LOCAL COOPERATION AND UPGRADING IN RESPONSE TO GLOBALIZATION: THE CASE OF CEBU’S FURNITURE INDUSTRY

Victoria Zosa

I. INTRODUCTION

The Cebu furniture industry is not a newcomer to globalization, with an international rattan market presence dating back to the 1950s. Partnering with global buyers, Cebu became a dominant rattan furniture exporter until the 1980s, after which its share in the global furniture market steadily declined to a negligible level as exports from Malaysia, China, and Vietnam displaced Cebu’s. The furniture industry, however, is still a major contributor to the Cebuano economy, remaining one of the top export earners of the province.

The industry’s response to globalization over the decades is an interesting case study of an established industry suddenly being put in transition. With the entry of new, low‐cost producers in the global market since the 1980s, the pressure for product upgrading mounted. These new entrants possess multiple advantages such as low raw material cost, low labor cost, government support and access to technology. The literature on competitiveness suggests that Cebu has to take the high road of competitiveness by upgrading—making better products, producing them more efficiently, and moving into more skilled activities. In this regard, cooperation among industry stakeholders and global buyers plays an important role in product upgrading (Loebis & Schmitz, 2005).

In broad strokes, this study discusses the depletion of rattan resources, Cebu furniture’s coping mechanisms and the shift toward product and process upgrading. The work has the following objectives: (i) examine the role of local cooperation in product upgrading with respect to raw materials procurement, inter‐firm relations, knowledge diffusion, entrepreneurship, gender and income, and business associations’; (ii) determine the role of global buyers in product and process upgrading; (iii) verify the implications of global market trends on the Philippine furniture industry.

The paper is organized as follows: Section 2 traces the evolution of the Cebu furniture industry, defines the study objectives, and presents the data and study approach. Section 3 looks into the industry today, focusing on: (a) the use of common raw materials by complementary industries, (b) inter‐firm cooperation in the cluster, (c) the role of skilled workers in knowledge diffusion, (d) the role of local entrepreneurs, (e) the contribution of women in the industry, and (f) the role of business associations and strategic alliances, such as those with local government units. Section 4 tackles the global buyers’ tasks in product upgrading and process upgrading. Section 5 outlines the Philippine experience in the global furniture industry, and Section 6 summarizes the findings and charts future directions for competitiveness and upgrading in the furniture clusters and value chain.

II. OVERVIEW OF THE FURNITURE INDUSTRY AND METHODOLOGY

A. Evolution of the Cebu Furniture Industry

The evolution of this Filipino industrial sector is cast within the global value chain framework. Figure 1 shows the furniture value chain (Kaplinsky & Morris, 2003). The cycle proceeds as follows: The major inputs to the forestry sector are seeds, chemicals, machineries, and water and extension services. Cut logs are brought to the sawmill, which are processed to sawn timber using chemicals, machinery, and logistics and quality advise. Manufacturers transform the wood products to export furniture, with inputs of design, machinery and chemicals and paints, adhesives, upholstery, etc. Furniture products are then sold to both domestic and foreign buyers. In the case of Cebu, however, some 90% of the furniture products are exported (Organizational Performance Associates, Inc., 2003). The large furniture exporters have direct access to foreign markets through the wholesalers (distributors), manufacturers, and retailers. Small furniture exporters, for their part, turn to buying agents. Furniture exports eventually reach consumers who, after a period of time, either recycle or dispose the furniture as junk.

The roots of the Cebu furniture cluster can be traced to two historical circumstances: the Mehitabel‐McGuire supplier‐buyer partnership in 1948 which introduced Cebu rattan products to the global market, and the 1981 entry of Maitland‐Smith Limited to Cebu, exposing the local craftsmen and industry players to global furniture design and product innovation. The industry has experienced major supply side (e.g. the rattan shortage starting in the 1970s, the on‐and‐off log ban, exodus of skilled craftsmen to competitor countries) and demand side shocks (global entry of low‐cost newcomers such as Indonesia, Malaysia, Thailand, China and Vietnam from the 1980s onwards, and the popularity of IKEA assembly‐type furniture).

Figure 1: The Furniture Value Chain

Seeds Water

Machinery

Extension

Chemicals Forestry services

Machinery

Sawmills

Logistics, quality Design advice

Furniture manufacturers Machinery Paint, adhesives,

upholstery etc.

Buyers

Domestic wholesale Foreign wholesale

Domestic retail Foreign retail

Consumers

Recycling

Source: Kaplinsky and Morris (2003) Cebu’s rattan furniture went global in 1948, when Mehitabel, a local backyard furniture shop, partnered with McGuire Furniture Company, a US buyer. Dissatisfied with the quality of Cebu rattan furniture, McGuire initiated a breakthrough in rattan production by combining rattan with cowhide to address the bulk‐strength problem (process upgrading) and hiring a US designer (product upgrading). The Mehitabel‐McGuire partnership became such a success that McGuire furniture was marketed in 21 US cities, Europe, and Japan. To cope with increasing demand, Mehitabel subcontracted some jobs to Rattan Arts and Rattan Pacifica (Jurado, 1997).

The furniture association (Chamber of Furniture Industry in the Philippines–Cebu Chapter, or CFIP‐Cebu) was born in 1974, when furniture exporters, unable to buy rattan poles from exporters, banded together to lobby against the export of rattan poles. Shortly afterwards, the 1976 export ban on rattan poles was implemented; the top five rattan pole exporters, in turn, modernized itself by hiring foreign consultants, importing machinery, and professionalizing its ranks throughout the 1980s.

The entry of rattan pole exporters into the furniture industry paved the way for Cebu’s furniture industry to penetrate markets in Europe, Canada, Japan, Australia, and South America. During the time, exports were at US$50 million annually, and represented 60% to 70% of all Philippine exports; the Philippines, along with Taiwan, were the region’s biggest furniture exporters.

Yet the export ban was not able to arrest the dwindling supply of rattan, as an estimated 300,000 hectares of forestland were lost annually due to the massive deforestation in the late 1970s and the early 1980s (Tumaneng‐Diete, Ferguson, & MacLaren, 2005). Hence, the industry tapped Indonesia and Malaysia for its wood requirements. In turn, Indonesia, the world’s largest rattan producer, eased out the Philippines as a major player in the global furniture market by investing heavily on equipment and pirating skilled Filipino workers. On the other hand, Malaysia, a major exporter of logs, sawn timber and wood products (plywood, veneer, wood‐based panels, wooden furniture, builders’ carpentry and joinery (BCJ), moldings) just recently became a major player in the global furniture market.

To protect their local furniture manufacturers, both Indonesia and Malaysia implemented an export ban on their wood products, further pushing the cost of raw materials up to an average of 40% of production cost. Again, faced with increasing production costs and global markets in recession, Philippine furniture exporters again had to make institutional adjustments. In 1992, the exit of 81% of the furniture firms led to the industry’s near‐collapse; only 38 out of 200 firms were operational.

The increasing costs of raw materials weighed heavily on the furniture industry beginning in the 1980s. Fortunately in 1982, Maitland‐Smith decided to locate at the Mactan Export Processing Zone, bringing to Cebu its vast experience in design and marketing. This marked what industry players now refer to as a period of “renaissance.” Maitland‐Smith Hong Kong reproduced 18th century furniture and decorative accessories. Maitland Smith allowed its

company designers to create “signature” or brand items, under strict quality control using rattan, stone mosaic, coconut shell inlay, faux tortoise shell, penshell inlay, mother of pearl, faux malachite, petrified wood, and fossil stone, among others (Nielson, 2001).

Suffice it to say, Maitland‐Smith was instrumental in upgrading Cebu’s furniture industry. Its contributions included: (a) bringing professionals to the industry, (b) making wood a more prominent material in the industry, (c) initiating the training of workers especially in wood working skills, (d) attracting new buyers to Cebu, (e) enabling subcontractors to become exporters, (f) contributing to knowledge diffusion, and (g) experimenting with mixed‐ media design.

Since 2000, the industry has faced market threats from new entrants to the global furniture industry. In 2003, China exported 1.3 billion pieces of furniture, making it one of the world’s largest furniture exporters, in terms of quantity; and in 2004, China rose to become the second leading furniture exporter in the world, next to Italy (CRI News Online, 2004). Today, low production costs in China, Vietnam, Malaysia and Indonesia, low‐priced DIY (do it yourself) IKEA furniture, and the creeping encroachment by China, Malaysia, Thailand and Vietnam on the CFI’s share in the global high‐end niche market also threaten the industry’s survival.

Though the Philippines’ share in the global furniture market has dwindled to below 1%, Cebu has managed to retain a reputation as “the Milan of Asia” (Go, 2003). Schancknat, German design consultant to the Cebu Furniture Industries Foundation, notes that “Cebuanos were the first in Asia to introduce different materials into a very unique style of mixed media1.”

B. Data and Approach

The industry profile is drawn from four sets of survey data: the Department of Trade and Industry’s (DTI) 1995 Benchmark Survey on the Micro‐Cottage and Small Enterprises in Cebu conducted by the Center for Research and Communication‐South (CRC‐South), the 2003 Organizational Diagnosis of Cebu Furniture Industry Foundation, Inc (CFIF) by management consulting firm Organizational Performance Associates, Inc., the International Labour Organization’s (ILO) Case Study of Young Workers in the Furniture Industry of Cebu, and Learning in Small Enterprise Clusters: The Role of Skilled Workers in the Diffusion of Knowledge in the Philippines, a University of Amsterdam Ph.D. dissertation (Remedio, 1996 & Beerepoot, 2005).

Information on raw materials and markets were obtained from CFIF, news, and firm websites, the National Statistics Office (NSO), and the Bureau of Export Trade Promotion

1 Mixed media is “the harmonious marriage of man‐made with natural materials; the innovative blend of traditional and the contemporary look; the creative combination of soft, flexible fibers with the solid sturdiness of wood or stones emphasizing the wide range of possibilities than can still be explored with the use of two or more materials” (Seno, 2004).

(BETP). Data on exports generated by CITEM‐sponsored trade shows are included to measure their contribution to export sales. Industry‐specific training programs are likewise furnished by the CFIF. Firm‐level financial data are obtained from Top 5,000 Corporations 2002 and Top 7000 Corporations 2001. CFIF also provided aggregate data on the profit and cost structures of selected furniture firms. Financial ratios from these two studies were used as indicators of the industry’s profit margin and degree of financial leverage. Female participation in the Cebu furniture industry was gauged by using data from the 2003 DTI survey, CFIF List of Contact Persons, and the 2000 Census of Population. The percentage share of Cebu‐based export commodities, which share common raw materials and production processes with furniture manufacturing, is used as an indicator of the extent of inter‐firm linkages in the cluster. In addition to these data, information regarding the dominance of certain families in the industry, results of the CFIF organizational diagnosis, and cross‐country statistics are presented.

The industrial cluster and global value chain analysis approaches are adopted in this study. Briefly, cluster analysis focuses on the role of local linkages in product upgrading, while the global value chain considers the role of global buyers (agents, retailers, or brand‐name companies) in pushing for process and product upgrading. In the context of globalization, upgrading‐‐innovation to increase value‐added‐‐is a necessary condition for the “high road” to competitiveness. The analysis of industrial clusters is focused on the role of local linkages in generating competitive advantages in the export industries (Pietrobelli & Rabellotti, 2004). Table 1 maps the different roles of clusters and value chains in governance and upgrading (Humphrey & Schmitz, 2002).

Table 1: Governance and Upgrading: Clusters vs. Value Chains Clusters Value Chains Governance Horizontal. Close inter‐firm Vertical. Strong governance within cooperation and active private the chain. and public institutions. Relations with International trade increasingly the external managed through inter‐firm world Arm’s length market transactions. networks. Upgrading Incremental upgrading (learning Incremental upgrading made by doing) and diffusion of possible through learning by doing innovations within the cluster. within the chain. Discontinuous For discontinuous upgrading, upgrading made possible by entry local innovation centers play an into more complex value chains. important role. Key competitive Promoting collective efficiency Gaining access to chains and challenge through interactions within the developing linkages with major cluster customers. Source: Humphrey and Schmitz, 2002

Earlier studies provide evidence that clustering enables a group of firms concentrated in one geographic location to achieve the gains of collective efficiency through local external economies and joint action. Specifically, local external economies attract local suppliers, and hence give clustered firms better access to inputs and raw materials and create a pool of skilled workers. Joint action, made possible by joining business associations, could help firms open new markets and allow small firms access to government services (Schmitz, 1995).

Porter provides a succinct discussion on the role of clusters in economic competition. Clusters, according to him, are critical, geographically‐concentrated masses of unusual competitive success in particular fields. Clusters encompass an array of linked industries and other entities important to competition—including, for example, suppliers of specialized inputs and providers of specialized infrastructure. Clusters also often extend downstream (to channels and customers) and laterally (to manufacturers of complementary products and companies in industries related by skills, technologies, or common inputs). Finally, many clusters include government and institutions such as universities, standards‐setting agencies, think‐tanks, vocational training providers, and trade associations providing support services.

