US slump forces strategy shift

Western buyers of key housing materials, accustomed to being welcomed warmly by China suppliers, may suddenly find themselves rebuffed as the building supply industry adjusts to the housing slowdown in the US.

Reduced orders and lower volumes from the US, coupled with threats of a downturn in other developed regions, have forced more China makers of building materials to shift their priorities and start looking elsewhere to grow their business. They are finding the results to their liking. This has led to an increasing number of small orders being refused to Western buyers.

Suppliers of flooring, roofing and wall materials in China that operate near capacity are less interested in small volumes from a declining market when more opportunities are available in the domestic building sector, and in booming regions such as parts of the Middle East, Southeast Asia, and in India.

"Exports to the US have definitely slowed down in both value and volume," said Corrine Ho, sales manager of Fai Far East Aluminum Industry, a maker of panels and ceiling boards.

"While our attitude toward US buyers remains the same, we have actually been refusing orders from the US if the volume is not high enough." She added that revenue from the domestic market has increased, thereby boosting overall sales.

This shift is being seen across the building materials sector in China especially in flooring and wall materials.

In the past, a slowdown in the US might have forced even high-quality suppliers to offer buyers incentives as a means of fending off their local competitors in the face of fewer overall orders.

That is, however, not the case in this downturn. Export opportunities abound, allowing makers, even those that count the US as one of their top overseas markets, to be picky in their dealings with buyers.

"The US is our most important and biggest market but we have been refusing more orders from buyers simply because the volume is too small," said Gavin Ji, sales manager of Zhangjiagang Yi Hua Plastics Co., the largest maker of vinyl tiles in China.

Part of the reason that other markets are so enticing to China suppliers is that many US clients are accustomed to dictating the terms of the relationship and are reluctant to accept price changes or more stringent terms, even when their order volumes drop.

"Chain stores are our main customers in the US and it is difficult to negotiate with them and persuade them to accept prices higher than they paid before," said Ji.

He added that the growth rate of Zhangjiagang Yi Hua's exports to the US has slowed in the first quarter of 2008 and that the company has already been looking at other markets.

The Wenzhou Timber Group, a maker of engineered wood flooring, is taking a similar approach by exploring other sales opportunities.

"To keep growing our business during the slowdown, we have definitely paid more attention to other markets this year, especially the EU and India," said Lisa Huang of the export department.

Zhangjiagang Elegant, a vinyl tiles maker that exports 90 percent of production, has also been able to replace its drop in US sales with business from other markets.

"Total exports to the US in the first quarter have decreased compared to last year but our shipments to the EU and Australia have risen, so we’re not seeing an overall change in export volume compared to domestic production," said sales manager Edward Ding.

While orders from other regions have been increasing for many exporters, this does not mean suppliers are ignoring the US market altogether. Rather, there is a subtle shift in the type of US buyer that will remain a high priority as volumes drop.

Wenzhou Timber's Huang said that in her experience the larger US buyers have been more acceptable to the inevitable upturn in prices tied to a hot industry with increasing raw material costs, and where buyers worldwide are continuing to look toward China. "Large customers in the US will accept new price quotes easier than the small buyers, especially those that own in-house brands in their markets."

For many smaller volume buyers in the US, the result is that they will have less bargaining power than in previous downturns, where suppliers were keen for any kind of business. It will be slightly more difficult to negotiate preferential terms and in some cases small orders may be refused altogether. Suppliers will still be interested in customers with long-term potential, however, regardless of whether they are small or not.

"In this environment we are paying more attention to customers that offer long-term cooperation such as commercial building customers," Zhangjiagang Elegant's Ding said.

Refused orders will generally only come from the higher quality manufacturers that have significant sales opportunities abroad and less available capacity. This of course is the case for all building materials trade, but looks to be more so in 2008.

On the bright side for smaller buyers, as the downturn continues some smaller manufacturers that have relied exclusively on the US for export orders will have a difficult time making the shift to other markets. These suppliers often have sales offices only in the US and do not understand the exporting procedures and requirements for other countries. They will be hard pressed to fend off stiff competition from other suppliers in the same situation all fighting for the leftover orders from the US. This will present some opportunities for small volume buyers.