Clearing the Air

October 31, 2008  by in UnCategorized   

By Home Furnishings Business in on November 2008 To hear furniture manufacturers describe it, California’s stringent new formaldehyde standards are the most difficult regulatory challenge for Asian furniture producers in the modern era.

While no one is arguing against the regulation’s public health goals, furniture makers say the effective date—Jan. 1, 2009—hasn’t allowed enough time for composite wood makers in Asia, in particular, to set up the testing labs—including on-site labs at the factories—that are required by California regulators.

In short, officials say, California’s regulatory arm is reaching across the Pacific to require enormous changes by furniture factories in Asia, and around the globe, to meet what the state’s Air Resources Board calls the “Airborne Toxic Control Measure,” or ATCM in industry shorthand. The rules are aimed at answering concerns about the health effects of formaldehyde emitted thorugh composite wood, which is thought to cause cancer and contribute to other illnesses.

At the same time, the ATCM is also changing the way furniture is made for retailers in our nation’s 49 other states, since most observers say it’s unlikely, in the long term, that wood providers will move to produce non-compliant wood for furniture stores outside California.

RETAILERS UNPREPARED Many manufacturers and a California-based retailer organization worry that California’s furniture stores are unprepared for the state’s efforts to curtail formaldehyde with an enforcement strategy that will be initiated inside furniture stores and could have store owners facing severe penalties along with their suppliers.

“I think a lot of the smaller retailers—as much as we’re telling them about this—aren’t realizing what they’re going to have to do” to comply, said Sharron Bradley, executive director of the Western Home Furnishings Association.

The scope of California’s regulatory reach is enormous because ATCM rules don’t just apply to composite board or furniture. They apply to any composite wood in any product offered for sale in the state—including everything from upholstery frames to pencil boxes, lamp bases and picture frames. Penalties are stiff, and a single violation can lead to retroactive fines for furniture a store sold before the initial non-complying item was found by California enforcement agents.

There are three important dates to remember: The California Air Resources Board’s (CARB) formaldehyde regulations take effect Jan. 1, 2009. Manufacturers of composite woods like plywood, particle board and MDF, including those in Asia, have a 90-day “sell-through” period, meaning they’ll be able to draw down inventory until April 1, 2009. Furniture makers have an 18-month sell-through period, setting a milestone date—or full compliance date—of July 1, 2010. “By July 1, 2010, all of a (furniture factory’s) inventory and all of their finished goods will be manufactured using CARB-compliant wood products,” said Bill Perdue, the American Home Furnishings Alliance’s vice president for environmental affairs.

INCREASING COSTS Industry reps said the CARB regulations will definitely increase costs for furniture producers, but added it’s too early to know just how much prices of composite wood products will rise. “With this rule, CARB has created a global commodity, and that’s CARB-compliant composite wood products,” Perdue said. “The second thing this rule has done is it’s given us six months, essentially, to put the testing infrastructure in place in countries where, for the most part, a testing infrastructure was nonexistent. So, (the industry) has been scrambling and working very hard with (private test labs outside Asia) to get this testing infrastructure in place.”

The efforts are complicated by the fact that two types of testing are required. In addition to off-site testing facilities, thousands of board factories across Asia must have on-site quality assurance labs to do daily tests, as well.

“It’s a huge concern (for Asian furniture factories) because the record-keeping is supposed to start in January, and, right now, the factories are just starting to find sources that even have CARB-compliant wood,” said Gil Sturtzel, vice president of purchasing, Davis International, who has traveled to China four times since April.

COMPLEX REQUIREMENTS For Ashley, the industry’s largest furniture producer, achieving compliance has involved multiple trips to Asia, but the company is confident its wood suppliers will be in compliance before Jan. 1, said President and CEO Todd Wanek. He said the regulation’s record-keeping requirements, which put a heavy emphasis on “chain of custody” reporting, have involved extensive computer programming changes to assure compliance. “Simply put, if the CARB compliance officers come to your store and select a piece of furniture to be tested, you must be able to give the item-level chain of custody,” he said.

Wanek still worries that, with the complexities involved, other importers won’t be able to meet ATCM requirements. “We’re very concerned about the furniture industry’s state of readiness for this law,” he said. “Retailers need to take this seriously and make sure the proper procedures and documentation are in place. ... Many (importers) don’t have the infrastructure to develop a system of compliance at the factory level.”



