Strategic Exchange: Domotex Asia was flush with rigid LVT producers - Apr 2019

By Kemp Harr

It was good to hear Fed chairman Jerome Powell say in late March that he has a positive outlook for the U.S. economy for 2019, though he did point to the slowing growth in Europe and China as a potential concern.

According to The Wall Street Journal, many economists feel that a recession is not imminent. Many economic indicators are still encouraging. Corporate earnings are still showing single-digit growth. The labor market has added jobs for 101 consecutive months, and previously owned home sales soared 11.8% in February.

The latest projection for U.S. GDP growth is 2.1% for 2019, down from 3.1% in 2018. The projection for 2020 is 1.9%-but still positive. If floorcovering sales maintain their normal growth pace of about 1% to 1.5% percent above GDP, we still might enjoy a 3% to 4% growth path, but we’ll need a stronger pace in the next three quarters to get there.

DOMOTEX WEST TO EAST
March was an interesting month, bookended with two Domotex expos. While the inaugural Domotex USA show in Atlanta had a full hall of exhibitors, the number of attendees was lighter than many had hoped for, though it was a first try and early March is a bit late for retailers to meet with suppliers to discuss 2019 programs. However, several industry veterans have recently pointed out to me that when the WFCA launched Surfaces in 1990 in Las Vegas, the crowd was very light because it competed against four other flooring shows. We’ll see if this show gets more traction next year when it moves to a bigger space in Hall D.

On the other hand, Domotex Asia, which took place at the end of March in Shanghai, has definitely taken the crown as the largest global flooring show in both exhibit size and attendee count. Some would argue that this show is still a regional show where Asians meet with Asians, but it is still massive and it’s the home base for rigid LVT-which was developed and continues to evolve in Asia. I counted seven whole buildings that were filled with LVT exhibitors. One dimension that hasn’t changed is the number of security guards that walk the show and the care that exhibitors take to protect their product and marketing ideas from being knocked off.

One cultural belief that contributes to the massive size of the show is the Chinese view that bigger is better. I was amazed at the size of the Armstrong, Shaw Contract, Novalis and Gerflor booths. The Chinese offices of these brands have decided that Domotex Asia is the place to go big.

TOUR OF CHINESE RIGID CORE LVT FACTORIES
I had an eye-opening experience as part of my trip to Shanghai. I was invited by Metroflor to tour two rigid core factories from which the Stone family has been sourcing some form of LVT for more than two decades. As LVT technology has evolved, so too have these factories. It’s easy to forget that rigid core was first introduced to the market in 2013, so many of the processes I witnessed are relatively new and continuously evolving.

Both facilities we toured in Zhangjiagang, about two hours northwest of Shanghai, produce both WPC and SPC formats. I was anxious to see firsthand the process many large firms have struggled to master here in the U.S. At both plants, it was surprising to see how systematic and advanced the operations were. One of the operations had resin-coated floors similar to what’s used at the Volkswagen plant in Chattanooga.

I had been led to believe that the magic behind why the Chinese are able to successfully produce rigid LVT was because it was a batch process that required a large number of people. But now, having seen the operation firsthand, I believe the truth lies closer to art than science. Coordinating all the processes, getting the mix ratio right combined with the right extrusion temperatures, calendaring and annealing timing-it’s closer to conducting a symphony and trying to get all the instruments to play in tune and with the right rhythm.

Are there a lot of people involved? Yes. But that relates more to scale than man hour per output. These factories are producing a massive amount of product. These plants are so advanced, they’ve installed Japanese sourced robotic arms in areas that require repetitive motion with precision.

There is some debate as to which rigid format of LVT performs best. Metroflor believes that WPC makes the best flooring but it also produces SPC on a smaller scale so it can compete in that business as well. While SPC is promoted as more durable, since it is a thinner, denser product less susceptible to indentation, WPC is more expensive to produce.

The biggest difference between the two, since both are basically made of PVC, calcium carbonate, decorative films, a wearlayer and a cushion layer, is the core, with WPC product produced using a foaming agent. As a result, it is lighter and thicker but also absorbs sound transfer better, and many argue that it is less likely to shrink and expand with temperature changes.

I am leaving this trip with one concern as it relates to the long-term viability of this category and the ratios of supply and demand, based on conversations I had at Domotex Asia as I walked through the seven buildings of LVT suppliers. Much of the infrastructure investment required to build these factories is reportedly subsidized by the government. When supply outpaces demand, a common reaction is to reduce price. The challenge in this rapidly growing segment is to not kill the goose that lays the golden egg by flooding the market with product that doesn’t perform, which is a lot harder to accomplish when government subsidies upset the natural equilibrium of the free market.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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