Wood Working and the Recession

[bignoise]

So today was my last day of work. I got a phone call 3 hours after work from another joiner on the island offering me a job. So I've been unemployed for all of 3 hours, aye thats the beauty of living in a small community

[jHop]

Congratulations on your new job! I wonder if you can file for unemployment anyway...

[Saddlestrum]

All these posts have made interesting reading for sure.

I think wisely, "ISAWITFIRST" has introduced a note of caution.

FIRSTLY....As with any business, a clear vision of your market demographic is essential. Who are your competitors in that market, etc. etc.

Are you going after the customer who is flush with cash and is willing to part with it to buy your handcrafted, one-off, Chippendale hall table you have toiled on for 80 hours and invested your tooling, your finishing materials, and your talent....and hopefully sell it (for more than what it cost you) with a healthy profit left over so you can put beans and rice on the table?

Or... are you going after the mass-market who have less disposable cash and want a dresser for Becky's bedroom that will hold her stuff? . . . or...somewhere in between?

Each of these requires a different approach, a different business plan, and different shop equipment.

SECONDLY, The shop, the layout, the equipment, you currently have isn't likely suitable for mass production. None of us on this forum can compete with off-shore (cheap labor) companies with CNC equipment that can crank out product 24/7 because the customer for that market is pulling the trigger based solely on price. On a related point, today's world is a "smaller" marketplace. American (Canadian too) companies are being wooed daily by offshore suppliers that drop stuff on our shores at prices most of us wouldn't bother turning the lights on for.

At the other end of the scale, is your talent and work coveted enough that discriminating buyers will flock to you to commission/purchase pieces you make?..and will that demand give you enough to make a profit, expand your lines, replace your aging equipment, feed the family, etc? It takes time to build such an enviable reputation.

THIRDLY, I have always been amazed at the enlightenment an "outside" perspective can offer. I've benefited from advice in the past so I'll pass some along for you to think about; (don't think me "negative" for mentioning these points. Better to be aware and make an informed decision than regret it later at great cost.)

- Being Canadian, we are still hearing about the continued depressed economy in the U.S. Yes, we've all heard about foreclosures of houses, but more than that, I'm hearing disturbing numbers of U.S. factories that are closing and either moving to Mexico or outsourcing production. As this exodus continues, American workers lose their jobs...and their paychecks.

- Obama's stimulus spending hasn't accomplished near what was hoped.

- the Canadian dollar has touched parity with the U.S. dollar and is hovering within 2 cents of parity any other week of the year. This is not a "strengthening" of the Cdn dollar but rather a weakening of the U.S. dollar in relation to other world currencies. In layman's terms, this signifies a diminished confidence in the U.S. economy by investors around the world.

- yes, there are areas within the U.S. that have fared better than others. Hopefully yours is one of them, but by and large I would be very cautious about starting a business in times like we're experiencing.

- do you have enough cash on hand to survive for 2 years with no money coming in? Plan on it.

- where will you work out of? If you're going to rent space most landlords want you to sign a lease (say, 3 years). Break that lease before the lease is up because business is lousy and you are legally liable for the remaining balance of the outstanding payments. You need to know this.

- as a business person myself I'll tell you, don't get mired down doing accounting. Your time is better spent "steering the ship rather than shoveling coal into the boilers". Either send your paperwork weekly to an outside bookkeeping company, neatly labelled so it's simple for them, or hire an employee to do it for you (= more expense). The point here is, despite claims one can do it yourself with accounting software, your energies need to be focussed on developing your business. Trust me, the last thing you want to do after a busy day in the shop is sit down to do paperwork on your computer.

- one of our tenants is shutting down a very nice woodworking shop that is fully equipped. His construction company "fed" the shop with cabinet orders and millwork orders. With the economy in the dolldrums, he has to shut the shop. He's trying to sell it as a "turnkey" wood shop but very little interest from anyone so far...and the Canadian economy wasn't hit nearly as hard as the U.S. economy.

- as a "hobby" you can toil (enjoy, savor, relish) for 2 hours doing mortise and tenon joints and no one will scream at you. Do that in a shop depending on production to bring in the cash and you'll be jerked back to reality real fast.

The owner of Bridge City Tools recently made some interesting observations about this years' IWF show in Atlanta which I'll include for your reading;

This show (in past years) could never be completely walked in two days, and there was always something to learn.

This years (2010) show however is a different story.

First, the square footage of exhibition space was down over 60% from 2008. YIKES!

Second, attendance was dismal. That said, the people I spent time with were fantastic. But the fact remains, it is painfully obvious the woodworking world has changed dramatically.

