LOCALCOOPERATIONANDUPGRADINGINRESPONSETO

GLOBALIZATION:THECASEOFCEBUSFURNITUREINDUSTRY

VictoriaZosa

I.INTRODUCTION

The Cebu furniture industry is not a newcomer to globalization, with an international

rattanmarketpresencedatingbacktothe1950s.Partneringwithglobalbuyers,Cebubecamea
dominantrattanfurnitureexporter untilthe1980s,afterwhichitsshareintheglobalfurniture
market steadily declined to a negligible level as exports from Malaysia, China, and Vietnam
displaced Cebus. The furniture industry, however, is still a major contributor to the Cebuano
economy,remainingoneofthetopexportearnersoftheprovince.

Theindustrysresponsetoglobalizationoverthedecadesisaninterestingcasestudyof
an established industry suddenly being put in transition. With the entry of new, lowcost
producers in the global market since the 1980s, the pressure for product upgrading mounted.
Thesenewentrantspossessmultipleadvantagessuchaslowrawmaterialcost,lowlaborcost,
governmentsupportandaccesstotechnology.Theliteratureoncompetitivenesssuggeststhat
Cebu has to take the high road of competitiveness by upgradingmaking better products,
producing them more efficiently, and moving into more skilled activities. In this regard,
cooperationamongindustrystakeholdersandglobalbuyersplaysanimportantroleinproduct
upgrading(Loebis&Schmitz,2005).

Inbroadstrokes,thisstudydiscussesthedepletionofrattanresources,Cebufurnitures
coping mechanisms and the shift toward product and process upgrading. The work has the
followingobjectives:(i)examinetheroleoflocalcooperationinproductupgradingwithrespect
to raw materials procurement, interfirm 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
Philippinefurnitureindustry.

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) interfirm cooperation in the cluster, (c) the role of skilled
workers in knowledge diffusion, (d) the role of local entrepreneurs, (e) the contribution of
womenintheindustry,and(f)theroleofbusinessassociationsandstrategicalliances,suchas
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
competitivenessandupgradinginthefurnitureclustersandvaluechain.

II.OVERVIEWOFTHEFURNITUREINDUSTRYANDMETHODOLOGY

A.EvolutionoftheCebuFurnitureIndustry

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
proceedsasfollows:Themajorinputstotheforestrysectorareseeds,chemicals,machineries,
andwaterandextensionservices.Cutlogsarebroughttothesawmill,whichareprocessedto
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
domesticandforeignbuyers.InthecaseofCebu,however,some90%ofthefurnitureproducts
areexported(OrganizationalPerformanceAssociates,Inc.,2003).Thelargefurnitureexporters
havedirectaccesstoforeignmarketsthroughthewholesalers(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
asjunk.

TherootsoftheCebufurnitureclustercanbetracedtotwohistoricalcircumstances:the
MehitabelMcGuiresupplierbuyerpartnershipin1948whichintroducedCeburattanproducts
totheglobalmarket,andthe1981entryofMaitlandSmithLimitedtoCebu,exposingthelocal
craftsmenandindustryplayerstoglobalfurnituredesignandproductinnovation.Theindustry
hasexperiencedmajorsupplyside(e.g.therattanshortagestartinginthe1970s,theonandoff
log ban, exodus of skilled craftsmen to competitor countries) and demand side shocks (global
entry of lowcost newcomers such as Indonesia, Malaysia, Thailand, China and Vietnam from
the1980sonwards,andthepopularityofIKEAassemblytypefurniture).

Machinery
Water
Seeds
Chemicals
Design
Machinery
Extension
services
Machinery
Logistics,quality
advice
Paint,adhesives,
upholsteryetc.

Forestry

Sawmills

Furnituremanufacturers
Buyers
Domesticwholesale
Foreignretail Domesticretail
Recycling
Consumers
Source:KaplinskyandMorris(2003)

Figure 1: The Furniture Value Chain

Foreign wholesale

Cebusrattanfurniturewentglobalin1948,whenMehitabel,alocalbackyardfurniture
shop,partneredwithMcGuireFurnitureCompany,aUSbuyer.Dissatisfiedwiththequalityof
Cebu rattan furniture, McGuire initiated a breakthrough in rattan production by combining
rattanwithcowhidetoaddressthebulkstrengthproblem(processupgrading)andhiringaUS
designer(productupgrading).TheMehitabelMcGuirepartnershipbecamesuchasuccessthat
McGuire furniture was marketed in 21 US cities, Europe, and Japan. To cope with increasing
demand,MehitabelsubcontractedsomejobstoRattanArtsandRattanPacifica(Jurado,1997).

The furniture association (Chamber of Furniture Industry in the PhilippinesCebu

Chapter,orCFIPCebu)wasbornin1974,whenfurnitureexporters,unabletobuyrattanpoles
fromexporters,bandedtogethertolobbyagainsttheexportofrattanpoles.Shortlyafterwards,
the1976exportbanonrattanpoleswasimplemented;thetopfiverattanpoleexporters,inturn,
modernizeditselfbyhiringforeignconsultants,importingmachinery,andprofessionalizingits
ranksthroughoutthe1980s.

TheentryofrattanpoleexportersintothefurnitureindustrypavedthewayforCebus
furniture industry to penetrate markets in Europe, Canada, Japan, Australia, and South
America.Duringthetime,exportswereatUS$50millionannually,andrepresented60%to70%
ofallPhilippineexports;thePhilippines,alongwithTaiwan,weretheregionsbiggestfurniture
exporters.

Yettheexportbanwasnotabletoarrestthedwindlingsupplyofrattan,asanestimated
300,000 hectares of forestland were lost annually due to the massive deforestation in the late
1970sandtheearly1980s(TumanengDiete,Ferguson,&MacLaren,2005).Hence,theindustry
tapped Indonesia and Malaysia for its wood requirements. In turn, Indonesia, the worlds
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,
woodbased panels, wooden furniture, builders carpentry and joinery (BCJ), moldings) just
recentlybecameamajorplayerintheglobalfurnituremarket.

To protect their local furniture manufacturers, both Indonesia and Malaysia

implemented an export ban ontheir wood products, further pushing the cost of raw materials
uptoanaverageof40%ofproductioncost.Again,facedwithincreasingproductioncostsand
global markets in recession, Philippine furniture exporters again had to make institutional
adjustments.In1992,theexitof81%ofthefurniturefirmsledtotheindustrysnearcollapse;
only38outof200firmswereoperational.

The increasing costs of raw materials weighed heavily on the furniture industry
beginning in the 1980s. Fortunately in 1982, MaitlandSmith decided to locate at the Mactan
Export Processing Zone, bringing to Cebu its vast experience in design and marketing. This
markedwhatindustryplayersnowrefertoasaperiodofrenaissance.MaitlandSmithHong
Kongreproduced18
th
centuryfurnitureanddecorativeaccessories.MaitlandSmithallowedits

company designers to create signature or brand items, under strict quality control using
rattan,stonemosaic,coconutshellinlay,fauxtortoiseshell,penshellinlay,motherofpearl,faux
malachite,petrifiedwood,andfossilstone,amongothers(Nielson,2001).

Suffice it to say, MaitlandSmith was instrumental in upgrading Cebus furniture

industry. Its contributions included: (a) bringing professionals to the industry, (b) making
woodamoreprominentmaterialintheindustry,(c)initiatingthetrainingofworkersespecially
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
mediadesign.

Since 2000, the industry has faced market threats from new entrants to the global
furnitureindustry.In2003,Chinaexported1.3billionpiecesoffurniture,makingitoneofthe
worldslargestfurnitureexporters,intermsofquantity;andin2004,Chinarosetobecomethe
second leading furniture exporter in the world, next to Italy (CRI News Online, 2004). Today,
low production costs in China, Vietnam, Malaysia and Indonesia, lowpriced DIY (do it
yourself) IKEA furniture, and the creeping encroachment by China, Malaysia, Thailand and
Vietnam on the CFIs share in the global highend niche market also threaten the industrys
survival.

ThoughthePhilippinesshareintheglobalfurnituremarkethasdwindledtobelow1%,
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
werethefirstinAsiatointroducedifferentmaterialsintoaveryuniquestyleofmixedmedia
1
.

B.DataandApproach

The industry profile is drawn from four sets of survey data: the Department of Trade
and Industrys (DTI) 1995 Benchmark Survey on the MicroCottage and Small Enterprises in
Cebu conducted by the Center for Research and CommunicationSouth (CRCSouth), the 2003
Organizational Diagnosis of Cebu Furniture Industry Foundation, Inc (CFIF) by management
consulting firm Organizational Performance Associates, Inc., the International Labour
Organizations (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
KnowledgeinthePhilippines,aUniversityofAmsterdamPh.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
Mixedmediaistheharmoniousmarriageofmanmadewithnaturalmaterials;theinnovativeblendof
traditionalandthecontemporarylook;thecreativecombinationofsoft,flexiblefiberswiththesolid
sturdinessofwoodorstonesemphasizingthewiderangeofpossibilitiesthancanstillbeexploredwith
theuseoftwoormorematerials(Seno,2004).

(BETP). Data on exports generated by CITEMsponsored trade shows are included to measure
theircontributiontoexportsales.Industryspecifictrainingprogramsarelikewisefurnishedby
the CFIF. Firmlevel financial data are obtained from Top 5,000 Corporations 2002 and Top
7000Corporations2001.CFIFalsoprovidedaggregatedataontheprofitandcoststructuresof
selectedfurniturefirms.Financialratiosfromthesetwostudieswereusedasindicatorsofthe
industrys 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 Cebubased export
commodities, which share common raw materials and production processes with furniture
manufacturing, is used as an indicator of the extent of interfirm linkages in the cluster. In
additiontothesedata,informationregardingthedominanceofcertainfamiliesintheindustry,
resultsoftheCFIForganizationaldiagnosis,andcrosscountrystatisticsarepresented.

The industrial cluster and global value chain analysis approaches are adopted in this
study.Briefly,clusteranalysisfocusesontheroleoflocallinkagesinproductupgrading,while
the global value chain considers the role of global buyers (agents, retailers, or brandname
companies)inpushingforprocessandproductupgrading. In the context of
globalization, upgradinginnovation to increase valueaddedis a necessary condition for the
highroadtocompetitiveness.Theanalysisofindustrialclustersisfocusedontheroleoflocal
linkagesingeneratingcompetitiveadvantagesintheexportindustries(Pietrobelli&Rabellotti,
2004). Table 1 maps the different roles of clusters and value chains in governance and
upgrading(Humphrey&Schmitz,2002).

Table1:GovernanceandUpgrading:Clustersvs.ValueChains
Clusters ValueChains
Governance Horizontal. Close interfirm
cooperation and active private
andpublicinstitutions.
Vertical.Stronggovernancewithin
thechain.
Relations with
the external
world Armslengthmarkettransactions.
International trade increasingly
managed through interfirm
networks.
Upgrading Incremental upgrading (learning
by doing) and diffusion of
innovations within the cluster.
For discontinuous upgrading,
local innovation centers play an
importantrole.
Incremental upgrading made
possible through learning by doing
within the chain. Discontinuous
upgrading made possible by entry
intomorecomplexvaluechains.
Key competitive
challenge
Promoting collective efficiency
through interactions within the
cluster
Gaining access to chains and
developing linkages with major
customers.
Source:HumphreyandSchmitz,2002

Earlierstudiesprovideevidencethatclusteringenablesagroupoffirmsconcentratedin
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
hencegiveclusteredfirmsbetteraccesstoinputsandrawmaterialsandcreateapoolofskilled
workers. Joint action, made possible by joining business associations, could help firms open
newmarketsandallowsmallfirmsaccesstogovernmentservices(Schmitz,1995).

