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Local Cooperation and Upgrading in Response to Globalization: the Case of Cebu's Furniture Industry

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Local Cooperation and Upgrading in Response to Globalization: the Case of Cebu's Furniture Industry 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
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