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Monday, June 28, 2010

Issues that could level the playing field between foreign and domestic products, prices

In some categories, like automobiles, the distinction between foreign and domestic has been blurry for quite some time. Many components in “domestic” models (Ford, Chevrolet, Chrysler, etc.) come from abroad, and some domestic vehicles are actually assembled in Mexico, Canada, or elsewhere outside the U.S. Meanwhile, many “imports” (Hyundai, Honda, Toyota, Nissan) are assembled in places like Kentucky, Alabama, and Texas. The biggest “difference” between the two seems to have been the legacy costs associated with the Big Three (union wages, pensions, health care, and so on). In the recent reorganization of the domestic auto industry, many of these costs have been made competitive with foreign producers… especially those using U.S. factories.

In some industries, though, the divide between foreign and domestic is still quite vivid. In furniture, for example, many products are now manufactured overseas, with a large share coming from Vietnam and China. And again, it is the difference in labor cost that has given those companies a competitive advantage.

But last week, I had the chance to speak with several executives in the home furnishings industry, as I attended the American Home Furnishings Alliance annual conference to present a modified Elm Street Economics workshop. A few “import” companies expressed at least mild anxiety—and a couple of domestic producers exhibited a corresponding optimism—that the production cost equation could be more balanced, and in the foreseeable future.

This competitive re-set could be influenced by a number of issues:

First, the Gulf oil spill is likely to put more regulatory burden on petroleum exploration and production. More rules generally lead to greater expense. And even without those regulatory concerns over the long term, supply and demand pressures could cause price increases in the short term. So if you’re shipping a sofa across the ocean (rather than part-way across the country), it could become more expensive to deliver your inventory.

Second, labor unrest in China could result in cost increases for manufacturing. When that expense finds its way into the price of a dining room set, some of the advantage for overseas production becomes diluted. (If you haven’t been following that issue, click here to see a story on the matter from the New York Times.)

Finally, quality concerns. Just a few short years ago, many people associated imported goods with the idea of quality. But with numerous toy recalls (many being products produced in China) and the high-profile Toyota recall of earlier this year, I’m not sure the concept of quality is something the consumer automatically assumes, just because an item came from a company on the other side of the globe.

Implications: This blog is not intended to be about manufacturing or the global marketplace. It attempts to be focused on matters that shape consumer sentiment and consumer behavior. That’s the point: These three significant issues are floating around there in the media space—seemingly unrelated for now—but eventually, I have to believe they could converge to create change in the marketplace (and therefore the consumer’s mind).

If you use the word “foreign” or “imported” as if quality and affordability can be taken for granted, I’d stay tuned to these three issues.

Mike Anderson

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