Are Chinese Goods Becoming Too Expensive?

All of us familiar with China’s economy are aware that the cost of goods has been moving up for several years now.
    Demands for higher wages and better working conditions combined with increased costs of raw materials and a slowly rising currency have taken their toll.

It appears, however, that those price increases may finally be having an impact on that nation’s competitiveness.   At least that is what the Wall Street Journal has to say in an article by Tom Orlik entitled:  “Made in China Is Getting Expensive.”

According to the article, “China's export growth peaked in 2004 at 35.4% year-on-year. Since then, costs for manufacturers have increased across the board.  Average wages have risen more than 150%. Land prices have risen more than 70%. Nate Taplin, China energy analyst at Dragonomics, says electricity prices are up more than 30%. Compounding woes for exporters, the yuan has appreciated more than 30% against the dollar.”

The article makes the point that China primarily competes on price as it has no technological or home grown IP advantages.  To reinforce that point, the Journal notes that powerhouse, Li & Fung, which sources products in China for Wal-Mart and other major retailers, has experienced a 22% decline in operating profits for the first six months of this year.

I anticipate China’s government taking actions to shore up its manufacturing sector.   They have to as China values social harmony above all else.  That means it has to keep people employed as

those without work become restless.

What actions, however, can they take? Here is what I think:   They can certainly, as the Journal suggests, “…cut interest rates and increase public spending.”  That will not, however, correct the underlying problem that the old way of doing business, lowest prices based upon an inexpensive labor supply, will no longer work in an economy as robust as that of China.    

Ultimately, they will have to figure out how to become a society that creates intellectual rather than emulates it.  That is no easy task, particularly in a society, that is late to the concept of intellectual property protection and that has a government controlled economy.

China will continue to be a major supplier to the consumer products industry.  Its infrastructure is just too massive for that to change.  What will change, however, is a drip-like move of production to locations closer to home, wherever home may be.  It’s a changing world, even for China.

2 thoughts

  1. Closer to home can mean at home. From a parochial UK perspective the decline of Chinese production opportunities has to be a truism. Producing in England can be economic. Sometimes it is all too easy to think mass production = Far East. True the great advantage HK and China have is a great infrastructure; finding stuff once you know your way around could not be easier and there are many support functions (at a cost) on the route. It is too easy to get sucked into the assumption that the UK cannot produce, or that overseas is easier.
    I am an expert on, allegedly, many business aspects, one being sourcing of toys and gifts and I was recently retained to advise on outsourcing a decorative product for laptops and phones etc., with a specific request to review moving production of several 100k to China. The client already had a production unit in the UK but it was concerned about both cost and capacity and, not unusually, assumed China would be more cost effective. I would not be writing this if the result was conventional; it transpired after many e-mails & conference calls to raw material suppliers and factories all over china that the UK was not only comparable on cost but probably better by at least a factor of 3, possibly more after full account of cash flow implications and freight etc.
    In this case the business owner had started small and sourced the plant, machinery & people he needed to run an SME, one which grew to “medium” pretty fast. What is interesting is to contemplate the idea that had the current volume arrived at one hit he would have tried to place production overseas as no such contract production existed in the UK. In that case the project would have never taken off as the costs would have defeated the opportunity, and hence no wealth and job creation. But, because he grew organically, he had to resource in the UK and has a strong and efficient organisation as a result. This is one example of why banks need to support start-ups, and also a shining example of how to produce in the UK. It is a business plan that will not always work but in today’s climate it is worth thinking about …………..always challenge an accepted truth.

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