Bad News for Buyers: The China Price is Going Up
Bad News for Buyers: The China Price is Going Up:from Business 2 Community
During the last decade as China grew to become a global manufacturing superpower, the catchphrase “the China Price” entered the business lexicon.
Symbolizing the flood of ultra-low-priced goods gushing out of the mainland’s factories, the phrase carried a negative charge for many, conjuring images of laid-off workers and outsourced jobs in developed countries unable to compete against China’s dirt-cheap labor force and factory friendly government. The China Price had upsides in the West: consumers benefitted at Wal-Mart’s cash registers from cheap Chinese imports, while many a margin-starved online retailer found they could make a go of it as long as they were able to source their inventory from the mainland.
For several years, though, there have been signs that the China Price is going up. We recently ran across some striking statistics in a research report from Macquarie Equities Research that show how Chinese manufacturers’ uber-competitiveness is being eroded by increasing costs and the slowdown in global demand.
According to Macquarie, the cost of electricity has increased by 15% in China since 2010, while industrial land is now more expensive in parts of China than in developed countries. In China’s coastal cities industrial land ranges from $11.15 to $21.00 per square foot, according to Boston Consulting Group, significantly higher than the corresponding cost of $1.86- $7.43 per square foot in Alabama, and $1.30- $4.65 in Tennessee and North Carolina.
What’s really hitting factories hard, though, is rising labor costs. Average wages in China increased by 150% during 1999-2006, while further annual increases of 19% were seen during 2005-2010. BCG forecast that the full cost of workers in the Yangtze River Delta will rise by 18% a year during 2012-2016 to about $6.31 per hour, equal to around 25% of the wage earned by skilled workers in the manufacturing states of the southern U.S. While this differential may appear large, the same Chinese workers cost just 72 cents an hour in 2000, equal to just 5% of the $15.81 earned in the U.S. south at this time.
What’s it all mean? Well, Macquarie analysts conclude that, due to ocean freight costs and other factors, in certain industries it’s becoming cheaper to make stuff in the markets where they will be sold, not in China—so some of the production that migrated to the mainland over the last 20 years will be shifted back home (in-sourced) to Europe and the U.S., or to countries such as Mexico located close to large consumer markets.
Meanwhile, companies that routinely source from China may find their lives becoming more complicated. With the China Price no longer guaranteed to be the absolute cheapest, sourcing from multiple countries is likely to become more common. At the very least, negotiating with Chinese suppliers that are finding it increasingly hard to survive without major price increases is bound to become more difficult.
Symbolizing the flood of ultra-low-priced goods gushing out of the mainland’s factories, the phrase carried a negative charge for many, conjuring images of laid-off workers and outsourced jobs in developed countries unable to compete against China’s dirt-cheap labor force and factory friendly government. The China Price had upsides in the West: consumers benefitted at Wal-Mart’s cash registers from cheap Chinese imports, while many a margin-starved online retailer found they could make a go of it as long as they were able to source their inventory from the mainland.For several years, though, there have been signs that the China Price is going up. We recently ran across some striking statistics in a research report from Macquarie Equities Research that show how Chinese manufacturers’ uber-competitiveness is being eroded by increasing costs and the slowdown in global demand.
According to Macquarie, the cost of electricity has increased by 15% in China since 2010, while industrial land is now more expensive in parts of China than in developed countries. In China’s coastal cities industrial land ranges from $11.15 to $21.00 per square foot, according to Boston Consulting Group, significantly higher than the corresponding cost of $1.86- $7.43 per square foot in Alabama, and $1.30- $4.65 in Tennessee and North Carolina.
What’s really hitting factories hard, though, is rising labor costs. Average wages in China increased by 150% during 1999-2006, while further annual increases of 19% were seen during 2005-2010. BCG forecast that the full cost of workers in the Yangtze River Delta will rise by 18% a year during 2012-2016 to about $6.31 per hour, equal to around 25% of the wage earned by skilled workers in the manufacturing states of the southern U.S. While this differential may appear large, the same Chinese workers cost just 72 cents an hour in 2000, equal to just 5% of the $15.81 earned in the U.S. south at this time.
What’s it all mean? Well, Macquarie analysts conclude that, due to ocean freight costs and other factors, in certain industries it’s becoming cheaper to make stuff in the markets where they will be sold, not in China—so some of the production that migrated to the mainland over the last 20 years will be shifted back home (in-sourced) to Europe and the U.S., or to countries such as Mexico located close to large consumer markets.
Meanwhile, companies that routinely source from China may find their lives becoming more complicated. With the China Price no longer guaranteed to be the absolute cheapest, sourcing from multiple countries is likely to become more common. At the very least, negotiating with Chinese suppliers that are finding it increasingly hard to survive without major price increases is bound to become more difficult.
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