Avoiding Collective Efficiency.
Growth and Crisis in the Furniture Cluster in São Bento do Sul (Santa Catarina, Brazil)

Jörg Meyer-Stamer

 

Draft
Please do not quote or circulate
Comments requested

October 1998

Introduction

There are different options when one presents the furniture cluster of São Bento do Sul, in the southern state of Santa Catarina, Brazil. On the one hand, one can present it as a spectacular success story. With a share of 5.5 % of turnover and 3.16 % of employment in Brazilian furniture industry, it was responsible for about 40 % of Brazil’s furniture exports in 1996 (Lanzer 1998, 31). Exports more than doubled in 1992 and 1993, and continued to grow, albeit at lesser rates, in the following years.

However, on the other hand one can tell quite a different story. One of the striking facts of the international furniture industry is that Taiwan has been a major exporter for quite some time while Brazil was not. There are hardly any forests left for economic exploitation in Taiwan whereas one tends to identify Brazil with wood; in fact, it owes its name to a tree, and it has received a lot of attention regarding the evolution of rainforests. One might thus be inclined to assume that industries based on wood play an important role in Brazil’s industrial development and its industrial exports. While this is true for the pulp and paper industry, it is not at all true for the furniture industry which share in manufacturing value added declined from about 2 % in 1970 to about 1 % in 1990.

The analysis of the SBS cluster which today is the leading furniture exporter in Brazil helps understand the reasons for this underperformance. The cluster shares structural features with other locations of the furniture industry: it is dominated by family-owned firms with a strong presence of micro, small- and medium-sized firms, there are no foreign companies, and the sector has never enjoyed much government support. This is one of the main differences compared to the pulp and paper industry where Brazil is one of the leading producers in the world, both in terms of quantity and productivity, thanks to several decades of consistent government support (Soto 1993). The performance of the São Bento cluster, as the performance of the furniture industry as a whole, thus depends on individual entrepreneurs, i.e. the internal effort of firms and the way the connect to shape competitive advantage by means of joint action. In this respect what one detects is a remarkably passive stance. The firms react to occasional surges in demand, and this was by far the most important reason for the surge in exports in the 1990s, a surge that started from a very low level. But they do little to create competitive advantage, and they do hardly anything at all to create what Schmitz (1995) has coined "collective efficiency". There is, in other words, very little cooperation and joint action between firms, a fact that reflects the incentive structure that prevailed in the past. Thus, what appears as a success story at first glance turns out to be a piece of luck, and actually luck may run out. It also indicates that Brazil’s furniture industry could have done much better had it relied more on effort and less on luck.

Structural features and evolution of Brazil’s furniture industry

Furniture production is concentrated in six Brazilian states (Lanzer et al 1998, 15 f): Rio Grande do Sul (most importantly Bento Gonçalves and Flores da Cunha, specialized in kitchens), Santa Catarina (São Bento do Sul and Chapecó), Paraná (Arapongas), São Paulo (dispersed with two notable clusters in Mirassol and Votuporanga), Espírito Santo (Linhares) and Minas Gerais (Ubá).

Brazil’s furniture industry is dominated by micro, small- and medium-sized firms; according to ABIMOVEL, the national association of furniture manufacturers, there are 10,000 micro-, 3,000 small and 500 medium-sized firms with altogether 300,000 employees. Even the leading firms are middle-sized (Table 1). It is important to note that this is a characteristic feature of the furniture industry in other parts of the world as well (Best 1990, Maskell 1996).

Table 1: Leading firms and Santa Catarina firms in Brazil’s furniture industry (1997)

Rank

Name

State

Turnover (million R$)

After tax profit (million R$)

Turnover / employee

1

Móveis Itatiaia

MG

107.5

14.0

 

2

Todeschini

RS

68.9

12.9

177.16

3

Carraro

RS

66.8

2.6

112.94

4

Simbal

PR

47.1

0.9

45.17

5

Giroflex

SP

46.2

4.8

86.57

6

Móveis Gaudêncio

RS

43.2

0.7

 

7

Bergamo

SP

34.4

0.1

 

8

Pastore

AM

31.8

0.8

 

9

Rudnick

SC

30.0

3.9

118.0

10

Movelar

ES

28.0

0.1

 

12

Artefama

SC

23.1

-0.2

 

16

Leopoldo

SC

16.4

0.7

 

19

Alpes (1)

SC

10.7

0.9

60.99

21

Weihermann

SC

9.3

0.2

33.41

22

Araújo (1)

SC

8.7

0.1

49.88

24

Artessol (1)

SC

7.9

0.2

46.65

26

Estofados Mannes

SC

7.6

-0.4

 

27

Zipperer

SC

7.5

0.2

 

30

Renar Móveis

SC

6.8

0.1

 

32

Artico (1)

SC

6.1

0.4

37.0

(1) belongs to Rudnick group. – Source: Gazeta Mercantil, Balanço Anual 1998.