Porter provides a succinct discussion on the role of clusters in economic competition.

Clusters, according to him, are critical, geographicallyconcentrated masses of unusual
competitive success in particular fields. Clusters encompass an array of linked industries and
otherentitiesimportanttocompetitionincluding,forexample,suppliersofspecializedinputs
andprovidersofspecializedinfrastructure.Clustersalsooftenextenddownstream(tochannels
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, standardssetting agencies, thinktanks,
vocationaltrainingproviders,andtradeassociationsprovidingsupportservices.

Porter also notes that clusters rarely conform to standard industrial classification
systemsbypromotingbothcompetitionandcooperation.Clusterspromotecompetitioninthree
ways: first, by increasing the productivity of clusterbased 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;andthird,bystimulatingtheformationofnewbusinesses(Porter,1998)

Global value chain (GVC) emphasizes crossborder linkages between firms in global
production and distribution systems. Specifically, GVC proponents emphasize the role of
global buyers in the valueadding 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,andsectoralinnovations(Pietrobelli&Rabellotti,2004).

In a world of uncertainty, bounded rationality, and conflicting economic interests, the

coordination issueswhat, how, how much, and when to producehave spawned four types
ofrelationshipsinthevaluechains.Firstisthearmslengthmarketrelation,wherebuyerand
supplier do not develop close relationships and where product certification provides buyer
requirement standards. Second are networks, characterized by a more informationintensive
relationship,wherebuyersspecifycertainproductorprocessstandardsthatthesuppliershould
complywith.Thirdisthequasihierarchy,wheretheleadfirmexercisescontroloveritsdirect
suppliersandothersfurtheralongthechain.Andfourthisthehierarchy,wheretheleadfirm
takesdirectownershipofsomeoperationsinthefirm(Humphrey&Schmitz,2002).

Figure 2 illustrates the productiondemand interactions between the global value chain
andthelocalfurnitureclusterinCebu.Foreignbuyersincludewholesalers,directretailers,and

buyingagents.Productionismobilizedwhenforeignbuyersplaceanorder.Exporterssource
some of their raw materials abroad, hire freelance designers for product development (in the
absence of inhouse 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
onecontainerwithproductscomingfromdifferentmanufacturers;freelancedesignersarehired
either by buying agents or exporters; and home workers and subcontractors tap local sources
fortheirrawmaterials.

Figure2:InternationalValueChainandLocalClusterofCebuFurnitureManufacturers

Theproductionoffurnitureexportsisafunctionofrawmaterials,thepresenceofother
firms, skilled workers, entrepreneurship, and support organizations such as business
associations, local government units, and national line agencies. From a strategic standpoint,
thePhilippinescannolongercompeteonthebasisoflowlaborcosts,cheapmaterials,andan
unregulatedlabormarket,asdoingsowilljusthastentheCebufurnitureindustrysracetothe
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,
functionalflexibility,andgoodworkingconditions(Pyke,Becattini&Sengenberger,1992).The
shift to mixed media in the use of raw materials, horizontal integration, and the reliance on
embeddedlearningaretheindustrysattemptstoimproveitselfalongtheselines.
Wholesalers Retailers
Rawmaterials,parts,
components
Buyingagents
Freelance designers
Exporters

Subcontractors
Localrawmaterials:wood,rattan,abaca,
stone, buri

Home
Workers
PHILIPPINE
ABROAD
Source: (Beerepoot, 2005)

III.THECEBUFURNITUREINDUSTRYTODAY

A.RawMaterials
In the 1980s, the Philippines was one of Asias top supplier of furniture exports (Table
2).Forinstance,thePhilippinesin1987exportedUS$173millionofwoodenfurnituretoOECD
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(InternationalTropicalTimberOrganization,1990).

Table2:ThePhilippinesShareinFurnitureImportsofSelectedCountries,19871988
1987 1988
OECD
(inUSD
million)
(in%)
U.S.
(inUSD
million)
(in%)
TotalFurnitureImports 18,332 100.0WoodFurnitureImports 1,209.44 100.00
Asia 2,573 14.0Asia 1019.68 84.00
Taiwan 1,848 10.1Taiwan 599.189 50.00
China 186 1.0Philippines 110.401 9.00
Philippines 173 0.9Singapore 64.147 5.00
Korea,Republic 170 0.9Thailand 63.197 5.00
Thailand 140 0.8Korea,Rep. 53.854 4.00
HongKong 90 0.5HongKong 31.131 3.00
Singapore 88 0.5China 13.396 1.00
1988 1988
Japan
(inYen
million)
(in%)
U.S.
(inUSD
million)
(in%)
RattanFurnitureImports 18,631 100.0RattanFurnitureImports 161.204 100.00
Asia 18,521 99.0Asia 159.038 99.00
Taiwan 13,637 73.0Philippines 86.336 54.00
Indonesia 2,320 12.0China 34.843 22.00
Philippines 1,450 8.0Taiwan 20.915 13.00
China 627 3.0HongKong 10.901 7.00
HongKong 193 1.0
Thailand 182 1.0
Sources:OECD,UnitedStatesInternationalTradeCommission,InternationalDevelopment
AssociationoftheFurnitureIndustryofJapan.

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,forcedaswitchtomixedmediaproduction,wherewood,metal,stone,bamboo,and
plasticarealsoused.Table5isadetailedlistoftherawmaterialsusedbyCebufurniturefirms.

Table3:CebuFurnitureExports
Year
Cebu
(inUSDmillion)
Philippines
(inUSDmillion)
CebuShare
(in%)
RattanSharein
CebuExports
(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:DTIRegionVII;Remedio,1996andBeerepoot,2005.

Table4:ValueofCebuFurnitureExports,2003

Value
(inUSD)
Percent
(%)
Wood 58,111,308 53.18
Rattan 27,165,518 24.86
Metal 16,415,086 15.02
Stone 3,703,010 3.39
PartsofFurniture 1,453,052 1.33
OtherMaterials 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:NationalStatisticsOfficeandBureauofExportTradePromotion

Table5:RawMaterialsUsedbyCFIFMembers,2004
Woodbased Amount StonebasedAmount IndigenousAmount ManufacturedAmount
Wood 104 Stone 83 IndigenousMaterials 7 WroughtIron 97
Veneer 4 Romblon 2 AbacaWoven 17 Metal 20
Rattan 80 Ceramics 2 NaturalFibers 2 CastAluminum 6
Rattanveneer 1 Tiles 1 Cotton 1 Brass 4
CloseCane 1 PhilAlabaster 1 Anakao 1 Steel 1
Wicker 14 RecycledGlass 1 Lampakanai 3 Plastic 5
Bamboo 13 Fiberglass 17 Turnsole 1 SyntheticWicker 1
Buri 6 Seagrass 3 Dexin 2

Coconut 4 MotherofPearl 1 Prolen&Prolex 1
CastResin 6 Shells 2 Upholstery/Vinyl 2
ManMadeBoards 5 LeatherInlaid 22
MediumDensityFiber 2 Accessories 18
Lamination 1
Total 241 107 38 161
Average 1.4 0.6 0.2 0.94
Source:CebuFurnitureIndustryFoundation(CFIF)Website

1. Rattan.

RattaniseitherlocallysourcedfromneighboringislandsorimportedfromPapuaNewGuinea
andBurma.Pabuayon,RiveraandEspanto(1998)mentionedthat

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,
SurigaodelSur(PaperIndustriesCorporationofthePhilippines)andTalacogon,
AgusandelSur(ProvidentTreeFarms).ThemajordemandareasarePampanga
(San Fernando and Angeles City), Cebu (Cebu City and Mandaue City), and
MetroManila,LagunaandQuezon.

Therattanmarketparticipantsinclude:
i) gathererswhoaremostlytribalpeopleandcouldbemembersornon
membersofagatherersassociation
ii) gatherers associations, composed of gatherers residing in particular
upland communities and organized for the purpose of obtaining a
rattancuttingpermitorundertakingotheractivities
iii) plantation owners who initiated rattan planting on their own or
throughgovernmentreforestationprogram
iv) rawmaterialtraderswhomayormaynotholdpermits
v) manufacturers who include producers of furniture and handicraft
items
vi) workerswhoincludesubcontractorsandinhouseworkers
vii) finished product traders who are engaged in trading at the domestic
orforeignmarketorboth
viii) transporterswhoincludetruckersandshipper

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
addedvalueofthetraderincludesthetransportrelatedcost.Ingeneral,thecost

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
misdeclaredshipment(onlyaboutonethirdofactualvalue)compriseabout14%
of total costs, while bribes, which make underreporting possible, are about 8%.
Thefullcharges,ifpaid,wouldamounttoP64.63per100lm.Withoutthebribes,
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
officefurniture.Importedwood,mainlysourcedfromMalaysia,Brazil,NewZealand,andthe
US,includeHondurasandBrazilianmahogany,pine,oak,beechcherry,andmaple.Veneer,a
thinsliceofexoticwoodorothermaterials,isappliedoverathickerbackingtomakedecorative
materialsmoredurable.

3.Stone

The stonecraft industry, originating from the neighboring island of Negros Oriental,
crossedovertoCebu,which,inturn,useditfordecorativefurniture.Stonebasedtabletopsare
made with wooden carcasses and laminated with pieces of fossilized stones colored white,
beige,gray,coral,greenandblack.Cebuanofirms,usingfossilizedstoneasarawmaterialfor
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
reasonsfortheirdecisionnottomakestonebasedtabletops.Cebuisexportingfossilizedstones
asrawmaterialstoChinasfurnitureindustry.

4.MixedMedia

Mixedmedia 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,andmixedwithchemicalstoresultinstonelikeproducts.Otherproductsinclude
mixedmedia 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
coconutrootsandeventermiteeatenwood(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
syntheticmaterialssimulatingrattan,bamboo,abaca,rustedmetal,bark,wood,willow,wicker,
hickory, and wrought iron. It is resistant to chemicals, weather, humidity, and water. Plastic
furnitureislargelydesignedforoutdooruse.

B. InterfirmCooperation
The Cebu furniture cluster fosters horizontal integration through close interfirm
cooperation.Thisisanalternativewayoforganizingthevaluechain:

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 armslength relationships without imposing
theinflexibilitiesofverticalintegrationorthemanagementchallengesofcreating
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,
effectivenessandflexibility(Porter,1998).

Table6listsCebuexportsthatsharecomplementaryinputswiththefurnitureindustry,
representing 36% of total Cebu exports. Furniture exports, for example, share similar
intermediateinputswithhousewaresandgifts,toys,andhandicrafts(GTH).Thisisduetothe
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
manyvendorsofdifferentexportproductsinasingletrip(e.g.attendingtheCebuX).

