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PRODUCT MARKET STUDY

MATRADE MEXICO CITY

MEXICAN FURNITURE INDUSTRY

OVERVIEW

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INDEX

INTRODUCTION 3

INDUSTRY OVERVIEW 5

PRODUCTION 8

STRUCTURE OF THE INDUSTRY 10

GEOGRAPHICAL DISTRIBUTION 11

DESIGN &OFFER 12

FURNITURE SITUATION IN JALISCO 14

DEMANDED INPUTS 16

WOOD 16

PRECIOUS WOOD 17

METAL COMPONENTS 17

FABRICS 17

EQUIPMENT 18

IMPORTS & EXPORTS 19

STATISTICS 22

COMPETITION 25

CONSUMERS PREFERENCES 27

SWOT & COMPETITIVE ANALYSIS 29

MARKET ACCESS 32

TARIFF STRUCTURE 32

REQUIRED DOCUMENTS 33

LABELING & STANDARDS 33

DISTRIBUTION / BUSINESS PRACTICES 35

FINANCIAL PRACTICES 36

CONCLUSIONS & RECOMMENDATIONS 37

EVENTS 39

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INTRODUCTION

Furniture sector in Mexico has been traditionally an activity that has used a high percentage of labor

hand and manual work. Industrialized countries have managed to substitute human work for

machinery, given the high cost of the human resources. In Mexico, on the other hand, salaries have

been considerably low, making it rentable and competitive in past times and employing more people.

But nowadays situation is different and the world markets require larger production volumes and

quality standards for this type of products that human labor hand cannot achieve without proper

machinery

Globalization and the lack of purchasing power of a great percentage of the Mexican population is

pushing domestic furniture manufacturers either into acquiring cutting edge equipment and

technology, or to impulse the production of traditional furniture with attractive designs, low cost and

what has more value is the artisan way of production and high content of work hand.

Furniture industry in Mexico is composed by “micro” and small companies, 97.6% (94% of them are

micro business) 2% medium size and the rest being large companies.

Installed capacity is used in average around at 60%. Production is basically artisan , even in those

furniture that could be totally manufactured by machines, given as a result that Mexican furniture are

not competitive in price and quality.

Mexican wood and metal furniture are based mainly on in-bond (maquila) industry , which accounts

almost 70% of the total furniture production in the country . This segment allows the trade balance to

be positive in a certain way.

Traditionally furniture manufacturing in Mexico has been devoted towards exports, to North

America. It is important to note that roughly 42% of Mexican furniture production is exported,

mainly to the USA. Basically Mexican furniture companies face the competition of Asian, mainly

Chinese furniture entrance into the U.S. market and also domestically.

With the increase and growth of Chinese furniture exports to the U.S. several Mexican

manufacturers have encountered fierce competition and even bankruptcy.

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This is probably the largest weakness for Mexican furniture industry. The strong dependence

on the U.S. as a market for Mexican furniture has created vulnerability. Even with this

dependence, Mexico is the leading furniture exporter to Central and South America.

The robust Mexican housing market has been the generator for a furniture boom over the past

four years - but critics believe local furniture suffers tired designs and old fashioned production,

putting local manufacturers under threat to faster, cheaper competition from overseas.

A case in point is the market for cheaper furniture that can fit into 50 square units, including

couches, chairs, beds and mattresses.

The demand is certainly there, but missing are the right kinds of furniture at lower prices, the

very sort that manufacturers in Brazil, China and India are beginning to discover represent

opportunities for mass production.

Pessimists believe that the Mexican furniture industry, which represents 1.8% of the country's

manufacturing GDP and 0.4% of the total GDP, will be hard pressed to survive externally-

produced industrial models, with the top end represented by the U.S. and Italy and the

economy end by Brazil, China and India.

Indeed, despite the fact that Mexico’s furniture exports around $5, 894 U.S. million dollars

annually – almost three times the value of its furniture imports - styles are said to be in urgent

need of upgrading to suit modern requirements.

Of the 19,000 furniture manufacturers in Mexico, about 86% are small companies with few

resources to upgrade their products.

So far, only 13% of imported furniture come from Asian countries, with 39% imported from

North American Free Trade Area (NAFTA) partners, the U.S. and Canada, with the same

percentage from Europe.1

It would suggest that the Mexican marketplace can be profitable to explore, particularly the

medium and lower-priced sectors.