Certainly the issues surround the housing market are central to this decline but I have never seen anything like this. For example…

In 2008 there was a company (which shall remain unnamed) that did $78.8 million in annual revenues. This year they will not break 8 million.

I spoke with a small business that sold power equipment–in 2008 they did $8.2 million. The first six months of 2010 their sales were $420K.

A REALLY BIG company that I will not name, and I know you know their products, is down 92% from 2008. Ouch. And from what I can triangulate, a significant percentage of the attendees were at the show looking for….jobs.

Now that's a reality check for you!

On the subject of "mass market" and offshore competition, allow me to relate a personal story...or two;

Years ago I worked with a guy that was selling ball valves into the U.S. These ball valves are huge castings used in municipal waterworks, factories, and sewage plants. These ball valves were made in China and Korea. American companies hadn't a hope of competing with this offshore product. I found out a little bit of why they couldn't.

I saw photos taken in the huge foundry of molten steel being poured into moulds by Chinese workers dressed in tiny shorts, thin strap undershirts, and flipflops on their feet. No eye protection, no burn protection, no respirators. You could see scars on their legs and arms from where molten steel had flashed and landed on them in the past. The smoke in the air was so bad you couldn't see beyond 30 feet. These foundries have no OSHA regulations, no workplace health and safety standards, no inspections, no environmental procedures, etc., etc. Their daily wages were tragically meager. If someone was injured or killed, a hundred were willing to take his job. And it continues today as products flood Canada and the U.S. that are less expensive than what can be made here.

Offshore factories are without workplace standards, work cheaper than American counterparts, and can land boatloads of cheap product after 30 days on the water.

On this side of the water, city and county budgets are shrinking right where you live therefore administrators have to do more with less. It's a given they are going to buy the cheapest product available to get the job done, and so these ball valves are bought up by the hundreds while American companies, unable to compete and with fewer and fewer sales, have to layoff staff and eventually close the doors.

one more story . . .

pipe used for structural purposes (and similar purposes too) has to have what are called "Mill Test Certificates" (or "mill certs"). These certificates provide the pedigree of each particular piece of pipe indicating it's structural strength, it's burst strength, it's chemical composition, date of manufacture, ID number, company that produced, city of origin, etc, etc. When an engineering company draws up the plans for a highrise building, a new factory, a shopping mall, etc., they specify what pipe has to be certified to what standard for each application.

You can appreciate there is an ever-rising cost attached to this testing and tracking the ongoing journey each pipe makes from the mill, onto the ship, to the U.S. port, then to each distributor's yard and finally to the customer, all in minute detail. These mill certs accompany the pipe as it is sold through many hands before being used. This is not unlike stringent requirements in the aviation industry that require a verifiable audit trail of each and every component used in building an airliner, and repairing that airliner throughout it's service life. At any time an inspector must be able to trace the history of a component such as a landing gear nosewheel. No verifiable audit trail?...that part goes into the shredder or is sent to a school for training purposes. You get the idea. Lives are at stake, we can't afford to be sloppy.

Flooding into the U.S. and Canada is pipe made offshore in similar conditions to the castings I mentioned above. This pipe is being used for structural components. Now imagine a steel pipe distributor here in North America getting a phone call from a fabrication company that has been contracted to build a new hospital. They ask for 500 lengths of 16" pipe with Mill Certificates that says it meets standard "XYZ" as stipulated by the engineering department. "Wow, this would be a great sale to get," the distributor thinks already salivating at the profit he can make on his Korean pipe sitting in his yard. Unfortunately the 500 pcs of pipe he has sitting in inventory have mill certs that say it meets standard "ABC". No way he can provide those mill certs to the fabrication company 'cause they don't comply. So it's a simple matter of phoning the offshore factory, talking to Ho Whan, and asking him to fax over new mill certs with the same ID number that say it complies with the requested standard of "XYZ". Ta-daah! He's made a sale.

"Naw" you say, "that doesn't happen!" Think again my friend. It does and it is.

My point is this, conditions you and I wouldn't work in. Practices you and I would refuse to be a part of, (especially practices that put lives at risk). These are realities of huge companies that are sending products onto store shelves where you and I live. I've described only one of hundreds and hundreds of such factories.

Do you remember when the first Honda and Datsun cars were introduced in the States from Japan. Plagued with rust issues, mechanical problems, they were scoffed at. Look at them now. Their businesses are case studies in our universities and the envy of other companies. Did you know that in China there are over 100 Chinese car manufacturers? . . and that's not counting the foreign ones that are trying to muscle in? And where do you suppose is the next market these Chinese companies are looking to sell their cars? Bingo, North America. And you can bet the Japanese car companies are also looking over their shoulder as the Chinese powerhouse ramps up production.