Table6:CebuExportProductsUsingComplementaryInputs,2003
(ValueinUS$1,000)
Housewares Value
Basketwork 7,156
Wickerwork
Shellcraft 467
Woodcraft 229
Ceramics/Stoneware 1
Textilearticles 38
Flowerarticles 28
Metalware 1
Glassarticles 30
Otherarticles 2,518
SubTotal 10,468
(2%)
ConsumerProducts Value
FashionAccessories 9,914
Garments 53,970
HolidayDcor 1,051
Toys 45
Giftware 8,131
Woodwork 3,461
ConsumerProducts 5,126
SubTotal 81,898
(16%)
FoodandResourceProducts Value
MarineProducts 18,855
Mineral 1,028
Coconut 2,939
ForestProducts 300
Seaweeds 37,246
Marble 144
Cutflower 6
Twine 8,518
Nonmetallicmineral 7,904
NaturalFibers 24
OtherResource 4,358
SubTotal 79,964
(15%)

Table6:CebuExportProductsUsingComplementaryInputs,2003
(ValueinUS$1,000)
IndustrialManufactures Value
Metal 540
Construction 7,755
Chemicals 7,314
Packaging 303
Others 3,241
SubTotal 19,153
(4%)
ExportsofComplementaryInputs 188,483
(36%)
CebuExports 521,791
Sources:NationalStatisticsOffice(NSO)andBureauofExportTradePromotion(BETP)

To illustrate the horizontal integration or interdependenceof different industries in the

Cebu cluster, a comparison between the furniture and fashion accessories is made in terms of
rawmaterialusage,machineryandequipmentuse,anddesignsources.AsperTable5,thetop
rawmaterialsusedinfurniturearewood(65%),wroughtiron(60%),stone(52%),rattan(50%),
leather inlaid (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%),
glassbeads(16%),glass(12%),andsemipreciousstones(12%).

An interview with a designer revealed that the excess shavings of furniture raw
materialsaresometimesusedinthemanufactureoffashionaccessories,andthatmaterialssuch
asstoneinlay,firstintroducedforsmallitemslikegiftsandtoys,arenowusedinthefurniture
industry(Interview1).WecloselywatchtheGifts,ToysandHardwaresectorfornewproduct
ideas.Inthatsector,thetrendsgomuchfaster.Theyhavetobemoreinnovativeandcomeup
withnewideasmoreoften.Wealsooftenvisitlocalandregionaltradefairsthatareorganized
by DTI. In the countryside, people are more innovative in experimenting with indigenous
materials.Ourdesignteamoftengoestotheprovincesfornewideas.Anexampleismydesk
from laminated coconutshells. At first, laminated coconut shells were only used for picture
frames.Weintroducedthematerialforfurnitureproductionandmadeanentiredeskfromit
(Beerepot,2005;Interview1)

Based on key informant interviews, interfirm cooperation takes the form of

subcontracting,endingofmaterials,sharingofbuyers,consolidationofsmallshipmentsandthe
bandwagon effect. One company interviewed, Company A, however, claims that full
cooperationisnotpossiblebecausefurnitureisajealousandsecretiveindustry(Interview2).
To avoid being drawn to discussions on pricing and raw material sources, this company shies

away from CFIFsponsored social gatherings; then again, it lends materials to other furniture
firmsandofferstheuseoftheirslowmovingmaterialstosmall,startupfurniturefirms.

In the caseof another company, Company B,subcontracting is limited to some veneer

andwoodproductsandonlytoCompanyBsMultipurposeCooperativewhosemembersare
former employees retrenched more than 10 years ago when the highcost of rattan forced the
companytodiscontinuethisproductline.CompanyBencouragedtheretrenchedemployeesto
organizeacooperative,andprovidedspaceforaworkingarea.Today,thecooperativehasits
ownbuilding,hasassetsofuptoPhp8million(someinTbills),andsuppliesthecompanywith
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
otherindustryplayersinformationandlessonsonthedifferentstandardsforrattan,wood,etc.
(Interview3).

Table7:RawMaterialsUsedinCebuFashionAccessories:2005
Imported
Local
Direct LocalTraders
Total
Materials
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
Cocoshell 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
GlassBeads 2 8.00 2 8.00 4 16.00
Glass 2 8.00 1 4.00 3 12.00
Semipreciousstones 1 4.00 2 8.00 3 12.00
Beads 1 4.00 1 4.00 2 8.00
Leather 1 4.00 1 4.00 0.00 2 8.00
Plastics 1 4.00 1 4.00 2 8.00
Raffia 2 8.00 2 8.00
Acrylics 1 4.00 1 4.00
Adhesives 1 4.00 1 4.00
Bones 1 4.00 1 4.00
Carabaobone 1 4.00 1 4.00
Chemicals 1 4.00 1 4.00
Chords 1 4.00 1 4.00
Crystals 1 4.00 1 4.00
ElasticGarters 1 4.00 1 4.00
Fiber 1 4.00 1 4.00
Horns 1 4.00 1 4.00
Metalcasting 1 4.00 1 4.00
Paint 1 4.00 1 4.00
Pearls 1 4.00 1 4.00
Sandpapersandabrasives 1 4.00 1 4.00
Silver 1 4.00 1 4.00
Sinamay 1 4.00 1 4.00

Table7:RawMaterialsUsedinCebuFashionAccessories:2005(continued)
Imported
Materials Local
Direct LocalTraders
Total
Stones 1 4.00 1 4.00
Syntheticbeads 1 4.00 1 4.00
WaxChords 1 4.00 1 4.00
Wires 1 4.00 1 4.00
Woodbeads 1 4.00 1 4.00
Source:Interviewwith25ManufacturersofFashionAccessories,January2005

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
closenessofpersonalrelationships,firmssharebuyerssubjecttosomelimitations(Interview5).
CompanyEadvancesmoneytosubcontractorsandagreestoconsolidatesmallshipmentswith
its competitors (Interview 6). Company Fs owner, interestingly, set up a furniture export
businessin1983inhopesthathewillbeasaffluentasotherCebuanoexporterswere(Interview
7).

C. RoleofSkilledWorkersinKnowledgeDiffusion
ThissectiondrawsheavilyfromtheworkofBeerepot(2005),whichemphasizedtherole
of skilled workers in knowledge diffusion. Competent entrepreneurs and an adaptable, well
trainedlaborarekeystoinnovationandproductupgrading(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).Theknowledgeandknowhowofskilledworkersareintangibleassetsthatenhancethe
international competitiveness of regions. On that note, since an important aspect of collective
learning is the development of trust among the industrys stakeholders, it is necessary to
identify how interpersonal and interfirm relations enable the diffusion of knowledge within
theCebufurniturecluster.

1.LaborMarketSegmentation

Table 8 demonstrates the highly segmented nature of the labor market, with the co
existenceofhighlyeducatedandlearningbydoingworkers.Thislabormarketstructureisdue
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, subcontractors, or
productionsource)withtheirpeersintheindustry.Knowledgetransmittersareworkerswith

limitedformaleducationwholearntheirskillsprimarilyonthejob.Theyarehighlyskilledin
weaving and intricate woodcarving, for instance. Knowledge transmission occurs when these
skilledworkershireapprenticesorassistantstoincreaseproduction.Thepracticeofpiecerate
payment of skilled workers encourages the craftsmen to bring in a young helper. This
arrangement,ofcourse,hasitsdisadvantages:

Entrepreneursandproductionsupervisorshavelimitedwillingnesstoinvestin
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
trainingandskillsdevelopmentisageneraltrendindevelopingcountryclusters,
as pricebased competition is still predominant here. Several entrepreneurs in
Cebu ask leadmen in their company to start for themselves and work
exclusivelyassubcontractorsfortheircurrentemployer.Theadvantageforthe
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
weakeranddependentthatitcanbequestionedtowhatextenthecanserveasa
sourceofknowledgeorfeedbackforexporters.

Table8:LaborMarketSegmentationintheCebuFurnitureIndustryinCebu
Category
Specialskilled,
secureentrepreneurs
andworkers
Skilledsecure
workers
Skilledsecure/non
secureworkers
Semiskillednon
secureworkers
Position Entrepreneurs,
production managers,
designers,draftsmen
Supervisors, leadmen
inbigcompanies
Leadmen, sample
makers, skilled
workers
(semi) skilled work
for subcontractors,
apprentices
Education Collegedegree College degree or
vocational
High school graduate,
(some)college
Elementary graduate,
(some)highschool
Occupationalstatus Regularemployees Regularemployee Regular and
contractual
Oncall, jobouter,
piecerateworkers
Sourceofknowledge Formal training, then
experience
Experience then
formaltraining
Onthejob,experience Onthejob
Additionaltraining Yes(some) Yes(some) No No
Jobsecurity Medium Medium Medium/low Low
Payment >150% of minimum
wage
Up to 150% of
minimumwage
Minimumwage Below minimum
wage
Locallabormobility Medium Medium High Veryhigh
Knowledgetransmitter No Little Yes No(receiver)
Knowledgeprotector 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
willingnesstoshareknowledgeandteachotherstheirskills.Mostofthesurveyed
production workers indicated that they learned their skills primarily from other
workers, their leadmen or relatives. For lower hierarchy workers, apprentices or
helpers are not seen as a threat to their own position on the labor market. The
prospectthat,eventually,thesehelperswilllookforaskilledpositionhasnotmade
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
productionknowledgebecomesmorewidelyaccessible.Skilledworkersmightnot
alwayshaveasecurepositionwithintheparticularcompanywheretheywork,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
turnovercandistortthebuiltupofdistinctiveskillsinindividualcompanieswithin
theCebucluster.Undifferentiatedbasicproductionknowledgeandtechniquesare
widely available within this cluster, but the complementary knowledge and skills
necessarytostrengthentheindustrialbasearelimited.

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 spiritexiststhatpoorpeopleshouldhelpeachother.Thiscanbeby
training a young relative in a specific craft or when subcontractors help each other
toreachadeadlinefordelivery,orshareordersduringthelowseason.Interviewed
subcontractorsclaimedthatdiscussionswithothersubcontractorswereoneoftheir
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.Forsubcontractors,thenecessitytoprotecttheirspecificknowledgehasnot
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.Whencompaniesexpand,orpeopleenjoyrelativesecurityinthelocallabor
market, the willingness to associate or undertake collective activity that should
encourageknowledgeaccumulationdiminished(Beerrepot,2005;7891).

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 piecerate payment schemes for workers.
Localvaluechainrelationsandoutsourcingstrategiesarebasedonthedominanceofexporters,
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
learningprocess.

2.MatchingofProcessesandSkills

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
resultsarereportedinTable9.(However,todate,thereisnoavailableskillcertificationorany
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,andpolishing;roughmillingandmachining;fiberglasscasting;upholstery;
leather inlay; and stone inlay and packaging are largely selflearned, obtained from work
experiences, or acquired from coworkers. On the other hand, formal training is required for
roughmillingandmachining,metalworks,productengineering,anddesignandmaintenance.
(Collegegraduatesdothelattertasks.)

