Ceramic Update: As duties on Chinese tile necessitate a sourcing shift in the U.S. market, who will fill the gap? - March 2020
By Jessica Chevalier
It would seem that a category as old as ceramic tile would have weathered every storm. But, in fact, the veteran industry is facing some unique new challenges brought on by the significant duties levied on Chinese product as well as the rapid growth of LVT and the fact that it has essentially “borrowed” ceramic’s waterproof messaging and used it to propel itself upward through the hard surface ranks. While both of these factors have created hurdles that the U.S. ceramic industry must overcome, they have also yielded opportunity for the market to change and innovate. And the contemporary ceramic market has proven itself willing to do both.
Indeed, the category’s pioneering spirit is evident in several innovations currently impacting its fortunes: the introduction of click-together tile installation systems, such as Daltile’s RevoTile, that streamline the installation process and thereby alleviate the labor shortage to some degree, as well as the category’s push for diversification, stretching tile beyond its traditional floor/wall uses. While the market can’t yet see the long-term impacts of these investments, they represent the incredible value inherent in the material and what it offers within the built environment.
According to Market Insights’ preliminary estimate, consumption in revenue for the U.S. ceramic tile market slipped 2% in 2019, closing the year at $3.4 billion. In the same period, imports fell an estimated 2.7% to $2.1 billion.
DUTIES: HOW DID WE GET HERE?
The Trump administration’s trade war with China has impacted a wide variety of imports across the U.S. market and the flooring industry. Duties, first imposed in September 2018, are being used as a negotiating tool with the country and were initially set at a 10% rate on $200 billion worth of Chinese imports-flooring included. These tariffs are meant to forcibly deter what the Trump administration sees as China’s unfair trade practices and have been increased incrementally over the ensuing 18 months. Today, ceramic imports from China carry a 35% tariff under the U.S. Trade Representative dictate.
Then, last September, the U.S. Commerce Department imposed countervailing duties of more than 100% on Chinese imports of tile as part of an investigation into government subsidies. The preliminary duties range from 104% to 222% and affect “tile imports worth about $483.1 million in 2018,” the Commerce Department said in a statement. This action effectively eliminates ceramic tile imports from China, reports Santo Torcivia of Market Insights, imports which previously accounted for approximately one-third of the tile in the U.S. market (by value).
Donato Grosser, ceramic industry consultant, reports that what makes the duties even more crippling for importers is that they must be paid up front. “The importer has to pay the duty before he enters the country, which means that if the duty is 8.5%, a company owes $8.50 on $100 worth of tile; they pay that up front and hope to recover it as part of the price,” Grosser explains.
He continues, “At 15%, certain products are expensive enough that you can’t increase the price by that percentage in the market. But now importers have to pay 35% in advance. How many companies have so much cash available that they can put that much down? Except for those with very deep pockets, this definitely affects their viability in the U.S. market, so the action temporarily reduced imports from China. Then, in September  came the announcement about countervailing duties from the Department of Commerce. With that, the market totally closed. The importer has to pay these tariffs in addition to the other duties, and that takes the product totally out of the market. In the last half a year, the Chinese import market went to almost zero with the exception of some really expensive mosaics that are still coming in. Chinese imports were at about 750 million square feet prior to the tariffs, which means that in 2020, we’re going to have a shortage of about 700 million square feet of product. Who will fill the gap?”
DUTIES: MANAGING THE SHIFT
Over the past few years, due in part to the proliferation of manufacturing capacity on U.S. soil, some domestic producers have not been operating at full capacity, so there is hope that the elimination of Chinese imports presents possibilities for these entities. But stepping in to fill the void isn’t a plug-and-play prospect.
While filling gaps can sometimes be simply about expanding a relationship with a partner, many times it requires establishing new relationships, which can be time-consuming and arduous. In essence, according to Grosser, taking advantage of the opportunity comes down to basics. “It depends how good a manufacturer is at selling,” he says. “You have to have orders if you want to increase capacity.” And once the orders are penned, it takes more time to create the desired product, test it, have it cleared with the company that ordered it, and get it made. In summary, a period of shift is to be expected.
Says Don Haynes, environmental manager for Florim USA, “By the end of 2019, Chinese imports were a negligible fraction of the market. We have made sales that we were told were to replace Chinese product, but it’s not a panacea. We have not had to ramp up production yet.”