The largest company in SBS, the Rudnick group, is actually the fourth largest company in Brazil’s furniture industry, with an overall turnover of R$ 62 million. Rudnick is a somewhat unusual firm in SBS as it produces mainly for the domestic market, and its products are mainly not made of pine. Most of the firms in the cluster produce Scandinavian-style products made of pine, mostly for export; some firms actually have an export ratio of 100 %.

The size structure in SBS is somewhat different from other places in Brazil, as there are less micro- and small-firms than one might expect (Table 2).

Table 2: Size structure of furniture firms in the SBS cluster

 

Micro

Small

Medium

Large

unclear

Sum

Firms

87

45

31

1

45

209

Total of employees

980

2102

5823

580

 

9485

Source: Lanzer et al. (1998), p. 25.

Evolution of the SBS cluster

Exporting pine furniture is a pretty recent phenomenon in SBS. The first firms in the cluster started in the 1920s, producing furniture and wooden artifacts based on wood from primary forests (like Marfin). The cluster evolved since the 1950s when employees of the pioneering firms started their own firms. It enjoyed a first period of growth in the 1970s. Between 1971 and 1980 production of furniture in Brazil doubled (Rangel 1993), and the SBS cluster had a fair share of this expansion. It was this a time when the furniture market was a seller’s market. Whoever was able to produce a decent piece of furniture could sell it, and producers like those in SBS who achieved a good product quality could earn a lot of money. With the macroeconomic turbulences in the early 1980s the situation changed profoundly: the market contracted in 1981 and even more sharply in 1983, and only in 1986 sales reached the 1980 level. However, this was mainly due to the consumption boom after Plano Cruzado, and sales dropped again sharply after that.

Firms tried to compensate for the decline in domestic sales by starting to export, but the results were modest at best. While production amounted to about US$ 1.8 billion in 1989, exports peaked in that year at about US$ 56 million. Firms from SBS had a share of about one third. While this was little in absolute terms, it was important as it put them on the map for international traders in the furniture business.

Being known to international traders was the point of departure for the second boom in the industry. European sales firms had for quite some time purchased a substantial part of their merchandise in Eastern Europe. In the early 1990s, many Eastern European firms lost their competitiveness as government support vanished and productive efficiency was insufficient to compete without that support. This opened a window of opportunity for suppliers elsewhere in the world. European trading firms looked for suppliers elsewhere, and one of the places where they found them was SBS. Firms there had just initiated a move from traditional types of wood to pine so that they could deliver immediately. In 1992 as well as 1993 exports more than doubled. Like in the 1970s, the atmosphere was vibrant, with opportunities proliferating.

This period of extreme growth was short-lived. In 1994/95, after the implementation of the Plano Real stabilization program, the Brazilian currency appreciated by more than 30 %, thus putting Brazilian exporters at a serious price disadvantage. Thus, growth dropped from 48 % (1994) to 24 % (1995) (see Table 3). Things became worse when after 1996 the US-Dollar appreciated against European currencies, notably the German Mark. Export agents had calculated on the basis of a DM-$-rate of 1.50. When the Mark continued to drop exports to Germany decreased dramatically as products became price-uncompetitive. Increasing exports to the U.S. in 1997 seemed to offer an alternative, thus explaining the 13 % export growth in that year (after just 3 % in 1996). However, with the stark devaluations of Asian currencies local firms find it increasingly difficult to compete with firms from Malaysia, Thailand and Indonesia. Exports actually dropped in the first half of 1998.

The domestic market offers no alternative to resume growth. First, demand is compressed due to uncertainty because of macroeconomic instabilities plus astronomical interest rates; according to ABIMOVEL, sales of national firms on the domestic market dropped from US$ 6 billion in 1995 to 5.6 billion in 1996 to 5.2 billion in 1997. Second, it is difficult to sell pine furniture on the domestic market anyway as consumers regard it with suspicion. There was a first wave of pine furniture production in the mid-1980s, also from SBS. However, firms started to sell them before they had really mastered the production process based on pine. According to local sources, furniture tended to fall apart or change its color due to inadequate drying and painting.