Company A, which invested in machinery to cope with big orders, employs about 700
workers.Tominimizereturnedsales,qualityinspectionisdonebeforeshipment,inthetesting
laboratoriesofforeignbuyers.Thecompanypolicyisnottohireexemployeeswholefttowork
foranIndonesianorChinesefirm.CompanyB,meanwhile,complementsitshugeinvestment
inmachinerieswith2,000workers.Tocontrolproductquality,itavoidssubcontracting,except
toacooperativerunbyretrenchedemployees.Italsohiresprofessionalmanagers,hasitsown
testing facilities, engages in product development, and allows overseas buyers to bring in
technicianstotrainworkers(particularlyinwoodworking).CompanyCstartedasasmallfirm,
with just seven workers who now have been with the firm for more than three decades.
CompanyCsworkersperformmultiplefunctionsonarotationbasisandtheylearnbydoing.
Loyalty is rewarded by nonretrenchment during times of recession, and credits its Japanese
buyers for influencing them to continuously monitor product quality. Company D employs
homebased subcontractors; company F initially hired unskilled and unschooled workers until
theydraggeddownthefirmsproductivity.

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
verylittlecapital,utilizingalowleveloftechnologyandskills,andprovidinglowandirregular
incomes(InternationalLabourOrganisation,2002).Exportersadoptlocaloutsourcingtoreduce
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,difficultiescanarise,soaccordingtoonecompany,reducingthecommunication
gapbetweenlaborandmanagementimmenselyimprovesqualityandproductivity.

Duringthemid1980s,asubstantialnumberoffurniturefactoriesclosedshopbecauseof
laborunionswhichwentonstrike.Thisscenarioisnolongerpresentmainlybecausethelabor

market is quite tight, and in cases when workers of furniture firms are affiliated with labor
unions,employersmaintainharmoniouslaborrelations.CompanyDsaysitisagiveandtake
proposition.

Table9:MatchingofProcessesandSkillsintheCebuFurnitureIndustry,2002
Process Description SkillsInventory
Raw Material
Preparation
Plywood and solid wood are commonly used
materials, which are bought kiln dried. The
five most common wood working equipment
are:tablesaw,bandsaw,cutoffarmsawand
circular saw. Quality control is done by
comparing the material quality against a set
standardorbyitsmoisturecontent.
A few attended training courses, mostly on
developing supervision skills. Skills were
obtainedfromworkexperiences.
Rough Milling/
Machining
Most respondents processed solid wood,
mediumdensityfiberboardandplywood.The
five most common wood working equipment
are: surface planer jointer, thickness planer,
table saw, band saw and shape molder.
Quality control is done by comparing
measurements/dimensions against wood
qualityandspecificationsbasedonthecutting
list.
Most respondents attended training on
woodworking, furniture & cabinet making
and jigs & fixtures making. Skills were
obtainedfromworkexperiences.
Assembly/
Carpentry
The five most common furniture assembly
gadgets are: jigs, clamps, assembly machine,
cabinet press and rubber bands. Quality
controlisdonebycomparingtheworkagainst
job or customer specifications, fullsize
checklists,patternsorblueprints.
Attended training on furniture assembly.
Acquired skills from previous job, supervisor,
coworker,relative,selflearnedandschool.
Carving Qualitycontrolisdonebycomparingthefull
size detailed carving against the sample
picture.
Carving skills were mostly selflearned or
acquiredfrompreviousjob.
Sanding, Finishing
andPolishing
MostSMEsdrytheirfinishedproductsinopen
areas or under the sun. Quality control is
done by adhesive test and visual inspection,
comparing the color with the color swatches
and inspecting for crackles, pinholes, bubbles
orothermarks.
Finishing skills were mostly selflearned.
Some respondents were taught by supervisor,
coworkerandfinishingconsultant.
Fiberglass and
Casting
Quality control is done by comparing the
productwithjobspecifications.
Skills were selflearned, acquired from
previous job, supervisor or training on
fiberglassmaking.
Upholstery Quality of sewing, fitting, uniformity of foam
thicknessandcolorischecked.
Attended training on upholstery; selflearned;
acquiredfromcoworkerorpreviousjob.
LeatherInlay Leather inlays are tested for bubbles, edges
andgrains.
Learningbydoing; taught by supervisor, co
workerandpreviousjob.
StoneInlay Hairlines, stone grains, stone color and
adhesiontocarcassarechecked.Thehammer
testisusedtotestthestoneinlay.
Skills acquired from coworker, previous job,
supervisor,relativesandself.
MetalWorks Qualitycontrolisdonebycomparingwiththe
jobspecificationorperformingthedroptestor
heavyloadtest.
Obtained vocational course on Mechanical
Technology;previousjobasironfabricator.

Table9:MatchingofProcessesandSkillsintheCebuFurnitureIndustry,2002(continued)
Process Description SkillsInventory
PackingandCrating Quality control is done by comparing with
buyers standards or specifications, drop test
andadhesiontest.
Learningbydoing; taught by supervisor, co
employeeandtrainingonpackingstandards.
Product Engineering
andDevelopment
Qualitycontrolisdonebyfollowingamanual
or procedure in correcting quality defects and
product inspection (random sampling, batch,
process,lotsperbatch).
College degree (Architecture, Fine Arts,
Mechanical and Industrial Engineering);
Trainings
Maintenance Manual for preventive maintenance is
followed.Repairrecordsarekept.
Maintenancetraining
Source:IndustryAnalysis,CebuFurnitureIndustriesFoundation,Inc.

C.EntrepreneurialCompetence
There is an important distinction to be made between proprietorship and
entrepreneurship.Theentrepreneurisdrivenbytheneedtoaccumulatecapital,sohisdecision
is based on business factors; the proprietor is driven by the need to earn income. Since the
latterseconomicsurplusislikelytobeusedtosustainaspecificstandardoflivingratherthan
be reinvested in business, there is little capital accumulation (Scase, 2000). Recently,
organizations such as ILO, UNIDO, and GTZ have emphasized strengthening entrepreneurial
competence.Inbuyerdrivenvaluechains,producersareexpectedtoreceivetechnicaltraining
andinformationonproductsanddesignsthroughnetworkrelationswithforeignbuyers.

Beerepot (2005) considers entrepreneurs the most privileged group in the cluster in
termsofaccesstoknowledge.Anentrepreneurabsorbsknowledgethroughfourchannels:(i)
observingsimilarproducts,(ii)negativeaction,(iii)valuechain,and(iv)jointaction.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 freeriding 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
formalandinformalmechanism,motivatedbyarelationshipoftrust.

D. ProfitabilityofFurnitureFirms

TheprofitabilityoffurniturefirmscanbegleanedfromthedataontheTop5,000/7,000
Corporationsandthe2003CFIFSurvey(Table10).TheTop5,000Corporations(2002)include
29 Cebu furniture exporters and 5 Luzon furniture exporters, collectively contributing sales of
P2.123billion.Cebubasedfirmscontribute67%oftotalsalesandaccountfor53%ofthetotal
assetsoftheTop5,000Furniturecorporations.Theyrepresent86%oftotalequityandgenerate

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,withadebttoequityratioof1043%.Insimpleterms,theimplicationisthatifthese
firms would close today and the assets were sold, the owners would only receive 9% of total
assets.

Table10:SelectedFinancialIndicatorsforTop5,000/7,000FurnitureCorporations,20012002
2002 2001
Indicator
Cebu Luzon CebuShare Cebu Luzon CebuShare
F/SData(inP1,000)
TotalAssets(TA) 2,324,176 2,065,104 53% 3,562,497 2,075,416 63%
FixedAssets(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%
FinancialRatios(in%)
ProfitMargin 4.52% 0.61% 7.45 3.93% 0.91% 4.33
AssetTurnover 182% 103% 1.77 196% 98% 1.99
ReturnonAsset 8.25% 0.62% 13.20 7.69% 0.89% 8.62
ReturnonFixedAssets 19% 5% 4.31
DebttoEquity 118% 1,043% 0.11 231% 807% 0.29
%ofFAtoTA 40% 20% 2.00
%ofLiabilitiestoTA 54% 91% 0.60 70% 89% 0.79
%ofEquitytoTA 46% 9% 5.27 30% 11% 2.75
Source:Top5000Corporations(2002)andTop7000Corporations(2001)

The Top 7,000 Corporations (2001) include 43 Cebu and 13 Luzon furniture exporters,
contributing total sales of P5.638 billion. Cebubased firms contribute 77% of total sales and
accountfor63%ofthetotalassetsofthoseTop7,000furniturecorporations.Theyclaim77%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%forCebufirms.

The 2003 CFIF Survey disaggregates profit and cost structures by asset size (Table 11).
Theindustryisdominatedbylargefirms,whichcapture41%oftotalsales.Medium,small,and
microenterprises account for 36%, 21%, and 2% of total sales, respectively. Profit rates of
microenterprisesarethehighestat9%,whilethoseoflargefirmsarelessthan1%.Inabsolute
terms, large firms registered the highest average profits at P5 million, while microenterprises
had the lowest average profit at P1.256 million. Raw materials claim a lions share (74% of
revenues)inmicrofirms,whilethecombinedlaborandsubcontractedlaborrepresentthebulk
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 buildup of fixed assets to
revenuesat406%.

The data indicate that firms have a tendency to continue investing in fixed assets until
becomingclassifiedasalargecompany,uponwhichitsrateofinvestment(relativetosales)
becomes lower than microenterprises. This suggests that furniture manufacturers are acting
moreasproprietorsratherthanasentrepreneurs.

Table11:ProfitandCostStructureofSelectedFurnitureFirms,byAssetSize,2002
(inPhPmillion,%inparentheses)
Variable Micro Small Medium Large Total
No.ofFirms 2 11 5 1 19
GrossSales 28.45 270.09 457.68 530.00 1,286.22
Percent (2.21) (21.00) (35.58) (41.21) (100.00)
GrossCost 25.80 249.92 443.11 522.00 1,240.82
Taxes 0.156 5.81 4.431 3.00 13.39
AfterTaxIncome 2.51 14.36 10.14 5.00 32.02
ProfitRate(in%) (8.83) (5.32) (2.22) (0.94) (2.49)
GrossCost 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)
SubcontractedLabor 1.83 40.58 70.24 79.50 192.15
%SubcontractedLabor (6.42) (15.03) (15.35) (15.00) (14.94)
RawMaterial 19.01 115.10 185.31 201.40 521.71
%RawMaterial (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)
FixedCapital 8.18 1,096.01 277.88 104.9 1,486.972
%toRevenues (28.77) (405.80) (60.71) (19.79) (115.61)
AverageFixedCapital 4.09 99.64 55.58 104.90 78.26
Source:IndustryAnalysis,CFIF,2003

What could account for the better performance of Cebu furniture firms visvis their
Luzoncounterparts?OnepossiblereasonwouldbethedominanceoffamilyfirmsinCebu.In
manydevelopingcountries,familybusinessesplayanimportantroleinthenationaleconomy.
In response to globalization, family businesses had to obtain management resources such as
financial,human,andtechnologicalresourcesfromoutsidetheirfamilies(Shimizu,2004).

E.FamilyOwnershipofFurnitureFirms

How strong are family businesses in the Cebu Furniture Cluster? A tentative answer
canbegleanedfromthemembershipinformationobtainedfromtheCFIFwebsite(Table12).It
seemsthatsomefamilieseitherownmorethanonefurniturefirm.Specifically,32%oftheCFIF

memberfirmsarecoownedbyfamilies.Some68%ofCFIFfirmslistcontactpersonswhoare
nonfamilymemberstaskedtoattendCFIFandrepresentthefirminCFIFfunctions.

