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China Carpet IndustryChina is an important carpet producing country,
however most of its carpets are exported. The demand for nylon carpet is
growing because living standard and housing conditions are improving. In
2001, carpet sales volume increases 3%-5% yearly in Beijing, Tianjin and
Shanghai. Though distributors play the major role in a supply chain, the
owner is also directly involved in the business. More than 50% of the
sales are conducted by owner/manager. Price competitiveness and the
delivery period are the added advantages of the local carpet sale. The
disadvantages of local carpets are variety and design. The companies
working locally do not employ professional carpet designers.
Nearly all manufacturers copy the designs of imported or other local products. Furthermore, the production capacity of the local manufacturers is small, their equipment is dispersed and a large part of the production capability is left unused. The capacity utilization of the equipment is sometimes less than 50%. Commercial enterprises, hotels and restaurants account for the majority of the domestic carpet consumption. Carpets are not commonly used in households basically for three reasons.
Why Carpet Market of China is Growing? There are three major reasons leading to the hotly growing carpet market.
In the past few years, China's overall carpet import volume and value has been rising. In 1999 the volume and value of imports rose by 80% and 200% respectively. The rapid increase in 2002 was in part due to the growth of the Chinese economy and carpet market, attracting shoals of foreign carpet manufacturers, and in part due to lowering of tariffs and loosening of trade restrictions facilitated by China's entry into the WTO. The following chart shows the import volume and growth rate from 1997 to 2002.   Procurement Country Germany is China's largest carpet supplier. Other countries from which China imports carpets are:
Whilst a number of domestic producers have been able to produce medium and high quality products; however imports still occupy a considerable share in the high quality sector. Most competition in the polypropylene market is price competition; reaching cutthroat levels in recent years. In contrast, competition in sectors of the market characterized by carpets made from high-end materials such as wool and silk have been primarily concerned with design and production techniques. Market trends and Analysis Domestic nylon fibre carpet production output growth reached 13.5% last year. Chinese nylon carpet consumption has consistently exceeded 15mn square meters in each of the past three years. With increasing Chinese carpet use, the nylon fibre sector is likely to grow substantially in future. In contrast the rug manufacture sector appears to have already reached saturation point, and cutthroat price competition has already eliminated a number of producers from the market. In both sectors above the high profit end of the market has already been eliminated by price competition. In the high quality end of the market design capabilities, service, production techniques and after sales service are very likely to become critical factors in competitiveness. It is very likely that a number of Chinese carpet manufacturers that have not already integrated their production facilities or rationalized production will be restructured, exit the market, merge or be absorbed by more competitive companies consolidating the industry. With the growth of the Chinese economy and China's push toward urbanization office block, residential building, hotel and restaurant construction has surged. Coupled with increasing attention to living environments LCC therefore estimate the Chinese import carpet market will continue to grow. It is estimated the nylon fibre carpet market will continue to grow at or around 20% per year for at least the next two years, probably longer1. Decorative craftwork carpets, and handmade carpets will continue to grow in popularity among middle class Chinese families although at a much slower rate for a number of Chinese cultural reasons listed below.
