Taorui Lui Senior Thesis 2024

Dynamics of the PVC Flooring Market: A Comprehensive Analysis of Chinese and American Sectors

Taorui Liu Senior Thesis | 2024

Dynamics of the PVC Flooring Market: A Comprehensive Analysis of Chinese and American Sectors Taorui Liu Boston University Academy Senior Thesis Paper Colleen A. Krivacek April 12, 2024

Abstract The goal of this study is to investigate the factors that influence the American PVC flooring market, and use these factors to make predictions for the future of the PVC flooring market. Import data from the U.S. and export data from China will be collected to reflect the trends of the American PVC flooring market. Industrial reports like 10-K and annual stockholder reports are collected from companies such as Mohawk and Armstrong to provide a professional perspective on the PVC flooring industry. Two major time slots will be specifically looked into: the 2020 global pandemic and August 2022. During these times the import/export data reflected disruptions which showed correlation between other factors such as COVID-19 restrictions, personal consumption preferences, and construction costs. It is found that these factors have a major impact on the PVC flooring industry and it is predicted through these factors that the American PVC flooring market will remain stable for the upcoming years.

Keywords: PVC flooring market, COVID-19, international trade

Dynamics of the PVC Flooring Market: A Comprehensive Analysis of Chinese and American Sectors Flooring has always played an important role in defining the characters of living spaces, its history begins from when early civilizations used natural materials like straw, wood and animal skins to decorate their dwellings. As society progressed, so did materials used in flooring, in Ancient Rome and Greece, beautiful mosaic floors were created, and in the middle ages patterned tiles were used in European castles and cathedrals while hardwood flooring were applied during the Renaissance. During the industrial revolution, mass production made linoleum flooring and carpets popular, (Right Flooring, 2023).

Now, in the 20th century, technological advancements introduced more innovations. In the flooring industry. Vinyl floorings became popular for its affordability, while laminate flooring provided a cost-effective alternative to hardwood, and among the various types of flooring, resilient flooring emerged.

Made with synthetic plastic polymer, its exceptional versatility and practical advantages quickly became favored among the industry.

In the category of resilient flooring, polyvinyl chloride (PVC) flooring, characterized by its durability, water resistance, and low maintenance, has become a well liked choice in both residential and commercial spaces. Its wide range of designs and styles has made it a popular choice for those seeking both practicality and aesthetic for their uses. Modern-day PVC flooring is available mostly in two forms, sheets and tiles. The sheets are characterized by their highly flexible capabilities, their soft texture marks, and their uses within childcare facilities and nursing homes. On the other hand, tiles are stable, meaning they are less likely to change sizes due to temperature change, and great insulators, making them ideal for large indoor spaces, (Right Flooring, 2023).

The flooring industry evolves accordingly with the taste and needs of society, and today, PVC flooring stands as the representation of all these trends. Having both functionality and

style, it is used by construction companies on various real estate projects. The purpose of this study is to analyze the market by the import and export and examine its correlation with related fields such as construction and customer preferences to identify the key factors that influence the market. The study will be looking into specific times such as during COVID-19 and in August 2022. The outcome of this study will be a prediction for trends in the PVC flooring industry.

Thesis Statement The market of U.S. PVC flooring is dependent on the personal consumption of the people, construction costs of projects, and international trade status of America. Through exploration of these factors, this research seeks to provide predictions for the future of the U.S. PVC flooring market.

Methodology Data Collection To ensure accuracy and consistency in data collection, this study used the Harmonized System (HS) code. The specific code chosen for this study is 3918109000, which corresponds to “Floor coverings of polymers of vinyl chloride, whether self-adhesive or in rolls”. HS code is a tool for classifying trade products, allowing for accurate data extraction. The dataset was then acquired from the General Administration of Customs of the People's Republic of China for export data and the United States International Trade Commission (USITC) for import data. These two countries were chosen because of their status each as a largest exporter and largest importer of PVC flooring, (OEC, 2022).

Visualization and Analysis By translating the data to two different line graphs, one of raw data, and the other of percentage change, the trends became visually apparent. The raw data graph provided a clear picture of

the market's quantitative aspects, while the percentage change graph allowed for an understanding of the trends in a relative context.

Exploration of Related Fields In addition, an examination of the Personal Consumption Expenditure (PCE) index from the U.S. Bureau of Economic Analysis (BEA) and the Construction Cost Index from Mortenson Group gives insights into consumer behavior and industry risk assessments by construction companies. This approach enables an exploration of related factors influencing the PVC flooring market.

Company Reports This study incorporates Armstrong’s 10-K and Mohawk’s annual stockholder report, providing a professional perspective.

The 10-K is a report required by the U.S. Securities and Exchange Commission (SEC) which provides a detailed overview of the company's financial performance, business operations, and

potential risks. This document typically includes information about the company's competitive landscape and strategies. The annual stockholder report outlines the company's challenges and strategic initiatives. Both of these documents can give important information on the status of the PVC flooring market from another perspective during the time slots that this study is looking into.

