Rugnews.com Executive Session:
HAND KNOTTED RUGS:
TO BE OR NOT TO BE?
By Rob Leahy
Adapted from the blog
Growth returns, but unevenly
As I prepared for the Afghanistan/ USA Carpet Conference held in Dubai September 20-22nd of this year, I collected a large amount of information for presentation to the participants. From these data a picture appeared that was encouraging on one level, but disconcerting on another.
The bright spot was that the rug business is getting its strength back after a dramatic decline in 2008-2009. The disturbing news, however, is that the hand knotted segment is not recovering . Digging deeper into the details I found indications that it may never come back.
Over my career, I have always looked at the rug industry in a very analytical way. Having entered it in 1971 as a department store buyer in Washington DC , I worked for the undisputed dean of the business. Later, I was with a large textile company that was owned by one of the most demanding men ever to operate an American company. In both of these roles I was expected to be fully aware of my customers' needs, my suppliers' strengths and weaknesses and, above all, my competitors. So, expert or not, during my 40 year career, I have been conditioned to study and always understand the markets that include me.
As world demand for the purchase area rugs improves, hand tufted rugs are taking an ever-growing share of the market. Using import data to the USA it is apparent that tufted rugs are now over 50% of the market; up from about 25% five years ago. Source for the chart above was the US International Trade Administration which compiles the data from US customs for the U.S. Department of Commerce, Office of Textile & Apparel (OTEXA).
To further put this growth into perspective, these records are in dollars and since tufted rugs have a 3 or 4 :1 cost per unit relationship to hand knotted rugs, the unit growth is amazing. The unit growth is indication, though, that new consumers are also coming into the US rug market.
While this growth in tufted rugs is stunning it is noteworthy that, since 2009, the value of hand knotted rug shipments to the US has leveled off at about $225 million annually.
One of the outcomes of the Afghanistan/ USA Carpet Conference was that there were two days of free and open exchange of ideas and opinions on the future of the hand knotted portion of the world carpet trade.
Long into the night we discussed which countries are making hand knotted rugs and how do the carpet makers in these countries compete with each other. A couple of factors that separate these major shippers from each other were identified.
I feel that two most important factors controlling the competitive relationship between countries are relative cost advantage versus the ability to produce innovative products compared to other countries, or product differentiation.
The diagram above depicts my view of the relationship of the world’s major shippers comparing these two metrics.
While subjective, the result is a graphic representation of expected sourcing trends in the hand knotted rug business over the next five years.
Producing countries compared
Beginning with the world’s largest producer of hand knotted rugs, India has had to increase weavers’ wages some 30% by government decree.
In addition, new industries locating in carpet making districts have been attracting workers away from established rug companies.
To counter higher prices, made necessary by these pressures, there has been a wave of product development with the Indian rug suppliers. Notice that the arrow for India moves up in differentiation and slightly left marginally reducing the country’s former cost advantage.
The movements depicted by the arrows are relative to each other as can be seen with China compared to India. China’s weaving companies, being directed by a central government, have ceased all new development and raised prices on existing hand knotted and hand woven products by as much as 100%. This has effectively taken China out of the market for handmade rugs re-directing workers and investment to machine assisted carpets such as the hand tufted rugs discussed earlier. Consequently, China’s arrow moves downwards in differentiation and well away from a cost advantage. Remember, I am comparing only hand knotted production, not all types of rugs.
The third largest shipper to the US in recent years had been Iran. Under embargo for rug shipments to the US since 2011, legal exports to the US have dropped to zero.
Shipments from Iran continue to the Middle East, Turkey, some European countries and Russia. Because of sanctions and shortages within Iran, inflation is high, diminishing any cost advantages that once existed.
Iran will soon be in the most unfavorable cost situation relative to all other countries. Banned from the most viable markets, there is little incentive to create new styles or methods. However, because of the historical diversity of the products made there, Iran’s relative position in product differentiation remains the highest.
