18th April, 2008
Why China Is No Longer Cheap | What That Means To You
Brent Butterworth
Any old hand can tell you that nothing has changed the CE industry like China. China is the reason we have $29 DVD players, $999 flat-panel TVs, and even the unprecedentedly gorgeous metalwork and woodwork on many of today’s high-end speakers.
However, recent reports from the Middle Kingdom tell us the party is over, that manufacturing in China offers much less of a cost advantage than it did just two years ago. It’s easy to figure out how rising prices in China might spell trouble for Wal-Mart. But how does this situation affect the integrator?
Recent economic changes in China haven’t received much attention in the press, so let’s do the numbers. So far in 2008, China’s currency, the renminbi, has risen against the dollar at a 16 percent annual rate. In July of last year, China’s government eliminated the value-added tax (VAT) refund for hundreds of commodities, and reduced the VAT refund for more than 2,000 types of manufactured products. Oil prices have risen dramatically worldwide, making plastic and transportation more expensive—and in turn making other commodities more expensive. Thanks to the one-child policy instituted in 1979, China’s labor force is dwindling, and wages are rising at low double-digit rates in the coastal manufacturing centers. Stricter environmental and labor laws have further raised costs. It all adds up to price hikes of 20 to 40 percent on many Chinese-made goods.
Many factories in the Guangdong region on China’s southern coast are closing for lack of work. Some production is being shifted to places with lower labor costs, such as China’s interior and less-developed countries like Vietnam. But with primitive infrastructure and a population that’s less than 7 percent of China’s, there’s no way that Vietnam (or any other small, undeveloped country) can take up the slack.
None of this will seem like good news when you see the rising prices on, say, kitchen doodads at Bed Bath & Beyond. But the decline of cheap goods from China may benefit your business.
In the CE industry, the vendors that will suffer most are the bottom-feeders specializing in generic plastic in-wall speakers and indistinguishable midsize flat-panel TVs. These companies have little or nothing to offer other than a low price, and now they’ll find it difficult to deliver even that.
Most important to you, though, is that these are the companies who inspire your customers to ask, “Why should I spend thousands to buy a Panasonic or Pioneer or Runco TV from you when I can get a 50-inch plasma at Costco for $1,200?” Yes, most of the major video brands get some of their TVs (or at least the components to build them) from China, but they’re not as dependent on cheap Chinese labor as the no-name brands are. So maybe, just maybe, the demise of some no-name TV companies will make it a little easier for you to hold your margins.
Higher product costs raise the bottom line on your invoices, too, but your customers will notice this rise much less than Wal-Mart’s will. After all, product cost is just one part of your invoices—you also charge for labor and design fees. Wal-Mart doesn’t.
Finally, some of the industry’s most storied brands may shift part of their production back to North America. Domestic factories that are underutilized or even mothballed may come back to life. As a result, companies won’t be paying for empty factory space as some are now, and profits might even improve a little. Whether or not your vendors make more money may not be your direct concern, but at least their expense accounts might expand. And that’s good news for all of us.
Posted at 1:53 pm |