Porter also notes that clusters rarely conform to standard industrial classification systems by promoting both competition and cooperation. Clusters promote competition in three ways: first, by increasing the productivity of cluster‐based firms through (i) joint sourcing of inputs, (ii) access to specialized information, technology and needed institutions, (iii) complementarities among related industries, and (iv) better motivation and measurement provided by local rivalry and peer pressure; second, by determining the direction and pace of innovation; and third, by stimulating the formation of new businesses (Porter, 1998)

Global value chain (GVC) emphasizes cross‐border linkages between firms in global production and distribution systems. Specifically, GVC proponents emphasize the role of global buyers in the value‐adding chain of activities carried out by different firms in different locations. From this perspective, global buyers are instrumental in the upgrading of processes, products, functions, and sectoral innovations (Pietrobelli & Rabellotti, 2004).

In a world of uncertainty, bounded rationality, and conflicting economic interests, the coordination issues—what, how, how much, and when to produce—have spawned four types of relationships in the value chains. First is the arm’s length market relation, where buyer and supplier do not develop close relationships and where product certification provides buyer requirement standards. Second are networks, characterized by a more information‐intensive relationship, where buyers specify certain product or process standards that the supplier should comply with. Third is the quasi‐hierarchy, where the lead firm exercises control over its direct suppliers and others further along the chain. And fourth is the hierarchy, where the lead firm takes direct ownership of some operations in the firm (Humphrey & Schmitz, 2002).

Figure 2 illustrates the production‐demand interactions between the global value chain and the local furniture cluster in Cebu. Foreign buyers include wholesalers, direct retailers, and

buying agents. Production is mobilized when foreign buyers place an order. Exporters source some of their raw materials abroad, hire freelance designers for product development (in the absence of in‐house designers), or outsource some job processes to home workers. Buying agents may be Filipinos or foreigners who maintain local offices tasked with organizing production carried out by different manufacturers and subcontractors. Buying agents may fill one container with products coming from different manufacturers; freelance designers are hired either by buying agents or exporters; and home workers and subcontractors tap local sources for their raw materials.

Figure 2: International Value Chain and Local Cluster of Cebu Furniture Manufacturers

ABROAD

Raw materials, parts, Wholesalers Retailers components

PHILIPPINE

Buying agents Exporters

Free‐lance designers

Subcontractors Home‐ Workers

Local raw materials: wood, rattan, abaca, stone, buri

Source: (Beerepoot, 2005)

The production of furniture exports is a function of raw materials, the presence of other firms, skilled workers, entrepreneurship, and support organizations such as business associations, local government units, and national line agencies. From a strategic standpoint, the Philippines can no longer compete on the basis of low labor costs, cheap materials, and an unregulated labor market, as doing so will just hasten the Cebu furniture industry’s “race to the bottom.” What the industry can and should do is take the “high road”: that is, product upgrading, translating to efficiency enhancement, innovation, high quality productions, functional flexibility, and good working conditions (Pyke, Becattini & Sengenberger, 1992). The shift to mixed media in the use of raw materials, horizontal integration, and the reliance on embedded learning are the industry’s attempts to improve itself along these lines.

III. THE CEBU FURNITURE INDUSTRY TODAY

A. Raw Materials

In the 1980s, the Philippines was one of Asia’s top supplier of furniture exports (Table 2). For instance, the Philippines in 1987 exported US$173 million of wooden furniture to OECD countries, next to Taiwan and China (US$185 million) and ahead of Korea, Thailand, Hong Kong, and Singapore. During the same year, the United Kingdom imported its furniture requirements from developing economies, led by Taiwan, Philippines, and Singapore. The following year, the US furniture market saw 84% of its wooden furniture imports come from Asian countries, led by Taiwan and the Philippines. Notably, the Philippines then had 54% (US$161 million) of the US’ imported rattan furniture market. The Philippines was likewise a major supplier of rattan furniture to Japan, with an 8% market share behind Taiwan and Indonesia (International Tropical Timber Organization, 1990).

Table 2: The Philippines’ Share in Furniture Imports of Selected Countries, 1987‐1988 1987 1988 OECD (in USD U.S. (in USD (in %) (in %) million) million) Total Furniture Imports 18,332 100.0 Wood Furniture Imports 1,209.44 100.00 Asia 2,573 14.0 Asia 1019.68 84.00 Taiwan 1,848 10.1 Taiwan 599.189 50.00 China 186 1.0 Philippines 110.401 9.00 Philippines 173 0.9 Singapore 64.147 5.00 Korea, Republic 170 0.9 Thailand 63.197 5.00 Thailand 140 0.8 Korea, Rep. 53.854 4.00 Hong Kong 90 0.5 Hong Kong 31.131 3.00 Singapore 88 0.5 China 13.396 1.00 1988 1988 Japan (in Yen U.S. (in USD (in %) (in %) million) million) Rattan Furniture Imports 18,631 100.0 Rattan Furniture Imports 161.204 100.00 Asia 18,521 99.0 Asia 159.038 99.00 Taiwan 13,637 73.0 Philippines 86.336 54.00 Indonesia 2,320 12.0 China 34.843 22.00 Philippines 1,450 8.0 Taiwan 20.915 13.00 China 627 3.0 Hong Kong 10.901 7.00 Hong Kong 193 1.0 Thailand 182 1.0 Sources: OECD, United States International Trade Commission, International Development Association of the Furniture Industry of Japan.

The “golden age” of furniture exports in the Philippines saw the Cebu furniture industry lead all others in generating furniture export revenues for the country, with most coming from rattan (Tables 3 and 4). The declining market for rattan furniture exports, however, forced a switch to mixed media production, where wood, metal, stone, bamboo, and plastic are also used. Table 5 is a detailed list of the raw materials used by Cebu furniture firms.

Table 3: Cebu Furniture Exports Rattan Share in Cebu Philippines Cebu Share Year Cebu Exports (in USD million) (in USD million) (in %) (in %) 1985 61.6 83.7 73.6 78.3 1986 63.1 89.4 70.6 79.8 1987 84.1 130.4 64.5 78.5 1988 117.4 183.7 63.9 73.8 1989 119.5 203.7 58.7 73.6 1990 103.8 189.5 54.8 66.3 1991 101.9 177.2 57.5 63.4 1992 119.2 181.2 65.8 63.6 1993 92.6 203.2 45.6 56.3 1994 86.2 238.6 36.1 32.2 2002 211.0 316.0 66.8 11.5 Sources: DTI Region VII; Remedio, 1996 and Beerepoot, 2005.

Table 4: Value of Cebu Furniture Exports, 2003 Value Percent (in USD) (%) Wood 58,111,308 53.18 Rattan 27,165,518 24.86 Metal 16,415,086 15.02 Stone 3,703,010 3.39 Parts of Furniture 1,453,052 1.33 Other Materials 1,151,307 1.05 Bamboo 790,032 0.72 Plastic 334,485 0.31 Furnishings 137,746 0.13 Buri 12,566 0.01 Total 109,274,110 100.00 Source: National Statistics Office and Bureau of Export Trade Promotion

Table 5: Raw Materials Used by CFIF Members, 2004 Wood‐based Amount Stone‐basedAmount IndigenousAmount ManufacturedAmount Wood 104 Stone 83 Indigenous Materials 7 Wrought Iron 97 Veneer 4 Romblon 2 Abaca Woven 17 Metal 20 Rattan 80 Ceramics 2 Natural Fibers 2 Cast Aluminum 6 Rattan veneer 1 Tiles 1 Cotton 1 Brass 4 Close Cane 1 Phil Alabaster 1 Anakao 1 Steel 1 Wicker 14 Recycled Glass 1 Lampakanai 3 Plastic 5 Bamboo 13 Fiberglass 17 Turnsole 1 Synthetic Wicker 1 Buri 6 Seagrass 3 Dexin 2

Coconut 4 Mother‐of‐Pearl 1 Prolen & Prolex 1 Cast Resin 6 Shells 2 Upholstery/Vinyl 2 Man Made Boards 5 Leather Inlaid 22 Medium Density Fiber 2 Accessories 18 Lamination 1 Total 241 107 38 161 Average 1.4 0.6 0.2 0.94 Source: Cebu Furniture Industry Foundation (CFIF) Website

1. Rattan.

Rattan is either locally sourced from neighboring islands or imported from Papua New Guinea and Burma. Pabuayon, Rivera and Espanto (1998) mentioned that

“Rattan products generate more than US$200 million annually in 1994, with an estimated 4 million dependent on the sector. Major rattan production areas include Apayao (Conner and Kabuyao), Cagayan Valley (Baggao), Palawan (Puerto Princesa), Bukidnon (San Fernando) and plantation sites in Bislig, Surigao del Sur (Paper Industries Corporation of the Philippines) and Talacogon, Agusan del Sur (Provident Tree Farms). The major demand areas are Pampanga (San Fernando and Angeles City), Cebu (Cebu City and Mandaue City), and Metro Manila, Laguna and Quezon”.

The rattan market participants include: i) gatherers who are mostly tribal people and could be members or non‐ members of a gatherer’s association ii) gatherers’ associations, composed of gatherers residing in particular upland communities and organized for the purpose of obtaining a rattan cutting permit or undertaking other activities iii) plantation owners who initiated rattan planting on their own or through government reforestation program iv) raw material traders who may or may not hold permits v) manufacturers who include producers of furniture and handicraft items vi) workers who include subcontractors and in‐house workers vii) finished product traders who are engaged in trading at the domestic or foreign market or both viii) transporters who include truckers and shipper

“The study shows that the gatherers’ share of product value averaged only 5‐ 21%, about 63.87% went to the manufacturers and the rest to the traders. The shares refer to both profit and costs incurred. The higher added value of the manufacturer refers to the associated costs of producing rattan furniture. The added value of the trader includes the transport‐related cost. In general, the cost

component of marketing margin for the market participants exceeds the profit component. For instance, traders realize about P46.17 net return per 100 lm of rattan shipped or P30,232 per shipment. Forest charges, which are based on misdeclared shipment (only about one‐third of actual value) comprise about 14% of total costs, while bribes, which make underreporting possible, are about 8%. The full charges, if paid, would amount to P64.63 per 100 lm. Without the bribes, net return would still be positive at P36.58 per lm or P25,913 per average shipment of 65,476 lm. Transport cost comprises 19% of total cost. If it can be lowered, then higher profit rates are possible. Another illegal practice involves multiple uses of transport documents which means that profits are higher since no forest charges are paid (although bribes are still paid) in second or third shipments.”

2. Wood

Lumber is available in the domestic market, with lauan and tanguile as the most commonly used species. Plantation species like rubberwood and gemelina are used for particleboards, while medium density fiberboard (MDF) is popular material for panels and office furniture. Imported wood, mainly sourced from Malaysia, Brazil, New Zealand, and the US, include Honduras and Brazilian mahogany, pine, oak, beech cherry, and maple. Veneer, a thin slice of exotic wood or other materials, is applied over a thicker backing to make decorative materials more durable.

3. Stone

The stonecraft industry, originating from the neighboring island of Negros Oriental, crossed over to Cebu, which, in turn, used it for decorative furniture. Stone‐based tabletops are made with wooden carcasses and laminated with pieces of fossilized stones colored white, beige, gray, coral, green and black. Cebuano firms, using fossilized stone as a raw material for their furniture exports generally cater to the Middle East market. Nonetheless some Cebuano furniture firms cite health hazards and the relatively high cost of stone cutting as the primary reasons for their decision not to make stone‐based tabletops. Cebu is exporting fossilized stones as raw materials to China’s furniture industry.

4. Mixed Media

Mixed‐media furniture combine conventional materials like rattan, wicker, buri, wood, metal, stone craft, bamboo, and plastic with tems such as grasses, shells, coconut lumber and leather. For instance, “lava stone” designs consist of recycled waste materials laid, crushed, compressed, and mixed with chemicals to result in stone‐like products. Other products include mixed‐media sofas with metal skeletons wrapped in rattan splits; cabinets featuring bamboo twigs encased in oak wood frames; furniture finished with signature veneers from bamboo,

sugarcane and coconut; and laminated tabletops from banana tree barks, corn husks, spliced coconut roots and even termite‐eaten wood (Seno, 2004).

Mixed media metal furniture, on the other hand, combines wrought iron with wicker, wood, seagrass, and other indigenous materials. Examples are Prelen and Prolex, patented synthetic materials simulating rattan, bamboo, abaca, rusted metal, bark, wood, willow, wicker, hickory, and wrought iron. It is resistant to chemicals, weather, humidity, and water. Plastic furniture is largely designed for outdoor use.

B. Inter‐firm Cooperation

The Cebu furniture cluster fosters horizontal integration through close inter‐firm cooperation. This is an alternative way of organizing the value chain:

“The proximity of companies and institutions in one location, and the repeated exchanges among them, fosters better coordination and trust. Thus clusters mitigate the problems inherent in arm’s‐length relationships without imposing the inflexibilities of vertical integration or the management challenges of creating and maintaining formal linkages such as networks, alliances, and partnerships. A cluster of independent and informally linked companies and institutions represents a robust organizational form that offers advantages in efficiency, effectiveness and flexibility” (Porter, 1998).

