Cabinet Businesses Overseas

      Here's an in-depth discussion of what it's like to move your U.S. cabinet business to a developing country (where, yes, there are opportunities). August 29, 2011

Question
Spending is down in this country. This has hurt a lot of woodworking businesses. Spending is up in a lot of developing countries. Many poor are moving up into the middle class. So upper middle class individuals are trying to distinguish themselves by building more expensive homes and buying imported high-end furniture, doors, and windows. I see that this gives us opportunity.

Here is why: First, there is a large population in these countries that make over $100,000. In many countries, that gives them a very high disposable income. It is hard to do comparisons but purchasing power of a $100,000 salary in some countries could be more equivalent to a $500,000 salary in the states. People at or above this income level live in exclusive communities, have at least two full-time servants and generally like having American things. Also, our domestic woods are their exotic woods. Ponderosa pine, for example, is only found in high end homes in some countries. The other thing we have going for us is that the value of the dollar is down and could decline more. Domestically, this could hurt us. But if we look to other markets, it could help us.

Does anyone have input on this, or other ways to make a declining dollar work for us? Are there other ways to take advantage of all the spending going on in developing countries where we have free trade?

Forum Responses
(Business and Management Forum)
From contributor T:
I would love to tap this market expansion. I just need to figure out all the logistics involved and how to setup for exporting to other countries. Also, Iím not sure how the compensation exchange would be handled.



From the original questioner:
I have a little knowledge about Nicaragua. Not enough to go ahead with starting to export but I'll share what I have learned. Nicaragua is very tax friendly to US businesses. I don't remember the details right now but you pay basically no tax for the first ten years in business and can get an extension if you can show you are helping the economy.

The US has a program in Nicaragua that will help you do business if the net result is more jobs in the US. They will do a feasibility study including a list of potential commerce partners that they recommend for something like $400. They do background checks and while I don't know what standards they use, it's better than trying to find partners on your own.



From the original questioner:
Economics 101, it seems you have real-world experience that would be of great benefit to me. I am now thinking of setting up an interior design firm down in Nicaragua specializing in high end contemporary and mission style doors and furniture. In other words American style designs. (Yes I am aware I should not phrase it as American when selling down there. US designs or Estado Unidense would be more appropriate. I was even thinking of calling the contemporary stuff New York style.)

I am thinking of using established, fairly well-known custom woodworkers here in the states as my sources. Basically I would put together a catalog showing parts of portfolios from different companies and have a show room with a few pieces. My dad works for a company that is a Marvin distributor so I was also going to talk to the Marvin rep about setting up distributorship down there. The closest distributor is in Miami, I am not sure if they have exclusive distributorship for Central America or not. They use a lot of pine so that would be a good selling point down there.

You mentioned knowing the clients. From my limited experience down there, I couldn't agree more that this would be essential. I don't know enough people to make this work so I was planning on partnering with somebody with more contacts and some experience with interior design offering them a basic salary plus commission to do sales and I would focus on logistics/pricing etc. For some of the custom furniture I was thinking of setting up assembly/finishing down there to save on shipping.

This would be low volume shipping. An expensive way to do it but if I focus on the high end products, it would be a relatively smaller factor in the final pricing. I know for a small business trying to create a market almost always doesn't work. I know this is a rather loose plan and I didn't provide you with much data on the market. But in your experience, does it seem like I am more on the right track? You dealt a lot with wealthy Central Americans. From what I have seen they like high-end imported stuff especially if it comes from the states. Does this coincide with your experience?



From contributor S:
This thread is very close to home for me. I owned and operated a two man traditional cabinet shop in Texas for five years. I was mostly not very successful. My cabinets were great but I did not make enough money to justify having my own shop. I saw the light when I started attending IWF and AWFS shows and the technical seminars they offer. I was ready to get serious and change my company to set myself up for success. Lean, CNC, Frameless and outsourcing were my thoughts.

My wife is Filippina, (she lived in the US working as a PT for 10 years before we met in Texas). During one of our trips to the Philippines (PI) two or three years ago I attended a construction trade show where I found out that cabinets cost more in the PI than in the US. I could not fathom why because labor is the overwhelming cost in the States. I met a guy who has a kitchen design center and we spent the rest of that vacation discussing the market for cabinetry and the industry. After a year of intense studying I confirmed that the market there is ripe for the pickings. We sold everything and moved to the Philippines.

