PALLISER FURNITURE LTD: THE CHINA QUESTION
Analysis first :
- ’98, set up a leather furniture facility in Mexico (for Midwest/southern N.A market)
- Chose ‘facility’ in Mexico over China back then, here’s why:
Lower distribution cost: Mexico being closer to Texas
China’s leather furniture sector was small/inexperienced. China only had leather
FDI in China were mainly Joint venture. DeFehr wants his own business
Mexico was considered due to closer to the U.S. market, and more meaningful comparison.
- Problems w/ Mexico investment:
Mexican taxation practices & disagreement w/ the local taxation authorities ( what they
allow and not allow weren’t clear)
Took longer to recover initial investment.
Other costs involved “mexico-u.s border” : trucks from Mex cannot cross the border;
transferred only using U.S trucks (a.k.a “friction cost”)
Order allocation process favoured Canadian facility: orders given to Winni plants first ->
balance then allocated to Mexico. Mexico plant fight with headquarters for orders -> a
positive impact on the Mexican overhead recovery rate
Mexico facility: competitiveness resulting from NAFTA. Palliser had yet to focus on how to
lower the costs through changes in its Mexican supply chain.
- Furniture industry since ‘98
Gone tremendous change: due to rise of China (furniture exports grown @ ann. Rate of
30%) as well as the capcity
Rise of China -> more competition -> affect profit margins
Natuzzi’s (Italian firm) income dropped 70%, sales dropped 10% in the 2 quarter of 2002.
Contributing factors to china being strong: cheap labout and comparable product Q
and design (labour cost : 3/day (china), 32/day (mexico), 90/a day (Canada)
Chinese workers: work more than 10hrs a day, 6 days a week. No unions. No
environmental problems in China. No tax paying concerns and no social costs and no
benefits to ee.
Chinese currency being undervalued
Many us firms moved manu sites offshore
While many followed low-cost strategy, some Canadian followed to become active
importers, FOCUS on specialized lines not being produced domestically.
- Palliser’s strat since ’98:
Cost leadership: negotiated w/ Brazilian partners for supply chain for Mexico plant.
Quick delivery: purchasing from china (min. del. T 6-7 weeks); focused on custom manu
strategy w/ delivery time of 3 weeks. This was premium biz . More comp? More offshoring
(from other firms). The delivery time became less flexible. After 9/11, airlines became very
epxnesive to ship. Palliser tries to work with brazil suppliers to seek solut