Table 3: Furniture Exports from Brazil (million US$)

 

Santa Catarina

Brazil

Santa Catarina / Brazil

1990

 

39,7

 

1991

 

57,3

 

1992

44,2

125,7

35,2%

1993

93,1

266,1

35,0%

1994

137,4

293,5

46,8%

1995

170,1

336,6

50,5%

1996

174,5

351,3

49,7%

1997

197,0

390,5

50,4%

1-6/98

76,2

162,6

46,9%

Source: SECEX/DTCI/MICT, quoted from Lanzer (1998) and an unpublished paper from Centro Internacional de Negócios / São Bento do Sul. The share of firms from SBS in exports from Santa Catarina amounts to about 70 %.

The furniture industry in SBS in a cluster perspective

Passive advantages

The competitiveness of furniture firms in SBS builds mainly on two factors, namely technological upgrading and passive cluster advantages. Regarding technological upgrading, it is notable that many firms are using state-of-the-art machinery, like numerically controlled machining centers or ultraviolet painting equipment. According to the firms, part of the exceptional profits of the high-growth years was used to purchase new machinery. Firms’ owners regularly visit international fairs to identify current trends in technology.

Regarding passive cluster advantages, the factor most frequently mentioned by local sources is labor. It is, however, important to note that local sources refer to "labor culture", i.e. the availability of workers who are first accustomed with the disciplinary requirements involved in industrial work, and, second, who have been working in the sector some time (if not for some generations). Formal qualification of workers is quite a different issue. Frequently, the majority of workers in a factory have not completed primary education, let alone participated in vocational training courses. Training takes place on-the-job.

Further passive advantages include the availability of inputs and machinery. There is one local varnish producer which was established in 1992 and has since enjoyed strong growth. Apparently, this firm has been able to leverage local demand to build a competitive advantage, thus creating the conditions to grab a notable share of the Brazilian market (where the leading firm has a market share of 60 % and is busily creating barriers to entry against potential entrants, so that entering the market and surviving is quite a success). Then there are manufacturers of inputs like door hinges and other accessories. There is also one important manufacturer of packaging material. Representatives of equipment vendors are present, and there is one small and several micro firms producing machinery. The small firm manufactures milling-machines and has established itself as a credible supplier of such equipment to smaller furniture manufacturers in the whole country.

With respect to the export boom, the most important passive advantage has been the presence of three major and some minor export agents. They are the intermediaries between local producers and foreign clients; local producers, except for some relative larger firms, do usually not deal directly with foreign customers. A further advantage is the fact that the neighboring municipality of Rio Negrinho has established itself as an important location for furniture sales, attracting consumers from relatively far away places. However, it must be noted that local actors in SBS perceive this as a nuisance rather than an asset ("They sell what we produce. Why can’t we do that ourselves?").

Other segments where passive advantages might emerge appear relatively weak. For instance, transport firms are not particularly competitive, and a substantial part of furniture transport is managed by firms located in other municipalities. Subcontracting firms, both regarding machining of wooden parts and painting / finishing, do exist, but not in substantial numbers (e.g. three firms specialized in drilling, two in painting).

Active advantages

There are also some active advantages. The most notable one is FETEP, the technical school for the furniture industry. It was created in 1975 as the result of an initiative of local firms which sensed the necessity to have well-trained technicians available. Initially, the school came out strong, being regarded country-wide as a point of reference. It appeared like the paradigmatic case of firms uniting to create collectively a locational advantage. However, firms did not stay united, and they tolerated the decay of FETEP in the late 1980s and early 1990s. It is not clear what exactly was behind this process. Local sources cite factors like incompetent and arrogant leadership inside the school and the lack of leadership among the firms. However, one might speculate about further reasons, like hyperturbulent macroeconomic conditions which absorbed most of the attention of the firms, and the absence of an adequate institutional solution for the supervision of the school. In 1994/95, local actors lobbied with the SENAI system of technical schools to take over FETEP; this took effect by January 1, 1996. Today, FETEP is still in the process of reconstructing facilities and credibility.

Another important element is ARPEM, the association of small and medium-sized furniture firms which was founded in 1983 and today has 31 member firms. ARPEM organizes seminars and invites speakers, organizes joint presentations on fairs and joint trips to fairs abroad, and funds fact-finding trips of individual members abroad. Projects currently under evaluation are a joint shop for factory sales, and the organization of meetings inside the member firms; so far, meetings take place in a restaurant, and there is no practice of mutual visits to factories. – Essentially, ARPEM takes a role that one might expect from the sector’s business association, the sindicato patronal, which, however, sticks to its legal mandate, i.e. wage negotiations.