Table 6 lists Cebu exports that share complementary inputs with the furniture industry, representing 36% of total Cebu exports. Furniture exports, for example, share similar intermediate inputs with house wares and gifts, toys, and handicrafts (GTH). This is due to the use of mixed media in these industries. Aside from the use of common raw materials, complementarities occur in the industries’ sharing of designs, skilled workers, machinery and equipment, and quality control standards, among others. This allows visiting buyers to see many vendors of different export products in a single trip (e.g. attending the CebuX).

Table 6: Cebu Export Products Using Complementary Inputs, 2003 (Value in US$ 1,000) House wares Value Basketwork 7,156 Wickerwork Shell craft 467 Woodcraft 229 Ceramics/Stoneware 1 Textile articles 38 Flower articles 28 Metal ware 1 Glass articles 30 Other articles 2,518 Sub‐Total 10,468 (2%) Consumer Products Value Fashion Accessories 9,914 Garments 53,970 Holiday Décor 1,051 Toys 45 Giftware 8,131 Woodwork 3,461 Consumer Products 5,126 Sub‐Total 81,898 (16%) Food and Resource Products Value Marine Products 18,855 Mineral 1,028 Coconut 2,939 Forest Products 300 Seaweeds 37,246 Marble 144 Cut flower 6 Twine 8,518 Non‐metallic mineral 7,904 Natural Fibers 24 Other Resource 4,358 Sub‐Total 79,964 (15%)

Table 6: Cebu Export Products Using Complementary Inputs, 2003 (Value in US$ 1,000) Industrial Manufactures Value Metal 540 Construction 7,755 Chemicals 7,314 Packaging 303 Others 3,241 Sub‐Total 19,153 (4%) Exports of Complementary Inputs 188,483 (36%) Cebu Exports 521,791 Sources: National Statistics Office (NSO) and Bureau of Export Trade Promotion (BETP)

To illustrate the horizontal integration or interdependence of different industries in the Cebu cluster, a comparison between the furniture and fashion accessories is made in terms of raw material usage, machinery and equipment use, and design sources. As per Table 5, the top raw materials used in furniture are wood (65%), wrought iron (60%), stone (52%), rattan (50%), leather in‐laid (14%), metal (12%), accessories (11%), abaca (11%), fiberglass (11%) and wicker (9%). To some extent, this overlaps with those most used in making fashion accessories: shells (84%), wood (68%), coco shell (56%), resin (52%), metals (28%), bamboo (20%), chains (16%), glass beads (16%), glass (12%), and semi‐precious stones (12%).

An interview with a designer revealed that the excess shavings of furniture raw materials are sometimes used in the manufacture of fashion accessories, and that materials such as stone inlay, first introduced for small items like gifts and toys, are now used in the furniture industry (Interview 1). “We closely watch the Gifts, Toys and Hardware sector for new product ideas. In that sector, the trends go much faster. They have to be more innovative and come up with new ideas more often. We also often visit local and regional trade fairs that are organized by DTI. In the countryside, people are more innovative in experimenting with indigenous materials. Our design team often goes to the provinces for new ideas. An example is my desk from laminated coconut‐shells. At first, laminated coconut shells were only used for picture‐ frames. We introduced the material for furniture production and made an entire desk from it” (Beerepot, 2005; Interview 1)

Based on key informant interviews, inter‐firm cooperation takes the form of subcontracting, ending of materials, sharing of buyers, consolidation of small shipments and the “bandwagon effect”. One company interviewed, Company A, however, claims that “full cooperation is not possible because furniture is a jealous and secretive industry” (Interview 2). To avoid being drawn to discussions on pricing and raw material sources, this company shies

away from CFIF‐sponsored social gatherings; then again, it lends materials to other furniture firms and offers the use of their slow‐moving materials to small, start‐up furniture firms.

In the case of another company, Company B, subcontracting is limited to some veneer and wood products—and only to Company B’s Multipurpose Cooperative whose members are former employees retrenched more than 10 years ago when the high‐cost of rattan forced the company to discontinue this product line. Company B encouraged the retrenched employees to organize a cooperative, and provided space for a working area. Today, the cooperative has its own building, has assets of up to Php8 million (some in T‐bills), and supplies the company with rattan poles and other materials, aside from labor contracting. The president of Company B claims to be sharing materials and information with competitors – “A company cannot do everything”. From his 20 years of experience in operating six furniture plants, he shares with other industry players’ information and lessons on the different standards for rattan, wood, etc. (Interview 3).

Table 7: Raw Materials Used in Cebu Fashion Accessories: 2005 Imported Local Total Materials Direct Local Traders No. Percent No. Percent No. Percent No. Percent Shells 21 84.00 21 84.00 Wood 16 64.00 1 4.00 17 68.00 Coco shell 14 56.00 14 56.00 Resin 11 44.00 2 8.00 13 52.00 Metals 4 16.00 2 8.00 1 4.00 7 28.00 Bamboo 5 20.00 5 20.00 Chains 1 4.00 2 8.00 1 4.00 4 16.00 Glass Beads 2 8.00 2 8.00 4 16.00 Glass 28.00 1 4.00 3 12.00 Semi‐precious stones 1 4.00 2 8.00 3 12.00 Beads 14.00 1 4.00 2 8.00 Leather 1 4.00 1 4.00 0.00 2 8.00 Plastics 14.00 1 4.00 2 8.00 Raffia 28.00 28.00 Acrylics 1 4.00 1 4.00 Adhesives 1 4.00 1 4.00 Bones 14.00 14.00 Carabao bone 14.00 14.00 Chemicals 1 4.00 1 4.00 Chords 14.00 14.00 Crystals 14.00 14.00 Elastic Garters 1 4.00 1 4.00 Fiber 14.00 14.00 Horns 14.00 14.00 Metal casting 14.00 14.00 Paint 14.00 14.00 Pearls 14.00 14.00 Sandpapers and abrasives 1 4.00 1 4.00 Silver 14.00 14.00 Sinamay 14.00 14.00

Table 7: Raw Materials Used in Cebu Fashion Accessories: 2005 (continued) Imported Materials Local Total Direct Local Traders Stones 1 4.00 14.00 Synthetic beads 1 4.00 14.00 Wax Chords 14.00 14.00 Wires 1 4.00 14.00 Wood beads 1 4.00 14.00 Source: Interview with 25 Manufacturers of Fashion Accessories, January 2005

Company C, serving solely Global Buyer 1, subcontracts to individuals and families to cut down costs, with skills and disciplines handed down to subcontracting parties as part of their cultural heritage (Interview 4). Company D, for its part, claims that depending on the closeness of personal relationships, firms share buyers subject to some limitations (Interview 5). Company E advances money to subcontractors and agrees to consolidate small shipments with its competitors (Interview 6). Company F’s owner, interestingly, set up a furniture export business in 1983 in hopes that he will be as affluent as other Cebuano exporters were (Interview 7).

C. Role of Skilled Workers in Knowledge Diffusion

This section draws heavily from the work of Beerepot (2005), which emphasized the role of skilled workers in knowledge diffusion. Competent entrepreneurs and an adaptable, well‐ trained labor are keys to innovation and product upgrading (Scase, 2000).

Collective learning is a source of competitiveness for regional clusters, especially because of the shared knowledge base of entrepreneurs and workers engaged in the local production system that initiate innovations and upgrades (International Labour Organisation, 2002). The knowledge and know‐how of skilled workers are intangible assets that enhance the international competitiveness of regions. On that note, since an important aspect of collective learning is the development of trust among the industry’s stakeholders, it is necessary to identify how inter‐personal and inter‐firm relations enable the diffusion of knowledge within the Cebu furniture cluster.

1. Labor Market Segmentation

Table 8 demonstrates the highly segmented nature of the labor market, with the co‐ existence of highly educated and learning‐by‐doing workers. This labor market structure is due to how production is organized. Beerepot (2005) further distinguishes between “knowledge protectors” and “knowledge transmitters.” Knowledge protectors (entrepreneurs, production managers, designers) treat their knowledge in specialized production and design skills as a scarce good, and do not share their contacts (international buyers, sub‐contractors, or production source) with their peers in the industry. Knowledge transmitters are workers with

limited formal education who learn their skills primarily on‐the‐job. They are highly skilled in weaving and intricate woodcarving, for instance. Knowledge transmission occurs when these skilled workers hire apprentices or assistants to increase production. The practice of piece‐rate payment of skilled workers encourages the craftsmen to bring in a young helper. This arrangement, of course, has its disadvantages:

“Entrepreneurs and production supervisors have limited willingness to invest in workers’ skills, training and technological capacities. The fear that other companies will pirate production workers, or that workers will start companies for themselves, often prevents investment in training. The little attention to training and skills development is a general trend in developing country clusters, as price‐based competition is still predominant here. Several entrepreneurs in Cebu ask lead‐men in their company to start for themselves and work exclusively as subcontractors for their current employer. The advantage for the entrepreneur is increased informal production environment. The second advantage is that the loyalty of the subcontractor, based to a large extent on dependency, prevents the leaking of knowledge or the stealing of ideas. Through this process, the company can outsource production activity, but still retain control of key knowledge. The subcontractor is, in this context, so much weaker and dependent that it can be questioned to what extent he can serve as a source of knowledge or feedback for exporters.”

Table 8: Labor Market Segmentation in the Cebu Furniture Industry in Cebu Special skilled, Skilled secure Skilled secure/non‐ Semi‐skilled non‐ Category secure entrepreneurs workers secure workers secure workers and workers Position Entrepreneurs, Supervisors, lead‐men Lead‐men, sample‐ (semi) skilled work production managers, in big companies makers, skilled for subcontractors, designers, draftsmen workers apprentices Education College degree College degree or High school graduate, Elementary graduate, vocational (some) college (some) high school Occupational status Regular employees Regular employee Regular and On‐call, job‐outer, contractual piece‐rate workers Source of knowledge Formal training, then Experience then On the job, experience On the job experience formal training Additional training Yes (some) Yes (some) No No Job security Medium Medium Medium/low Low Payment >150% of minimum Up to 150% of Minimum wage Below minimum wage minimum wage wage Local labor mobility Medium Medium High Very high Knowledge transmitter No Little Yes No (receiver) Knowledge protector Yes Yes No No Source: Beerepoot (2005)

“Entrepreneurs admit that they have little control over this process of transfer of skills among workers. The availability of a large surplus of skilled production

workers in the local labor market is generally encouraged through their easy willingness to share knowledge and teach others their skills. Most of the surveyed production workers indicated that they learned their skills primarily from other workers, their lead‐men or relatives. For lower hierarchy workers, apprentices or helpers are not seen as a threat to their own position on the labor market. The prospect that, eventually, these helpers will look for a skilled position has not made them more hesitant to share their knowledge. A high labor mobility of these workers within the local industry can bring benefits to the entire industry, as production knowledge becomes more widely accessible. Skilled workers might not always have a secure position within the particular company where they work, but they feel their knowledge and skills give them the opportunity to easily find employment elsewhere in the local industry. It can be questioned if a high labor turnover can distort the built‐up of distinctive skills in individual companies within the Cebu cluster. Undifferentiated basic production knowledge and techniques are widely available within this cluster, but the complementary knowledge and skills necessary to strengthen the industrial base are limited.”

“When workers and subcontractors are employed under circumstances of limited security of tenure, as are most workers in category three and four, they are more willing to share knowledge and undertake common efforts. In these groups, the cooperative spirit exists that ‘poor people should help each other.’ This can be by training a young relative in a specific craft or when subcontractors help each other to reach a deadline for delivery, or share orders during the low season. Interviewed subcontractors claimed that discussions with other subcontractors were one of their key sources of market information. These contacts are important, as they have difficult access to formal providers of information or knowledge from outside the cluster. For subcontractors, the necessity to protect their specific knowledge has not much importance. The scope for localized learning and interventions to stimulate learning might, therefore, have most success at lower levels in the production hierarchy. At this level, production knowledge and skills are already transmitted easily. When companies expand, or people enjoy relative security in the local labor market, the willingness to associate or undertake collective activity that should encourage knowledge accumulation diminished” (Beerrepot, 2005; 78‐91).

Beerepot (2005) demonstrated that knowledge transmission in the furniture industry is constrained by the local mode of production, characterized by the increased outsourcing of work to the informal sector and the prevalence of piece‐rate payment schemes for workers. Local value chain relations and outsourcing strategies are based on the dominance of exporters, mainly to protect their own position in the value chain. Because of this, investments in skills and capacities necessary for product upgrading are low. Hence, the majority of the workers acquire their skills through informal mechanisms, and only a few undergo formal training to augment their knowledge and skills. This production setup hinders the development of a

regional culture of trust and collaboration, which is a necessary condition for a localized learning process.