Crossville reports that, as a result of China’s exit from the ceramic tile market, it has “seen opportunities with both new companies and those we have established partnerships with,” says Greg Mather, president of Crossville. “[Retailers] going through the reselection process are often reaching out to a variety of potential partners. Sometimes they have a specific product in mind that they are looking for, at least in the short term, but in the longer term they are open to collaboration.”
Florida Tile reports a similarly moderate upswing. “We have experienced a modest increase in domestic production,” says Clark Cornelius, chief operating officer. “Our sourced products come from countries other than China and are of higher value, so we have experienced a very minimal impact to our supply chain from a sourcing perspective.”
Gianni Mattioli, executive vice president, marketing and research and development with Daltile, points out that the benefit of the tariffs to U.S. producers may reveal itself slowly, with long-term preferences shifting, “What has happened with China shows retailers the importance of having a strong domestic supply base. Things can change fast and dramatically. U.S. partners provide peace of mind.” Cornelius agrees and hopes that, moving forward, the market better understands the value of having a diversified supply base.
Of course, not everyone operating in the U.S. market believes the tariffs on Chinese-made product have been positive; distributors who worked with Chinese firms are of a very different mind.
Says Raj Shah, president of MSI Surfaces, the tariff ruling on “Chinese-made ceramic tile has definitely been a step backward for not only the industry but retailers and consumers as well. China was producing tiles that were not easily available in the United States or from other parts of the world. This included polished tile, rectified tiles and mosaics. Unfortunately, the Tile Council of North America (TCNA) and its members believed that the retailers’ and consumers’ choice of tile should be restricted to those made in the U.S.”
Mara Villenueva-Heras, vice president of marketing for Emser, adds, “Consumers are the ones suffering because they can’t get the products they want, or they are paying more. We have seen disruptions across the market, and some folks may be scrambling to find solutions. The problems come when there is a product that people love that they can no longer access.”
U.S. capacity alone is not enough to fill that gap, reports Grosser. He estimates that if all U.S. manufacturers go to full capacity, it will add only 200 million square feet of product, a mere dent in the 700 million square feet that used to come from China. In that dearth, he predicts that “prices will go up. Some importers will increase the percentage of LVT that they work with. If you can’t sell tile, you have to sell something, so this is benefiting U.S. manufacturers of ceramic but also manufacturers of LVT, though only in the short run. In the long run, everything will be resolved, but that may take a year or more.”
Grosser points to MSI as an example of this trend. In September 2018, the company-historically a tile and stone supplier-announced that it was diversifying into LVT and quartz countertops and changed its name to “MSI Surfaces” to reflect this broader focus. And in December 2019, the company created a joint venture with Spectrum Quartz. “People are diversifying,” the consultant says. “If they can’t sell flooring, they will sell countertops. There are lots of things people can do. They can look for different suppliers. Together, Bedrosians, MSI and Emser have 150 distributor locations in the U.S. Once you have them, you have to fill them with something.”
Of course, there are a host of non-tariffed tile-producing countries that will up their imports to the U.S. These include Malaysia, Brazil, Spain, Mexico, Taiwan, Turkey, Sri Lanka and India. Unlike a trend the market saw when LVT was tariffed. Haynes reports, “We have heard talk of people establishing a plant elsewhere, but we haven’t see it happening yet.” That may be because there are already so many tile-producing countries in the world, unlike with LVT, or because establishing a tile factory and workforce is no small undertaking.
Regardless, Torcivia believes the transition will be quick, “The disruption [in the market] will last only as long as it takes to adjust the logistical trains for suppliers.” In fact, mega-importer Emser reports that it has already rejiggered its offering to acount for the product loss it had from China.
While retailers may turn to U.S. producers to make up for lost inventory, large importers are not likely to do the same, but that does not mean that U.S. manufacturers will see no benefit. “We know that most large importers are going to other countries for product, like India and Turkey and Brazil, which will likely have slightly higher price points that China,” says Mather. “So the market is still competitive but at a higher price point, and that narrows the gap with U.S. manufacturers.”
In spite of all that has developed, it is important to remember that we may not yet have a full view of what the market will look like with Chinese product fully out of the market, as retailers and distributors may yet be selling warehoused product.
Channel changes are challenging long-standing to-market patterns, and in that situation, there are obvious winners and losers. The winners, of course, are those entities that have the capital to either create or follow these changing paths. The losers are those without that nimble nature.
