Things that make China Prices Rise

Just a few days ago I had a client ask me about some (factory direct) prices, saying: “I thought China was supposed to be a great deal?!” Well sure, it can be. But not everything every time is going to be blow-your-socks-off cheap and fast. It often depends on a number of different factors, some you can and some you cannot control.For example if you’ve got small quantities and lots of SKU’s, as does this client, there really isn’t going to be a great bargain anywhere. One of the keys to “China pricing” is millions of the same widgets, not hundreds of different widgets.Another key is having a real reason to be here—are you here just because everyone else is? Can you do smaller runs just as cheaply at home without the hassle of overseas production? Unless there is clear bottom line (or other) reasons to be here, you don't have to be here.A third key is to do your research UP FRONT. Don't make the transition to China and then see if it is cost effective to have done so. Finding and qualifying the best supplier possible will save you TONS of money, problems and headaches later.Now there are obviously thousands of other issues that affect the prices of individual products too. These are both product specific and very general issues that cross over multiple industries. I can’t speak here to product specifics, but I do know that what happens with these general issues affects my bottom line and that of my clients’. So here’s a list of general things that are making the price in China go up now.1. The US government. Because politicians and unions lobby Congress to pressure China to raise their RMB the prices in China will rise as the RMB strengthens. In the past 2.5 years prices for Chinese goods have gone up more than 10% do to this fact alone (8.3 to 7.4). Sure, there are a few thousand manufacturing jobs in the US that will benefit from this, but there are 300 million consumers in the US that will not. But the consumers don’t have a lobby in DC like the manufacturers do. In addition to the consumers there are also thousands of American SME’s that will be caught in the squeeze—they are too big to keep manufacturing in the US (or their industry is too price competitive) but with a rising RMB they can’t get the competitive pricing they need in China either—hence my client’s question in the opener.2. Inflation in China. The CPI in China is up more than 6% in the last year. That means that indirectly prices for labor and the costs to house/feed workers has gone up. This is in part due to the incredible bubble in the Chinese housing and stock markets, and in part due to the annual 10% growth rates that the government can’t, despite their best efforts, reign in.3. Prices of raw materials/commodities. The war in Iraq, growth in China and other global issues are raising the price of commodities all over the globe. China is no exception. When your products are heavy into commodities with little value-added you’re competing with the rest of the global markets—and sometimes US tech is going to be cheaper than Chinese labor as it’s more developed than that that in China. To compete with this Chinese factories are gearing up—buying new equipment to compete with the more developed industrialized countries (and raising your prices to pay for the equipment).4. The new China moon probe. Ok, the probe itself isn’t raising prices in China, but the shift to technology over lower end manufactured goods means that (educated) labor is more expensive than it was just 5 years ago. Why are Western China, Cambodia and Vietnam exciting? Because the cost of labor (for one thing) is cheaper than in Eastern China. China isn’t pricing it’s self out of the cheap labor market yet, but there is a conscious effort to do just that—they don’t want to be the “low cost leader” when it comes to low-end manufacturing.5. Domestic Chinese Growth. Labor prices in general are rising in China as the population becomes more urbanized. The numbers today show that about 44% of the Chinese population is urban compared with only 35% 15 years ago—and that number is expected to continue to rise over the next decade. The demand for production for the domestic market means that more (not-for-export) factories are competing for more and more of the labor pool previously dominated by export-only factories. It also means that cities are growing bigger and bigger and the cost of living is going up for laborers that live in urban areas.6. Mature industries and industrial zones. Competition between regional industrial centers (Yangtze River vs. Pearl River) for a limited labor force means that laborers have a choice of where they want to work. Within industries skilled laborers, and even unskilled to a lesser degree, have a choice of factories in similar industries and even within the same industrial parks. Factory-offered incentives to laborers, most especially skilled labor, are rising quickly in this limited labor market. Yes, you read that right; there is a limit to the Chinese population and the available pool of labor. Western educated Chinese have their pick of jobs and change employers regularly. Factories are complaining regularly that they just “can’t find workers” or “workers refuse to work over time” and “if you yell at a worker they’ll walk out and go get a job across the street.” Just about makes you pine for the good old days, don’t it?!7. The Chinese government. The government is scared that too much growth is bad and that the growth rates are currently (Q3 = 11.5%) too high. So they are regularly raising interest rates (again this last week) making it harder to get cash to do business in China. On a related note, why is the Chinese economy so strong while the West (and the US in particular) seems to be having issues (housing, banking, stocks, etc.)