2. Matching of Processes and Skills

The 2003 CFIF Study undertook a documentation of thirteen processes in furniture making, the quality controls done for each process, and the modes of skill acquisition. The results are reported in Table 9. (However, to date, there is no available skill certification or any standard against which to measure the current levels of manpower skills in the industry.) The findings show that skills on raw material preparation; assembly and carpentry; carving, sanding, finishing, and polishing; rough milling and machining; fiberglass casting; upholstery; leather inlay; and stone inlay and packaging are largely self‐learned, obtained from work experiences, or acquired from co‐workers. On the other hand, formal training is required for rough milling and machining, metal works, product engineering, and design and maintenance. (College graduates do the latter tasks.)

Company A, which invested in machinery to cope with big orders, employs about 700 workers. To minimize returned sales, quality inspection is done before shipment, in the testing laboratories of foreign buyers. The company policy is not to hire ex‐employees who left to work for an Indonesian or Chinese firm. Company B, meanwhile, complements its huge investment in machineries with 2,000 workers. To control product quality, it avoids subcontracting, except to a cooperative run by retrenched employees. It also hires professional managers, has its own testing facilities, engages in product development, and allows overseas buyers to bring in technicians to train workers (particularly in woodworking). Company C started as a small firm, with just seven workers who now have been with the firm for more than three decades. Company C’s workers perform multiple functions on a rotation basis and they learn by doing. Loyalty is rewarded by non‐retrenchment during times of recession, and credits its Japanese buyers for influencing them to continuously monitor product quality. Company D employs home‐based subcontractors; company F initially hired unskilled and unschooled workers until they dragged down the firm’s productivity.

Subcontracting or local outsourcing involves the production of all or parts of a final product specified and marketed by an export firm outside the premises of the export firm. Subcontractors employ family labor or a few hired workers or apprentices while operating on very little capital, utilizing a low level of technology and skills, and providing low and irregular incomes (International Labour Organisation, 2002). Exporters adopt local outsourcing to reduce cost, spread risks and avoid labor disputes, and have been used by the furniture industry to adopt restrictive labor laws. When subcontractors are unschooled and lack managerial competencies, difficulties can arise, so according to one company, reducing the communication gap between labor and management immensely improves quality and productivity.

During the mid‐1980s, a substantial number of furniture factories closed shop because of labor unions which went on strike. This scenario is no longer present mainly because the labor

market is quite tight, and in cases when workers of furniture firms are affiliated with labor unions, employers maintain harmonious labor relations. Company D says “it is a give and take proposition.”

Table 9: Matching of Processes and Skills in the Cebu Furniture Industry, 2002 Process Description Skills Inventory Raw Material Plywood and solid wood are commonly used A few attended training courses, mostly on Preparation materials, which are bought kiln dried. The developing supervision skills. Skills were five most common wood working equipment obtained from work experiences. are: table saw, band saw, cut‐off arm saw and circular saw. Quality control is done by comparing the material quality against a set standard or by its moisture content. Rough Milling/ Most respondents processed solid wood, Most respondents attended training on Machining medium density fiberboard and plywood. The woodworking, furniture & cabinet making five most common wood working equipment and jigs & fixtures making. Skills were are: surface planer jointer, thickness planer, obtained from work experiences. table saw, band saw and shape molder. Quality control is done by comparing measurements/dimensions against wood quality and specifications based on the cutting list. Assembly/ The five most common furniture assembly Attended training on furniture assembly. Carpentry gadgets are: jigs, clamps, assembly machine, Acquired skills from previous job, supervisor, cabinet press and rubber bands. Quality co‐worker, relative, self‐learned and school. control is done by comparing the work against job or customer specifications, full‐size checklists, patterns or blueprints. Carving Quality control is done by comparing the full‐ Carving skills were mostly self‐learned or size detailed carving against the sample acquired from previous job. picture. Sanding, Finishing Most SMEs dry their finished products in open Finishing skills were mostly self‐learned. and Polishing areas or under the sun. Quality control is Some respondents were taught by supervisor, done by adhesive test and visual inspection, co‐worker and finishing consultant. comparing the color with the color swatches and inspecting for crackles, pinholes, bubbles or other marks. Fiberglass and Quality control is done by comparing the Skills were self‐learned, acquired from Casting product with job specifications. previous job, supervisor or training on fiberglass making. Upholstery Quality of sewing, fitting, uniformity of foam Attended training on upholstery; self‐learned; thickness and color is checked. acquired from co‐worker or previous job. Leather Inlay Leather inlays are tested for bubbles, edges Learning‐by‐doing; taught by supervisor, co‐ and grains. worker and previous job. Stone Inlay Hairlines, stone grains, stone color and Skills acquired from co‐worker, previous job, adhesion to carcass are checked. The hammer supervisor, relatives and self. test is used to test the stone inlay. Metal Works Quality control is done by comparing with the Obtained vocational course on Mechanical job specification or performing the drop test or Technology; previous job as iron fabricator. heavy load test.

Table 9: Matching of Processes and Skills in the Cebu Furniture Industry, 2002 (continued) Process Description Skills Inventory Packing and Crating Quality control is done by comparing with Learning‐by‐doing; taught by supervisor, co‐ buyer’s standards or specifications, drop test employee and training on packing standards. and adhesion test. Product Engineering Quality control is done by following a manual College degree (Architecture, Fine Arts, and Development or procedure in correcting quality defects and Mechanical and Industrial Engineering); product inspection (random sampling, batch, Trainings process, lots per batch). Maintenance Manual for preventive maintenance is Maintenance training followed. Repair records are kept. Source: Industry Analysis, Cebu Furniture Industries Foundation, Inc.

C. Entrepreneurial Competence

There is an important distinction to be made between proprietorship and entrepreneurship. The entrepreneur is driven by the need to accumulate capital, so his decision is based on business factors; the proprietor is driven by the need to earn income. Since the latter’s economic surplus is likely to be used to sustain a specific standard of living rather than be re‐invested in business, there is little capital accumulation (Scase, 2000). Recently, organizations such as ILO, UNIDO, and GTZ have emphasized strengthening entrepreneurial competence. In buyer‐driven value chains, producers are expected to receive technical training and information on products and designs through network relations with foreign buyers.

Beerepot (2005) considers entrepreneurs the most privileged group in the cluster in terms of access to knowledge. An entrepreneur absorbs knowledge through four channels: (i) observing similar products, (ii) negative action, (iii) value chain, and (iv) joint action. Observing similar products of other firms is a cheap means to absorb knowledge, although the scope for knowledge absorption is quite small. For instance, when entrepreneurs attend trade shows, they can observe fashion developed by competitors and may copy the designs if they wish. Negative action results from free‐riding behavior of rival firms, such as poaching of workers and designs. Though the financial costs of negative action might be small, the social costs of these actions might be high (ostracism). Global buyers encourage local producers to create a market brand for their designs, to invest in new machineries, and to comply with quality standards of foreign buyers. Joint action refers to the sharing of information through both formal and informal mechanism, motivated by a relationship of trust.

D. Profitability of Furniture Firms

The profitability of furniture firms can be gleaned from the data on the Top 5,000/7,000 Corporations and the 2003 CFIF Survey (Table 10). The Top 5,000 Corporations (2002) include 29 Cebu furniture exporters and 5 Luzon furniture exporters, collectively contributing sales of P2.123 billion. Cebu‐based firms contribute 67% of total sales and account for 53% of the total assets of the Top 5,000 Furniture corporations. They represent 86% of total equity and generate

94% of the profits of furniture firms. In fact, the profit margin for Cebu firms (4.52%) is 7.45 times more than Luzon firms (0.61%). The difficulties of Luzon furniture firms stem mainly from liabilities, which make up 91% of their total assets. They are, unsurprisingly, highly leveraged, with a debt‐to‐equity ratio of 1043%. In simple terms, the implication is that if these firms would close today and the assets were sold, the owners would only receive 9% of total assets.

Table 10: Selected Financial Indicators for Top 5,000/7,000 Furniture Corporations, 2001‐2002 2002 2001 Indicator Cebu Luzon Cebu Share Cebu Luzon Cebu Share F/S Data (in P1,000) Total Assets (TA) 2,324,176 2,065,104 53% 3,562,497 2,075,416 63% Fixed Assets (FA) 1,407,623 410,385 77% Liabilities 1,262,493 1,884,460 40% 2,485,029 1,843,268 57% Equity 1,071,413 180,644 86% 1,077,467 228,550 83% Sales 4,235,958 2,123,340 67% 6,973,719 2,041,594 77% Profit 191,636 12,896 94% 273,906 18,514 94% Financial Ratios (in %) Profit Margin 4.52% 0.61% 7.45 3.93% 0.91% 4.33 Asset Turnover 182% 103% 1.77 196% 98% 1.99 Return on Asset 8.25% 0.62% 13.20 7.69% 0.89% 8.62 Return on Fixed Assets 19% 5% 4.31 Debt to Equity 118% 1,043% 0.11 231% 807% 0.29 % of FA to TA 40% 20% 2.00 % of Liabilities to TA 54% 91% 0.60 70% 89% 0.79 % of Equity to TA 46% 9% 5.27 30% 11% 2.75 Source: Top 5000 Corporations (2002) and Top 7000 Corporations (2001)

The Top 7,000 Corporations (2001) include 43 Cebu and 13 Luzon furniture exporters, contributing total sales of P5.638 billion. Cebu‐based firms contribute 77% of total sales and account for 63% of the total assets of those Top 7,000 furniture corporations. They claim 77% of total fixed assets, represent 83% of total equity, and generate 94% of the profits of furniture firms. Even in 2001, Luzon firms were highly leveraged, and reported a lower percentage of fixed assets compared to Cebu firms. Their return on fixed assets is a lowly 4.51%, as against 19.46% for Cebu firms.

The 2003 CFIF Survey disaggregates profit and cost structures by asset size (Table 11). The industry is dominated by large firms, which capture 41% of total sales. Medium, small, and micro‐enterprises account for 36%, 21%, and 2% of total sales, respectively. Profit rates of micro‐enterprises are the highest at 9%, while those of large firms are less than 1%. In absolute terms, large firms registered the highest average profits at P5 million, while micro‐enterprises had the lowest average profit at P1.256 million. Raw materials claim a lion’s share (74% of revenues) in micro firms, while the combined labor and subcontracted labor represent the bulk of expenditures of large firms (45% of revenues). Large firms had the lowest share of fixed

assets to revenues at 20%, while small firms showed the highest build‐up of fixed assets to revenues at 406%.

The data indicate that firms have a tendency to continue investing in fixed assets until becoming classified as a “large” company, upon which its rate of investment (relative to sales) becomes lower than microenterprises. This suggests that furniture manufacturers are acting more as proprietors rather than as entrepreneurs.

Table 11: Profit and Cost Structure of Selected Furniture Firms, by Asset Size, 2002 (in PhP million, % in parentheses) Variable Micro Small Medium Large Total No. of Firms 2115 119 Gross Sales 28.45 270.09 457.68 530.00 1,286.22 Percent (2.21) (21.00) (35.58) (41.21) (100.00) Gross Cost 25.80 249.92 443.11 522.00 1,240.82 Taxes 0.156 5.81 4.431 3.00 13.39 After‐Tax Income 2.51 14.36 10.14 5.00 32.02 Profit Rate (in %) (8.83) (5.32) (2.22) (0.94) (2.49) Gross Cost 25.80 249.92 443.11 522.000 1,240.815 Labor 3.80 66.50 75.500 159.00 304.80 % Labor (13.36) (24.62) (16.50) (30.00) (23.70) Subcontracted Labor 1.83 40.58 70.24 79.50 192.15 % Subcontracted Labor (6.42) (15.03) (15.35) (15.00) (14.94) Raw Material 19.01 115.10 185.31 201.40 521.71 % Raw Material (66.84) (42.95) (40.49) (38.00) (40.56) Others 1.15 26.85 112.06 82.10 222.15 % Others (4.04) (9.94) (24.48) (15.49) (17.27) Fixed Capital 8.18 1,096.01 277.88 104.9 1,486.972 % to Revenues (28.77) (405.80) (60.71) (19.79) (115.61) Average Fixed Capital 4.09 99.64 55.58 104.90 78.26 Source: Industry Analysis, CFIF, 2003

What could account for the better performance of Cebu furniture firms vis‐à‐vis their Luzon counterparts? One possible reason would be the dominance of family firms in Cebu. In many developing countries, family businesses play an important role in the national economy. In response to globalization, family businesses had to obtain management resources such as financial, human, and technological resources from outside their families (Shimizu, 2004).

E. Family Ownership of Furniture Firms

How strong are family businesses in the Cebu Furniture Cluster? A tentative answer can be gleaned from the membership information obtained from the CFIF website (Table 12). It seems that some families either own more than one furniture firm. Specifically, 32% of the CFIF

member firms are co‐owned by families. Some 68% of CFIF firms list contact persons who are non‐family members tasked to attend CFIF and represent the firm in CFIF functions.