Table12:ContactPersonsforCFIFActivities
ContactPersons
Numberof
Persons
Percentage
Family 55 32%
SameRepresentativeinCFIFFirms 12 7%
FamilyMemberRepresentativeinCFIFFirms 43 25%
IndependentRepresentative 116 68%
Total 171 100%
Source:CebuFurnitureIndustryFoundation(CFIF)Website

ThedesignationoffirmrepresentativesinCFIFactivitiesisshowninTable13.Fromthe
information,itcanbeinferredthatfunctionssuchasoverallmanagement,productionandsales
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
protectionisttendenciesislowinvestmentinskillsandcapacityupgrading.(Ontheotherhand,
familyenterprisescanmakeimportantstrategicdecisionsfasterthanusual.)

Table13:CFIFRepresentatives,byPositionandGender
Position
Male Female Total
Male
(in%)
Female
(in%)
President 75 8 83 90 10
CEO 6 1 7 86 14
VicePresident/COO/OIC 7 7 14 50 50
ManagingDirector/GeneralManager 28 10 38 74 26
VPFinance/FinanceOfficer 2 5 7 29 71
Operations/ProductionManager 2 3 5 40 60
VPMarketing/MarketingManager 3 12 15 20 80
Designer 2 0 2 100 0
Total 125 46 171 73 27
Source:CebuFurnitureIndustryFoundation(CFIF)Website

All of the key informants run familyowned furniture firms. For Company A, key
positionsareheldbyfamilymemberswhohavesomeforeignheritage;policydirectionsareset
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 nonfamily members who participate in a profitsharing 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 Es 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 incharge of marketing and production, while the wife oversees the finance.
Company F has a husbandwife tandem with the husband handling sales and the wife
designingtheirproducts.

F. GenderandIncome

ItisworthnotingthatwhileoverallmanagementandproductdesigninCFIFfirmsare
maledominated, 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
CensusofPopulationisused(Table14).SincetheCensusdidnotidentifytheworkersengage
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
(woodtreaters,cabinetmakersandrelatedtrade).

The census data on the 10% sample of Cebu households show that furniture workers
comprise 14% (47,050) of the provinces total population. Stratification reveals that Mandaue
ranksfirstintermsofestimatednumberoffurnitureworkers(9,790),followedcloselybyCebu
(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,andconversely,thatthereareagedbetween90to99stillinvolvedinfurniturework.

The 2003 DTI Furniture Industry Profile also states that only 43% of the sample were
women. Only mediumsized firms hired more female workers, largely due to the presence of
semiskilledfemaleworkers.Largefirmsreportedhavingmoremaleemployees.

Table14:NumberofFurnitureWorkers,byAgeandEducation,2000
AgeofWorkers(inyears)
Location No.ofWorkers
Median Range
Education
Male Female %Female Male Female Male Female Male Female
Cebu 3,806 899 19% 32 32 1099 1187 HSII HSII
Mandaue 716 148 17% 32 33 1174 1272 HSII HSII
CebuCity 823 148 15% 33 33 1090 1567 HSIII HSIII
LapuLapuCity 422 63 13% 32 30 1580 1756 HSII HSII
Others 1845 425 19% 32 32 1299 1187 HSI HSI
Source:2000CensusofPopulation

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 semiskilled
laborposts.Ontheotherhand,femalesearnahighermedianmonthlyincomeformultiskilled,
skilled, and unskilled labor. On the whole, male workers earn slightly more than female
workers(1.34%);therateofvariationbetweenmaleandfemaleworkersrangedfromalowof
4.29%forunskilledworkerstoahighof2.82%forsemiskilledworkers.

Table15:EmploymentSizeandMonthlyIncomebyPosition,2003
EmploymentSize/
MonthlyIncome
ManagerialSupervisory
Specialist/
Support
Staff
Multi
skilled
Labor
Skilled
Labor
Semi
skilled
labor
Unskilled Total
EmploymentSize
Micro:9orLess 47 36 29 17 10 21 21 181
PercentFemale 38% 44% 48% 47% 50% 62% 52% 47%
Small:10to99 8 17 10 25 32 27 11 130
PercentFemale 50% 35% 30% 36% 38% 37% 36% 37%
Medium:100to199 2 3 5 8 2 20
PercentFemale 50% 67% 60% 63% 50% 60%
Large:200andAbove 3 7 2 1 13
PercentFemale 33% 29% 0% 0% 23%
Totalofpercentsample 55 53 41 48 54 58 35 344
PercentFemale 40% 42% 44% 42% 41% 48% 46% 43%
MedianIncome(inP)
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:2003DTIFurnitureIndustryProfile

G.LocalSupportOrganizationsandStrategicAlliances

Localeconomicdevelopmentisenhancedwiththeestablishmentofpartnershipsbetweenlocal
governments and community and civic groups in managing existing resources, creating jobs,
andstimulatingeconomicactivity(Helmsing,2003).InEurope,clusterdevelopmentproceeded
in two stages: spontaneous growth, then institutionally enhanced growth (Gereffi, 1999). It is
in the second phase of cluster development that local support institutionsbusiness
associations,localgovernmentunits,nationallineagencies,educationandtraininginstitutions
andforeignfundingagenciesplayavitalrole.

Figure 3 depicts the sources of knowledge and its transmission. Business associations,
localgovernments,andeducationandtraininginstitutionsarethemainlearningfacilitatorsand
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
knowledgetosubcontractors,rankandfileemployees,andskilledworkers.

Figure3:LearningStakeholdersatClusterLevel

1.CebuFurnitureIndustryFoundationandStrategicAlliances

Withdailyoperationshinderingfirmsfromconductingjointprojectsandinitiatives,the
business association is responsible for cooperative activities that would otherwise not be
undertaken by individual firms. In the Cebu furniture industrys case, before the CFIF, there
wastheChamberofFurnitureIndustryPhilippinesCebuestablishedin1974torespondtothe
threatofdecliningrattansupply.Theorganizationwassuccessfulinlobbyingforanexportban
on rattan. In 2002, CFIPCebu disassociated itself with CFIPManila to form CFIF due to
concerns about the Cebu furniture industrys declining US market share, the expansion of
ChinaandVietnam,andanincreasinglynegativeoutlookfortheindustryasawhole.

The following year, the CFIF held a Buyers Forum to consult with exporters, buyers,
suppliers, subcontractors, otherindustry exporters, and government. In 2004, CFIF celebrated
its 30
th
year, growing from an eightmember to a 172member business association (now
LearningFacilitatorsandKnowledgeSources
Localgovt
units
Business
associations
Educationand
traininginstitutions
Entrepreneurs Internationaloutlook
Productionorganization
Market trends
Subcontractors
*Materials
*Production
knowledge
*Reputation
ofexporters
Rankandfile
workers
*Production
skills
*Critical
enablingskills
*Labormarket
Skilledkeyworkers
*Specificjobskills
*Organizational
skills
*Accesstonetworks
ofworkersand
LABORFORCE
Source: Beerepot (2005)

including subcontractors). CFIF members are given the opportunity to join trade and study
missionstointernationalfurnitureshowsinNorthAmerica,Europe,theMiddleEast,andAsia.
CFIF organized the participation of Cebu exporters in international trade shows in Cologne
(Germany),Milan(Italy),Tokyo(Japan),Dubai(UnitedArabEmirates),andShanghai(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(Table16).Outofthe25trainingprograms,20wereshorttermseminarswhile5were
longtermtrainingprograms.

Table16:ListofCFIFTrainingProgram,July2003June2004
ShortTermSeminars LongTermTrainingPrograms
ManagementofChange SupervisorsProductionCapabilityfor
CustomerServiceEnhancementProgram FurnitureManufacturingOperations
QualityandCostEffectiveFurnitureFinishingSeminar
ReinforcedPlasticsFurnitureManufacturing:Working
withFiberglass
FurnitureandCabinetMaking(FCM)
Technology
TotalQualityManagement(TQM)
EnvironmentalManagementSystems SupervisoryDevelopmentProgramforFurniture
StrategicCompensation ManufacturingOperations
JigsandFixturesTechnology
FocusonLeather MarketingManagement
DecorativeProcessofGoldLeafing(Gilding)
MarketingThroughPrintedSalesLiterature PrinciplesandApplicationsofManagement
BasicsofFairParticipationandBoothDesignsand
VisualMerchandising

FSCCertification&ItsImportancetotheFurniture
Industry

CompetitivePricingforMaximumMarketability
ReproductiveHealth&GenderSensitivity
DesignTrendsandMarketingUpdatingBriefing
MachineandEquipmentMaintenance
TimberandLumberDrying:FocusonSolarDrying
PEPPEnvironmentManagementWorkshop:Batch1
PEPPEnvironmentManagementWorkshop:Batch2
Source:CFIF2004AnnualReport

The CFIF 2004 Annual Report enumerates several strategic alliances with other
organizations.TheBusinessLinkagesProject(BLP),facilitatedbyDTIundertheEntrepreneur
SupportProgram(ESP)oftheCanadianInternationalDevelopmentAgency(CIDA),assistedin
institutionalstrengtheningandmarketexposure.TheEuropeanChamberofCommerceofthe
Philippines (ECCP) created and managed the CFIF website, www.furniturecebu.com. The
German government through its technical consultants from Center for International Migration

(CIM)andGermanDevelopmentServices(DED),launchedtheDualTrainingSystem(DTS)on
Furniture and Cabinet Making, a oneyear course on furniture making for operators and
supervisorsaccreditedbytheTechnicalEducationandSkillsDevelopment(TESDA).TheCarl
DuisbergFoundation(CDG),CenterforPromotionofImportsfromDevelopingCountries(CBI)
of the Netherlands, Private Enterprise Accelerated Resource Linkage (Pearl 1 and Pearl 2) of
CIDA,ASEANCenter, andJapanExport TradeOrganization(JETRO) fundedstudyandtrade
missions.

TheConfederationofPhilippineExporters(PHILEXPORT)hasjoinedCFIFinadvocacy
issuesonmattersaffectingthewholeexportsector.RegardinganissueonGiantAfricanSnails,
PHILEXPORTlobbiedfortheresumptionofacceptingshipmentsfromCebutoAustralia.CFIF
advocated making the Cebu International Port ISPScompliant 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
issuanceofPDEAlicenses,permits,andcertificationsfromManilatoitsregionalofficeinCebu.

AbusinessfriendlyMandaueCitygovernmenthasmadepossibletheemergenceofthe
Cebu Furniture Cluster. The local government processes business permits within a day, and
has allocated some 9,000 m
2
of its cityowned lot in the North Reclamation Area to house the
proposedCebuInternationalTradeandExhibitionCenter(CITEC).TheCITECTaskForcewas
organized in 2002, with members coming from the CFIF, Cebu Chamber of Commerce and
Industry (CCCI), PHILEXPORTCebu, the European Chamber of Commerce, DOST, and DTI.
TheJapanInternationalCooperationAgency(JICA)istheproposedfundingagency.CITECis
expectedtobenefit265,619SMEsbyprovidingavenuefortrainings,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
purchaseorders.

On a related note, the Department of Environment and Natural Resources (DENR)

encouragedmandatoryselfmonitoringandcompliancewithenvironmentalstandardsthrough
the Environmental Consent Agreement. CFIF partnered with LGUs and private organizations
inthereforestationofCebusdenudedwatershedsandtherehabilitationofmangroveareasin
OlangoIsland.

