China Update

We have seen some dramatic developments throughout Asia on both a macro-economic and micro-economic scale over the past couple of months and thought that it would be beneficial for our clients if we sent out a supplemental newsletter highlighting these developments and explaining the ramifications upon your supply chains.

Prior to looking at the developments, it is important to understand the backdrop against which companies are increasingly looking to purchase their products from Asia. We are approaching the busiest time of the Chinese manufacturing calendar and, therefore, factories’ order books for the next quarter are overflowing. Add to that the additional capacity requirement due to a global inventory readjustment (particularly in the US, where consumer confidence and retail comparables have recently improved*) and the demand for raw materials, and we are left with an intimidating environment in which factories are struggling to meet deadlines but are no longer at the mercy of the buyers because of overflowing order books.

This trend is not limited to China. It is a global phenomenon. If we take cotton as an example: China plantings were delayed by 3-4 weeks because of heavy snow and India recently restricted the export of cotton in order to support its own local industry. In addition, 50,000 Pakistani textile workers staged protests last month to put pressure on their own government to follow India’s lead with protectionist measures of their own.

No doubt you have all heard of the recent spate of suicides at Hon Hai’s Foxconn unit that manufactures key components to Dell, Apple, Motorola and Sony. The consequence of which was an effective 100% increase in wages at the manufacturing plant. Notably, the management of Foxconn have recently suggested that they will be looking to shift the production of some of Apple’s products to other locations further North in China to leverage off cheaper labour rates. According to Geoffrey Crothall, director of the China Labour Bulletin in Hong Kong, reports from all over China tell of militancy spreading like wildfire in which strikes are becoming more common place as a method of “negotiation” to receive increased wages.

On a macro-economic scale, the West have successfully “persuaded” the Chinese government to relax its controls on the Yuan (RMB) and allow currency appreciation. The early indications are, however, that the recent flexibility as set out by the Chinese was simply an exercise in window-dressing prior to the G8 and G20 summits in order to move the agenda to other issues. We do expect an increase in the value of the Yuan but do not expect this to be dramatic; rather it is likely that there will be a gradual controlled appreciation over the next 6 months. The Yuan has appreciated only 0.2% since the Central Bank’s announcement.

What can our clients take from all this? Will China still play an important role for outsource manufacturing in the future? The answer has to be yes. There are slight shifts in the manufacturing sector within China, because of the reasons discussed above, but this does not detract from the country as a whole generally having the efficiency, access to raw materials, infrastructure as well as investment to continue delivering both value and quality to companies’ supply chains. For example, there will be a move away from the coastal regions of China and from Hong Kong (which we have been pointing to for the last couple of years – please also see our April/May Newsletter (www.et2c.com/resources.html) which refers to the increase of minimum wage in Guangdong from 1 May 2010) towards the north and further inland areas of the mainland. As infrastructure continues to improve the easier the access will become. We have been identifying factories in these areas over the past couple of years and our clients will continue to benefit from this work in the near future.

Given the widespread press coverage, we must also put these pricing pressures into context and not be clouded by the obvious hysteria. No one can deny that there are pricing pressures in China but this is not new and so too have there been increases in costs in other export driven economies. For example, India’s average labour cost is $2.99 per hour (17% increase on 2009) whereas China’s average labour cost is still only $1.84 per hour (14% increase on 2009). One other point to bear in mind is that other export driven economies do not benefit from China’s access to raw materials, its infrastructure and labour force to name just a few. In some instances where there is an initial reduction in cost price FOB from a country other than China, there are additional transport costs or other expenses incurred. The fact remains that for the money, the quality of Chinese-made goods is tough to match.

There is no question that the road is going to be a bit bumpy over the next few months whilst the dust settles but we will continue to work on your behalf to prevent any disruption to your supply chains. More than ever, it is necessary to have ET2C International Inc on the ground and working for you. We are confident that our clients will continue to benefit from sourcing from China.

*Note that Consumer Confidence in the US dropped in June to 52.9.

Vietnam

As you all know, we do have a sourcing office in Vietnam and over the past 3 years have been increasing ET2C International Inc’s capability to source products from this country. During this time, we have been able to develop good relationships with some excellent factories. Whilst there is a large labour pool in Vietnam and the labour cost in 2010 is lower than in China, there are sometimes other factors to consider such as infrastructure, import of raw materials etc.

The above said, we will be increasingly cross-quoting a number of your products and will bring these to your attention where there are significant cost savings. Should you wish us to provide details of areas Vietnam could be of benefit for you, please do let us know.

Please do not hesitate to contact any of our staff to discuss any of the above. Please also refer to our website or twitter page to get frequent updates on relevant news and information (all links on our website).

2010
- Jun
- Apr/May

2009
- Dec/Jan
- Sep/Oct
- Feb/Mar
- Apr/May
- Jun/Jul

2008
- May/June
- Oct/Nov