1 Source: Ministry of Economy

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INDUSTRY OVERVIEW

Wooden furniture industry is widely considered of family

tradition , relatively young, with few resistance to change

and almost a handcraft style. However in order to maintain

its national presence and to compete with international

markets, this activity has required to adopt its processes

from a commercial opening , where strong competition with

imported furniture caused companies using less its

installed capacity and along with the fall in the internal

market, that more manufacturers penetrated international markets. Mexico's furniture

industry had traditionally been supported through protectionist measures aimed at job

creation. These measures closed the door to foreign products for many years. However,

sweeping changes have occurred, and after NAFTA (1994) elimination of numerous tariffs and

reduction of many others for NAFTA members allowed entry to different products in style and

price. In recent years, there has been very significant growth in imports.

The furniture industry is built on both the centuries-old Mexican tradition of artisanal

handicrafts and new production facilities in northern border-state cities. The industry is

overwhelmingly one of widely dispersed small producers. When Mexico initiated free-market

reforms in the late 1980s, a half-decade ahead of NAFTA, 65% of furniture manufacturers

closed, unable to compete with inexpensive imports from the United States.

Forecasters predicted greater incursions of American manufacturers into the Mexican market

with the passage of NAFTA, which augured further doom for the artisanal Mexican furniture

industry.

However, production of wooden furniture in Mexico grew by 7 % in 1999. Sales of Mexican

furniture in the United States rose by more than 73 %between 1993 and 1997. The most

popular import Into the U.S. was and continue to be rustic wooden furniture, usually made of

pine. 2

2 To find out why rustic furniture have become such an important export for Mexico despite the predictions of

failure due to market reforms is explained later within this study.

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In 1999 Mexico was the third furniture supplier of the world, its products were handled in 70

countries, it managed to account 20,000 companies and employed around 150,000 people.

Today the furniture industry is in a recession situation, getting over little by little and impulsed

directly with the construction boom of the past years.

Several factors are crucial for the recession of this sector:

�� Lack of design

�� Obsolete technology

�� Chinese furniture competition.

All the share that Mexico has lost in respect to furniture exports to the U.S., China has taken it

over. There are still around 1,000 Mexican companies that still export, 50 of them are very

successful, though with lower shares. Some of these successful companies exporting more

than $1 Million USD are:

�� Mueblera La Rivera (Office furniture)

�� Terciopelera Nacional

�� Camas Lamas

Furniture sector managed in the past to be one of the 20 more efficient sectors in Mexico,

representing 2.6% of the GDP. But it is an almost artisan and family industry and some in-bond

(maquila) companies that were added to the industry during the 90’s.

Both add up almost $6,000 million U.S. dollars in exports. Manufacturers participate roughly

with $2,000 Million U.S. dollars with home furniture and in-bond companies exporting

around $4,000 million U.S. dollars, mainly for car and airplane seats manufacturing.

Around 70% of the total furniture exports are wooden furniture and the rest are metallic and

forged iron. 90% of the exports are directed towards the USA and in a minor scale to Europe,

Caribbean, Central & South America.

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During the late 80’s and 90’s, Mexico’s rustic style furniture became fashionable. This allowed

the entrance of its products to 70 countries through a brand called SEGUCINO, located in

Chipilo, Puebla.

Today Mexico has not been able to get over the rustic furniture style stigma, neither has it

invested in design nor in technology.

Market diversification could be a good way to improve it, and Europe is one true destination,

though not in enormous export volumes as China is doing nowadays, but in smaller amounts

and keeping existing segments that were created during the booming industry in the 90’s.

This is the reason why BANCOMEXT (Mexican Bank for Foreign Trade) along with Mexican

furniture producers open up two distribution centers in Valencia, Spain.

Increase in furniture imports into Mexico, 14% annually in average , indicates increasing

penetration of foreign products, and this threatens the national industry.

According to a report conducted in 2003, (All Data Processing Ltd.) Jalisco 3 furniture

manufacturers witnessed a 70% decline in sales to the U.S. that year. Another source that

showed pessimism (Zayas, 2005) reported that 67% of Jalisco manufacturers perceived their

economic environment adverse rather than favorable, (5%).

The Chinese furniture imported by Mexico have risen from $5.3 Million USD in 1997 to $229

Million U.S. dollars in 2006. Just in the first half of 2005, the overall furniture imports rose at an

annual rate of 32.5%, and the trend continued until the present , the growth in the January-

April 2007 period grew 37.8% compared with the same period in 2006.

