last few years, the economic conditions on the ground meant that our relationship needed to adjust as well. Gone were the days where we could order materials 60 days ahead of time without deposit. Gone were the days of sending the container on credit. It was now a cash business for he and his fellow producers who had seen some of the large banks in the world fail, had seen their largest customers walk away, and who were managing the expectations of the staff -and mayor.
In the end, the 7000 layoffs announced by Home Depot are in reality just the tip of the iceberg. We have already seen layoffs at trucking companies and ports in the US, distribution ports and mills in Jiangsu, factories in Jiangxi, packaging companies in Zhejiang, and surly loggers in New Zealand. It is an industry whose chain stretches globally, and while administrations view these retail closures of failed business models of an unsustainable real estate bubble, the fact is that their policies are likely to fail to fully correct the core issues as they fail to understand just how long and how deep the problem goes.
Perhaps with this post, some of the void was filled, but sadly it still will not do much for those firms who have already closed.
So, while doing some research on trucking in China, I ran into a report online entitled The supply chain and management of fresh produce in China (
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