Table 12: Contact Persons for CFIF Activities Number of Contact Persons Percentage Persons Family 55 32% Same Representative in CFIF Firms 12 7% Family Member Representative in CFIF Firms 43 25% Independent Representative 116 68% Total 171 100% Source: Cebu Furniture Industry Foundation (CFIF) Website

The designation of firm representatives in CFIF activities is shown in Table 13. From the information, it can be inferred that functions such as overall management, production and sales management, finance and designing are reserved for family members. This practice might explain the protectionist behavior among key persons in the industry referred to by Beerepot (2005). This, in turn, hinders the development of a regional culture of trust and collaboration, which is a necessary precondition for localized learning processes. Another consequence of protectionist tendencies is low investment in skills and capacity upgrading. (On the other hand, family enterprises can make important strategic decisions faster than usual.)

Table 13: CFIF Representatives, by Position and Gender Male Female Male Female Total Position (in %) (in %) President 75 8 83 90 10 CEO 61786 14 Vice President/COO/OIC 7 7 14 50 50 Managing Director/General Manager 28 10 38 74 26 VP Finance/Finance Officer 25729 71 Operations/Production Manager 23540 60 VP Marketing/Marketing Manager 3121520 80 Designer 2 0 2 100 0 Total 125 46 171 73 27 Source: Cebu Furniture Industry Foundation (CFIF) Website

All of the key informants run family‐owned furniture firms. For Company A, key positions are held by family members who have some foreign heritage; policy directions are set by family members, though employees who help run the company are treated as parts of the family. This company recently ventured into Vietnam while retaining Philippine operations. Company B, during its early years, was run by a husband and wife management team. At present, plant managers are non‐family members who participate in a profit‐sharing scheme. Interestingly, Company B is open to transferring operations to other countries. Company C is

managed by the mother and assisted by two sons (handling marketing and accounting) and a brother (in charge of planning, logistics, systems and control). Company D, like A, limits key positions to family members. The highest position that an employee can reach is plant manager. Company E’s team is composed of the husband as the president, the wife as vice president, the son as finance business manager, and the daughter as the corporate secretary. The husband is in‐charge of marketing and production, while the wife oversees the finance. Company F has a husband‐wife tandem with the husband handling sales and the wife designing their products.

F. Gender and Income

It is worth noting that while overall management and product design in CFIF firms are male‐dominated, finance, production, and sales work are largely handled by females. A more comprehensive picture of the distribution of furniture workers in Cebu is given by the 2000 Census of Population is used (Table 14). Since the Census did not identify the workers engage specifically in the furniture industry, the following occupation codes were used as proxy indicators: code 714 (painters and related trade workers), code 721 (metal molders, welders, sheet metal workers), code 733 (handicraft workers in wood, textile, leather) and code 742 (wood treaters, cabinet makers and related trade).

The census data on the 10% sample of Cebu households show that furniture workers comprise 14% (47,050) of the province’s total population. Stratification reveals that Mandaue ranks first in terms of estimated number of furniture workers (9,790), followed closely by Cebu (9,710), and Lapulapu a distant third (4,850). Contrary to perceptions of key informants, furniture workers are predominantly male (81%). Regardless of gender, the median age of furniture workers was 32, while the median educational attainment was Second Year High School. The census data likewise show that child labor (below 15 years old) is a production input, and conversely, that there are aged between 90 to 99 still involved in furniture work.

The 2003 DTI Furniture Industry Profile also states that only 43% of the sample were women. Only medium‐sized firms hired more female workers, largely due to the presence of semi‐skilled female workers. Large firms reported having more male employees.

Table 14: Number of Furniture Workers, by Age and Education, 2000 Age of Workers (in years) Location No. of Workers Education Median Range Male Female % Female Male Female Male Female Male Female Cebu 3,806 899 19% 32 32 10‐99 11‐87 HS II HS II Mandaue 716 148 17% 32 33 11‐74 12‐72 HS II HS II Cebu City 823 148 15% 33 33 10‐90 15‐67 HS III HS III Lapu‐Lapu City 422 63 13% 32 30 15‐80 17‐56 HS II HS II Others 1845 425 19% 32 32 12‐99 11‐87 HS I HS I Source: 2000 Census of Population

With regard to monthly income, the information shows that wage rates among males and females by work category do not have much variation (Table 15). For instance, the median monthly incomes for both male and female managers are over P10,000. The median monthly income for males is higher than females, however, for supervisory, specialist, and semi‐skilled labor posts. On the other hand, females earn a higher median monthly income for multi‐skilled, skilled, and unskilled labor. On the whole, male workers earn slightly more than female workers (1.34%); the rate of variation between male and female workers ranged from a low of ‐ 4.29% for unskilled workers to a high of 2.82% for semi‐skilled workers.

Table 15: Employment Size and Monthly Income by Position, 2003 Specialist/ Multi‐ Semi‐ Employment Size/ Skilled Managerial Supervisory Support skilled skilled Unskilled Total Monthly Income Labor Staff Labor labor Employment Size Micro: 9 or Less 47 36 29 17 10 21 21 181 Percent Female 38% 44% 48% 47% 50% 62% 52% 47% Small: 10 to 99 81710 25 32 27 11 130 Percent Female 50% 35% 30% 36% 38% 37% 36% 37% Medium: 100 to 199 2358220 Percent Female 50% 67% 60% 63% 50% 60% Large: 200 and Above 372113 Percent Female 33% 29% 0% 0% 23% Total of percent sample 55 53 41 48 54 58 35 344 Percent Female 40% 42% 44% 42% 41% 48% 46% 43% Median Income (in P) Males > 10,000 7,333.83 5,653.36 5,176.97 4,750.51 4,333.83 2,375.09 5,455.05 Females > 10,000 7,176.97 5,538.96 5,385.12 4,788.21 4,214.79 2,481.65 5,382.85 % Difference 2.19% 1.74% (3.86%) (0.79%) 2.82% (4.29%) 1.34% Source: 2003 DTI Furniture Industry Profile

G. Local Support Organizations and Strategic Alliances

Local economic development is enhanced with the establishment of partnerships between local governments and community and civic groups in managing existing resources, creating jobs, and stimulating economic activity (Helmsing, 2003). In Europe, cluster development proceeded in two stages: spontaneous growth, then institutionally enhanced growth (Gereffi, 1999). It is in the second phase of cluster development that local support institutions—business associations, local government units, national line agencies, education and training institutions and foreign funding agencies—play a vital role.

Figure 3 depicts the sources of knowledge and its transmission. Business associations, local governments, and education and training institutions are the main learning facilitators and knowledge sources in the furniture industry. Foreign buyers, the business community, and external sources (exhibits, the Internet, magazines, foreign donor organizations, etc.) are

contributors of knowledge in the furniture industry. The entrepreneur then transmits knowledge to subcontractors, rank and file employees, and skilled workers.

Figure 3: Learning Stakeholders at Cluster Level

Learning Facilitators and Knowledge Sources

Local gov’t Business Education and units associations training institutions

Entrepreneurs ‐ International outlook ‐ Production organization ‐ Market trends

Skilled key workers Subcontractors Rank‐and‐file *Specific job‐skills *Organizational *Materials workers *Production skills *Production knowledge skills *Access to networks *Reputation *Critical of workers and of exporters enabling skills *Labor market

LABOR FORCE Source: Beerepot (2005)

1. Cebu Furniture Industry Foundation and Strategic Alliances

With daily operations hindering firms from conducting joint projects and initiatives, the business association is responsible for cooperative activities that would otherwise not be undertaken by individual firms. In the Cebu furniture industry’s case, before the CFIF, there was the Chamber of Furniture Industry Philippines‐Cebu established in 1974 to respond to the threat of declining rattan supply. The organization was successful in lobbying for an export ban on rattan. In 2002, CFIP‐Cebu disassociated itself with CFIP‐Manila to form CFIF due to concerns about the Cebu furniture industry’s declining US market share, the expansion of China and Vietnam, and an increasingly negative outlook for the industry as a whole.

The following year, the CFIF held a Buyers’ Forum to consult with exporters, buyers, suppliers, subcontractors, other‐industry exporters, and government. In 2004, CFIF celebrated its 30th year, growing from an eight‐member to a 172‐member business association (now

including subcontractors). CFIF members are given the opportunity to join trade and study missions to international furniture shows in North America, Europe, the Middle East, and Asia. CFIF organized the participation of Cebu exporters in international trade shows in Cologne (Germany), Milan (Italy), Tokyo (Japan), Dubai (United Arab Emirates), and Shanghai (China).

From July 2003 to June 2004, CFIF sponsored a total of 25 training programs involving 430 training hours attended by 494 participants, or an average of 20 participants per training program (Table 16). Out of the 25 training programs, 20 were short‐term seminars while 5 were long‐term training programs.

Table 16: List of CFIF Training Program, July 2003‐June 2004 Short Term Seminars Long Term Training Programs Management of Change Supervisors Production Capability for Customer Service Enhancement Program Furniture Manufacturing Operations Quality and Cost Effective Furniture Finishing Seminar Reinforced Plastics Furniture Manufacturing: Working Furniture and Cabinet Making (FCM) with Fiberglass Technology Total Quality Management (TQM) Environmental Management Systems Supervisory Development Program for Furniture Strategic Compensation Manufacturing Operations Jigs and Fixtures Technology Focus on Leather Marketing Management Decorative Process of Gold Leafing (Gilding) Marketing Through Printed Sales Literature Principles and Applications of Management Basics of Fair Participation and Booth Designs and Visual Merchandising FSC Certification & Its Importance to the Furniture Industry Competitive Pricing for Maximum Marketability Reproductive Health & Gender Sensitivity Design Trends and Marketing Updating Briefing Machine and Equipment Maintenance Timber and Lumber Drying: Focus on Solar Drying PEPP Environment Management Workshop: Batch 1 PEPP Environment Management Workshop: Batch 2 Source: CFIF 2004 Annual Report

The CFIF 2004 Annual Report enumerates several strategic alliances with other organizations. The Business Linkages Project (BLP), facilitated by DTI under the Entrepreneur Support Program (ESP) of the Canadian International Development Agency (CIDA), assisted in institutional strengthening and market exposure. The European Chamber of Commerce of the Philippines (ECCP) created and managed the CFIF website, www.furniturecebu.com. The German government through its technical consultants from Center for International Migration

(CIM) and German Development Services (DED), launched the Dual Training System (DTS) on Furniture and Cabinet Making, a one‐year course on furniture making for operators and supervisors accredited by the Technical Education and Skills Development (TESDA). The Carl Duisberg Foundation (CDG), Center for Promotion of Imports from Developing Countries (CBI) of the Netherlands, Private Enterprise Accelerated Resource Linkage (Pearl 1 and Pearl 2) of CIDA, ASEAN Center, and Japan Export Trade Organization (JETRO) funded study and trade missions.

The Confederation of Philippine Exporters (PHILEXPORT) has joined CFIF in advocacy issues on matters affecting the whole export sector. Regarding an issue on Giant African Snails, PHILEXPORT lobbied for the resumption of accepting shipments from Cebu to Australia. CFIF advocated making the Cebu International Port ISPS‐compliant by July 1, 2004. In response to another issue, this time about toluene, the CFIF crafted two position papers for the immediate release of detained containers by the Bureau of Customs and the decentralization of the issuance of PDEA licenses, permits, and certifications from Manila to its regional office in Cebu.

A business‐friendly Mandaue City government has made possible the emergence of the Cebu Furniture Cluster. The local government processes business permits within a day, and has allocated some 9,000 m2 of its city‐owned lot in the North Reclamation Area to house the proposed Cebu International Trade and Exhibition Center (CITEC). The CITEC Task Force was organized in 2002, with members coming from the CFIF, Cebu Chamber of Commerce and Industry (CCCI), PHILEXPORT‐Cebu, the European Chamber of Commerce, DOST, and DTI. The Japan International Cooperation Agency (JICA) is the proposed funding agency. CITEC is expected to benefit 265,619 SMEs by providing a venue for trainings, meetings, conferences, and exhibitions.

The DTI has designated furniture as the product representative of Cebu in its “one product, one province campaign.”2 Company C claims that the DTI has announced the availability of P300 million credit assistance to SMEs in the next two years based on buyers’ purchase orders.

On a related note, the Department of Environment and Natural Resources (DENR) encouraged mandatory self‐monitoring and compliance with environmental standards through the Environmental Consent Agreement. CFIF partnered with LGUs and private organizations in the reforestation of Cebu’s denuded watersheds and the rehabilitation of mangrove areas in Olango Island.

2 DTI serves as the conduit for the industry to link with trade‐affiliated agencies such as Center for International Trade Expositions and Missions (CITEM) and the Product Development and Design Center of the Philippines (PDDCP), as well as other government agencies (e.g. Furniture and Handicrafts Industries Research Development Program (FHIRDP) of the Forest Products Research and Development Institute (FPRDI) of the Department of Science and Technology (DOST).)

