EconSouth (Fourth Quarter 2006)
Carpeting on a Roll in Georgia
While global competition squeezes many domestic manufacturing industries, north Georgia's carpet-making industry enjoys enviable stability. Consolidation, technological advances, and low labor intensiveness have combined for strong business.
In late October, more than a dozen securities analysts from Wall Street to the West Coast listened intently as a pair of executives in the north Georgia hamlet of Calhoun—population 11,000—described their company's performance.
It's a safe bet that Calhoun, home of Mohawk Industries Inc., is better known at places like JP Morgan and Lehman Brothers than almost any other small Southern town. Legendary investor Warren Buffett knows north Georgia, too. Buffett's holding company, Berkshire Hathaway Inc., bought Shaw Industries Group Inc. of Dalton, Ga., in 2001 for $2.4 billion.
Sophisticated financiers are familiar with these Appalachian foothill towns because they form the hub of the nation's $14 billion-a-year carpet industry.
Mohawk and Shaw combined sold more than $10 billion worth of carpet and flooring in the first nine months of 2006, according to company figures. According to the Carpet and Rug Institute, a trade association, some 80 percent of the carpet sold in the United States is produced within a 65-mile radius of Dalton, which lies about 80 miles north of Atlanta.
From humble origins to a colossus
Carpet has been good to Georgia since it began with local hobbyists, who built a cottage industry by making and selling tufted bedspreads. Through the 1930s, according to the Carpet and Rug Institute, that industry provided income to nearly 10,000 front-porch tufters.
Mechanization ultimately pulled workers from the hills to tufting mills. Tufted chenille gave rise to mats and rugs created in the same manner. Synthetic fibers and more advanced tufting machines allowed Dalton's mills to mass-produce rugs and carpet comparable in quality to and cheaper than the woven wool products produced in the Northeast, whose factories also generally used less efficient and more expensive production techniques. A booming post-World War II economy supplied plenty of carpet-buying consumers, and an industry began to flourish.
The benefits of steady employment
Despite ups and downs, the carpet mills have been reliable employers even as Georgia has lost other manufacturing jobs. While employment in Georgia's carpet industry has risen from about 32,000 to more than 40,000 since 1997, the state has lost about 97,000 overall manufacturing jobs over the same period, according to the Bureau of Labor Statistics, the state Labor Department, and Randall Patton, an associate professor of history at Kennesaw State University who has studied the Georgia carpet industry.
Shaw and Mohawk are by far the largest manufacturing employers in Georgia: Shaw with 19,000 factory jobs and Mohawk with 17,186 as of October 2006, according to the state of Georgia Department of Economic Development. No other manufacturer in the state employs more than 8,000 people.
Sticking close to home
Unlike many other manufacturers, carpet makers have so far not moved significant numbers of jobs to countries where labor is far cheaper than in the United States. Unlike the manufacture of apparel and furniture, for example, carpet production is not labor intensive. Labor accounts for less than 10 percent of the overall cost of making carpet, said Frank Boykin, Mohawk's chief financial officer. Raw materials, mostly petroleum-based, such as nylon, yarn and polypropylene, account for a far larger share of expenses.
In carpet mills, big, increasingly advanced machines do much of the work. At a Shaw plant in Dalton, for instance, tufting mechanisms function like giant sewing machines. They thread thousands of strands of yarn every few seconds through sheets of polypropylene as three or four employees work among the rapid drumbeat of tufting machines that fill a space the size of a football field.
Yarn feeds through hundreds of plastic tubes into the tufters. Before long, the finished carpet will be in a warehouse or a store. Because of improvements in the machines and operations, carpet makers today fill more than 90 percent of retail orders within 24–48 hours, said Julius Shaw, executive vice president of Shaw Industries. As recently as the late 1980s, retailers had to wait two to three weeks for their carpet.
What's more, carpet is bulky and thus not easily or cheaply shipped quickly over long distances in the large quantities that retailers demand, another reason imports have not made serious inroads into the domestic business.
Big carpet makers like Shaw keep about 22,000 types of carpet on hand, Shaw said. Manufacturers like Shaw and Mohawk store massive inventories and ship them to retailers as they place orders.
"One of the things that is good in the carpet industry—I'll knock on wood—is that we feel like, because it is not labor intensive, we have a moat, so to speak, around the industry that helps protect us," said Shaw, literally knocking on the edge of a conference table at the firm's Dalton headquarters. "That's not to say that some day we won't be pressed by foreign competition. But it's not happened yet."
A workforce becomes diversified
Even though north Georgia's carpet mills are more capital than labor intensive, they have nevertheless encountered labor shortages. Located in small towns and rural areas, and not paying the wages of higher-skilled professional jobs, the mills typically have jobs open at any given time, executives and industry observers said. But an influx of Hispanic workers starting in earnest in the early 1990s largely remedied any labor shortages.
Patton said there are no hard statistics on the Hispanic portion of the carpet manufacturing workforce. But it is, by all accounts, quite significant. In the broader community, more than half of the students in Dalton's public schools are Hispanic, according to numerous news reports. Hispanic residents make up 40 percent of Dalton's population and 17 percent of Calhoun's, compared with 5 percent of the state's population, according to the 2000 U.S. Census. Most of them have been drawn to the area by the carpet mills.