Turkey is being affected by almost identical forces as China, except that Turkey is not a centrally planned economy and that changes there are a result of market demands, mainly by nearby European countries.
Turkey once had an ideal balance of highly varied product and efficient low cost production. A combination of weavers retiring from the field and other job opportunities for the remaining workers has decimated the rug weaving business in Turkey. Consequently, the country has one of the most dramatic moves shown in the diagram.
Nepal is a factor in the rapidly growing contemporary segment of the business and, in fact, shipments to the US have remained stable over the recessionary period at about $35 million annually. The country’s weavers seem to be maxed out and other work opportunities for women are appearing.
I have not shown Nepal on this diagram because there is minimal product differentiation and because the uniqueness of the Tibetan weaving technique prevents product to product price comparison.
Pakistan remains the world’s second largest shipper of hand knotted carpets. There is no certainty as to how much of Pakistan’s shipments are native or of Afghan origin. Consequently, these countries are linked and the relationship will continue for many years into the future. A considerable lack of electrical power within the country prevents Pakistan’s carpet makers from moving to machine made rugs. Instead, Pakistani carpet companies have become more innovative and concentrated on higher value products. Still, many of these are being sourced in Afghanistan. This moves the arrow for Pakistan well up the differentiation scale, but reduces its relative cost advantage.
This leaves only Afghanistan to discuss. Now, more than ever, Afghanistan will have expanded options in product differentiation as Pakistan teaches the Afghan traders new skills and methods because of Pakistan’s own need to innovate. Sophistication and efficiencies over time should add cost advantages and put the Afghans in a very favorable position near the optimal center point of the chart. Security and the potential for business disruption in the country or, as likely, within Pakistan do create significant hazards.These risks are not included on the sourcing grid.
Carpet making has been said to be the world’s second oldest profession. Selling rugs, until the past 50 or 60 years, has always been a trade based on handmade crafts from remote and inspiring places. The business had, until recently, withstood industrialization like no other.
The Afghan carpet trade is legendary. Recent history has seen it flourish with the highly self-interested support of Pakistan. While I truly think that the county’s rug trade can withstand the likely chaos of the next few years, it could falter.The current state of the Afghan business emerged during the time of the Russian occupation and strengthened while the Taliban controlled Afghanistan. But it was created within Pakistan by refugees.
If the Afghan rug industry goes terribly awry in after the U.S. military withdrawal in 2014, it will be highly unlikely that Pakistan will be able to help this time.
There will be reduced support for refugees from donor countries for this third migration and the political and cultural instability within Pakistan itself will most likely prevent the attention that the government was able to earlier provide.
Having reviewed and considered the prospects for handmade carpets in all of the world’s rug producing countries I feel that the Afghan trade is the last stand for the hand knotted carpet business.
For one reason or another each of the current rug making countries has limited production or is moving away from handmade production and unlikely to be able to reverse that trend.
Today, competition from Pakistan and Afghanistan, by association, is preventing runaway price increases in hand knotted rugs. And, it is doubtful that higher prices for hand knotted rugs will attract workers or re-investment back to the hand knotted segment. Too many other options for workers are available and other new choices for rug consumers have been developed.
If today’s Afghan weavers are not able to pass on rug making skills to the next generation the world’s only growth source for handmade carpets will disappear. Prolonged civil unrest in either Afghanistan or Pakistan will severely weaken the carpet trade’s relationships with buyers and the consequent lack of demand may prevent this generational knowledge transfer.
Hopefully, this draconian scenario will not come to pass. We have been warned of the demise of hand weaving before and it has yet to occur. From my vantage, though, the possibility is as real as it has ever been.
This article has been adapted from the blog, www.charlestonrugsblog.com
For more on the Afghanistan Investment and Reconstruction Task Force, click here
Rob Leahy is owner of Fine Rugs of Charleston, Charleston, SC. He has been an observer and participant in the rug business since 1971, opening his current retail business in 2003. He is a Subject Matter Expert for the US Department of Commerce and works with the interagency Afghanistan Investment and Reconstruction Task Force.
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