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Changin' Times in China

David Moses -- Gifts and Dec, 6/17/2011 4:57:30 AM

How does this affect our industry?
     The following is a summary of one of the ghta's recent first Friday webinars. the discussion about china's changing demographic and economy, and how it is shaping the gift and home industry was facilitated by David Moses and included presenters George Kacic of Ganz and Rick Contino of Midwest/cbk.
     For decades we have enjoyed the benefits of low-cost manufacturing in China. Suppliers, retailers and consumers have all depended on, and indeed have become very used to, purchasing well-priced gift and home industry products coming out of China. As China's economy grows, and as its priorities begin to shift, significant changes are inevitable, and they will likely impact everyone in our industry.
     Low cost Chinese labor has fueled manufacturing for years and has helped keep prices low. Now however, shifting socioeconomics have led to sweeping changes by the Chinese government. The government has committed to spending hundreds of billion RMB (renminbi, the Chinese yuan currency) on affordable housing, health and welfare programs, and is also increasing the wages for millions of Chinese workers. We are even beginning to see signs of worker unrest previously unheard of in China, such as the recent truckers strike in Shanghai.

Shrinking Labor Pool
     Labor shortages are already contributing major stresses to gift and home industry production. The enormous pool of migrant workers who left rural areas for work in urban factories is shrinking. Improved infrastructure now allows individuals to find work closer to their homes. In addition, an aging labor force is dramatically reducing the number of handicraft workers, as younger people are opting into industries with higher wages and better working conditions.
     Specifically for our industry, factories in the handicraft industry are at 50- 75 percent of ideal workforce numbers. Factories are struggling to justify their business models as capacity to produce declines. Labor shortages are even making it more difficult for suppliers in the U.S. to receive samples for new products in a timely manner.
     These factors are all contributing to demands for higher minimum order quantities (although they are already having difficulty in handling larger volumes, as well as quality control challenges), longer lead times and, ultimately, higher costs.

Rising Wages, Shrinking Subsidies
     Higher costs seem inevitable, and will be soon felt by consumers as those costs are passed on as higher prices on the retail shelves. Gift/Home/Toy importers report double-digit increases in factory first-cost pricing. The primary factors are the increases in worker wages, RMB valuation and the higher cost for raw materials. These factors are expected to continue, especially as labor costs will surely keep going up. The Chinese government goal is to double the salaries of laborers within the next five years.
     Another change is the Chinese government's granting of subsidies to factories for products geared to serve the domestic market, instead of subsidizing the export market as extensively as it has historically done. Without the benefit of reliable government subsidies, factories are now raising prices more frequently, and are also demanding more stringent credit terms from U.S. importers.
     As suppliers struggle to deal with new realities on the ground in China, other business environment issues also contribute to rising costs. These include social compliance audits, extensive product testing, claims and charge-backs and higher development costs.
     Alternative countries certainly are producing products for the U.S. market, but the limited capacity of other countries does not lead to a logical replacement for all we do with China.

Future [Sticker] Shock
U.S. suppliers and Chinese factories will need to find ways to work together in positive and productive ways. U.S. suppliers will also need to communicate honestly and clearly to their retailer partners about why prices are rising, so they can do the same to their constituency. We will likely be experiencing these changes in all walks of life where products are coming to us from China. We have been spoiled by inexpensive goods and seemingly unlimited labor, driven by a strong U.S. dollar that benefited the U.S. consumer. Hopefully, the coming sticker shock will not be too shocking!
GHTA Connect is a forum of the Gift and Home Trade Assn. For more information, visit www.giftandhome.org or cal 877.600.4872.

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