3 Jalisco is one of the main furniture producers sates in Mexico, carrying put several Trade Fairs a year devoted tom

this sector.

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PRODUCTION

Today, the furniture industry accounts for 1.8% of the manufacturing industry's GDP and 0.4%

of that of Mexico as a whole.

Around 75 % of the value of the production is devoted to home furniture.

10 % of the sector belongs to office furniture and the rest is focused towards collectivities

and others.

Mexican furniture production is as follows:

�� home furniture – 75%

�� office furniture – 10%

�� institutional furniture (hotels, restaurants, schools, etc.) – around 15%

Despite being a small percentage of the total , it handles around 3.3% of the employed staff in

the manufacturing sector and represents 270,000 manufacturing establishments officially

existing , according to INEGI (National Statistics and Geographic Institute) data. The furniture

industry accounts around 19,000 societies , and is composed as follows:

92% of furniture manufacturers in Mexico are micro business, specifically small workshops and

carpentry shops. They supply national demand for finished furniture and along with China and

Canada, are the most important exporters of furniture to the U.S. The sector is comprised of

around 19,000 business. Out of that total 1,100 are manufacturers and the rest are small

workshops and carpenters.

FURNITURE INDUSTRY (Company size)

�� 92% micro

�� 5.6 % small

�� 2% medium

�� .4% large enterprises

This explains the low competitiveness of these companies towards imported furniture that

manufacture in big scale and have mechanized processes.

Installed capacity is only used at 60% and basically it is an artisan way of production. Reason

why those furniture that necessarily require machinery for its production are out of

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competitiveness considering price and quality. This shows that products is not only limited by

the offer, but also for the demand as well.

In-bond industry has a great share in the furniture industry, ranked as the third position in

the number of establishments and the 5th in number of employees (after electronics, textile

and electrical sectors)

The growth in the furniture sector not only depends on the population expansion, but also is

defined by the development of the housing construction, and since this was showing slow

indexes during the first years of this decade, showing a turning in 2004-2006, the sector saw a

temporary recession, that has partially recovered.

A favorable point for this sector was pushed by the Government policies of housing

construction booming in the last years, where 475, 000 new houses were built in 2004 and

750,000 in 2006. Construction boom in several cities was evident, though it has decelerated

during 2007. Still there are thousands of new houses that have to be furnished. Most of these

new houses belong to the social interest scheme that is why furniture to be used in most of

them are extremely simple and economic.

There are credit institutions that finance credits for furniture acquisition, many of these

institutions operate in popular stores devoted to medium-low income classes. Malaysian

companies manufacturing simple and economic furniture could penetrate this market, which

is widely taken by Chinese furniture, much of it illegal.

Raw materials used for this industry are the following:

�� Commercial woods: Pine. Holm oak, Oak, Parota, Ocote (Pinus montezumae) Oyamel

and Mezquite (Prosopis).

�� Precious woods: Mahogany, White & red cedar, ebony and maple. (Many of this are

imported)

�� Agglomerated woods: Which result of the compressing or pressing sawdust and barks

leftovers.

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Partners

�� United States, top supplier with 50%

�� China

�� Spain

�� Canada

�� Germany

STRUCTURE OF THE INDUSTRY

Mexico’s furniture manufacturing industry is highly fragmented, with a bit more than 19,000

establishments in 2006, and only around 7% of these export their products. The vast majority

of these companies have less than 50 employees. Geographical location of manufacturing is

similarly dispersed. Wooden furniture is widely produced in Mexico.

A problem for Mexican manufacturers is the lack of technology and the lack of investment to

maintain their national ranking and overall, overseas, specially having the U.S. as the main

trading partner. According to Zayas study (2005) 76% of Jalisco manufacturers did not plan to

invest in the near future, 19% of the manufacturers reported problems with their existing

technology. This is another weakness for the Mexican industry making them not as competitive

as other Asian countries industries. There are only 4 or 5 Mexican manufacturers that can

meet the volume produced in the Chinese factories.

Furniture retail industry play a vital role in the furniture distribution in Mexico. Large players

such as Wal-Mart account for increasingly enormous amount of sales. With 400 Wal-Mart

stores and 250 other supermarkets formats this group owns , the firm posted annual sales in

Mexico for $11 billion U.S. in 2005.4

Though at present Wal-Mart sells primarily particle-board furniture, it could broaden its

offerings in the future.

4 DSN retailing Today, 2005)