ADDING TO THE CHALLENGES IMPORTERS FACE The complex requirements come at a time when furniture makers in Asia are being pulled in different directions by economic uncertainty. “China and Asia are in deep turmoil just as economies worldwide are in turmoil,” stated Emerald Home Furnishings CEO David Beckmann, whose company uses production facilities in China and Malaysia. “Pricing is inconsistent and manufacturers are changing direction like we change clothes, and it’s taking constant effort on our part” to keep pace.

Sturtzel said rising prices in China are prompting some producers to shift as much production to Vietnam as possible, at least for those who have facilities there. He said Vietnam’s relative stability—and the fact that no duties are in place—is making it a safe haven for producers who have struggled with cost increases in China stemming from the rising value of its currency, lower VAT tax rebates and issues like inconsistent electricity delivery last summer. Still, he said, “I have groups coming out of both China and Vietnam this Market, and I don’t see any difference in pricing.”

What is striking in China, he said, is how much producers there have shifted their focus to higher-priced goods with more potential to deliver higher margins. “If it’s promotional stuff, they just didn’t want to build it,” Sturtzel said. “If it’s not worthwhile from a profit perspective, they won’t entertain it. Everybody is raising prices, and the factories are doing everything they can to run furniture that they can make money on. So, they’re being really picky about the new projects they’re taking on.”

ALL ROADS LEAD TO CALIFORNIA WOOD Industry officials say CARB-compliant wood will eventually become the de facto standard for furniture sold in the U.S. due to the complexities inherent in managing two separate sets of inventory.

However, Sturtzel said it will be tempting for large East Coast-based furniture chains to insist on wood that doesn’t meet California’s standards—since that CARB-compliant wood is expected to carry a price tag that could be anywhere from 6 percent to 12 percent higher. “There are factories that may have to decide whether they’re going to sell California retailers because these regulations just aren’t going to matter to some of the big guys in the East,” Sturtzel said. “They’re not going to want to pay more to meet California standards.”

A CALIFORNIA-ONLY STRATEGY NIXED Wanek said Ashley considered a “California-only” strategy, but determined that it would be too difficult to manage. Plus, he believes it’s likely that that the federal Environmental Protection Agency will adopt a standard similar to CARB’s ATCM within a year or two.

Michael Cohen, vice president of sales at Emerald Home Furnishings, an importer based in Tacoma, Wash., said estimates of how much the CARB standards could increase wood prices vary widely. He’s heard estimates of 3 percent to 12 percent, but he said the CARB-compliant products also require a longer wood-curing process that, in many cases, slows production: “If you’re used to producing 100 dining sets in a day, for example, you may only be able to produce 80 sets a day, which, obviously adds to the cost of those goods.”

Cohen, who traveled to China for Emerald in September, said the factory owners he met with were struggling to come to grips with falling production levels, which are an outgrowth of the worldwide economic slowdown. “Some factories are shipping more business to countries in Europe, but they’re not getting the kind of volume that they need to keep their overhead down,” he said. “It’s harder to absorb your fixed overhead when your production is 85 percent less than it was before.”

Most of the composite wood being sold in the United States already meets CARB standards, and the CARB-compliant wood doesn’t carry a “substantial price premium,” said Curt Alt, vice president of marketing, the Composite (wood) Panel Association. He said producers began moving to producing low-formaldehyde products in 2002 as part of a voluntary industry effort called the Environmentally Preferable Program (EPP), Alt said.

EXPORTING RAW MATERIALS TO CHINA However, with little testing infrastructure available in Asia, Alt said some U.S.-based manufacturers of furniture and other wood products are planning to ship CARB-compliant board from the U.S. to factories in Asia, at least in the beginning. Shipping wood across the Pacific would obviously be more expensive, but he said the producers see it “as an interim solution until the amount of CARB-certified material in China reaches a level where it can support the current levels of production in China.”

For retailers in California, compliance means receiving—and keeping on file—documentation showing that wood products are compliant. Retailers also need to make sure that the product or the box it came in is tagged as complying with the ATCM. HFB