The following table gives countries of origin and their relative market share of China's carpet import market.   The following figure shows the distribution of China's import carpet volume by continent of origin.  Import flow trend Import volume in Guangdong was by far the highest in the country in 2002. Beijing, Shanghai, and Jiangsu, characterised by their more developed economies and higher population densities, also showed a relatively high demand especially in higher-grade product areas. The following table shows the national distribution of imported carpets in China in 2002.  Import product prices The following graph shows the approximate price fluctuation between 1997 and 2002.  The above graph shows that whilst over recent years import carpet market prices have fluctuated but on aggregate remained stable. Furthermore compared to the price of domestically produced carpets, imported carpets tend to occupy medium and high-end market areas. General Characteristic Features of Chinese Carpet Industry
Over the past few years, China has emerged as one of the largest carpet exporting country. The table below provides the Chinese carpet export performance from the year 1994- 2001.  Among the carpet enterprises, state-owned enterprises still dominate production activities, where large-scale import and export corporations account for 60% of the total carpet exports by China. Joint ventures, and collective and private enterprises are also sharing an increase in export. Presently, there are altogether 1,080 enterprises engaging in the carpet business in China. Export destination of Chinese Carpets Major export destinations of Chinese Carpets are:
Advantages Some of the advantages are:
China has no culture of using carpets, therefore in China, carpet supply chain appears relatively diasporas; less formal, less well established, and less developed. The largest user of carpets in China are commercial premises, hotels, restaurants, and luxury karaoke rooms; while household carpets, which tend to be predominantly handmade craftworks, occupy by comparison a tiny market share. Use of carpets in schools and hospitals is generally discouraged due to hygiene consideration. Since most of the manufacturers are small scale and there is no centralised production facilities, there is unused production capacity. There are few manufacturers who have switched over to advanced manufacturing facilities capable of producing a wide range of products. Organized chain distributors that occupy large market shares elsewhere in more developed markets are absent . Many foreign players are entering the Chinese market in Joint ventures in cooperation with Chinese firms. This has resulted in the diversification of domestic carpet production in terms of design and variety. Whereas quality is improving. All that can be said is that, a 'supply chain' as such is in China for the carpet industry non-existing. What remains are single and individually acting basically small-scale players and operators in the industry. Distribution modalities Main distribution modes Distribution mode of carpet includes Sole distributorship: a manufacturer sets up a branch company of its own or authorizes a sole agent in one city Multiple distributorships: a manufacturer sets up its own warehouse in the locality of distribution, and supplies goods to multiple distributors- usually wholesale Product line based distributorship: a manufacturer supplies different lines of its products to different distributors for sale For comprehensive listings in this field see Attachment 2 and Main distribution channels The main distribution channels are as follows.
The main features of carpet distributors are the following
Market access The market of China is big. The companies can invest after getting all the vital information both from the government sources or the This is often best achieved through intermediary/consultative companies and or agents. Due to liberalization, of the market in China, it is now possible for foreign firms to be the sole investor/operator in some projects. Equally, some companies have found it beneficial to enter into joint venture arrangements with domestic carpet manufacturers and distributors. Before entering into partnership get all the relevant information o0f the company. In China legal protection can often be weaker in reality than on paper and it pays to know who your friends are. Key factors The Chinese market is potentially big
Role of local representation and intermediary consultancy According to a rule, you may first choose to open a representative office. It is often both legally and financially expedient to use independent consultative services to act on behalf of your company as an agent. For a company without the resource, an agent, or consultant, can prove invaluable to establish a representative office in China. Agents are also useful for those who needs additional business intelligence on business practices in the region. The representative office promotes product and make contact with end users and distributors, to liase with Chinese commercial and government organizations in matters relating to the company, and to follow up market opportunities. The role of a local representative is particularly important in China as many distributors are small in scale and close personal relationships can often be of paramount importance. Local agents can therefore help to facilitate regular contact with Chinese carpet retailers and distributors. Guidelines for choosing an agent Below are mentioned few guidelines for choosing an agent in China:
