Tuesday, December 14, 2010

Anti-dumping allegations will profoundly effect engineered flooring market regardless of investigation outcome

On December 3rd the International Trade Commission (ITC) announced an affirmative determination in its preliminary investigation of claims made by US engineered flooring manufacturers against China. The ITC has stated there is sufficient evidence to launch an investigation by the US Department of Commerce. A final determination is expected around the end of July 2011.  Read their decision here.

This is a complex issue that isn’t so simple as US. vs China. This action is creating a situation where some US distributors and importers are lining up on the side of China, where others are questioning who the potential winners and losers might really be and point out that the remedies sought by the US manufacturers could “deliver a potential fatal blow to many American entrepreneurs,” by making the distributors and retailers pay retroactively for new tariffs.  Read: "Distributors question ITC investigation impact." 

So how did this situation arise?

Back in October the Coalition of the American Hardwood Parity (CAHP) was formed. Its members include some of the leading engineered hardwood flooring manufacturers. They filed a petition with the ITC and the US Dept of Commerce requesting that antidumping and countervailing duties be imposed on multi-layered flooring from China. The coalition alleged in part that:
  • US imports from China of engineered hardwood flooring have almost doubled from 2008 to 2009 – notably during the US market slump;
  • China has dumped products in the US market at prices that are well below fair value;
  • Chinese manufacturers receive an array of government subsidies and benefit from China’s manipulation of currency exchange rates; and
  • These factors combine to give Chinese manufacturers an unfair advantage and injure the entire domestic hardwood flooring industry.
An explanation of Antidumping and Countervailing Duties is here.

Some remedies sought could increase duties by as much as 242%. Obviously this situation has caused a some distress among Chinese manufacturers and their US import partners. In response, the Chinese suppliers and some US importers and distributors (including Lumber Liquidators) formed the Coalition of Asia Pacific Flooring Manufacturers for Free and Fair Trade.  The coalition’s response includes the following:
  • US manufacturers unlike their Chinese counterparts have been slow to adapt to and embrace new technologies (i.e., locking joints and alternative cores) targeting the growing DIY segment and thereby have failed to satisfy consumer demand for this kind of product;
  • In the past couple of years the remodel market segment has performed better than the new home construction segment and it is the remodel market that attracts the use of DIY products made by Chinese manufacturers;
  •  Chinese imports have provided the US consumer with a wider product range featuring many new species;
  • The figures presented by CAHP are overstated and government subsidies were removed several years ago.
The stage is set for a very interesting “battle,” the outcome of which could have a profound effect on the whole landscape of the engineered hardwood flooring segment. It’s too early to tell how this will end but I wonder:
  • Why weren’t these claims alleged six or seven years ago when Chinese products first appeared in the US and when low prices fueled by government subsidies were helping China build market share?
  • Aren’t some of the US manufacturers who have made these allegations the same ones who have been importing product from China for their own product lines?
  • Who will be the real winners and losers? If increased duties are the outcome, distributors, retailers and consumers will face significant price increases. Some duties could be imposed retroactively which means retailers could never recover them.
  • How will this disrupt the supplies? Finding alternative suppliers will not be easy given logistics, timing and product duplication issues.
  • What will happen to the hand-scraped market? Some estimates say that labor to duplicate a true hand-scraped product in the US could increase the product price by as much as a $1 a square foot. Will the consumer pay this?  Or will the same inexpensive hand-scraped product simply flow to the US through Indonesia which could avoid the tariffs because of its most favored nation status?
  • Will the US manufacturers seek ITC investigations in other countries? 
A major concern is the disruption to our industry and the amount of management time that manufacturers, distributors and retailers will have to spend on this issue - at a time when all their energies are surely needed elsewhere. Competition from the Chinese has spurred many US manufacturers to improve processes and efficiencies but the recent market decline means they haven’t seen positive outcomes yet.  Will the outcome give a significant boost to domestic manufacturers? Or, will it do more damage than good?  Will uncertainties of  pricing, supply and disruption of business, combined with the depressed market, water down the effect of the remedies sought?  Who will ultimately pay the price of for this fight?  And how will retailers and distributors handle the impact on them?

It will be very interesting to see how it all falls out with the only certainty being that, as always, it will be very good for the lawyers.  The ITC's public report "Multilayered Wood Flooring from China" will contain the views of the commission and information developed during the investigation and should be available after the first of the year. You can obtain a copy by emailing  pubrequest@usitc.gov, calling 202-205-2000 or writing to the Office of the Secretary, 500 E Street SW, Washington, DC 20436. Requests may also be faxed to 202-205-2104.

I wonder what you think about all of this and how are you likely to be affected? Do you have a plan to deal with this?

Season’s Greetings,
David Wootton is President of The Wootton Group, an independent flooring consultancy, and a member of the Floor Covering Institute. He is past CEO of both Columbia Flooring and Harris-Tarkett.

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