? Part of the answer is the fact that the RMB is not fully convertible—meaning it’s not free to exchange on the open market. This insulates the Chinese economy from the ups and downs of the world markets. Another part of the answer is that the Chinese economy is an export economy so it lags the downturns in the West. A third part is the large domestic market that is growing as well as the construction that is necessary just to keep up with annual internal migration.8. Wal-Mart. Yup, the low price leader changes prices here by demanding low low prices. So low in fact, that factories are forced make their margins on other clients. If you’re making bags in the same factory as Wal-Mart, for example, you’ll certainly not get the Wal-Mart factory price and you’ll probably get a higher price since the factory won’t be making any money on the Wal-Mart deal (that is also pushing back your production times). So why do factory’s work with Wal-Mart if they don’t make much money? Factories I work with have given me the following answers. First, they want the name and status that comes from the association with Wal-mart. That status is not just face, but money—the Wal-Mart name in China is a by word for quality production and international standards. Buyers and traders often use the Wal-Mart certification as a standard to measure the capabilities of factories. Second, they know that Wal-Mart doesn’t just do one-off’s and so they can keep people employed and have a consistent source of income. Third, they expect that one product order will lead to others. Once your foot’s in the door…9. Quality Control and Testing. The scares of the past summer are now going to translate into “additional costs” for anyone producing here. Of course you can ask the factory to pay for product tests themselves, but ultimately the costs will find their way back to you. In the toy industry prices are going up because out of 2700 some odd toy factories in Guangdong the government just closed down 700-plus. That’s 25% of the manufacturing base gone, overnight! The related question is now, with the rise in testing/inspection standards and enforcement will there really be an appreciable rise in standards too? Date-rape drug beads recall this week would be strike one.10. Alibaba. Ok, not just Alibaba but all sourcing sites that take payment for rankings and don’t audit their vendors. I think that Alibaba, because there are so many unverifiable vendors on the site, makes the cost of doing business in China higher. I know, I know. With the billion-dollar IPO last week I’m being sacrilegious, but I still think that it’s true. Most of our new clients are companies who used Alibaba (and other sites) and just couldn’t get real product to match anything they saw on-line. They spend time and money working with online suppliers only to find that they’ve wasted months to produce something that just won’t cut it. Sure they had a “learning experience” but at what cost?!11. Green GDP. While this has been scuttled a number of times in China in the last 5 years, it’s getting more and more attention as the conditions in China are getting worse and worse. It goes without saying that production without any environmental controls in China is going to be cheaper (in the short run) than production anywhere else that has environmental controls. Further, as the many EU distributors start tracking the carbon footprint of their products expect prices to rise accordingly (read: astronomically).12. Paying the Piper—Yup, the days of Americans living on debt are coming to a swift (and painful) end. We’ve had a late night out and now it’s time to go to work in the early AM—and it’s going to be a long day. The Dollar is weakening, the economy is sluggish, we’ve got way to much consumer and collective debt, the housing market hasn’t hit bottom yet and growth is slowing while inflation is rising—the American economy isn’t the hottest date at the ball any more and, consequently, we’re going to paying more for just about everything.Now all of this doesn't mean that China isn't an opportunity any more. But it does mean that what happens in Topeka or Bagdad has influence on prices in your Dongguang factory. So again, do the homework before hand. Know what your approximate prices are going to BEFORE you place orders or ask for bids and then you'll never be saying "Hey, I thought this was going to be a great deal?! What happened?"Good luck!