For more effective presence in China, you should open a representative (rep) office. However, a rep office is generally not allowed to conduct business, issue invoices or sign contracts. Representative office can liase between local customers and the company's home office and to carry out market research and promotional activities. Representative offices are however required to pay taxes based on their expenditures. Foreign investment and joint enterprises Before investing, it is always imperative to make study on the market, start-up costs, taxation, miscellaneous charges, labour costs, etc. There are many companies who had to close down their operation from China because of misjudging the market or failing to realize the actual costs in running an operation in China. Hiring a local professional consulting company can be retained to make a thorough investigation of the market and the costs of setting up and running a business operation in China. For the FIE wanting to set up a manufacturing base or a wholesale/retail business in China, it is advisable to form an equity joint venture with a qualified Chinese party who is already in the market and has capital and facilities to contribute. Starting business as a wholly foreign owned enterprise without any experience in China can lead you to problems. The local partner should meet certain qualifications such as that they are in a similar line of business, have a market network, have experienced staff and facilities, and are financially sound. It is advisable to fix a clearly defined corporate governance plan as a basis of working with the Chinese partner. Trade fairs and exhibitions For learning Chinese market environment and to meet the potential customers, participation in the trade fairs and exhibitions are good options. Opportunities for related goods and services With the increasing demand for carpet and higher living standards, there is a great potential for carpet detergents and carpet cleaning equipment. It is expected that the production of carpet detergent in China will reach 40 kilo tons in 2005. Compared to overseas manufacturers, development of carpet detergent market in China is slow. The industry was established in China in 1980s. This offers opportunities for foreign well-developed manufacturers to explore the market. Though the carpet industry is a traditional industry in China, most carpet manufacturers do not have good cash flow and can't invest in advanced equipment to expand the business. The industry lacks professionals and technicians. Hence, the industry has to be well prepared for the challenges from overseas carpet manufacturers after WTO entry. With the increasing demand for nylon fibre carpet, domestic enterprises have significantly increased their production of carpets. Currently, there are 30 nylon carpet manufacturers in China. However, suppliers can only satisfy about 50% of the market demands. This provides a good opportunity for carpet manufacturers to develop the market. The main foreign manufacturers of nylon fibre carpets are the US, Taiwan, Korea and Germany. The building construction sector, which is one of the major carpet users in China, presents ample business opportunities with strong demand for housing, as well as office and industrial buildings. According to China's Ministry of Construction, China plans to start work on 380mn square meters (4.1bn square feet) of new housing projects in 2000, with 5bn more square meters (53bn square feet) to be built with government funding by year 2005. Obstacles Competition from local manufacturers Local carpet manufacturers are aware of their weaknesses and they have taken or are taking actions to meet the challenge in the following aspects:
According to the local carpet manufacturers, the carpet market is largely restricted to the urban area that covers only 50mn households from major cities like Beijing, Shanghai, Guangzhou and Shenzhen who can afford imported carpet. Further restrictions are imposed on foreign carpet manufacturers. 6.4.3 Limited benefits from the WTO Many foreign manufacturers expect tariff reductions after China's WTO entry will increase imported products competitive capability. Yet, although the full impact has yet to be seen or experienced, and whilst it is likely to be significant, it is also likely to be less favorable to foreign companies than overoptimistic commentators initially expected. For example, since China became a member of the WTO it enjoys, among others, the 2005 quota phase-out, automatic quota increases as stipulated in the Agreement on Textiles and Clothing, and the growth-on-growth provision whereby, under the ATC and as a new WTO member, the country receives the same benefits accorded to other member countries during the past seven years. These changes have had a tremendous impact on China's performance as a major exporting country. For example, US textile and clothing imports from China increased by 125% in 2002, a trend confirmed in the first three months of 2003. In the same period, apparel exports increased by 60%. Chinese exporters reduced their prices in order to gain a greater share in the market. They were able to do so, among other reasons, because quota rents were reduced and Chinese enterprises increased their productivity by investing heavily in new machinery and technology. The impact of the vast increase in Chinese exports can already be seen in the quota-free Japanese market. In 2001, Japan imported more than two-thirds of its total garment requirements from China, an increase of 66% over the previous ten years. If the Japanese example is repeated in other markets it would create deep concerns for many exporting countries, especially the smaller ones. These changes have had a tremendous impact on China's performance as a major exporting country. For example, US textile and clothing imports from China increased by 125% in 2002, a trend confirmed in 2003. In the same period, apparel exports increased by 60%. Many foreign manufacturers initially expected significant tariff reductions after China's entry into the WTO, however the reality may be less promising than expected offering less benefits than initially assumed for the following reasons:
The protection of copyright is limited. Because of the constraints on time, cost and regional protection, enterprises rarely use legislative action to solve the problems. It is common to see local carpet manufacturers copy the popular carpet designs of overseas manufacturers. |
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