My advice is - don't be a mass producer of wood products. Offshore companies will eat your lunch. Don't pretend to play in that market. You don't have the money, muscle, or margins to do it.

I will say Canadians and Americans don't need another IKEA. They don't need more dinette sets shipped in flat boxes from Indonesia and Thailand.

To be successful you must set yourself apart. Be distinct. Be a leader with some product that is unique, innovative, and that people will want to own. Give people value for their $. These principles hold true for any market, for any product. Apple is a company that reflects these values.

(hmmm...reading this over before posting, I'm sure it sounds like a rant and I hope you don't take it that way. I've tried to lay out some realities of the world we live in and that should caution anyone starting a business.)

[iSawitFirst]

A reminder of what we face with overseas competition always compels us to find ways to work smarter. If we can't compete at the lower price points, only the higher price points are left. Thankfully the higher price points have potentially higher margins but there's more risk and, like you say, you have to really distinguish yourself to attract customers which can take time for the beginner.

If you're a new business, EVERY customer is a new costumer and you'll probably have to steal some of your competitions' customers to make it work. If you have mad skills, tons of design talent and live in a market with plenty of people who spend money on that type of product, you'll be OK. Otherwise, be heavily capitalized and willing to take a substantial loss until this economy turns around (if ever).

I still say that now is not the time for the beginner. The right time is when the economy is on the rise and the customer base is expanding, not contracting or stagnant.

[jHop]

a couple of additional points to throw into the muddy waters...

I once heard that a company needed to keep roughly 5 years of expenses available. The reason being that it takes five years for a business starting up to actually turn a profit, and be successful. Now, this does not mean every business falls into this category.

now I do not recall where I heard this 5 year figure. It may have been from my great aunt, who was trying to start a roofing company with my cousin. This company succumbed to a typical startup among family: difference of opinion about priorities. They had the business, but each wanted to run it in a different direction.

Second point I'd like to throw in is a cautionary tale of paying attention to your expenses, and making smart decisions. One of the largest employers in my city, as of twenty years ago, was a steel company. One of the things they did to cut costs was to sell the coal mine they owned, but keep the rail lines running from the mine to their mill. Now, I realize coal is fairly low in price. (You can buy a fifty pound bag for less than 30 bucks if you look casually.) But they are purchasing tons. The cost of maintaining the rail lines, the diesel engines, the coal hoppers, the loading equipment, the crew to operate all this equipment far outweighed the costs of maintaining the mine.

This company was purchased by another steel mill about ten (give or take) years ago. This company had been in bankruptcy for a while, and the new company sold off many assets to make a "lean, mean" steel machine. now, this company is also in danger, has sold off many assets, and is not producing the steel that they once did. In fact, the rumor had it that they were trying to lease out office space in their former plant office tower, right on the mill site. I know for a fact they sold off several acres of land, which was turned into a mini-strip mall. (one of the anchors is the BORG: but I'm still resisting.)

Third point for consideration: Cost of living in other countries. yes, people live in what we might consider squalor in some of these places. I've heard (haven't been yet) that there are places in Mexico that do not have phone lines, do not have much power lines, have very little by way of road ways. So why would they need thirty thousand a year to pay for insurance, car insurance, futility bills, cell phones, and laptops. So they can survive on twelve thousand a year, and even thrive on it. Does that make them any better? I don't know. But here it is, 11:00 at night on a Saturday, when I have to get up for work in six hours for an eleven hour shift that will not be enough to pay for my cell phone and car insurance, let alone put gas in the tank.

My point isn't commiseration, it's consideration. They survive on less money because they live simply. Or at least more simply than we do. That does not mean that they have safer lives, nor should that be ruled out. While I personally think that the time for unions as we know them to be over (I think they either need to evolve or go away, but have no clue how to do either), I cannot deny that the unions have done wonders for the American worker, and some of their allies and business partners. There are still areas that need to be addressed, but the point I'm trying to make (while my brain has died, and the body will die shortly for a blissful 6 hours) is that all this safety and modernization comes with a price. everything costs a little more, because this price is passed along to the purchaser. and while you can make a fortune selling modern conveniences to those who do not have them in remote areas, you'd also incur expenses that will cut drastically into those fortunes.

I apologize for the rant, and the randomness of the thoughts. My stream of unconsciousness is flowing fast and far, and might actually get back into the river bank sometime before work tomorrow. (I certainly hope so, since my job depends on clear thought...) I'm not trying to convince people not to start a business. I'm trying to add things to consider. These are certainly things I am considering for myself.

(I really like the idea of the weekly mailing to the accountant. I have to say doing paperwork for two hours after working in the shop for fourteen takes all the fun out of eating. Especially when you eat spaghetti, and spill sauce on the paperwork.)