SCDigest: What’s Going to Happen to ‘The China Price’?

May 11, 2009

By SCDigest Editorial

The “China Price” dynamic
has gone through several iterations.

First, Western manufacturers
were panicked over the prices coming from Chinese competitors, which were
often 20-30 percent less than they could make it for domestically.

Next, companies in almost
all industries looked to outsource production, directly or indirectly,
to China’s increasingly sophisticated manufacturing sector. While many
found the true net savings somewhat elusive or at least less than expected,
unit manufacturing costs went down substantially for most companies that
took this path.

Then, given the huge
growth in manufacturing and the Chinese economy overall, Chinese labor
started to rise substantially. In 2007-08, this really began to eat into
the savings companies had achieved by moving to China. As a result, especially
for low value-added manufacturing, many companies moved further west into
inland China chasing lower wage rates, or considered other lower costs
countries such as Vietnam.

But then, the financial
crisis hit, and China’s export volumes dropped dramatically. Tens of thousands
of factories in the country have closed, and reports are that millions
of urban workers without jobs in Eastern China have moved back to the countryside.
This change is putting a heavy brake, for now, on rising labor costs, as
suddenly labor demand is much weaker than supply, after the reverse was
true for the past several years.

Between lower wage pressures
and the fact that most Chinese factories operating at low levels of utilization,
Western buyers are gaining more pricing clout than they have had in years.

“Deflation [in China
pricing] is here to stay,”
believes William Fung, managing director at Li & Fung. “Buyers have
more of an upper hand again.”

That’s because export
volumes to the weak economies of the U.S., Europe and Japan show no signs
of recovering soon. However, there are signs that China’s manufacturing
sector is recovering on its own, without much help from export customers,
as the country’s economic stimulus plan and focus on bolstering the internal
economy start to pay off.

So for now, it may be
time to revisit pricing with existing Chinese suppliers or postpone moves
further inland or to other countries. But mid-term, the pricing pressure
on Chinese goods is likely to return, especially if the U.S. dollar starts
to fall, as many predict it will as the printing presses run to monetize
the growing U.S. deficit.

Discussion question:
Do you expect higher or lower prices coming out of China over the next
year? Why? Will this trend be short-lived, or long lasting?

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6 Comments on "SCDigest: What’s Going to Happen to ‘The China Price’?"

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David Biernbaum
11 years 11 months ago

Over these past ten years, China’s manufacturing sector has learned a lot about the U.S. and western consumer goods business model. Many of the higher quality factories in Asia have learned western economics and are pricing their goods more accordingly to supply and demand, and many have installed special tooling for certain products that allow for less direct competition in certain niche markets. Therefore, some prices in China will be steady to slightly increasing, while the basic commodity suppliers might offer lower costs to western suppliers over the next year.

Lee Peterson
11 years 11 months ago

Sure, prices will drop and sure, it’s going to be temporary, but that makes this an excellent time to scour the Chinese manufacturers for better standards of operations all the way around.

Price is one thing, but the benefit of heightened competition and limited consumer spending makes this a perfect time to push increased speed to market, better communication and above all, better QC methodology and overall quality.

Hallelujah, leverage at last!

Carol Spieckerman
11 years 11 months ago

I’m with David on prices holding steady to slightly increasing out of China overall; however, all of this depends on volume. It is a great time for sourcing giants like Li & Fung to make deals and take over production, and that’s exactly what they’re doing (their recent purchase of Liz’s sourcing operation and Buying Agency Agreement). These are the guys who will be able to turn the tables and wield a big negotiating stick regardless of Chinese labor shifts.

M. Jericho Banks PhD
M. Jericho Banks PhD
11 years 11 months ago

Unmentioned in this report is the impact that product recalls have had on the Chinese manufacturing bidness. We are all familiar with the weekly newspaper listings of recalls, most or all of which are from China. Lead and melamine content are clear issues, but poor construction and cheap materials also play a significant role. The Chinese government has taken decisive steps to curb these problems, even executing some owners of companies with especially damaging violations. This has had some positive effect on the manufacturing responsibility of the affected (and similar) companies, forcing them to raise their prices to implement quality improvements. The overall mood is that the government is more proactive than ever regarding product quality, no longer waiting for problems to be laid at their doorstep. This, among the myriad other economic and political influences on prices of Chinese goods, will exert a sustained upward pressure.

Kai Clarke
11 years 11 months ago

This article is only partially correct. We have many operations, JVs and partners in China, as well as a full office and manufacturing operation, and it is not the cost of labor that has necessarily changed, but the cost of materials, demand for product (read profits) and the impact of oil. In addition to all of this the deflated value of the dollar has worked against getting even more in-roads into China.

However, prices are becoming deflationary, but not to a large degree. The Chinese government still controls many things, including material costs, labor costs (and insurance) and other “outside” costs which are all a part of the finished product. Managing this alongside a full-scale logistics implementation is the only way to maximize a China manufacturing and exporting operation.

Mark Lilien
11 years 11 months ago

What really matters: does the Chinese government want to maximize employment, and will they keep their currency cheap to accomplish that goal? History says: yes and yes. The Chinese government wants to avoid social unrest caused by unemployment.

The race to the bottom to find the world’s cheapest labor will continue. Certainly China will continue to be a major player in the “cheap labor contest” for many years to come. Cheap labor, working for the West, has been China’s number 1 national resource since the 1800’s.


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