A further outcome of joint action is the creation of the Centro de Gestão Empresarial, a complex of four small buildings where the Chamber of Commerce and Industry, the small business development service SEBRAE, some facilities of SENAI, the offices of the sindicatos, and a local branch of the International Trade Center (maintained by the state’s federation of industries, FIESC) are located. There was, however, no indication that this complex is particularly important for the furniture industry.

Reasons for the absence of collective efficiency

One of the most notable features of the SBS cluster is the very low level of cooperation, collaboration, and collective action, and thus the absence of collective efficiency. However, these are not unique observations but very much resemble findings in other clusters in Santa Catarina. In our earlier work, we have pointed at five reasons for the emergence of an uncooperative business culture (Meyer-Stamer 1998):

The last argument obviously does not apply to exporting firms in SBS. However, there is another argument which has to do with the structure of competition in the furniture industry which explains a lot: predatory behavior. A sarcastic characterization of SBS is "Europe’s furniture subcontractor". A typical sale would go like this: A trade firm in Europe, say Metro from Germany, would look for a producer of a piece of furniture, say a box made of pine with a predetermined design. It would ask an export agent in SBS to make a bid, and it would provide price conditions at the margin of reality, indicating that firms elsewhere in the world might be in a position to meet those conditions. The export agent would then look around among local producers capable of delivering the necessary product quality, and a bidding process would start among them.

This system establishes an incentive for local producers to be flexible, i.e. to be able to participate in whatever bid comes up. As long as the export business went fine, there was no obvious incentive for a firm to try to distinguish itself via product design, i.e. to develop a specific series or style of furniture, or at least to do market research and anticipate changes in style and taste. Thus, there was fierce local rivalry which often gave rise to predatory behavior. For instance, one of the larger firms told the following story. More than a year ago they received an order from the U.S. that went beyond their production capacity. They asked a local competitor whether he would be willing to subcontract part of the lot. During the negotiations, the competitor was very inquisitive about the customer and conditions of the contract. The competitor then got directly in contact with the customer, offering the same product for a somewhat lower price.

A finding from the study of Lanzer et al (1998, 74) further illustrates the prevalence of local rivalry. They asked firms about the most important competitors. 50 % of the respondents mentioned firms in the cluster, 45 % firms elsewhere in Santa Catarina, and 50 % firms elsewhere in Brazil (principally in Bento Gonçalves), whereas only one third mentioned firms outside Brazil.

Regarding the local business culture, this structure does not only create a climate of mistrust between producers. It also gives rise to a tense relation between producers and export agents; local actors describe this relation with phrases like "The producer is the hostage of the export agent".

The competitive potential of the furniture cluster in SBS

The history of the furniture industry in SBS is far from unique. In terms of unexpected export growth due to external factors it reminds, for instance, of the history of Taiwan’s bicycle industry (Chu 1997). In terms of uncooperative structures it is similar to other clusters where firms also suffer from a low degree of product differentiation and low design and marketing competence. However, it appears that there is a way out of crisis for the cluster based on the creation of collective action to develop design and marketing competence.

Competitive advantage in the furniture industry

To identify the options open to firms in SBS it is important to understand the way the international furniture trade works. Some of the main characteristics are the following:

Given these features, certain strategies for a cluster like that in SBS are a priori not viable. One of them would be to establish an SBS brand on the international market. Behind this suggestion one can sense the wish to keep things as they are – no bothering with the changing tastes of customers, no necessity to move away from a model of production based on large lots.

Another dead-end street, it appears, would be business-as-usual. So far, exporting firms in SBS have benefited from the fact that they could respond fast, and that they could attain the level of product quality expected by European customers. However, these are no longer advantages. Whereas the product quality of producers in Southeast Asia may be inferior, this is – according to sources in SBS – not at all the case with competitors in Eastern Europe, especially Poland, which are also located closer to the final market and probably have learned their lesson regarding quick response.

Options for the SBS furniture cluster

According to export agents, firms from SBS have a competitive advantage when it comes to producing pine furniture with higher value-added (that is, higher than so far). In this segment there is no competition from Asian firms due to insufficient technological capability, and even East European firms seem to have difficulties entering into this segment, at least at competitive prices and response times. At the same time, products from SBS are cheaper than those manufactured in EU countries. Specifically, pine furniture with higher value-added would mean cupboards or wardrobes with detailed design features, or furniture that is made to look old.

Under the current conditions, such competitive advantage is based on the combination of the production capability of firms with the marketing savvy of the local export agents. This constellation is disadvantageous for two reasons. First, it is vulnerable – thousands of jobs depend on the ingenuity of literally a handful of people. Second, it shelters producers from necessary learning processes. They display a certain tendency to dream of the ‘good old days’ when they could sell a huge lot of furniture, say ten containers, with a substantial profit. There is, however, strong evidence that these days are by and gone. Today’s demand is more differentiated, like a lot which just fills one container. In fact, it is almost by definition that higher valued-added furniture will sell in smaller numbers than traditional bread-and-butter products.