Results Results present an overview of the factors that affect the U.S. PVC flooring market, this study particularly focused on the import data from the U.S., the export data from China, personal consumption expenditures in the U.S., and the annual constructions in the U.S. As shown in Figure 1, a line graph illustrates the relationship between time and (export of China/import of U.S.) values. The x-axis represents the time from January 2015 to December 2022, while the y-axis represents the value in dollars.

This graph indicates the general trends of the market, where the

large V-shaped recovery happens when COVID hits, and the consistent decline starts at the beginning of 2022. The blue line is the import value, the red line is the export value, (General Administration of Customs of the People’s Republic of China, 2024; USITC, 2024).

Figure 1 Line graph of export value of China and import value of U.S. under “Floor coverings of polymers of vinyl chloride, whether self-adhesive or in rolls” (Dollars) vs time, (General Administration of Customs of the People’s Republic of China, 2024; USITC, 2024).

In Figure 2, a line graph illustrates the relationship between time and year-over-year (YoY) percentage change of (export of

China/import of U.S.) values. The x-axis represents the time from January 2016 to June 2023, while the y-axis represents the YoY percentage change. This graph indicates the proportional growth in (export/import) values over the analyzed period, offering insights into the rate of change in comparison to the absolute values presented in Figure 1. It is visible that during both the time slots that this study is looking into, the blue and red lines are both in the negative percentage area. The blue line is the import percentage change, the red line is the export percentage change, (General Administration of Customs of the People’s Republic of China; USITC, 2024).

Figure 2 Line graph of percentage change of export value of China and import value of U.S. under “Floor coverings of polymers of vinyl chloride, whether self-adhesive or in rolls” (Dollars) vs time, (General Administration of Customs of the People’s Republic of China; USITC, 2024).

In Figure 3, a line graph illustrates the relationship between time and personal consumption expenditure (PCE), including subcategories of PCE of “Furnishings and Durable Household Equipment” which PVC flooring products are under. The blue line represents the overall PCE index, while the red line represents the “Furnishings and Durable Household Equipment” PCE index. This graph indicates that the “Furnishings and Durable Household

Equipment” category exhibits a static trend despite the increasing trend of the overall PCE index starting from 2022, (BEA, 2023)

Figure 3 Line graph of personal consumption expenditure index vs time, (BEA, 2023).

Figure 4 shows a box plot of the national construction cost index each year, it is clear that a change in the increasing trend was observed between the years 2020 and 2021, the cost index increased substantially.

Figure 4 Bar Graph of National Construction Cost Index vs time, (Mortenson group, 2024)

Analysis Impact of COVID-19 The global pandemic in 2020 created an economic ripple effect, with governments imposing restrictions and lockdowns that lasted for around two months. Its impact on the PVC flooring market was evident in the subsequent V-shaped recovery seen in Figure 1. The main cause was due to the two-month duration of

restrictions set by US that led to disruptions in supply chains and a temporary halt in construction activities both affecting the PVC flooring market, (Logan, 2022) Armstrong acknowledged significant repercussions on its business due to the pandemic, including results of operations and cash flows. The widespread outbreak of communicable disease, caused economic and trade disruptions further lead to disruptions in global supply chains. The negative effects of the pandemic extended to the U.S. economy, marked by disruptions in supply chains and workforce participation due to widespread "shelter-inplace" restrictions, (Logan, 2022). Both of these effects impact the PVC flooring market, with the supply chain disruption damaging sales and lowered workforce participation damaging the construction industry, which the PVC flooring market is highly dependent on. Factors such as transport restrictions, effects on customer demand, the ability to sell and provide products and

services are the effects that Armstrong, as a flooring provider in the midst of a global pandemic, faces, (Armstong, 2021).

Mohawks also faced a similar situation, they started their annual report by emphasizing the material consequences and the potential for ongoing effects due to the pandemic. The company anticipates economic downturns, resulting from the pandemic, to pose a significant risk of decreased demand for Mohawk's products, leading to lower sales, (Mohawk, 2022). The correlation between PVC market and global trade is evident by looking at the two documents.

August 2022 Anomaly Starting from August 2022 the positive increasing trend of PVC flooring import and export was disrupted. Notably, the data shows a consistent decline, evident in both the decreasing raw data line plot in Figure 1 and the negative values reflected in the percentage increase line plot as observed in Figure 2. While the Vshaped recovery has an apparent explanation of being affected by

the global pandemic COVID-19, this August anomaly for the PVC flooring market does not. Delving into related fields, such as the personal consumption expenditure index and the construction cost index, allow the study to find possible conclusions.

In figure 3, the Personal Consumption Expenditure (PCE) index shows a consistent upward trend in the PCE line, signifying increase in annual spending by individuals. However, when examining the specific category of "Furnishing and Durable House Equipment," under which PVC flooring is classified, it appears that this line has exhibited a static trend since 2022, despite the upward movement of the PCE line. It can be inferred that while the overall PCE continues to rise, the stagnation observed in expenditures related to "Furnishings and durable household equipment" suggests a change in consumer preferences. This implies that consumers, despite an increase in overall spending, are not directing their financial resources towards this specific segment. This shift in consumer preferences may be influenced by various factors, such

as change in construction trends or a focus on alternatives that are more sustainable. As a result, the stagnant demand within this category directly affects the PVC flooring market.

