External Analysis

PESTLE

The Chinese furniture industry has experienced a rapid growth since the start of the market-oriented economic reforms in the 1970’s. According to data from the China National Furniture Association, in 2011, the total value of production of the Chinese furniture industry was USD 83.16 billion; the export value was USD 59.37 billion of that total. The total value of imports has experienced a decrease, from 2010 to 2011 from USD 27.84 billion to USD 10.71 billion[1]. Chinese domestic furniture production has increased and they are less reliable on imports.  From the graph, we can se that the Chinese consumer expenditure of furniture, furnishing, carpets and other floor coverings has more than doubled since 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

                               

                                                                                               [2]

 

The furniture production in China is primarily centralized on the east coast provinces. The largest production comes from the Zhejiang province with an estimated production of 180 million pieces of furniture. The top five producing provinces account for approximately 80% of the total national production. After China entered the WTO, they have been forced to accept several trade agreements; this is one of several factors as to how China has surpassed Italy as the largest exporter of furniture.

 

DISTRIBUTION SYSTEM

The furniture retail industry is the most important sales channel in China. The totl industry account for approximately 34% of total revenue in the total furniture sales in China. The furniture store industry has been growing by 22.2% to 20,2 billion in the last five years[3]. Many buyers increasingly source furniture directly from manufacturers, wholesalers, and through distributors. The reason for this is the increased availability to buy directly from manufacturers through webpages like alibaba.com, dhgate.com or made-in-china.com[4].

 

As income level and the middle class increases, high-end furniture is expected to account for more of the furniture industry in China the next five years. AMCR-IBISworld expect the industry to expand with 18,3% annually to reach USD 46,9 million in 2019, but with gradually slower speed. 

 

In addition to the traditional furniture stores, malls that are designated to furniture are getting more common. The high-end players often chose to build their own exclusive stores. The furniture malls also offer a promotional effect for the brands located in them.

The largest players in the Chinese furniture stores market are:

 

• IKEA Group – market share: 8.1%

• Kinhom Group market share: 7.3%

• Yuexing Group market share: 2.4%

 

The industry concentration is low. The top four firms stand for 19,9 % of the revenues in 2014. The international firms play an important role with only 1,4% of the total market stare, but generate 14 % of the total revenue in the industry[5].

 

As we can see from the ilustration bellow, the industry profit is lower than the average industry profit in China in 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INDUSTRY TREND

The recent year’s construction boom, the rapid economic development, and the ongoing urbanization have resulted in a significant increase in office spaces with a more western layout than before. The development has also contributed to approximately 13,000 star-ranked hotels in China, which is increasing in number every year[6]. Also, the developing tourist and business travel industry promotes the construction and renovation of hotels and therefore, creates a healthy market for the hotel furniture segment.

 

Product safety is a frequent and relevant topic discussed in China. Health related problems related to furniture are possible to attract negative attention from the media.

 

For the Chinese customer, there is still a divide between the classic furniture and modern style. The classic styled furniture is still recognized as a luxury item and the turnover of this kind of furniture is low. However, customers that often have higher incomes, tend to favor modern and western styles when purchasing furniture. The many improvements in quality of life in China in recent years implies that the consumers demand more from their living spaces in terms of personality and comfort.

 

CUSTOMER ANALYSIS

The main sources of information for the general public are magazines, interior designers, TV shows, and the internet.

 

Due to greater product awareness and increased purchasing power, there is a trend of consumers becoming more reluctant to choose furniture of a reputable brand name. The consumers are more quality-conscious and exposed to advertising and sales promotions. The consumers with higher income are willing to pay a premium for furniture of a reputable brand, which is associated with high-quality craftsmanship or artistic items.

 

CUSTOMER AGE

A research conducted by the Shanghai Furniture Association in 2006 showed that 42 % of the furniture market consisted of customers aged between 20 and 30 years old. The second largest group was 31 to 40 with 22 % of the market[7]. The research showed that the educational level of customers who bought modern furniture was generally higher than average, thus they are more likely to have a higher income and increased purchasing power.

 

 

The PESTLE analysis is used to evaluate the external factors that have an influence on the company’s performance and provides a broader perspective of the company’s environment. The analysis is divided into six main groups; political factors, economical factors, sociological factors, technological factors, legal factors, and environmental factors.

 

POLITICAL FACTORS

For more than 60 years, China has been under the Communist Party of China (CPC)’s leadership. The party has been able to implement its decision without going through as many negotiations as other nations. This has been one of the sole reasons why China has become one of the fastest growing economies in the world. However, tensions between China, Japan, and Taiwan remain a matter of concern.

 

China continues to show strong geopolitical influence and continues to forge ties with many countries. The latest example of this is the ease of visa requirements for American citizens and the signed gas contract with Russia.

 

Corruption has been an issue for many companies when doing business in China. However, the president of China, Xi Jinping has focused on corruption and other economic reforms and policies since he was chosen in 2012. Many cases have been revealed by the government’s commitment to tackle corruption. The latest example is the crackdown of GlaxoSmithKline, revealing the corruption of a major MNC in China.

