When Moran Furniture began losing market share to low-cost Asian imports, it was time to change its manufacturing strategy. So it went to China.
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Entrepreneur: Dan Pekin, CEO and part-owner
Company: Moran Furniture
Business type: Furniture manufacturer
Founded: 1962
Employees (Australia): 280 full-time equivalents
Turnover: (2005 - 2006) About $50M
Head office: Noble Park, Victoria
Contact details: +61 3 9790 9000
The Moran Furniture Story
Furniture manufacturing is one of those businesses that many expected would die in Australia as tariffs were slashed in the 1980s and 1990s. And, yes, there has been an onslaught of cheap Asian product competing with local makers. So how has the Australian business Moran Furniture continued to prosper, with expanding sales worldwide?
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Key learning points:
- Complementary production - A high-volume, long lead time Chinese operation may complement your high-value-added, short lead time Australian business.
- Quality control - Only you can ensure that you get the quality you want in China - and that means having your staff on the ground there to supervise production.
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The man to ask is Dan Pekin, who joined Moran in 2000 as general manager. He has run the upmarket maker of corporate and domestic furniture through a turbulent half decade. In 2003, the company's iconic co-founder, John Moran, died unexpectedly and his family decided to sell out of their interest in the business. Moran's co-founder David Hatton, his son Andrew Hatton and Pekin were buyers - but of what?
Moran's market share at upmarket retailers such as David Jones, Myer and Domayne was being eaten into by lower-cost Asian product, often produced in China. But Moran's manufacturing was centred on a 12,000-square-metre factory in Noble Park, Melbourne, with a workforce of 280. Something had to change if Moran was to compete and grow.
The Challenge
To make an Australia-based manufacturer competitive with lower-cost Asian imports.
The Solution
"We were getting hit on the head," says Dan Pekin, graphically describing Moran's competitive situation by 2004. The obvious solution was to find a lower-cost Chinese maker to supply Moran but that wasn't so easy to do.
Moran's whole brand image is tied to the premium end of the market. Shipping in poor-quality product from China would ultimately damage the business. Pekin also found that quality makers of Chinese furniture - used to supplying big US retailers - weren't very interested in a customer the size of Moran.
Pekin says: "We were looking like C-class customers for them, compared with their A-class American customers. They were used to shipping 2-3 containers a day to one customer; we might have needed 2-3 containers a week."
The solution was to set up a 50:50 joint venture (JV) in 2005 with a Shanghai furniture maker that Moran heard about through contacts in Australia. A key to the success of the JV has been a Chinese partner who had worked in the US and had reasonable English skills, enabling clear communication between senior executives. Pekin also studied Mandarin for six months and has lived in Asia for three years. Cultural skills have been helpful for the socialising that is so vital to doing business, networking and building trust in China.
Quality control has been a key issue. Under the JV agreement, Moran reserved the right to refuse any product that did not meet its standards. In the first shipment, nearly 10% was not up to standard. Moran put its own general manager for manufacturing in Shanghai to supervise quality control. Pekin says: "If he is not around, it is amazing how quality can slip off - the Chinese are very focused on cost-control. But their work ethic is brilliant."
When that first shipment arrived in Australia, the senior Moran executive team, including Pekin and the Shanghai-based quality manager, visited customers in Australia to show the product and get feedback. Pekin visits the Chinese operation every three months for up to 10 days to keep in personal touch and "so that I understand what's going on".
Being in Shanghai has opened up new opportunities for Moran. A display at Shanghai's furniture fair lead to big new contracts in Europe. The location has also put Moran in the frame for projects in Asia, such as furnishing Crown's new casino in Macau.
The Chinese and Australian operations complement each other. The Shanghai operation has a longer lead time for orders but can manage big production runs; the Noble Park factory is ideally suited for one-off jobs and premium leather and fabric upholstery of small batches with a quicker lead time.
The Result
Moran's Shanghai operation employs about 70 staff and contributes about 20% of Moran's group turnover. About 70% of the Shanghai output is exported to Australia, enabling Moran to compete effectively with lower-cost Asian imports. Pekin says: "I was looking at our products in a recent furniture catalogue and there were Moran units with product from both Australia and China. We can cover more price points than in the past while maintaining quality."
The Shanghai operation positions Moran in one of Asia's key developing markets, with access to larger international clients and commercial contract opportunities.