The linkage with Don Bosco Technical School assures a constant supply of skilled manpower to the furniture industry. Presently, Don Bosco offers a BS in Industrial Technology, major in Furniture Making. CFIF was involved in curriculum development and admission applications for the course. CFIF also collaborates with the University of the Philippines’ Cebu Campus in offering Summer Module Courses on Industrial Design. The CFIF is likewise working with TESDA in promoting work in the industry as a career for skilled, vocational workers. In this regard, the Cebu furniture sector can focus on developing subcontractors, which are mostly unregistered, backyard industries. CFIF estimates that 92% of the jobs in the furniture industry are outsourced to subcontractors, making them an important albeit neglected industrial partner.

IV. GLOBAL BUYERS AND UPGRADING

Most industrial clusters in developing countries operate in a “buyer‐driven” value chain, i.e., the buyer exercises control over the chain in the absence of ownership (Gereffi, 1999; Humphrey &Schmitz, 2002). In the Cebu furniture cluster, foreign buyers or their buying agents are the main source of information for entrepreneurs. Entrepreneurs meet their foreign buyers through participation in furniture exhibits, through word‐of‐mouth, references, advertisements, the Internet or intermediary organizations like CFIF or the Cebu Chamber of Commerce.

Though the Cebu furniture cluster is widely seen as buyer‐driven, furniture exporters are now exploring original design manufacturing (ODM) and hoping to eventually venture into original brand manufacturing (OBM). Mixed‐media furniture, in particular, has become the conduit for this functional upgrading. Toward this end, the CFIF started a Product Development Program for Furniture‐Contemporary Design to assist local furniture manufacturers to understand contemporary furniture design for specific markets, especially Europe. Five participating companies developed prototypes of nine occasional furniture pieces, 13 furniture collections, and five accessories collections. Most of the final prototypes were displayed during Cebu X.

Figure 4 shows functional upgrading in the value chain, tracing the role of design, production, branding, and marketing. To a certain extent, furniture design takes into account the production structure, such as availability of mixed media, logistics, quality and packaging, among others. Likewise, quality and consistency of production are conditions for a product to attain branding. As of late, there is an effort to market Cebu furniture as an international brand—which could foster sustainability.

Figure 4: Functional upgrading in the value chain

Production

 Logistics Design  Transform inputs Branding Marketing  Quality  Packaging Etc

A. Market for Cebu Furniture Exports

The DTI’s 2003 Profile of Furniture Industries report that 89% of the furniture firms surveyed engage in direct export trading, while 42% engaged in indirect export trading and others were involved in both (Table 17).

Table 17: Economic Activities Engaged by Respondents, 2003 Type of Activity Industry Role Total Percent Subcontracting 1111 5 9 18 47 Manufacturing 14 2 359 3387 Domestic trading 113 9 14 37 Indirect export trading 1123 9 16 42 Direct export trading 11142359 3489 Total 111111423 5 9 38 100 Percent 3333337581324100 Source: 2003 DTI Furniture Industry Survey

Respondents claimed that 68% of their biggest foreign buyers were distributors and wholesalers, retailers for 21%, and manufacturers and assemblers for the rest (Table 18). Multiple responses were allowed.

Table 18: Main Business of Biggest Foreign Buyer, 2003 Main Business Frequency Total Percent Manufacturer/Assembler 5 513 Retailer 6 28 21 Distributor 24 226 68 Wholesaler 24 226 68 Total 5 624 237 97 Percent 13 16 63 597 Source: 2003 DTI Furniture Industry Profile

The top 10 markets for furniture exports as of 2003 are the US, Japan, Great Britain and Northern Ireland, Australia, Saudi Arabia, Netherlands, France, Italy, Spain, and Canada (Table 19). Some 63% of furniture exports are bought by US buyers. Together, the top 10 markets comprise 88% of total furniture exports.

Table 19: Top 10 Markets for Furniture Exports, 2003 Value Country Percent (in USD) USA 126,288,378 63 Japan 13,185,046 7 Great Britain and Ireland 6,555,875 3 Australia 5,933,783 3 Saudi Arabia 4,844,271 2 Netherlands 4,797,376 2 France 4,750,600 2 Italy 3,945,350 2 Spain 3,702,232 2 Canada 2,612,850 1 Total Market Share of Top 10 countries 176,615,761 88 Total Furniture Exports 200,965,549 100 Sources: NSO and BEPT

B. Role of Design and the Designers’ Guild in Product Upgrading

New products are developed through interactions between a foreign buyer and an exporter. Sometimes, foreign buyers provide the design and product specifications (e.g. paint color and shade). Most export firms maintain in‐house designers, although they hire freelance designers when they join exhibits. Estimates from buying agents indicate that 50% to 70% of the furniture designs are done by Filipinos. In one case, a foreign buyer requested a Cebu‐based foreign designer to implement a furniture design for Chinese production. Since these products cater to niche markets, they are mainly sold in small volumes. A testimony of a designer is given below, while Table 20 is a sampling of furniture designers and their works.

“Coconut tiles are a new material for us. When I visited the furniture show in High Point (USA), I saw that another producer from Cebu had used the material. My buyer asked if I could produce a similar product (dinner trays). Sometimes my buyer sends me pictures of products from competitors. My buyer then asks if I can produce something similar. For this product, I placed an advertisement for coconut tiles in a local newspaper. Ten guys reacted, but only one of them was involved in the production himself. The rest were just traders. One of my existing subcontractors will do the inlay of the tiles.” (Beerepot, 2005; Interview, 13‐05‐2003).

Table 20: Sample List of Furniture Designers and their Works Designer Works Awards/Accomplishments John McGuire, McGuire 1948: Innovated the combination of 1988: Galleon Award (Manila) as top Furniture Co. rattan and rawhide, an exclusive buyer of Phil. Rattan furniture and trademark patented internationally contributing to the development and improvement of the product and expansion of the market 15 designs, two are classics displayed Opened 21 showrooms in key US at the Museum of Modera Art in cities; distributor for Europe and New York (officer’s chair and Sebu Dept Store (Japan) otterman) Tapped Mehitabel, Rattan Arts, Nazareno (Zambales peel), Indonesia and Hongkong (teak and mahogany with rattan)

Debbie Palau, Design Popularized the use of ceramics on 1993: KATHA Award for Best Ventures tiles Product Collection (Manila Fair) with Water Buffalo line in terracotta tiles and metal Design used sustainable and 1997: Best Product Design for renewable materials on Contemporary (Cebu Fair) for contemporary lines skeletal metal frame chaise with stitched leather Design inspired by Filipino heritage, 1994: Vitruvian chair graced the studies of Malay and Eastern culture cover of the International Home Furnishings Market Resource Guide, Fall Edition (Highpoint, North Carolina) Design philosophy revolves around 1998: Carl Duisberg Gesellschaft concepts that mix the linear (CDG) sponsored Advanced Eco‐ simplicity of the West with the Design Management Program in “wabi‐sabi” complexity of the East Germany

Table 20: Sample List of Furniture Designers and their Works Designer Works Awards/Accomplishments President of the Designers Guild – Phil. Ramon Castellanos, Applies new treatments to the 100% 35 years experience in designing Diseno en Asia, Inc. natural materials he uses in his furniture and working on interior designs decoration projects Original design, hand‐crafted and 1985: National Design in Traditional use of entirely natural materials Craftsmanship Price (Spanish Ministry of Industry and Energy) Kalma Collection: European design 1988: Best Image Price (Milan inspired by traditional Asian International Furniture Fair) furniture, bamboo, rattan, cotton matting, wood, leather, and iron Kalma Nature’s Light: natural shell 1988: Chosen by C.E.E. to develop collection transformed into standard the project Natural Design in the or table lamps and hanging lights. Caribbean Each shell has a unique light and 1999: Artistic Director (Manila transparency, creating an ocean International Furniture Fair) atmosphere on land Takto Collection: leather and 1999: Artistic Director of the Cebu bamboo are principal materials International Fair

Betty Cobonpue, Interior Patented a process of laminating Crafts of the Islands rattan

Kenneth Cobonpue, Design integrate locally sourced 1987: Studied Industrial Design at Interior Crafts of the organic materials with innovative Pratt Institute (New York); Islands hand‐made production techniques as apprenticed for a leather and wood an alternative to the Western workshop near Florence, Italy definition of modern design Fuses industrial techniques with 1994: Studied Marketing and indigenous materials. Complements Production at Export Akademie his use of steel with sturdy native Baden‐Wurttemberg in Reutlingen, fibers (rattan, abaca, buri and Germany and worked in Bielefeld coconut) and Munich Movement 8 (Filipino furniture and 12 Mugna and 4 Katha Awards for accessory designers formed by Design Excellence (Phil. International CITEM and DTI) Furniture Exhibition) Japan Good Design Award (2003, 2004) for Voyage Bed, Yin and Yang Chair, Kabuki buffet cabinet and loveseat/easy chair

Table 20: Sample List of Furniture Designers and their Works Designer Works Awards/Accomplishments Golden Shell Award (2002) for embodying the ideals of Asian design 2003: Ten Outstanding Young Men Award (Phil Jaycees Inc. and Gerry Roxas Foundation) Featured in magazines like I.D., Elle Décor, Wallpaper, Asiaweek and Time Carlo Cordero, Cebu Fil Design‐diven, limited‐edition pieces 2001: Editors’ Award for Best Veneer with highly technical features Manufactured Product (International Contemporary Furniture Show, New York); square‐cut bamboo chair of 142 pieces joined only by pegs Tropea: uses wood and bamboo held by strips of leather. Stephanie Zagala, SS Laminated surface using banana tree Glider: quasi‐rocking chair on ball Dezign barks, corn husks, spliced coconut bearings roots and termite‐eaten wood to create different patterns, mosaics and marbled effects for table tops and occasional furniture (side and coffee table) Maitland Smith Use rare stone, metal and shell 8,000 designs of 18th century English veneer. Evolved to incorporate reproduction furniture. Cebu has innovative designs which include niche market for small volumes; it is metal casting, porcelains, design‐led from concept to sophisticated finishing techniques, production detailed hand painting, beautiful inlaid marquetry and handcarved woodwork Pacific Traders European‐trained design team Source: Company Websites

The Cebu Furniture and Furnishings Fair was launched in 1988 in conjunction with CITEM. Eventually, six of the participating designers formed the Designers Guild of the Philippines (DGP), which has now grown into 51 in‐house and freelance designers, including members of the academe. The vision of the DGP is to transform concepts and ideas into creative and innovative designs for furniture through the bonding of artists, professionals, and designers for home, commercial, and contract export markets. As a non‐profit organization, it funds its operations through seminars, trainings, and workshops. To become a guild member,

one must be actively engaged in the furniture or related industries in any of these processes: design, production, distribution, promotion, communication, and training.

Of the four designers interviewed, two are DGP founding members, one is a PDCP member, while the fourth is unaffiliated (Interview 1). According to them, designs are arrived at through constant experimentation, materials and library research, reading magazines, attending trade fairs, surfing the Internet, and combining old designs with contemporary ones. Overall, Filipino designers lack the foreign exposure and formal training that their foreign counterparts have—making Filipino designers reliant on the tastes of particular buyers—but nonetheless make up for this with their proficiency in using different raw materials.

The designers share the following concerns: limited technology and materials, design piracy and intellectual property issues, and, in relation, the tedious process of patenting. Designers are usually given commissions when their creation is marketed, ranging from 3% to 5% of gross sales to a mutually agreed lump sum amount.

C. Role of CITEM and Cebu X in Product Upgrading

CITEM, a support agency of the DTI, organizes trade fairs to facilitate face‐to‐face selling and provide opportunities for taking orders and immediate feedback gathering from buyers and other trade members. Participation in trade fairs requires substantial investment, about P1 million for local trade fairs and P1.5 million for international trade fairs. There are several Philippine trade fairs, but Cebu X is notable for being organized by CFIF members.

Statistics for the Philippine International Furniture Show (PIFS) from 1997‐2004 are on Table 21. In 1997, sales generated by 181 exhibitors amounted to US$ 44.7 million, or an average of US$246,886. This went down to 116 manufacturer‐exhibitors selling US$13.8 million, or average sales of US$119,299 in 2004. This could mean two things: either trade shows have ceased being effective in attracting foreign buyers, or that the Philippines has simply lost too much of its share in the global furniture market.