 

ECONOMIC FACTORS

The Chinese government has taken a series of measures to lessen the dependence of export and investments for future growth. Important parts of this have been the allowance of foreign investors to invest in the Chinese stock market through Hong Kong and the ease of capital control by the People’s Bank of China. This had made it possible to issue and purchase RMB bonds for foreign nations and hold RMB outside of China.

 

Today, the Chinese economy benefits from a strong economic growth over the last decades. The average GDP growth between 2004 and 2012 was 10.5% annually. They are also the largest holders of foreign exchange reserve, which now totals almost USD 4 trillion, where around 60% is U.S. treasury bills. However, since China benefits from low exchange rate, which can be achieved by increasing the central bank’s balance sheet through buying foreign exchange reserve, there has been a decrease in holdings of foreign exchange reserves and a rapid increase of private debt in the Chinese economy. This makes many foreign financial institutions worried about a potential real estate bubble. Another concern regarding the Chinese economic factor is the reliability of the official numbers.

 

For Ekornes, there are many possible advantages to gain from the financial reforms in China. They can now easily hedge the risk of currency fluctuations when conducting business in RMB than before through non-deliverable foreign exchange derivatives.

 

SOCIAL ANALYSIS

First, the rising population has been a longstanding problem for China. The one-child policy was originally invented to meet this challenge, resulting in a drop in the population growth. This ultimately led to an increase in the aging population. Secondly, are the improvements in quality of life, which has increased life expectancy. The average life expectancy in China increased from 70 to 82 years of age from the 1950’s to 2013.

 

Thirdly, another challenge is the gender imbalance. According to the National Bureau of Statistics of China, the gender ratio was 105 boys per 100 girls in 2013, while gender ratio of birth was 117.6[8]. These numbers show that the gender imbalance will increase in the future, which can have a large impact on the furniture industry and customer preferences.

 

Last, the urban migration imposes several changes on society. The rapid industrialization has caused China to become less dependent on agriculture. The rural labor force has been forced and incentivized to move to the cities primarily due to higher living standards and incomes. Even though employment in agriculture has decreased, productivity has increased[9]. This has made many Chinese cities among the most populated in the world.

The Gini coefficient, which measures income inequality, was a score of 42.1 in 2010, which was higher than the United States[10]. These numbers prove that a percentage of the population has a higher income and the middle and upper- middle class increases in number. This can be an advantage for the luxury furniture segment.

 

TECHNOLOGICAL ANALYSIS

China is becoming an increasingly technological advanced nation. This is due to an increasing number of college graduates, know-how from FDI and M&A, and R&D institutions.  By the end of this decade, China is expected to have 195 million college graduates[11]. With the acquisitions of western companies such as Volvo Cars and Smithfield pork producers, China is also increasing their know-how from these companies.

 

The increasing technological advancement poses a great opportunity for the development of high-end furniture with modern technology and materials. However, the weak enforcement of intellectual property rights makes many foreign companies reluctant to engage in R&D and production with China. These issues has seen some improvements as the Chinese government have committed themselves to the WTO to make efforts to promote worldwide IPR rights.

 

LEGAL ANALYSIS

There are still many concerns with the Chinese legal system. Given the physical size of the country, population, amount of trade, and corruption; this has made it difficult to settle disputes.

 

The Chinese labor laws have seen several improvements in recent years, resulting in an increase in minimum salary. However, the minimum salary is still relatively low ranging from RMB 830 per month in rural areas in the Guanxi province to RMB 1820 per month in Shanghai[12]. The employees in China were traditionally in a weak position against employers. The protection of employees is now regulated by the state and has increased minimum wage, implementing proper working hours and employment contracts.

The law enforcement against corruption has improved over the past two years. Several cases of government officials and companies that were prosecuted of corruption makes it clear that the government has been diligent in following up on their commitments on the fight against corruption. Even though progress has been made, corruption is still a large problem in China. Today, China is ranked 80 out of 178 countries in the Transparency International’s Corruption Perceptions Index, on par with Serbia and Trinidad and Tobago[13].

 

The Chinese’s freedom of speech is limited compared to other countries. Internet access is still regulated and social media such as Facebook, Skype or search engines like yahoo.com and google.com are prohibited. The internet censorship is gradually becoming more strict by the latest blocking of Instagram during the protests in Hong Kong in 2014 and stricter laws against posting content against the government.

 

ENVIRONMENTAL ANALYSIS

The economic growth in China has brought millions of people out of poverty; the price for this is the ever-growing environmental pollution. The polluted water, soil, and air posed a great challenge for the Chinese society to overcome in the future.

 

The communist party’s second most powerful official, Li Keqiang, announced to 3,000 communist party delegates in March 2014 that China intends to take a stance against pollution. Last year’s air pollution in Beijing was 10 times more polluted than what is considered a healthy level. China had 16 of the world’s 20 most polluted cities[14]. Xi Jinping has pledged to spend USD 275 billion to fight the smog the next five years. Green investing is booming in China, many companies have seen opportunities in products such as air filters and real estate projects with focus on air quality. Still, China’s energy supply relies largely on coal. The process of switching to gas, clean coal technologies, and more sustainable energy resources will take decades of time to implement.

 

However, China’s increased awareness of pollution creates a healthier environment for workers by implementing air filtering systems. Ekornes has aimed to become environmentally responsible by producing sustainable furniture.