2
DTI serves as the conduit for the industry to link with tradeaffiliated agencies such as Center for
InternationalTradeExpositionsandMissions(CITEM)andtheProductDevelopmentandDesignCenter
of the Philippines (PDDCP), as well as other government agencies (e.g. Furniture and Handicrafts
IndustriesResearchDevelopmentProgram(FHIRDP)oftheForestProductsResearchandDevelopment
Institute(FPRDI)oftheDepartmentofScienceandTechnology(DOST).)

The linkage with Don Bosco Technical School assures a constant supply of skilled
manpowertothefurnitureindustry.Presently,DonBoscooffersaBSinIndustrialTechnology,
major in Furniture Making. CFIF was involved in curriculum development and admission
applicationsforthecourse.CFIFalsocollaborateswiththeUniversityofthePhilippinesCebu
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
furnitureindustryareoutsourcedtosubcontractors,makingthemanimportantalbeitneglected
industrialpartner.

IV.GLOBALBUYERSANDUPGRADING

Most industrial clusters in developing countries operate in a buyerdriven value

chain,i.e.,thebuyerexercisescontroloverthechainintheabsenceofownership(Gereffi,1999;
Humphrey &Schmitz, 2002). In the Cebu furniture cluster, foreign buyers or their buying
agentsarethemainsourceofinformationforentrepreneurs.Entrepreneursmeettheirforeign
buyers through participation in furniture exhibits, through wordofmouth, references,
advertisements, the Internet or intermediary organizations like CFIF or the Cebu Chamber of
Commerce.

Though the Cebu furniture cluster is widely seen as buyerdriven, furniture exporters
arenowexploringoriginaldesignmanufacturing(ODM)andhopingtoeventuallyventureinto
original brand manufacturing (OBM). Mixedmedia furniture, in particular, has become the
conduit for this functional upgrading. Toward this end, the CFIF started a Product
Development Program for FurnitureContemporary Design to assist local furniture
manufacturers to understand contemporary furniture design for specific markets, especially
Europe.Fiveparticipatingcompaniesdevelopedprototypesofnineoccasionalfurniturepieces,
13 furniture collections, and five accessories collections. Most of the final prototypes were
displayedduringCebuX.

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
theproductionstructure,suchasavailabilityofmixedmedia,logistics,qualityandpackaging,
amongothers.Likewise,qualityandconsistencyofproductionareconditionsforaproductto
attain branding. As of late, there is an effort to market Cebu furniture as an international
brandwhichcouldfostersustainability.

A.MarketforCebuFurnitureExports

TheDTIs2003ProfileofFurnitureIndustriesreportthat89%ofthefurniturefirms
surveyedengageindirectexporttrading,while42%engagedinindirectexporttradingand
otherswereinvolvedinboth(Table17).

Table17:EconomicActivitiesEngagedbyRespondents,2003
TypeofActivity IndustryRole Total Percent
Subcontracting 1 1 1 1 5 9 18 47
Manufacturing 14 2 3 5 9 33 87
Domestictrading 1 1 3 9 14 37
Indirectexporttrading 1 1 2 3 9 16 42
Directexporttrading 1 1 14 2 3 5 9 34 89
Total 1 1 1 1 1 14 2 3 5 9 38 100
Percent 3 3 3 3 3 37 5 8 13 24 100
Source:2003DTIFurnitureIndustrySurvey

Respondentsclaimedthat68%oftheirbiggestforeignbuyersweredistributorsand
wholesalers,retailersfor21%,andmanufacturersandassemblersfortherest(Table18).
Multipleresponseswereallowed.

Design

Production

Logistics
Transforminputs
Quality
PackagingEtc

Branding

Marketing
Figure 4: Functional upgrading in the value chain

Table18:MainBusinessofBiggestForeignBuyer,2003
MainBusiness Frequency Total Percent
Manufacturer/Assembler 5 5 13
Retailer 6 2 8 21
Distributor 24 2 26 68
Wholesaler 24 2 26 68
Total 5 6 24 2 37 97
Percent 13 16 63 5 97
Source:2003DTIFurnitureIndustryProfile

Thetop10marketsforfurnitureexportsasof2003aretheUS,Japan,GreatBritainand
NorthernIreland,Australia,SaudiArabia,Netherlands,France,Italy,Spain,andCanada(Table
19). Some 63% of furniture exports are bought by US buyers. Together, the top 10 markets
comprise88%oftotalfurnitureexports.

Table19:Top10MarketsforFurnitureExports,2003
Country
Value
(inUSD)
Percent
USA 126,288,378 63
Japan 13,185,046 7
GreatBritainandIreland 6,555,875 3
Australia 5,933,783 3
SaudiArabia 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
TotalMarketShareofTop10countries 176,615,761 88
TotalFurnitureExports 200,965,549 100
Sources:NSOandBEPT

B.RoleofDesignandtheDesignersGuildinProductUpgrading
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
colorandshade).Mostexportfirmsmaintaininhousedesigners,althoughtheyhirefreelance
designerswhentheyjoinexhibits.Estimatesfrombuyingagentsindicatethat50%to70%ofthe
furniture designs are done by Filipinos. In one case, a foreign buyer requested a Cebubased
foreigndesignertoimplementafurnituredesignforChineseproduction.Sincetheseproducts
cater to niche markets, they are mainly sold in small volumes. A testimony of a designer is
givenbelow,whileTable20isasamplingoffurnituredesignersandtheirworks.

Coconut tiles are a new material for us. When I visited the furniture show in
HighPoint(USA),IsawthatanotherproducerfromCebuhadusedthematerial.
MybuyeraskedifIcould produceasimilarproduct(dinnertrays).Sometimes
mybuyersendsmepicturesofproductsfromcompetitors.Mybuyerthenasks
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
existingsubcontractorswilldotheinlayofthetiles.(Beerepot,2005;Interview,
13052003).

Table20:SampleListofFurnitureDesignersandtheirWorks
Designer Works Awards/Accomplishments
1948: Innovated the combination of
rattan and rawhide, an exclusive
trademarkpatentedinternationally
1988:GalleonAward(Manila)astop
buyer of Phil. Rattan furniture and
contributing to the development and
improvement of the product and
expansionofthemarket
15designs,twoareclassicsdisplayed
at the Museum of Modera Art in
New York (officers chair and
otterman)
Opened 21 showrooms in key US
cities; distributor for Europe and
SebuDeptStore(Japan)
John McGuire, McGuire
FurnitureCo.
Tapped Mehitabel, Rattan Arts,
Nazareno(Zambalespeel),Indonesia
and Hongkong (teak and mahogany
withrattan)

Popularized the use of ceramics on

tiles
1993: KATHA Award for Best
ProductCollection(ManilaFair)with
Water Buffalo line in terracotta tiles
andmetal
Design used sustainable and
renewable materials on
contemporarylines
1997: Best Product Design for
Contemporary (Cebu Fair) for
skeletal metal frame chaise with
stitchedleather
Design inspired by Filipino heritage,
studiesofMalayandEasternculture
1994: Vitruvian chair graced the
cover of the International Home
Furnishings Market Resource Guide,
Fall Edition (Highpoint, North
Carolina)
Debbie Palau, Design
Ventures
Design philosophy revolves around
concepts that mix the linear
simplicity of the West with the
wabisabicomplexityoftheEast
1998: Carl Duisberg Gesellschaft
(CDG) sponsored Advanced Eco
Design Management Program in
Germany

Table20:SampleListofFurnitureDesignersandtheirWorks
Designer Works Awards/Accomplishments
President of the Designers Guild
Phil.
Applies new treatments to the 100%
natural materials he uses in his
designs
35 years experience in designing
furniture and working on interior
decorationprojects
Original design, handcrafted and
useofentirelynaturalmaterials
1985:NationalDesigninTraditional
Craftsmanship Price (Spanish
MinistryofIndustryandEnergy)
Kalma Collection: European design
inspired by traditional Asian
furniture, bamboo, rattan, cotton
matting,wood,leather,andiron
1988: Best Image Price (Milan
InternationalFurnitureFair)
1988: Chosen by C.E.E. to develop
the project Natural Design in the
Caribbean
Kalma Natures Light: natural shell
collection transformed into standard
or table lamps and hanging lights.
Each shell has a unique light and
transparency, creating an ocean
atmosphereonland
1999: Artistic Director (Manila
InternationalFurnitureFair)
Ramon Castellanos,
DisenoenAsia,Inc.
Takto Collection: leather and
bambooareprincipalmaterials

1999: Artistic Director of the Cebu

InternationalFair
Betty Cobonpue, Interior
CraftsoftheIslands

Patented a process of laminating

rattan

Design integrate locally sourced

organic materials with innovative
handmadeproductiontechniquesas
an alternative to the Western
definitionofmoderndesign
1987: Studied Industrial Design at
Pratt Institute (New York);
apprenticed for a leather and wood
workshopnearFlorence,Italy
Fuses industrial techniques with
indigenous materials. Complements
his use of steel with sturdy native
fibers (rattan, abaca, buri and
coconut)
1994: Studied Marketing and
Production at Export Akademie
BadenWurttemberg in Reutlingen,
Germany and worked in Bielefeld
andMunich
Movement 8 (Filipino furniture and
accessory designers formed by
CITEMandDTI)
12 Mugna and 4 Katha Awards for
DesignExcellence(Phil.International
FurnitureExhibition)
Kenneth Cobonpue,
Interior Crafts of the
Islands
Japan Good Design Award (2003,
2004) for Voyage Bed, Yin and Yang
Chair, Kabuki buffet cabinet and
loveseat/easychair

Table20:SampleListofFurnitureDesignersandtheirWorks
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
RoxasFoundation)
Featured in magazines like I.D., Elle
Dcor, Wallpaper, Asiaweek and
Time
Carlo Cordero, Cebu Fil
Veneer
Designdiven, limitededition pieces
withhighlytechnicalfeatures
2001: Editors Award for Best
Manufactured Product (International
Contemporary Furniture Show, New
York); squarecut bamboo chair of
142piecesjoinedonlybypegs
Tropea:useswoodandbambooheld
bystripsofleather.

Stephanie Zagala, SS
Dezign
Laminatedsurface usingbananatree
barks, corn husks, spliced coconut
roots and termiteeaten wood to
createdifferentpatterns,mosaicsand
marbled effects for table tops and
occasional furniture (side and coffee
table)
Glider: quasirocking chair on ball
bearings
MaitlandSmith Use rare stone, metal and shell
veneer. Evolved to incorporate
innovative designs which include
metal casting, porcelains,
sophisticated finishing techniques,
detailed hand painting, beautiful
inlaid marquetry and handcarved
woodwork
8,000 designs of 18
th
century English
reproduction furniture. Cebu has
niche market for small volumes; it is
designled from concept to
production
PacificTraders Europeantraineddesignteam
Source:CompanyWebsites

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 inhouse and freelance designers, including
membersoftheacademe.ThevisionoftheDGPistotransformconceptsandideasintocreative
and innovative designs for furniture through the bonding of artists, professionals, and
designers for home, commercial, and contractexport markets. Asa nonprofit organization, it
fundsitsoperationsthroughseminars,trainings,andworkshops.Tobecomeaguildmember,

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

Of the four designers interviewed, two are DGP founding members, one is a PDCP
member,whilethefourthisunaffiliated(Interview1).Accordingtothem,designsarearrived
at through constant experimentation, materials and library research, reading magazines,
attendingtradefairs,surfingtheInternet,andcombiningolddesignswithcontemporaryones.
Overall, Filipino designers lack the foreign exposure and formal training that their foreign
counterparts havemaking Filipino designers reliant on the tastes of particular buyersbut
nonethelessmakeupforthiswiththeirproficiencyinusingdifferentrawmaterials.