Importers Bedrosians, MSI and Emser now have a combined 150 distributor locations. Daltile has over 300 across the U.S., Canada and Puerto Rico. And Crossville has 24. These direct-to-end-user retail centers cut a layer out of the traditional channel, enabling the seller to either net a larger margin or sell to the customer at a lower price-probably a bit of both. It also provides them a direct means of both sharing their story and gathering market information, and these benefits are invaluable. “One of the advantages of LVT is that it is simple to explain,” says Emser’s Mara Villenueva-Heras. “Tile is more complicated, and there are so many related choices-with grout color, grout joint sizes and more-that it can be overwhelming, so it is incumbent on designers, retailers and contractors to really sell tile, not just the product but the installation.” Service centers gives their owners the ability to educate their staff to do exactly that.
However, while these centers may be a good move for the individual companies establishing them, some believe they adversely impact the industry as a whole, as they create a less-than-level field of competition and reduce the power of distributors, which play an important role in the industry. Ultimately, this may irrevocably change the nature of the competitive market.
In addition to this, the channel is being flattened by the trend toward private labeled product. Says Torcivia, “The flattening of the market is a very serious, long-term issue in my estimation, especially if you are referring to the proliferation of private label brands-store brands at big box retailers, distribution brands, etc. Former major customers to the top suppliers are increasingly becoming major competitors to those same suppliers. No supplier seems to have a handle on the issue yet.”
Several interviewees note that the best strategy for thriving in such a market is being strategic: choosing a specialty and becoming the best at it.
Of course, distributors also play an important role and must do whatever they can to support their manufacturer partners, and thereby bolster their role in the industry. Crossville’s Greg Mather says, “I think the best thing [distributors] can do is highlight their core customers and the value proposition they offer. They should also communicate their portfolio targets and gaps so that manufacturers can do a better job at producing to meet their needs. Distributors have a better perspective on the market than most manufacturers, and they can help their partners by sharing their insights.”
Daltile’s Gianni Mattioli adds, “Distributors need to compete with better product, faster delivery and work closer to the customer. They need to continue to invest in the latest technology and use technology and social media to serve the younger generations, who will be our customers for years to come.”
“Transparency and open communication are critical in this quickly changing market,” says Florida Tile’s Clark Cornelius. “From our point of view, it’s important to be in front of our distributors and listening when they present solutions. We also must be willing to rapidly deploy improvements.”
THE LVT AFFECT
Ceramic manufacturers are quick to say that the only truly waterproof flooring installation is ceramic, and that’s the truth when you consider the performance of an installed floor. While LVT products may themselves be waterproof, groutless installations cannot fully prevent the seepage of liquids between planks, which can become trapped below, creating environments conducive to mildew and mold growth.
In December 2019, Clemson University published the results of multiple studies related to the waterproof nature of plastic material flooring commissioned by the TCNA.
The abstract for Standardized Waterproof Testing of Plastic Based Material Flooring (PBM Flooring) reads as follows, “Tile Council of North America Product Performance Testing Laboratory, under the direction of Dr. John Sanders of the Bishop Materials Laboratory at Clemson University, evaluated the extent that water can leak through plastic based material (PBM) floor coverings advertised as 100% waterproof. To make this assessment, product literature was examined to determine which test methods were used to support the manufacturers’ claims of products being waterproof. Neither test methods nor data to justify a 100% waterproof claim were found, despite a thorough review of product literature.”
This finding, of course, addresses the grey area between what LVT manufacturers claim and what consumers hear in these claims. While responsible manufacturers may be careful to state only that their product is waterproof, consumers, hearing this, naturally make the assumption that a waterproof product must yield a waterproof installation. Or they don’t even think it through that far. Regardless, many are not getting the protection they believe they paid for.
A second study, Comparison Study of Mold Growth Resistance of Plastic Based Material Flooring (PBM Flooring) and Ceramic Tile Flooring, revealed similarly dismal findings: “Clemson University Department of Biological Sciences and Tile Council of North America Product Performance Testing Laboratory evaluated whether ceramic tile and Plastic Based Material (PBM1) flooring support mold growth when exposed to fungal spores.