The U.S. Construction Cost Index in Figure 4, as supplied

by Mortenson Group, a service provider in the construction industry, reveals a notable increase in construction costs during 2021. The index climbed from 137.8 to 167.4, indicating a substantial growth in costs between 2021 and 2022. For companies operating in the construction sector, this uptick introduces an element of risk, prompting concerns about its potential impact on profitability in the future. The heightened construction costs pose a direct challenge to companies, as their goal is to maximize profit, and this increase of expenses can lead to decrease in profit margins. The year-on-year growth leading up to 2021 adds an additional layer of concern for businesses engaged in housing projects. Companies operating in the construction sector are compelled to adopt a cautious approach in the upcoming year,

2022, which means that they will be cautious in participating in building projects in the upcoming year. Further effects will directly impact various elements of the industry, including demand for construction materials and, consequently, the sales of products like PVC flooring.

Minor factors that are also affecting the American PVC flooring market are reflected in the report from Mohawk, it notes that new home construction, and the subsequent demand for flooring materials, tend to decelerate during declining periods. In this case, the declining period is referring to the time slot from the start of COVID-19 in 2020, and continues even to this day.

Economic uncertainties or declines have a direct and negative impact on the floor covering industry, particularly influencing consumer behavior in home remodeling. During periods of economic uncertainty, end consumers tend to reduce spending on home remodeling projects, further lowering the demand for PVC flooring products.

It can be concluded that the 2022 anomaly within the U.S. PVC flooring market is deeply related to the dynamics within the US construction industry and shifts in consumer spending patterns.

The surge in construction costs, as evidenced by the U.S. Construction Cost Index, poses a significant risk to companies involved in building projects, leading to cautious decision-making in the allocation of resources and participation in construction projects. Simultaneously, an examination of the Personal Consumption Expenditure (PCE) index gives insight on changing consumer behaviors, specifically the stagnation in spendings related to "Furnishing and Durable House Equipment," a category including PVC floorings. Despite an overall increase in PCE, this static trend suggests a transformative shift in consumer preferences, impacting the demand and subsequent sales of PVC flooring.

The China-U.S. international trade relationship continues to affect the future of the PVC flooring market. According to Chinese

Customs data (2024), the Year-to-Date U.S.-China trade recorded a 15.4% decline in July compared to the same period in 2022. This persistent decline underscores the ongoing deterioration in the U.S.-China trade relationship, introducing an element of uncertainty and potential disruption to the supply chain and market dynamics. The stasis in construction costs, shifting consumer spending patterns, and the strained China-U.S. trade relationship collectively hints at the challenges that PVC flooring market is facing in August 2022.

What adds more to the list is the U.S. specific factors such as housing market and increase in essential costs like energy.

According to Mohawk, in 2021 the sector benefited from high home equity levels, a trend towards larger homes, and a focus on customizing living spaces amid the pandemic, all contributing to significant investments in remodeling. However, as the year progressed, the U.S. housing market experienced a decline, influenced by a series of interest rate increases and the impact of

high inflation on household budgets. Inflation and higher mortgage rates resulted in a softening of residential sales as well. There was also a notable increase in energy prices and overall inflation, prompting consumers to lower discretionary spending like flooring products and prioritize essential expenses. The shifting economic landscape, characterized by changes in interest rates, inflationary pressures, and altered consumer spending patterns, further contributed to a decrease in flooring sales, (Mohawk, 2021) Conclusion It can be concluded that the PVC flooring market is influenced by various factors, such as, consumer preferences, construction costs and international trades. Through the Personal Consumption Expenditure (PCE) index, the study discovered consumer spending patterns. In particular, the decreasing trend within the "furnishings and durable equipment" line despite a general increase in the PCE, means that consumers are shifting away from products like PVC flooring. Other factors like the

construction cost increase caused companies to adopt a cautious stance in construction projects, impacting the demand for PVC flooring subsequently. What adds more to it is the strained ChinaU.S. trade relationship also due to COVID-19, introducing uncertainty and potential disruptions to the supply chain caused by shutdown and restrictions. By studying the export and import data along with related fields, it shows the correlation between the PVC flooring market and major factors such as construction costs, consumer expenditures, global events and many other minor factors.

As the flooring industry evolves, the factors that affect it will remain unchanged. This study and the conclusions it’s making can still be applied because the fields that these factors are from will always be related to the flooring industry. Stakeholders are urged to adapt strategies that align with evolving consumer preferences and industry dynamics. As the construction cost increase slowly became constant, and the effect due to COVID-19

on world trade continues to die out, it is predicted that within the upcoming years, the U.S. PVC flooring market will remain relatively stable. More research might be needed to research the scale of impact the related industries have on the American PVC flooring industry.

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