The designers share the following concerns: limited technology and materials, design
piracy and intellectual property issues, and, in relation, the tedious process of patenting.
Designersareusuallygivencommissionswhentheircreationismarketed,rangingfrom3%to
5%ofgrosssalestoamutuallyagreedlumpsumamount.
C.RoleofCITEMandCebuXinProductUpgrading
CITEM, a support agency of the DTI, organizes trade fairs to facilitate facetoface 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
Philippinetradefairs,butCebuXisnotableforbeingorganizedbyCFIFmembers.

Statistics for the Philippine International Furniture Show (PIFS) from 19972004 are on
Table21.In1997,salesgeneratedby181exhibitorsamountedtoUS$44.7million,oranaverage
of US$246,886. This went down to 116 manufacturerexhibitors 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
muchofitsshareintheglobalfurnituremarket.

Table21:PhilippineInternationalFurnitureShow,19972004
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
TradeService/Sponsor 25 21 20 20 20 10 10
SalesGenerated(US$) 13,838,733 10,260,535 17,640,343 16,013,727 30,214,602 27,596,461 34,225,504 44,686,333
BookedSales 7,382,895 4,201,788 7,704,666 7,121,615 12,580,900 9,405,398 12,817,362 19,698,751
UnderNego 6,455,838 6,058,747 9,935,676 8,892,113 17,633,702 18,191,064 21,408,143 24,987,581
AverageSales
(inUSD/manufacturer) 119,299 86,223 171,265 136,869 183,119 140,084 174,620 246,886
Buyers 1406 861 3097 1586 1704 1649 1502 1727
Foreign 952 458 981 873 1057 1143 1114 1198
Local 454 403 2116 713 647 506 388 529
AverageSales
(USD/ForeignBuyer) 14,536.48 22,402.92 17,982.00 18,343.33 28,585.24 24,143.89 30,723.07 37,300.78
AverageSales
(US$/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
SaudiArabia 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 9 37 53 53 56 47 40
Netherlands 44 46 42
Singapore 36 36 65 53 60
Malaysia 24 41 38
Taiwan 35 42
Canada 45
Korea 56
RatioofTop10toForeign
Buyers 64% 71% 62% 65% 65% 70% 63% 68%
Source:TheFurnitureMan,JanuaryJune2004

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)thatremainedastop10buyersfrom1997to2004.France,Singapore,Malaysiaand
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
diversesetofforeignbuyers(Table22).For2003and2004,68countrieswererepresented,and

in contrast to PIFS, registered 11% and 14% increases in buyers and sales for the same period,
respectively.Averagesales,unsurprisingly,wentupby14%fromUS$18,745perbuyerin2003
toUS$19,222perbuyerin2004.

Table22:CebuX,2004and2003
Statistics 2004 2003 %Change
Visitors 3,793 4,318 12
TradeBuyers 1,363 1,227 11
NonTradeVisitors 2,430 3,091 21
Total 7,586 8,636 12
TradeExhibitors 139 173 20
Sales(US$M) 26.2 23 14
AverageSales(USD) 19,222 18,745 3

D.RoleofForeignBuyersinProcessUpgrading
Furniture Brands International is the largest residential furniture manufacturer and
retailerintheUnitedStates.Itrepresentsagroupofsixwellrenowned,brandedcompaniesin
the industry: Broyhill and Lane are dominant middleprice brands; Thomasville caters to the
upperprice market; Drexel Heritage, Henredon, and Maitland Smith are premiumprice
brands.MaitlandSmithwasthelatestacquisitionofthegroupin2001.

Furniture Brands recently shifted from being a purely domestic manufacturer to a

verticallyintegrated 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 costefficient but highquality furniture exports, it taps furniture
producersinIndonesia,China,VietnamandthePhilippines,amongothers.

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
approachesafurnituremanufacturertorequestasampleorder.Whenthesampleiscompleted,
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,suchasthepackaging,themoisturecontentofthewood,thequalityofthefinishing,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
theproductioncloselytoensurethatthedetailsofthesamplespecificationsarefollowed.The
finishedproductsaretestedforqualityassurance,thistimeonarandombasis.

Rejection rates for this Cebubased 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,theagentmaintainsjustfivefurnitureexportersasregularproducersfor
theforeignbuyerorders(Interview9).Inoneinstance,oneofthefivefurnitureexporterswas
hiredbyaBoardofInvestmentsregisteredfurnituremanufacturerasamanagementconsultant
tooverseetheefficiencyandqualityofitsoperations.

Quality assurance spans the inprocess 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
inprocess 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
itemsandchargebackthecostofrepairtothefurnitureexporter,ratherthanhavetheproducts
shipped back to Cebu. Since labor cost is higher at the United Sates, there are instances when
thefurnitureexportermightstandtolosefromthetransaction(Interview10).

TherearealsocaseswhenU.S.buyersinvitefurnitureexporterstotheHighPoint,North
Carolina, and Las Vegas Furniture Shows. These events give furniture exporters a chance to
interactwithfurnitureconsumersandleadingfurnitureretailersandwholesalersintheUnited
States.

A Cebubased global buyer, staffed with FilipinoAmerican designers, regularly visits

USbased 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
wholesalerclient,whichwouldbealteredaccordingtothespecificationsoftheclientsinhouse
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.Theglobalbuyerwouldthenextendadditionalassistancetothefurnituremanufacturer,
such as purchase of dutyfree imported raw materials, provision of working capital
requirements of the furniture manufacturer, informationsharing of product prices, and raw
materialsourcing(Interview11).

V.THEPHILIPPINESINTHEGLOBALFURNITUREMARKET

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 lowtech 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 largevolume exporters and low
volumeimportersoffurniture.Industrializedcountriesarelargevolumenetexporters,ledby
Italy(1
st
),Canada(3
rd
),Denmark(7
th
),Spain(10
th
),andSweden(14
th
).

In2004,globalfurnituretradereached$220billion,withItalyandChinaeachexporting
US$10billion.ThereareindicationsthatChinahasemergedfrommassproductionoflowcost
commoditystyle 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
theboard.Thecostsavingsarethenreinvestedinnewequipment.

Furniture has traditionally been a resource and laborintensive industry that

includesbothlocalcraftbasedfirmsandlarge,volumeproducers.Massproducing
furniture became a viable manufacturing strategy with the advent of flatpack or
readytoassemble designed furniture. This product innovation paved the way for
firms to design, manufacture and ship products in large quantities. Firms that
massproduce flatpack furniture tend to supply products for the low to medium
price markets. Solid wood furniture manufacturers have retained important niche
marketsegmentsprimarilyforhighend,expensiveanddesignledproducts.These
specialized products tend to be purchased locally while massproduced, 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
SoutheastAsiaduringthe1980s,thePhilippinesnowaccountsforanegligible1/5of1%ofthe
globalfurnituremarketbecauseofslowinnovation.

Innovation is usually measured through inputs (R&D indicators such as number of

personnelengagedinR&D)andoutputs(patents,bibliometrics,etc.).However,thesemeasures
provide little insights into the effectiveness and productivity of inputs, the applicability of
output,andtheefficiencyoftheinnovationprocess.

KaplinskyandReadman(2004)proposeunitpriceandmarketsharedataasinnovation
indicators.UnitpriceswerefirstusedbyStout(1977)andpursuedbyPavitt(1980)toassessthe
competitiveness of UK industries (defense, textile machinery and electrical power tools).
However, this measure had three limitations, given the assumption that falling unit prices
reflectdowngradingandlossofcompetitiveness.First,intheeraofrapidproductivitygrowth,
fallingunitpricescoupledwithimprovedincomesmayrepresentaformofupgrading(asinthe

electronics industry) rather than downgrading. Second, unit prices may reflect exchange rates
ratherthanproductivityperformance,reflectingmacroeconomicratherthanfirmdeterminants
ofcompetitiveness.Third,tradegrowthmaybebothextensive(moreofthesame),orintensive
(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
complementaryimprovementin(orstabilityof)marketshare.

Table23isanapplicationoftheKaplinskyReadmanschematothefurnitureindustry.A
product with increasing unit prices and expanding market share is thought to be a winner,
outrankingitscompetitors(Quadrant2).Ontheotherend,aproductfacedwithacombination
offallingunitpriceandshrinkingmarketshareisperceivedtobealoser,orisstartingtoloseits
competitiveness (Quadrant 4). Ambiguous cases occur when the two indicators move in
different directions. For instance, a product with increasing unitprice and a declining market
share (Quadrant 1), or a product with increasing market share but a declining unitprice
(Quadrant3).

Table23:UpgradingandDowngrading,A2x2MatrixforAnalysis
MarketShareDecreases MarketShareIncreases
Unit Value Rises
Relative to Industry
Average
Quadrant 1: Ambiguous;
depends on degree of price
increase, the degree of falling
marketshareandtheopportunity
cost of the resources invested in
exports
Quadrant2:

UPGRADING
Unit Value Falls
Relative to Industry
Average
Quadrant4

DOWNGRADING
Quadrant 3 Ambiguous;
depends on degree of rising
market share, the degree of
fallingpricesandtheopportunity
cost of the resources invested in
exports

Figure 5 shows the value of global furniture trade and the quadrant placements, using
EuropeanUniondataof40furnitureproductsinthe1990sAlthoughthePhilippineswasnot
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,andCanada.

Figure5.UpgradingPositionofCountrieswithatLeast1%MarketSharein2001

Quadrant1

Source:KaplinskyandReadman(2004)

Romania3
Switzerland3
Hungary3
Italy2
Sweden2
Portugal1
Spain1
Bulgaria1
Taiwan1
Finland1
BelgiumLuxembourg.1
Total23
Poland1
Switzerland4
Lithuania4
Portugal4
UK3
Latvia3
CzechRep.3
Estonia2
Hungary2
USA2
Thailand2
China2
Slovakia2

Malaysia1
Ukraine1
Brazil1
Vietnam1
Bel.Lux1
Sweden1
Ireland1
Belarus1
Canada1
France1
Spain1
Norway1
Turkey1
Germany10
Netherlands8
France7
Italy7
BelgiumLuxembourg6
Denmark6
Spain6
Sweden5
Austria5
UK5
Slovenia4
CzechRep.2
Croatia1
Finland1
Hongkong1
Ireland1
Romania1
SouthAfrica1
Taiwan1
Philippines<1
Total79
Denmark5
Austria5
Poland5
China5
CzechRep.5
Brazil5
Slovakia5
Finland4
Malaysia4
UK3
Spain3
Slovenia3
France3
Sweden3
Estonia3
Norway3
Taiwan3
Bel.Lux.3
USA3
Italy2
Thailand2
Latvia2
Croatia2
Canada2
SouthAfrica2
Vietnam2
Switzerland2
Lithuania1
Russia1
Hungary1
Germany1
Bermuda1
Chile1
Bangladesh1
Laos1
Brunei1
NorthKorea1
Romania1
India1
Total103
Increasingunitprices
Decreasingunitprices
Decreasingmarketshare Increasingmarketshare
Quadrant2
Quadrant4
Quadrant3

Tables 24 and 25 present a more detailed discussion of the product and market
performance of the Philippines, using the unitprice index method of analysis. Table 24
summarizes export price changes by commodity for the 19952003 period. On the whole, unit
pricesoffurnitureproductsfellby22%.Specifically,thefollowingfurnitureproductssuffered
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%),andstonefurniture(16%).Onthebrighterside,thefollowingfurnitureproductsshowed
appreciation in unit prices: metal mountings (210), preparation for maintenance of wooden
furniture (95%), bamboo furniture (48%), furniture parts (15%), wooden furniture (11%), and
rattanfurniture(3%).