“Testing was conducted on 25 PBM products that manufacturers advertise or claim to be waterproof, water resistant, or depict being used in areas where flooring gets wet. For 22 out of 25 products (88%), the manufacturers also disclaimed damage from mold or excessive moisture in the product warranties. The results of this study, including a total of three repetitions of all testing, show that 100% of the PBM products tested supported mold growth. The growth of fungi was observed on all surfaces on some PBM products and only on certain surfaces (top, bottom, or sides) on others. Such mold growth can release spores, mycotoxins, microbiological volatile organic compounds (MVOCs) and other environmental toxicants to contaminate indoor air through a variety of mechanisms as detailed in Section 3.2. The ceramic tile tested did not support mold growth.
“Given the possibility of material degradation and potentially serious health consequences from mold growth as detailed in Section 3.2, and the likelihood of damp and favorable conditions for mold growth as detailed in Section 3.3, a dry use-only caution, and/or warning regarding potential for mold growth, should be considered for products that perform similarly to those tested for this report. This is especially relevant given the exclusion for mold damage in many of the products’ warranties.”
What’s to be determined, of course, is how the TCNA will use these findings and how effective its efforts will be against the LVT marketing machine and the fervor for the product in the market. The fact is, much is on the line. At present, the bulk of U.S. flooring manufacturers have launched LVT lines. This includes former category specialists, such as Interface, Mullican, Stanton and Dixie. Plastic-based floors are the growth engine of the industry, and, as a whole, the floorcovering business can’t afford to back away from the category or backtrack on the claims. Too much investment has been made.
That doesn’t mean it isn’t worth disseminating the truth, of course, and the ceramic manufacturers with whom we spoke are generally in support of an industry-wide campaign to this end. Says Mather, “I think that what we need to do is share the story of the advantages of ceramic and the weaknesses of LVT, providing customers the opportunity to make a more informed choice. Up until now, the claims and beliefs around LVT’s waterproof nature and durability haven’t really been challenged. It should be a much more balanced education going forward. We will do this as a company. We are educating all of our salespeople to provide the right level of education. And, now that we have the information to support it, we will do better as an industry as well.”
Villenueva-Heras adds, “The LVT industry has done a great job marketing the category and creating a perception, but it’s not totally transparent to the consumer. Buildings thousands of years old have tile. LVT won’t wear that long. Besides that, tile is waterproof, fireproof, durable and sustainable-there are lots of advantages that we need to communicate. And we can create the look of many things, like they promote in LVT.”
Ultimately, Mattioli is hopeful that LVT’s expansion of hard surface into areas that were once under the stronghold of carpet may benefit the ceramic category in the long run with consumers ultimately upgrading their hard surface flooring to ceramic. He notes that it is incumbent on the ceramic category to take advantage of that opportunity, adding, “We have the only truly waterproof installation out there, and we have to continue to say that loud and clear. We cannot afford not to be a part of the discussion. We can’t expect the consumer to understand that if we aren’t saying it.”
Cornelius notes that this is a long-game strategy and requires that the ceramic industry “be proactive with our messaging on all fronts, including clearly defining the superior benefit of a porcelain installation in comparison to a plastic-based material installation. This means improving our messaging on what we provide to homeowners as well as educating them on the impact that plastic-based material and installation could have to the environment within the home. It’s important that homeowners understand the possible long-term effects compared to any short-term advantages.”
Shah points to the incredible opportunity for ceramic in the U.S. market, noting that “the U.S. has amongst the lowest per capita usage of ceramic tile in the world. This means there is significant upside if the industry can continue to promote and inspire the use of ceramic tile.”
It’s important to remember that this won’t be a fight won through a single ad campaign but a long-term educational campaign, battling what has become the American way with regard to interiors: fast-fashion consumerism.
Both new construction and renovation rates correlate to ceramic sales. And several interviewees noted that while the housing market hasn’t been gangbusters, it has been solid for the past few years, and that is a good story for ceramic. Thus far, however, new home construction has trended upward in 2020.
Interestingly, Villenueva-Heras believes that builders and retailers were worst hit by the reduction of Chinese tile coming into the U.S. but notes that the market is so wide-ranging that there will always be an option available. “If prices rise, people may step down a tier,” she notes. The good news is that they won’t necessarily step away from ceramic, and Villenueva-Heras believes that that is partially because “You don’t see real estate listings bragging ‘premium LVT’.”