Charles Kuck, an Atlanta-based immigration attorney who has an office in Dalton, calls the Hispanic migration to the Georgia carpet mills "insourcing," contrasted with the outsourcing of jobs. Many of the people have moved to north Georgia after word about carpet jobs spread through immigrant communities in California and Latin America. A reasonably welcoming environment reinforces that in-migration, said Kuck, who has worked on state government panels dealing with immigration and on the Georgia Project, which promotes bilingual education in Dalton's public schools.
Launched by Dalton lawyer Erwin Mitchell, with the help of Shaw Industries cofounder and recently retired chief executive officer Robert Shaw as well as partners at Mexico's University of Monterrey, the project brought Spanish-speaking teachers to Dalton to help in the city's schools and sent Dalton teachers to Mexico to learn Spanish.
"You still have pockets of discreet discrimination against Hispanics, but by and large, it's a community that has welcomed Hispanics," Kuck said. "That's because they've saved the industry in Georgia."
The insourcing trend has not come without controversy. Mohawk continues to fight a lawsuit alleging that the company hired illegal aliens to suppress wages.
Slow and steady remains the strategy
More workhorse than showhorse, the carpet industry has in recent years grown almost continuously, if unspectacularly. Since the crippling recession of the early 1980s killed dozens of smaller manufacturers, eliminated thousands of jobs, and helped spur a sweeping consolidation, industry sales have grown at about the pace of the larger economy, Boykin said. As Mohawk's March 2006 filing with the Securities and Exchange Commission said, factors that influence the carpet industry include "consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries, and the overall strength of the economy."
The overall flooring industry—including hardwood, ceramic, laminates, and other hard surfaces in addition to carpets—has grown at an average rate of 4–5 percent in recent years, Boykin said. Within that segment, ceramic and wood flooring sales have risen 7–8 percent and laminate sales still faster, according to Boykin. Meanwhile, carpet sales have been growing 2–3 percent annually, he said.
"It's a cyclical business, no question about it," Boykin said. "[But] we haven't seen huge swings from year to year in the past 20 years. In terms of units, a good year is up 5–6 percent, a bad year is down 5–6 percent."
Bracing for a slowdown
Because of a slowdown in residential construction, signs in 2006 began pointing toward a bad year. While new residential construction accounts for 20 percent of the industry's revenue, according to Boykin and Shaw, the slowdown in housing is conspiring with less residential replacement demand and higher costs for petroleum-based raw materials to create possibly the worst climate for the business since the early 1980s, when a recession hit the industry hard.
"Both new and replacement residential carpet declined significantly from the prior year, with commercial carpet continuing to grow," Mohawk announced in its third-quarter earnings report.
Late in the year, big companies like Shaw and Mohawk began girding for a slump. Mohawk announced plans to cut jobs and other expenses. Meanwhile, Shaw said his company is "battening down the hatches," which could involve reduced operating hours at some plants.
Executives don't expect this dip to be as deep as that of the early '80s. Still, it could be worse than the blips of 1990–91 and 2000, Shaw said.
The main reason carpet executives figure their industry is sturdy enough to endure a downturn without major damage is because of consolidation in the aftermath of the early '80s recession. A fragmented industry of 200-plus manufacturers in the 1970s is today dominated by fewer than a half-dozen big, financially solid companies, led by the two Georgia powerhouses, Shaw Industries and Mohawk. Those two companies and Beaulieu of America, also headquartered in Dalton, claim more than 70 percent of the $14 billion domestic carpet business, Boykin said.
Shag is out, hardwood is in
As consumer tastes have changed, these companies are making more than carpet. As Julius Shaw noted, 20 years ago carpets accounted for 75 percent of all flooring sold in America, while today it's about 60 percent.
In response, carpet companies have diversified their product lines. For example, in October 2005 Mohawk acquired Belgium-based Unilin Systems, a maker of laminate flooring, for $2.66 billion. The big carpet makers, unlike hard-flooring firms, have the capital and relationships with flooring retailers to make such acquisitions practical, Boykin said.
And acquisitions are nothing new in the industry. Shaw Industries helped pioneer the first wave of consolidation through the 1980s and 1990s when, in the 1970s, it began buying operations that produced yarn, polypropylene and other ingredients used to produce carpet. After completing that move, Shaw began acquiring other carpet makers and taking control of the wholesale distribution of its products. Other manufacturers soon followed suit.
Will 2007 bring new challenges?
The carpet industry enters 2007 facing what could be its most difficult climate in 25 years. It seems ready. Today's floor-covering industry is characterized by fewer, more diversified, and financially stronger producers than the business of the early 1980s and is thus better suited to weather a slowdown. Still, the long-term health of the domestic industry, executives and industry observers said, depends on several factors, including the national economy and the influence of imports.
Will it remain a domestic business? "Right now," said Julius Shaw, "we think it will."
This article was written by Charles Davidson, a staff writer for EconSouth.