Marketing in third world countries (especially those that were once Spanish colonies) is very different than in the West. In the US if your price is right and the quality is good marketing really just becomes a matter of selling to the right clients. Here people will not buy from you just because the price and quality are better. They will continue to buy from their associates/friends. In fact groups of manufacturers will work together to put you out of business if you are perceived as a threat. Marketing here is like running for a political office. You have to shake a lot of hands, drink a lot of beer, join groups like Rotary International and learn to sell yourself in an entirely different way. Most deals are made after many meetings where the broad strokes are discussed for a few minutes followed by hours of eating and drinking. In the few minutes of actual business discussion you have to learn to read between the lines and figure out their true agenda.

No one is straight forward with their requirements. Most of the time what we call salesmanship in the US is simply boastful in these markets. This can be maddening for the American used to straight forward bidding and negotiating. I usually mark up my price by 50% if they are Filipino and 100% if they are Chinese. I promised I would not do that when I first moved here. I was determined to conduct business in a straight forward fashion. But if you give them your actual price in the first bid and then refuse to negotiate they will consider you are being inflexible and "mayabang" (something like big headed). Brazil and Argentina are the same way. India, Korea, and Malaysia are far worse.

The practical aspects of setting up shop in a third world country are frustrating. There is no Home Depot. Few suppliers advertise in any meaningful way and others in the industry are very protective over their suppliers. Something as simple as figuring out where to have your blades sharpened is nearly impossible unless you have friends. The "friends" are also your marketing partners.

As far as exporting from the US to developing nation, it is nearly impossible unless the product you are selling cannot be produced in that country. Marvin has certain technologies like cladding and special treatments that cannot be done in these markets. But the price will be insanely higher here than in the US. Business men expect to make a 50% profit on these types of products. They will not settle for less and they do not have to because there is not the same level of competition here. So your cabinetry and furniture produced in the US is already too high in price to compete in the market here. Furthermore the person on this end will expect at least a 30% profit margin on the product. For high end products the margin will be a lot higher.

Here are some examples, Siematic modular cabinets are sold here at almost double the price in Germany! There is only one dealer and they can name any price they wish because it is imported and they marketed it correctly here. Blum products are imported by one company and the products are about 30% more expensive here than in the US. The importer also owns a large cabinet shop so he has a vested interest in keeping the price artificially high. I considered importing my own Blum hard ware from my old supplier in the US as it would save me thousands of dollars a month. But doing so would create enemies. As it is the Blum dealer is a friend. We drink beer and socialize regularly. When a new shop starts buying hard ware in large quantities the people that are in the loop will know and concentrate on shutting that shop down. This happens to imported products as well. If the individual that is importing your product is in the loop you will be ok, but his expected mark up will prevent you from ever selling one cabinet. Ikea products are imported by a marketing group that buys and resells. It is sort of a black market. The prices are 50% higher than in the U.S.

You have to remember that the cost of doing business here is much less. No government fees and low taxes, low labor, cheap services (accounting and designers) and lax regulations regarding infrastructure like dust collecting, waste handling and permitting. So a 50% mark up means a 30 or 40% profit margin.

The real skills you can market here is knowledge. You would not believe how backwards these businesses can be. One of my big competitors has beam saws, a full blown Buseleto CNC machining center and all the technology you would find in a 3 million dollar a year US cabinet shop. Yet they manually measure and mark the hardware holes on their cabinet parts then line up the marks on the boring machine by eye and drill the holes. Meanwhile the CNC is doing nothing. There is no one here with the knowledge. The machine dealers here are useless for anything beyond importing and connecting the electricity to the machines. The shop owners have never touched a tool in their lives. The shop foreman are usually college graduates with a degree in engineering, but I think you guys know how useless that is in a cabinet shop. The carpenters are simply guys pulled from a construction site of an old school sash factory who have never used an automated machine of any type.

Those who choose to move into these markets and start new businesses can make a lot of money. But it requires a serious attitude adjustment. I know of a couple of software dealers who tried very unsuccessfully to sell cabinet making design packages here. It is because you canít simply get off the plane and go knocking on doors trying to sell a product in these markets. You need a marketing partner.

I can go on and on, but I will tell you despite all these wonderful advantages I have here in this industry starting this shop was incredibly difficult. Most of my employees are from the provinces where they do not have TVs or paved roads, so a computerized edgebander is a spaceship to them. Even a simple concept like the interior vs. exterior of a cabinet is hard for them. They never had anything like a cabinet in their house before. Implementing a Lean flow, cellular production system like I dreamed about in the US has been the most frustrating thing I have ever experienced. There are fundamental cultural attitudes that make this hard to sell to the employees. India is worse, and South America is about the same.



