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