Given this change in demand, producers are facing two challenges. The first one has to do with the area in which their main competence rests, that is production. The have to manage the transition of organizational structures from something like mass production, or at least production of large lots, to flexibility, i.e. the efficient manufacture of small lots. This may mean introducing concepts like cellular manufacturing which are so far not being employed. Apart from that, firms will be well-advised to deal more systematically with quality management which so far follows the control model rather than the total quality concept; for instance, there is so far no furniture firm certified according to ISO 9000.

The second challenge is to get to know the customer and his fancies much better. This means, first of all, that firms have to understand that ‘the customer’ means people like people like the readers of this paper rather than wholesale traders. Manufacturers have to accompany tendencies regarding fashion and style much closer. This means, for instance, that firms’ directors and managers have to leave SBS much more often than they use to. A poll of the SBS branch of FIESC’s International Trade Center in 1997 revealed that almost all local furniture manufacturers expose at the local furniture fair. However, just 5 % put their products on display at fairs in São Paulo, Arapongas and Bento Gonçalves, the other important furniture fairs in Brazil (which may make sense as they produce mainly for exports). However, firms are hardly present at fairs abroad, either. 3 % display their products in High Point (USA), 2 % in Birmingham (UK); and just 8 % of the firms visit the fairs in Cologne and Paris (without putting products on display). Being more present at such events would be an important first step to expose local firms to final markets. Visiting firms abroad might also help to open-up minds. In the medium, it may be useful to explore proposals like cooperation with design firms in Europe and the U.S.

In both fields there is an obvious scope for cooperation. Firms might unite to bring in speakers for seminars and consultants for flexible production and quality management. Firms might jointly organize trips to fairs abroad, and to visit firms elsewhere in Brazil and abroad. The funny thing is that in discussions about cooperation representatives of local firms come up with projects which are much more ambitious, like joint purchasing, sharing of machinery, or joint sales. Such activities run a high risk of failing due to opportunist behavior, especially in an uncooperative environment such as in SBS. Some such cooperation projects have been initiated in the past, have failed, and have thus reinforced the uncooperative culture. Seminars and trips hardly offer an opportunity for opportunist behavior and can thus help to overcome this culture.

To sum up: The main challenge for furniture producers in SBS, and perhaps elsewhere in Brazil, is to formulate a strategy to establish themselves as a niche producer on the global market, in this case for high-value pine furniture. Firms have to work together among themselves, and with institutions like FETEP, to create a competitive advantage. The inability to do so in the past is an important feature in understanding the unimpressive performance of Brazil’s furniture industry.

Bibliography

Best, Michael H. (1990). The New Competition. Institutions of Industrial Restructuring. Cambridge: Polity Press.

Chu, Wan-wen. (1997). Causes of growth: a study of Taiwan's bicycle industry. Cambridge Journal of Economics, Vol. 21, No. 1, pp. 55-72.

Encontro (1998). Sumário. 2° Encontro Sul Brasileiro de Engenheiros Florestais e 1° Encontro de Estudantes de Engenharia Florestal. No location given.

Gereffi, Gary. (1996). Global Commodity Chains: New Forms of Coordination and Control Among Nations and Firms in International Industries. Competition and Change, Vol. 4, pp. 427-39.

Lanzer, Edgar, et al. (1998). Análise da Competitividade Sistêmica do Setor de Móveis em Santa Catarina. Florianópolis: BRDE.

Maskell, Peter. (1996). Localized low-tech learning in the furniture industry. Aalborg: Danish Research Unit for Industrial Dynamics (Working Paper No. 96-11).

Meyer-Stamer, Jörg. (1998). Path Dependence in Regional Development: Persistence and Change in Three Industrial Clusters in Santa Catarina / Brazil. World Development, Vol. 26, No. 8, pp. 1495-1511.

Rangel, Armênio de Souza. (1993). A competitividade da indústria de móveis de madeira. Campinas: Estudo da Competitividade da Indústria Brasileira.

Schmitz, Hubert. (1995). Collective Efficiency: Growth Path for Small-Scale Industry. Journal of Development Studies, Vol. 31, No. 4, pp. 529-566.

Soto B., F. (1993). Da indústria do papel ao complexo florestal no Brasil: o caminho do corporatismo tradicional ao neocorporatismo. Campinas: IE/Unicamp.