From the original questioner:
I appreciate the response. I do intend to get a partner down there that has contacts to help me sell. I don't really understand your advice about setting up a Marvin distributorship. I'm not sure you understand that I am planning on moving down there with my family. I have lived down there before and have some but not many contacts with wealthy families. I met my wife down there so she has Nicaraguan citizenship but she is from a very poor area, not where I plan on selling so she doesn't have many useful contacts. So I want to bring somebody else in that is already well known in that community. I do know a sugar broker down there so I was thinking of having him recommend somebody.

My point is, I would be the one running the Marvin distributorship. I selected them specifically for the aluminum clad feature and because they are considered higher end even up here. So I was thinking their products would appeal to the high end customers down there who love paying more for quality things from the States. But it sounds like you are saying Marvin might be priced a little too high for this type of market?

From my experience down there, people are willing to pay a premium for products imported from the states just as you mention. They also view pine as a very high end wood. So I was thinking rather than import rough sawn random width/length pine and other North American woods and make the cabinets and furniture down there, I could have it machined into parts before it is shipped and just do assembly/finishing down there. Or should I try to keep the exotic lumber suppliers down there in the loop like you mention with Blum?

My comments on exporting at the beginning of this thread was to see if anybody would be interested in this type of arrangement but I am thinking of being on the other end, importing from down there. I like the Ikea idea, I can see that being considered high end down there. I will have to check but I'm sure somebody has done that down there by now. Thanks for the specific information on negotiating prices, I tend to give the price I want right away and don't usually do much negotiating. Now you have me thinking of going your route with frameless cabinetry. How did you do your market research? What lead you to decide on your specific product?



From the original questioner:
As you say, labor is cheap. So why did you decide to go automated? Why not use low-tech machines the workers know how to run? I used to work in a four man shop that did everything without a CNC or edgebander. Most of our custom jobs were frameless but there just wasn't room for an edgebander and the foreman (my dad) didn't want to mess with learning to run a CNC. They are still to this day doing things the same way. I agree, they could increase their profit margin if they updated their process but they are still making money.

So if you can do it in the States, it seems like it would be viable down there. With wages so low, wouldn't it take a long time to make enough extra profit to justify the cost of the machines? If you go low-tech, your employees could just go on using the machines they are comfortable with. What happens when your machinery needs to be worked on? If you had to do it all over, would you consider low-tech?



From contributor S:
Sorry for the misunderstanding. I am "low tech" here. No CNC. Only the edge bander is "computerized" (All Holz-Her Sprints are now). I need the edgebander because of the volume of work. Even at top speed and with three workers feeding it we have to wait on the edgebander sometimes. If we used a more manual process we would never get anywhere. Remember that frameless cabinets with panelized doors use a lot of edgebanding.

I have a slider, and two single line construction boring machines. No case clamp. For most jobs I am faster here with four employees than I was in the US with fully nested CNC and one helper. The European system is very fast and lends itself well to Lean production. I was doing well to process 30 sheets in a ten hour day on my Thermwood. We can process 40 sheets in the same time now with only four people and the machine overheard is far lower. Not to mention the ROI on the machines. If I was paying U.S. labor rates it would be still benefit me to use CNC, but only barely.

I will soon be buying a Gannomat CNC feedthrough boring machine. This will replace the line boring machines, which is still our most mistake prone process. This type of CNC machine is much less than a full sized machining center or nesting router and a lot faster and easier to operate. Not to mention it has a lot smaller footprint on the shop floor. Most of my competitors are using CNC. There are a couple of reasons for this. First of all none of the shop owners/production managers are technically competent enough to engineer a 32mm compatible product line that allows line boring machines to be used. In fairness this is truly a complex thing to do. All reveals, hardware, fixed shelves and other interior parts must be bored on 32mm centers and cases must also snap to 32mm increments. To do this and keep your product custom at the same time is a real engineering challenge.

The second reason is it is easier to buy a CNC and go screen-to-machine than train employees to operate complex manual machines. But their lack of technical knowledge still results in horrible production values. A third factor is that clients here are impressed with machinery. If you have a CNC and a beam saw they will automatically assume your product is better (even if the shops are not using them due to lack of know-how). So these machines become marketing tools more than anything else. Then they rely on manual operations for production. The CNCs are only used for cutting curves and such, but in most cases the hardware holes are bored by hand drills and marked out with a pencil. It is crazy.