CLICK-TOGETHER TILE SYSTEMS
With the many changes the ceramic category has gone through, one relatively static factor has been the way the product is installed, but the market may be in the early stages of change in this regard. While the industry has seen click-together ceramic products before, none have produced the level of chatter that Daltile’s RevoTile has.
That may be a result of the fact that the product comes from the biggest player in the industry and, therefore, has a strong PR machine behind it. But it is also because many in the industry know that Daltile has been at work on the system for years and was determined to take as long as it needed to create a good quality solution. Perhaps it is also that the product looks appealing. Prior iterations of click-together tile weren’t particularly style forward. Daltile chose its 26 bestselling visuals for RevoTile, so end-users don’t have to choose between aesthetics and ease.
There are, however, additional products hitting the market that seek to speed up the ceramic installation process. German inventor Karl-Heinz Scholz was at Domotex Germany talking about his patented new Drytiling and Ceraclick systems. Drytiling is a ceramic product backed with a cork substrate. It requires no thinset, increasing the speed of installation and making the process easier. The joints are grouted. The product targets residential installations, as the cork backing may be susceptible to damage under rolling loads. To serve the U.S. market, Lico will start production of Drytiling at its Wisconsin facility mid-year.
In addition, Scholz is rolling out Ceraclick, a click-together tile system with an attached waterproof substrate and a Unilin profile. Ceraclick is suitable for commercial applications.
While the installation process is simplified with these systems, it is still crucial that the substrate be level, and among the industry, the point of concern is that while DIYers or less experienced installers handing the product may well be able to tackle the installation, they might not understand the degree to which the subfloor must be flattened and prepped and may therefore may end up with a flawed installation, a problem that may manifest immediately or later with cracking and the like.
Overall, however, the ceramic industry is hopeful these and similar innovations to come may successfully address one of the greatest challenges facing the sector-and indeed the entire industry-the labor shortage. While some consumers may feel comfortable installing modular products within their homes, fewer have been comfortable tackling an installation as permanent as ceramic. That may now change.
Though these systems are click-together installations like LVT, unlike LVT they are fully grouted, so the resulting installation is completely waterproof. Analyst Torcivia believes the possibilities for RevoTile are great. “Mohawk has introduced a product that could alter the fortunes of ceramic tile by simplifying the installation cost and process for ceramic tile by making DIY more attractive,” says Torcivia. “The question becomes whether consumers have the time to invest in installation and whether the cost savings are attractive enough.”
Torcivia points out that professional installers in the market have some degree of power over whether the product is ultimately recognized for the savings it can yield, in that if the dealer and installer utilize the system to save themselves time but charge the consumer the same amount that they would for a traditional ceramic installation-padding their margin-demand for the product won’t necessarily be high among consumers, though dealers/installers would have a strong incentive for pushing the product. However, if the dealer/installer passes the time savings along to the consumer in reduced installation cost, consumer demand could be quite high. Both of these situations-consumer pull versus dealer push-will drive demand, but they could potentially have different impacts long-term.
Daltile’s Mattioli adds, “We don’t know how quickly the market will embrace [RevoTile], of course, but the initial indications from TISE and International Builders’ Show and KBIS were very positive, and I think it will have a foothold relatively quickly. We tried to simplify RevoTile compared to some of the previous systems that attempted quick installation. The click system is something that the market is very familiar with; even non-professionals today can become proficient quickly. The installation is simple, and the product is grouted to create a waterproof installation.”
In addition, Mattioli reports that digital printing makes it possible for the company to quickly alter its offering from an aesthetics perspective, according to market demand.
The executive adds that while they believe strongly in the product, Daltile is aware that it must have a strong marketing campaign behind it if the customer is to understand the concept, embrace its advantages and ultimately seek it out. And competitors point out that the product must provide a real cost or time savings to consumers if it is to make a great impact.
As another approach to lessening the installer shortage, MSI has been working to introduce products that, while they don’t click together, do reduce installation time and, thereby, cost. These include large tiles scoured to look like they are smaller tiles and groutless mosaics.
It is worth noting that, while managing all the current dynamics of the ceramic market, many producers are taking a big-picture approach and working to expand the range of applications for the category. While the payoff for these may be distant as the market develops awareness, then desire, then the systems to serve the market, there is precedent that it should pay off ultimately, especially as consumers’ desire for eco-responsible solutions increases.
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