Table 21: Philippine International Furniture Show, 1997‐2004 Exhibitors/Buyers 2004 2003 2002 2001 2000 1999 1998 1997 Exhibitors 141 140 123 137 185 207 206 181 Manufacturers 116 119 103 117 165 197 196 181 Trade Service/Sponsor 25 21 20 20 20 10 10 Sales Generated (US$) 13,838,733 10,260,535 17,640,343 16,013,727 30,214,602 27,596,461 34,225,504 44,686,333 Booked Sales 7,382,895 4,201,788 7,704,666 7,121,615 12,580,900 9,405,398 12,817,362 19,698,751 Under Nego 6,455,838 6,058,747 9,935,676 8,892,113 17,633,702 18,191,064 21,408,143 24,987,581 Average Sales (in USD/manufacturer) 119,299 86,223 171,265 136,869 183,119 140,084 174,620 246,886 Buyers 1406 861 3097 1586 1704 1649 1502 1727 Foreign 952 458 981 873 1057 1143 1114 1198 Local 454 403 2116 713 647 506 388 529 Average Sales (USD/Foreign Buyer) 14,536.48 22,402.92 17,982.00 18,343.33 28,585.24 24,143.89 30,723.07 37,300.78 Average Sales (US$/Buyer) 9,842.63 11,917.00 5,695.95 10,096.93 17,731.57 16,735.27 22,786.62 25,875.12 Top (10) Countries 610 323 607 570 682 801 699 812 USA 333 127 217 180 202 225 235 240 Australia 47 24 52 53 80 99 111 79 Saudi Arabia 43 43 64 51 89 63 Spain 38 16 37 39 51 39 Hongkong 37 16 30 24 57 102 Japan 36 35 54 61 58 79 31 105 UAE 22 14 UK 21 25 40 37 66 54 41 Germany 17 14 32 49 45 51 Exhibitors/Buyers 2004 2003 2002 2001 2000 1999 1998 1997 Italy 16 France 9375353564740 Netherlands 44 46 42 Singapore 36 36 65 53 60 Malaysia 24 41 38 Taiwan 35 42 Canada 45 Korea 56 Ratio of Top 10 to Foreign Buyers 64% 71% 62% 65% 65% 70% 63% 68% Source: The Furniture Man, January – June 2004

The composition of the top 10 countries representing the buyers has likewise changed through the years. There were six countries (USA, Australia, Hong Kong, Japan, UK and Germany) that remained as top 10 buyers from 1997 to 2004. France, Singapore, Malaysia and Korea, belonging to the top 10 PIFS buyers in 1997, were displaced by Saudi Arabia, Spain, United Arab Emirate and Italy. Notwithstanding PIFS’ decline in sales, Cebu X does attract a diverse set of foreign buyers (Table 22). For 2003 and 2004, 68 countries were represented, and

in contrast to PIFS, registered 11% and 14% increases in buyers and sales for the same period, respectively. Average sales, unsurprisingly, went up by 14% from US$18,745 per buyer in 2003 to US$19,222 per buyer in 2004.

Table 22: Cebu X, 2004 and 2003 Statistics 2004 2003 % Change Visitors 3,793 4,318 ‐12 Trade Buyers 1,363 1,227 ‐11 Non‐Trade Visitors 2,430 3,091 ‐21 Total 7,586 8,636 ‐12 Trade Exhibitors 139 173 ‐20 Sales (US$M) 26.2 23 ‐14 Average Sales (USD) 19,222 18,745 ‐3

D. Role of Foreign Buyers in Process Upgrading

Furniture Brands International is the largest residential furniture manufacturer and retailer in the United States. It represents a group of six well‐renowned, branded companies in the industry: Broyhill and Lane are dominant middle‐price brands; Thomasville caters to the upper‐price market; Drexel Heritage, Henredon, and Maitland Smith are premium‐price brands. Maitland Smith was the latest acquisition of the group in 2001.

Furniture Brands recently shifted from being a purely domestic manufacturer to a vertically‐integrated manufacturer and retailer offering branded consumer products. This change in business model led to the outsourcing of furniture production to countries with cheaper production costs and the closure of 23 of its local furniture plants since 2001. As a major global buyer of cost‐efficient but high‐quality furniture exports, it taps furniture producers in Indonesia, China, Vietnam and the Philippines, among others.

It was pointed out earlier that foreign buyers conduct quality assurance tests before furniture exports are shipped to importing countries. For instance, a product development center and a quality assurance and testing laboratory Cebu has been set up by six foreign buyers in Cebu through an agent with offices in Manila, Malaysia, Indonesia, Taiwan, and China. The process proceeds as follows: Principal buyers furnish the agent with the furniture design and product specifications. Depending on the media to be used, the agent then approaches a furniture manufacturer to request a sample order. When the sample is completed, the agent performs quality assurance tests, based on the standards set by the principal buyer, before the purchase order is placed. All of the processes involved in furniture production are tested, such as the packaging, the moisture content of the wood, the quality of the finishing, and durability. A stress test is performed to determine whether the packaged product can withstand the rigors of sea freight. Upon placement of the purchase order, the agent monitors the production closely to ensure that the details of the sample specifications are followed. The finished products are tested for quality assurance, this time on a random basis.

Rejection rates for this Cebu‐based agent was initially at a high of 20%, but has significantly decreased as a result of the constant monitoring of the production process. This process upgrading has improved the profitability of manufacturers, and has encouraged them to acquire machineries. Also, the agent once outsourced buyers’ orders to as many furniture manufacturers. Today, the agent maintains just five furniture exporters as regular producers for the foreign buyer orders (Interview 9). In one instance, one of the five furniture exporters was hired by a Board of Investments‐registered furniture manufacturer as a management consultant to oversee the efficiency and quality of its operations.

Quality assurance spans the in‐process and finishing stages and ensures that the entire production process conforms to the specifications agreed upon by the foreign buyer and the furniture manufacturer. There are also foreign buyers who would prefer to perform quality assurance only during the finishing stage. If strict quality assurance is implemented from the in‐process to the finishing stage, the rate of sales return is close to nil; only replacement parts are requested. However, if the quality assurance is done only at the finishing stage, the sales return could reach 20%. In these cases, some foreign buyers would offer to repair damaged items and charge back the cost of repair to the furniture exporter, rather than have the products shipped back to Cebu. Since labor cost is higher at the United Sates, there are instances when the furniture exporter might stand to lose from the transaction (Interview 10).

There are also cases when U.S. buyers invite furniture exporters to the High Point, North Carolina, and Las Vegas Furniture Shows. These events give furniture exporters a chance to interact with furniture consumers and leading furniture retailers and wholesalers in the United States.

A Cebu‐based global buyer, staffed with Filipino‐American designers, regularly visits US‐based wholesalers and customers to select furniture designs which would be the basis for purchase orders. In most instances, the global buyer presents a furniture design to the wholesaler‐client, which would be altered according to the specifications of the clients’ in‐house designers. Once the design specification is drawn, the client would issue a purchase order covering its requirements for the coming year. Upon receipt of the purchase order, the global buyer would farm out the orders to different furniture manufacturers worldwide, including Cebu. The global buyer would then extend additional assistance to the furniture manufacturer, such as purchase of duty‐free imported raw materials, provision of working capital requirements of the furniture manufacturer, information‐sharing of product prices, and raw material sourcing (Interview 11).

V. THE PHILIPPINES IN THE GLOBAL FURNITURE MARKET

Global furniture trade is big business. Between 1995 and 2000, it grew by 36%, faster than the growth of overall world merchandise trade (26.5%), apparel (32%), and footwear. By 2000, it was the largest low‐tech trade sector, surpassing apparel and footwear. Out of the 15

major furniture exporters in 2000, six are developing countries (Brazil, China, Indonesia, Malaysia, Mexico and Thailand) and four are transition economies (Czech Republic, Poland, Romania and Slovenia). These 10 countries tend to be both large‐volume exporters and low‐ volume importers of furniture. Industrialized countries are large volume net exporters, led by Italy (1st), Canada (3rd), Denmark (7th), Spain (10th), and Sweden (14th).

In 2004, global furniture trade reached $220 billion, with Italy and China each exporting US$10 billion. There are indications that China has emerged from mass production of low‐cost commodity‐style products to pioneering innovations in processing, products and business systems. The Forest Products Journal claims that China is now the leading buyer of woodworking equipment in the Asian region, cutting down production costs by 20% across‐ the‐board. The cost savings are then re‐invested in new equipment.

“Furniture has traditionally been a resource and labor‐intensive industry that includes both local craft‐based firms and large, volume producers. Mass‐producing furniture became a viable manufacturing strategy with the advent of flat‐pack or ready‐to‐assemble designed furniture. This product innovation paved the way for firms to design, manufacture and ship products in large quantities. Firms that mass‐produce flat‐pack furniture tend to supply products for the low‐ to medium‐ price markets. Solid wood furniture manufacturers have retained important niche market segments primarily for high‐end, expensive and design‐led products. These specialized products tend to be purchased locally while mass‐produced, large‐ volume products are sold locally and for export” (Kaplinsky, Morris & Readman, 2003).

In 1998, the Philippine furniture exports totaled US$322 million, which peaked at US$380 million in 2000. From thereon, it steadily declined to US$277 million in 2003, though briefly rising to $305 million in 2004. What is alarming though is the drastic decline in the Philippines’ share in the global furniture market. From being one of the top two exporters in Southeast Asia during the 1980s, the Philippines now accounts for a negligible 1/5 of 1% of the global furniture market—because of slow innovation.

Innovation is usually measured through inputs (R&D indicators such as number of personnel engaged in R&D) and outputs (patents, bibliometrics, etc.). However, these measures provide little insights into the effectiveness and productivity of inputs, the applicability of output, and the efficiency of the innovation process.

Kaplinsky and Readman (2004) propose unit‐price and market‐share data as innovation indicators. Unit prices were first used by Stout (1977) and pursued by Pavitt (1980) to assess the competitiveness of UK industries (defense, textile machinery and electrical power tools). However, this measure had three limitations, given the assumption that falling unit prices reflect downgrading and loss of competitiveness. First, in the era of rapid productivity growth, falling unit prices coupled with improved incomes may represent a form of upgrading (as in the

electronics industry) rather than downgrading. Second, unit prices may reflect exchange rates rather than productivity performance, reflecting macroeconomic rather than firm‐determinants of competitiveness. Third, trade growth may be both extensive (more of the same), or intensive (more trade, but of different products). To address these limitations, Kaplinsky and Readman (2004) complemented the use of unit prices with market share data: “Product upgrading (in design or quality) will be reflected by a relatively good unit price performance (in that either unit prices grow more rapidly or fall less rapidly than those of competitors) and a complementary improvement in (or stability of) market share.”

Table 23 is an application of the Kaplinsky‐Readman schema to the furniture industry. A product with increasing unit prices and expanding market share is thought to be a winner, outranking its competitors (Quadrant 2). On the other end, a product faced with a combination of falling unit price and shrinking market share is perceived to be a loser, or is starting to lose its competitiveness (Quadrant 4). Ambiguous cases occur when the two indicators move in different directions. For instance, a product with increasing unit‐price and a declining market share (Quadrant 1), or a product with increasing market share but a declining unit‐price (Quadrant 3).

Table 23: Upgrading and Downgrading, A 2 x 2 Matrix for Analysis Market Share Decreases Market Share Increases Unit Value Rises Quadrant 1: Ambiguous; Quadrant 2: Relative to Industry depends on degree of price Average increase, the degree of falling UPGRADING market share and the opportunity cost of the resources invested in exports Unit Value Falls Quadrant 4 Quadrant 3 Ambiguous; Relative to Industry depends on degree of rising Average DOWNGRADING market share, the degree of falling prices and the opportunity cost of the resources invested in exports

Figure 5 shows the value of global furniture trade and the quadrant placements, using European Union data of 40 furniture products in the 1990s Although the Philippines was not initially included in the data due to its low market share, other data obtained suggest that the country would be in Quadrant 3: Downgrading, declining market share and declining unit price. Joining the Philippines in this quadrant are Taiwan, Hong Kong, and some parts of Europe.

Quadrant 2 represents countries with product upgrading capabilities, and this is reflected by increasing unit price and increasing market share: China, Thailand, Malaysia, Vietnam, US, and Canada.

Figure 5. Upgrading Position of Countries with at Least 1% Market Share in 2001

Increasing unit prices Quadrant 2 Quadrant 1

Poland 1 Malaysia 1 Romania 3 Switzerland 4 Ukraine 1 Switzerland 3 Lithuania 4 Brazil 1 Hungary 3 Portugal 4 Vietnam 1 Italy 2 UK 3 Bel.‐Lux 1 Sweden 2 Latvia 3 Sweden 1 Portugal 1 Czech Rep. 3 Ireland 1 Spain 1 Estonia 2 Belarus 1 Bulgaria 1 Hungary 2 Canada 1 Taiwan 1 USA 2 France 1 Finland 1 Thailand 2 Spain 1 Belgium‐Luxembourg. 1 China 2 Norway 1 Total 23 Slovakia 2 Turkey 1

Decreasing market share Increasing market share

Germany 10 Denmark 5 Croatia 2 Netherlands 8 Austria 5 Canada 2 France 7 Poland 5 South Africa 2 Italy 7 China 5 Vietnam 2 Belgium‐Luxembourg 6 Czech Rep. 5 Switzerland 2 Denmark 6 Brazil 5 Lithuania 1 Spain 6 Slovakia 5 Russia 1 Sweden 5 Finland 4 Hungary 1 Austria 5 Malaysia 4 Germany 1 UK 5 UK 3 Bermuda 1 Slovenia 4 Spain 3 Chile 1 Czech Rep. 2 Slovenia 3 Bangladesh 1 Croatia 1 France 3 Laos 1 Finland 1 Sweden 3 Brunei 1 Hongkong 1 Estonia 3 North Korea 1 Ireland 1 Norway 3 Romania 1 Romania 1 Taiwan 3 India 1 South Africa 1 Bel.‐Lux. 3 Total 103 Quadrant 4 Taiwan 1 USA 3 PhilippinesDecreasing <1 unit prices Italy 2 Quadrant 3

Total 79 Thailand 2 Latvia 2 Source: Kaplinsky and Readman (2004)

Tables 24 and 25 present a more detailed discussion of the product and market performance of the Philippines, using the unit‐price index method of analysis. Table 24 summarizes export price changes by commodity for the 1995‐2003 period. On the whole, unit prices of furniture products fell by 22%. Specifically, the following furniture products suffered declines in unit prices: furniture fittings (‐62%), office furniture (‐52%), buri furniture (‐35%), medical furniture (‐34%), bedroom furniture (‐34%), plastic furniture (‐19%), metal furniture (‐ 18%), and stone furniture (‐16%). On the brighter side, the following furniture products showed appreciation in unit prices: metal mountings (210), preparation for maintenance of wooden furniture (95%), bamboo furniture (48%), furniture parts (15%), wooden furniture (11%), and rattan furniture (3%).