The ROI on a machine here is better than in the States. The cost of doing business is a lot less, labor is a fraction, materials are a bit more, electricity is about 15% higher (than Texas) but the price for quality cabinetry is 50% to 100% more. Lower end panelized melamine cabinets are about the same, unless the designs are progressive then they sell for up to 50% more. This adds up to much higher profits.

But as I said before coming here are setting up shop is not a guarantee for success. The marketing is very different. Bribes/kickbacks, beer and women are a big part of the equation. Alliances and perception are everything. The more serious businessmen that cannot be wined and dined into a contract will expect favorable terms that are "under the table". Also they will expect favors such as not working with their competitors. It is crazy, but if you accept it, it is fun.



From the original questioner:
You mentioned in your last post you spent a year researching the market. Did you do that from here in the states? Did you contact a company over there to help you do a feasibility study? I found a company I was going to work with about five years ago but ended up not following through. Do you know of a forum that addresses international small business? I tried looking but just ended up with forums with long lists of posts that were basically all just adds.


From contributor S:
Honestly I was in shock after seeing the prices for decent local made modular cabinetry. It seemed way too high, and high end work sells for even more. I was convinced I was missing something, like material costs, rent rates - something. So I mostly researched those things. From Texas I would call Philippine suppliers and price various services and such. As I collected the information I plugged it into my cash-flow projection for the business plan. After I could not find any holes in the plan I went to Manila for three months on my own (leaving three kids and wife in Texas). I spent the time tracking down suppliers and meeting with buyers. I already had pricing calculated for my cabinets and the responses were positive. So after that we sold everything and moved here. Now understand, moving here was not really a business decision, I really like it here. I was happy to discover that I could do what I love and make more money in a place that I like as well.

As for your question about International small businesses - I am sure the developed nations all have the usual yellow pages type things, but it doesnít work that way in third world countries. Even though these places can be technologically advanced they rely on a different marketing model. The small businesses here do not have websites or even phonebook listings. Finding a supplier for router bits or sandpaper is a real challenge. Again it comes down to knowing people.



From the original questioner:
Thanks a bunch, we are planning on going down to visit my in-laws in November so I'll start trying to set things up between now and then to make it a productive visit. I'm pretty sure I already know where I would try to rent a space and I have a vague idea of what it would cost per month. I have been keeping my eye on rent for commercial/light industrial space. Is your shop in a nice neighborhood? The reason I ask is where I have in mind is called the mercado oriental. It is a huge market that sells pretty much everything and on one end of the market, there are blocks and blocks of light industrial space.

But it is in a pretty bad neighborhood so there are security issues (some people don't even really consider it a crime to steal from foreigners since in their mind we have bottomless pockets) and also I wasn't sure if it would be better to have shop space closer to the high end neighborhoods in your opinion. I'm mostly thinking of marketing, not the logistics of it.



From contributor S:
The hitch to this gig is you have to live here. Third world living is not for everyone. My mom hates this place, my dad loves it. Visiting friends always have a blast, but would never move here permanently. I think it all depends on what is important to you. For me I value the time I have with my family and the laid back culture. Even though Manila has the worst traffic in the world (was #2 now #3 on most lists) there is no road rage. No one is stressed about traffic, no one even cares that much. People here know how to let go of things that are not important and focus on the things that really matter. What Americans call a "family reunion" we call Sunday. At least once a month there is a reason for 100 or more family members to get together. Christmas and New Yearís is a two week long celebration with no work.

Security and safety vary from country to country. I am a very down to earth kind of guy and live in a simple neighborhood. There is a medium sized squatters area about 100 meters from my house. I think they all know me (I am the only foreigner in the area) and I am on friendly terms with them. My shop is in a similar neighborhood. I have never once felt concerned for my safety, and I go to some places that few middle class Filipinos would venture into.

But this thread is supposed to discuss the options for U.S. shops to export to these developing Nations. Basically they do not need to import U.S. cabinetry, they need U.S. knowhow and experience. If you are good at setting up production and know how to be flexible in dealing with others ideas while improving their process there is a lot of opportunity. I have met two people who were willing to pay me $3,000 a month to work for them. That is a lot of money here. I suspect I could have asked for more. These are newer shops with CNC and beam saws and plenty of capitol. But they do not have the experience to put together a sound production process.



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