Table24:SummaryofFurnitureExportPrices,byCommodity,2003and1995
(PriceExpressedinUS$permetricton)
PSCC Description 2003 1995 %ChangeinPrice
8938500 fittingsforfurniture,coachwork/thelike,ofplastics 3.28 8.67 (62)
8213109 otherfurniture,nes,ofmetal,usedinoffices 131.03 (50)
8217904 furnitureofburi 14.47 22.39 (35)
8724001 medical,dental,surgical/veterinaryfurniture 127.00 (34)
8215509 otherfurniture,nes,ofwood,usedinbedroom 86.96 132.01 (34)
8217100 furnitureofplastics 20.72 25.63 (19)
8213909 othermetalfurniture,nes 44.43 54.02 (18)
6994102 helicalspringsformattresses,autoseats&other
furniture,ofiron/steel
1.28 1.54 (17)
8217901 furnitureofstone/marble 40.25 47.90 (16)
8215109 otherfurniture,nes,usedinoffices 75.84 (15)
6354909 woodenarticlesoffurniturenotfallingwithdiv82 4.75 5.01 (5)
8217909 furnitureofothermaterials,nes 37.18 37.97 (2)
8217903 furniture,rattan 41.81 40.66 3
8215909 otherwoodenfurnitures,nes 77.93 69.95 11
8218000 partsoffurnitureof8213,8215&8217 1.70 1.49 15
8217902 furnitureofbamboo 49.94 33.78 48
7243909 parts,nes,machinesandfurniturefallingwithinsubgroup
724.3
4.10 2.51 64
5543209 otherpolishes,creams&similarpreparation,for
maintenanceofwoodenfurniture
3.14 1.61 95
6991700 othermountings,fittings&similararticlesforfurniture,
basemetal
9.74 3.14 210
8217905 furniture,glass 25.37
8724004 identifiablepartsofmedical,dental,surgical/veterinary
furniture
25.79
6991103 locksforfurniture,ofbasemetal 31.80
8215309 otherfurniture,nes,ofwood,usedinkitchen 135.19
Total 15.65 20.07 (22)
Source:www.tradelinephil.dti.gov.ph,NSOprocessedbyBureauofExportTradePromotion(BETP)

Table25,meanwhile,showsthatPhilippinefurnitureexportshavehadsomesuccessin
Asia,Europe,andtheMiddleEast,butnotinJapanandEurope.Thesemarketshaveturnedto
ThailandandEastEurope,respectively,toservicetheirfurniturerequirements.

Table25:SummaryofExportPrices,byCountry,2003and1995
(PriceinUS$permetricton)
2003 1995
Country
Value
Market
Share
(%)
Price Value
Market
Share
(%)
Price
%Change
inPrice
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,NSOprocessedbyBureauofExportTradePromotion(BETP)

1.ValueChainRelatedIssuesandConcerns

The furniture cluster is confronted with many issues on production, markets, and local
cooperationofstakeholders.Sixdecadesofglobaltradesawthedepletionofrawmaterials,the
exodusoftrainedworkerstocompetitorcountries,andthetemerityofentrepreneurstoinvest
incapitalequipment.TheCebufurnitureclusterhasexperimentedwithvariousrawmaterials,
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
marketanditsdecliningunitprice.AspointedoutbyKaplinskyandReader(2004),thiscould
beindicativeoftheonsetofdowngrading.

The retention of skilled workers is also an area of concern. Firms invest in upgrading
theskillsofitsworkersthroughvariousmeans.Duetorelativelylowindustrywages,furniture
techniciansanddesignersareweanedawayby competitor countriessuchasIndonesia,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
DesigninCebu.

Institutional factors are commonly cited as reasons for subcontracting. Business

outsourcing has serious implications on quality, cost and delivery. In the Cebu furniture
clusters case, it is largely done by homebased workers, so product quality is highly uneven.

The lack of knowledge of basic accounting and untimely deliveries are also concerns, though
therehavebeensubcontractorswhohavegoneontobecomebigfurnitureexporters.Still,there
isaneedtoaddressthetrainingandfinancingneedsofthebusinessoutsourcingsector.

Technicalconsultantsandproductassurancemanagerslamententrepreneurshesitation
toinvestinfurnituremachinery.Machinesassureuniformquality,cutproductioncostsby30%
to50%,andallowfirmstoshipdeliveriesontime.Indonesia,ChinaandVietnam,ontheother
hand, immediately chose to pursue mechanized furniture production. In give years, China is
expected to transform its furniture export profile; Indonesia remains the worlds largest rattan
producer.

Thereareavarietyofexplanationsforthis.Theliteraturesuggeststhatthefirmowners
aremereproprietors,settingouttomaximizecurrentconsumptions,ratherthanentrepreneurs,
who are motivated to maximize their investment (future consumption). Another reason is the
uncertaintyinthebusinessenvironment.Investmentinmachineryrequiresskilledtechnicians,
whomaydecidetogoonstrikeorleavethefirmforahighpayingjobwithacompetitor.Firm
ownersarealsowaryofthegovernmentschangingpolicystances.Lastly,thelackofaccessto
cheap credit makes capital acquisition a financial burden amid an extremely volatile world
furnituremarket(e.g.declineinfurnitureexportsdueto9/11,SARSandBirdFlu).

Except for CFIF, the contribution of local support organizationslocal governments,

national line agencies, and educational institutionsare wanting. The furniture industry has
survivedsixdecadeswithlittleornosupportfromthegovernment.

There is a need to steadily expand into the Asian, American, and Middle Eastern
marketsespecially in China and India, where demand for highend, luxury furniture should
rise.Similarly,furnitureexportersshouldbeabletomarketdirectlytoretailerssoastorealizea
higher profit. Direct contact with retailers should help product development engineers and
designersmeetoverseasconsumersspecificationrequirementstoamuchbetterdegree.

Refiningtraditionalaccountingpracticetoreflectsupplychaincostingshouldalsohelp
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,
selectsupplychainpartners,andevaluatetheeffectsoftechnologyimprovements[30].

VI.SUMMARYANDRECOMMENDATIONS

Local cooperation among industry stakeholders and global buyers is important in the
upgradingoftheCebufurnitureindustry.Foraresourcebasedindustrysuchasfurniture,itis
interestingthattheindustry,locatedinaresourcescarcecluster,hasbeenabletocompeteinthe
international market for over five decades. In retrospect, it has been wellserved by its
proximity to raw materials via its location in a transshipment 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, resourcebased
products,andindustrialmanufactures.(e.g.excessshavingsoffurniturerawmaterialsareused
in fashion accessories, and the stone inlay, which was first introduced in GTH, is now used in
the furniture industry). On a broader level, interfirm cooperation has been manifested via
subcontracting,borrowingandlendingofsurplusmaterials,sharingofbuyers,consolidationof
small shipments, and the bandwagon effect. Local support organizations, especially the Cebu
FurnitureIndustryFoundation(CFIF),havehadmodestsuccessesinlobbyingfortheindustry
andinorganizingtradeshowsandstudyforums.MandaueCityhasallocatedspaceinitsNorth
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
exhibitorsandaveragesalesgenerationintradefairsduringthepastdecade.

Foranindustrywhichcaterstotheglobalmarket,itissurprisingtonotethattheCebu
furniture cluster mainly employs homebased subcontractors with little formal training; males
earn slightly more than females in supervisory positions, but this advantage is reversed in
skilledwork.Withregardtoownershipstructure,mostfurniturecompaniesarefamilyowned
and controlled, meaning there is a tendency to underinvest 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
professionalizingtheindustryandexposingittomixedmediauseandaninternationalmarket.
The creative use of indigenous material in producing Westernstyle furniture has eventually
become the clusters 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 dutyfree
importationofrawmaterials,inthesourcingofrawmaterials,andsharingpriceinformation.

Global furniture trade is big business, generating $220 billion in 2004 and even
surpassingworldmerchandisetrade.Outofthetop15furnitureexporters,sixaredeveloping
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,SpainandSweden).

Traditionally,furniturehasbeenaresourceandlaborintensiveindustryincludingboth
localcraftbasedfirmsandlarge,volumeproducers.Cebufurniturehaslongcateredthoughto
the premium, designdriven market. Nonetheless, Chinas aggressive growthbecoming the
leading buyer of woodworking equipment in Asia, cutting down production costs by 20%
acrosstheboard, and reinvesting its cost savings in new equipmenthas become worrisome
toCebu.

UnitpriceandmarketshareanalysisindicatethatthePhilippinesexperienceddecliningprices
andfallingmarketshareinfurnitureexports.

Process and product upgrading are necessary to sustain the competitiveness of the
furniture industry. Pietrobelli and Rabelloti (2004) arguesthat in buyerdriven chains, global
buyersfacilitatethelinkwiththeinternationalmarketbysignalingtheneed(andthemodes)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
contributortothePhilippineeconomy,thenthereisaneedtoincreasethescientificbaseofthis
activity by investing in R&D. Given that R&D pursuits are crucial to constant innovation, are
considered public goods and are highrisk undertakings, then the burden of R&D investment
fallsongovernmentandinternationalfundingagencies.

Since furniture firms generate jobs and contribute substantially to the local coffers,
LGUscouldofferbusinessexportservicessimilarinconceptandadministrationtotheMactan
Export Processing Zone, where business permits are processed quickly and issues are
immediately addressed by zone administrators. If LGU finances permit, a Product
DevelopmentandDesignCentercouldbesetuplocallysothatfurnitureworkers,technicians,
designers, accountants and managers could be trained. Retrenched or retired skilled workers
could teamteach 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 multisectoral
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
materialrequirements,thenbulkpurchasescouldbemade,orotherfirmscouldbeencouraged
tolocateintheCebuclustertoensurejustintimedeliveryfortheserawmaterials.

AttractingmoreforeigninvestorslikeMaitlandSmithtoeventuallytransferdesignsand
technology to the furniture cluster strengthens the global value chain. CFIF could encourage
furnitureexporterstoacquireinternationalcertificationsothatpurchaseorderswouldcontinue
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,
andproductengineers.

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,andthreatsofpowershortageandproductcertifications.Mostimportantly,industry

andacademeshouldworkcloselytodrawupasuitable,lifelonglearningorientedtrainingfor
thefurnitureindustry.

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