Table 24: Summary of Furniture Export Prices, by Commodity, 2003 and 1995 (Price Expressed in US$ per metric ton)

PSCC Description 2003 1995 % Change in Price

8938500 fittings for furniture, coachwork/the like, of plastics 3.28 8.67 (62) 8213109 other furniture, nes, of metal, used in offices 131.03 (50) 8217904 furniture of buri 14.47 22.39 (35) 8724001 medical,dental,surgical/veterinary furniture 127.00 (34) 8215509 other furniture, nes, of wood, used in bedroom 86.96 132.01 (34) 8217100 furniture of plastics 20.72 25.63 (19) 8213909 other metal furniture, nes 44.43 54.02 (18) 6994102 helical springs for mattresses, auto seats & other 1.28 1.54 (17) furniture, of iron/steel 8217901 furniture of stone/marble 40.25 47.90 (16) 8215109 other furniture,nes,used in offices 75.84 (15) 6354909 wooden articles of furniture not falling with div‐82 4.75 5.01 (5) 8217909 furniture of other materials, nes 37.18 37.97 (2) 8217903 furniture, rattan 41.81 40.66 3 8215909 other wooden furnitures,nes 77.93 69.95 11 8218000 parts of furniture of 8213, 8215 & 8217 1.70 1.49 15 8217902 furniture of bamboo 49.94 33.78 48 7243909 parts,nes,machines and furniture falling within subgroup 4.10 2.51 64 724.3 5543209 other polishes,creams & similar preparation, for 3.14 1.61 95 maintenance of wooden furniture 6991700 other mountings,fittings&similar articles for furniture, 9.74 3.14 210 base metal 8217905 furniture, glass 25.37 8724004 identifiable parts of medical, dental, surgical/veterinary 25.79 furniture 6991103 locks for furniture, of base metal 31.80 8215309 other furniture,nes,of wood,used in kitchen 135.19 Total 15.65 20.07 (22) Source: www.tradelinephil.dti.gov.ph, NSO processed by Bureau of Export Trade Promotion (BETP)

Table 25, meanwhile, shows that Philippine furniture exports have had some success in Asia, Europe, and the Middle East, but not in Japan and Europe. These markets have turned to Thailand and East Europe, respectively, to service their furniture requirements.

Table 25: Summary of Export Prices, by Country, 2003 and 1995 (Price in US$ per metric ton) 2003 1995 Market Market % Change Value Share Price Value Share Price in Price Country (%) (%) Japan 20,532,591 10 6.31 42,870,875 20 22.23 ‐72 Asia 5,591,810 3 3.9 8,725 0 12.13 ‐68 USA 134,405,244 66 18.89 137,525,194 63 21.13 ‐11 Middle East 10,055,896 5 64.4 2,844,696 1 56.51 14 Europe 29,093,836 14 32.19 40,500,536 19 21.5 50 Total 202,439,523 100 15.65 217,435,738 100 20.07 ‐22 Source: www.tradelinephil.dti.gov.ph, NSO processed by Bureau of Export Trade Promotion (BETP)

1. Value‐Chain Related Issues and Concerns

The furniture cluster is confronted with many issues on production, markets, and local cooperation of stakeholders. Six decades of global trade saw the depletion of raw materials, the exodus of trained workers to competitor countries, and the temerity of entrepreneurs to invest in capital equipment. The Cebu furniture cluster has experimented with various raw materials, from the rattan poles, buri, wood, stone, metal, plastic, and more recently, mixed media. However, this production switch has not arrested its declining share in the world furniture market and its declining unit price. As pointed out by Kaplinsky and Reader (2004), this could be indicative of the onset of downgrading.

The retention of skilled workers is also an area of concern. Firms invest in upgrading the skills of its workers through various means. Due to relatively low industry wages, furniture technicians and designers are weaned away by competitor countries such as Indonesia, China, and Vietnam. These skilled workers become consultants in competitor countries, and sometimes function as recruiters of Filipino furniture engineers and designers. The coping mechanism of some furniture firms is to maintain the control of product development within the family. Thus, sons and daughters are sent to expensive design schools in Italy and New York. Save for short training courses offered by the Designers’ Guild, there is no School of Design in Cebu.

Institutional factors are commonly cited as reasons for subcontracting. Business outsourcing has serious implications on quality, cost and delivery. In the Cebu furniture cluster’s case, it is largely done by home‐based workers, so product quality is highly uneven.

The lack of knowledge of basic accounting and untimely deliveries are also concerns, though there have been subcontractors who have gone on to become big furniture exporters. Still, there is a need to address the training and financing needs of the business outsourcing sector.

Technical consultants and product assurance managers lament entrepreneurs’ hesitation to invest in furniture machinery. Machines assure uniform quality, cut production costs by 30% to 50%, and allow firms to ship deliveries on time. Indonesia, China and Vietnam, on the other hand, immediately chose to pursue mechanized furniture production. In give years, China is expected to transform its furniture export profile; Indonesia remains the world’s largest rattan producer.

There are a variety of explanations for this. The literature suggests that the firm owners are mere proprietors, setting out to maximize current consumptions, rather than entrepreneurs, who are motivated to maximize their investment (future consumption). Another reason is the uncertainty in the business environment. Investment in machinery requires skilled technicians, who may decide to go on strike or leave the firm for a high‐paying job with a competitor. Firm owners are also wary of the government’s changing policy stances. Lastly, the lack of access to cheap credit makes capital acquisition a financial burden amid an extremely volatile world furniture market (e.g. decline in furniture exports due to 9/11, SARS and Bird Flu).

Except for CFIF, the contribution of local support organizations—local governments, national line agencies, and educational institutions—are wanting. The furniture industry has survived six decades with little or no support from the government.

There is a need to steadily expand into the Asian, American, and Middle Eastern markets—especially in China and India, where demand for high‐end, luxury furniture should rise. Similarly, furniture exporters should be able to market directly to retailers so as to realize a higher profit. Direct contact with retailers should help product development engineers and designers meet overseas consumers’ specification requirements to a much better degree.

Refining traditional accounting practice to reflect supply chain costing should also help the industry. This costing method allows firms to determine the overall effectiveness of the supply chain, identify opportunities for further improvement or reengineering, measure performance of individual activities or processes, evaluate alternative supply chain structures, select supply chain partners, and evaluate the effects of technology improvements [30].

VI. SUMMARY AND RECOMMENDATIONS

Local cooperation among industry stakeholders and global buyers is important in the upgrading of the Cebu furniture industry. For a resource‐based industry such as furniture, it is interesting that the industry, located in a resource‐scarce cluster, has been able to compete in the international market for over five decades. In retrospect, it has been well‐served by its proximity to raw materials via its location in a trans‐shipment point in the Visayas and

Mindanao. The industry, in turn, stimulated the export growth of complementary industries such as Gifts, Toys, and Houseware (GTH), fashion accessories, woodwork, resource‐based products, and industrial manufactures. (e.g. excess shavings of furniture raw materials are used in fashion accessories, and the stone inlay, which was first introduced in GTH, is now used in the furniture industry). On a broader level, inter‐firm cooperation has been manifested via subcontracting, borrowing and lending of surplus materials, sharing of buyers, consolidation of small shipments, and the bandwagon effect. Local support organizations, especially the Cebu Furniture Industry Foundation (CFIF), have had modest successes in lobbying for the industry and in organizing trade shows and study forums. Mandaue City has allocated space in its North Reclamation Area to house the proposed Cebu International Trade and Exhibition Center (CITEC) for the benefit 265,619 SMEs. Statistics, however, show a decline in the number of exhibitors and average sales generation in trade fairs during the past decade.

For an industry which caters to the global market, it is surprising to note that the Cebu furniture cluster mainly employs home‐based subcontractors with little formal training; males earn slightly more than females in supervisory positions, but this advantage is reversed in skilled work. With regard to ownership structure, most furniture companies are family‐owned and controlled, meaning there is a tendency to under‐invest in machinery for personal consumption.

A global buyer introduced Cebu rattan furniture to the world market in the late 1940s, initiating a breakthrough in rattan production through process and product upgrading. Maitland Smith, a global buyer and furniture manufacturer, is especially notable for professionalizing the industry and exposing it to mixed media use and an international market. The creative use of indigenous material in producing Western‐style furniture has eventually become the cluster’s distinctive advantage, and it is hoped that this will lead into original design and original brand manufacturing. In this context, global buyers are important in funding the working capital requirements of producers, assisting them in the duty‐free importation of raw materials, in the sourcing of raw materials, and sharing price information.

Global furniture trade is big business, generating $220 billion in 2004 and even surpassing world merchandise trade. Out of the top 15 furniture exporters, six are developing countries (Brazil, China, Indonesia, Malaysia, Mexico and Thailand), four are transition economies (Czech Republic, Poland, Romania and Slovenia), and five are industrialized countries (Italy, Canada, Denmark, Spain and Sweden).

Traditionally, furniture has been a resource and labor‐intensive industry including both local craft‐based firms and large, volume producers. Cebu furniture has long catered though to the premium, design‐driven market. Nonetheless, China’s aggressive growth—becoming the leading buyer of woodworking equipment in Asia, cutting down production costs by 20% across‐the‐board, and re‐investing its cost savings in new equipment—has become worrisome to Cebu.

Unit price and market share analysis indicate that the Philippines experienced declining prices and falling market share in furniture exports.

Process and product upgrading are necessary to sustain the competitiveness of the furniture industry. Pietrobelli and Rabelloti (2004) argues that “in buyer‐driven chains, global buyers facilitate the link with the international market by signaling the need (and the modes) of the necessary upgrading. However, global buyers do not normally foster and support the SMEs’ upgrading process.” If the furniture industry is to be truly considered an important contributor to the Philippine economy, then there is a need to increase the scientific base of this activity by investing in R&D. Given that R&D pursuits are crucial to constant innovation, are considered public goods and are high‐risk undertakings, then the burden of R&D investment falls on government and international funding agencies.

Since furniture firms generate jobs and contribute substantially to the local coffers, LGUs could offer business export services similar in concept and administration to the Mactan Export Processing Zone, where business permits are processed quickly and issues are immediately addressed by zone administrators. If LGU finances permit, a Product Development and Design Center could be set up locally so that furniture workers, technicians, designers, accountants and managers could be trained. Retrenched or retired skilled workers could team‐teach with a furniture consultant so that the knowledge center becomes self‐ sustaining. For the national government, it has to consider more carefully the effects of its erratic, uneven actions toward the industry. CITEM should continue assisting emerging furniture exporters; the Designers’ Guild should be given more serious funding, instead of relying on seminar fees, and can evolve into a cluster skills center with active multi‐sectoral partnerships.

The raw material chain can be improved if procurement could be done at the inter‐ industry level. If industry leaders or business associations could consolidate forecasts of raw material requirements, then bulk purchases could be made, or other firms could be encouraged to locate in the Cebu cluster to ensure just‐in‐time delivery for these raw materials.

Attracting more foreign investors like Maitland Smith to eventually transfer designs and technology to the furniture cluster strengthens the global value chain. CFIF could encourage furniture exporters to acquire international certification so that purchase orders would continue streaming in. More importantly, more aggressive marketing and promotion programs should be undertaken. There should be an effort to know the tastes and the lifestyle of the global consumer, instead of relying on trade magazines as a design resource. Toward this end, perhaps CFIF or a foreign sponsor could enable video conferences between buyers, designers, and product engineers.

There is a need to have one national furniture association to lobby for industry issues and against insufficient investment, the high cost of doing business, the lack of access to financing, and threats of power shortage and product certifications. Most importantly, industry

and academe should work closely to draw up a suitable, lifelong learning‐oriented training for the furniture industry.

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