China's Growing Pains
Richard Gottleib -- Gifts and Dec, 7/25/2011 7:04:22 AM
RICHARD GOTTLIEB is president of Richard Gottlieb & Associates LLC.
There has certainly been reason to believe that it may well be an alternative. After all, China's economic development has been stunning in the rapidity and sheer size of its growth.
The industry needs to pay attention to china: labor unrest, inflation, and transportation and power problems may cause rising prices and delivery delays.
That Chinese model may, however, be starting to rattle a bit, if not come apart. Recent reports of active and passive protest within China's business sector are challenging the government in determining just how it should react to a population that is having a revolution in upward expectations. Increased wealth is driving not just inflation, but desire for a better life.
Though some might see this as "China's problem," we in the toy industry need to be deeply concerned. We produce 86 percent of our toys in China, and it's not just because the prices are right. It is because China has been able to provide the sheer scale needed to produce in the thousands, the hundreds of thousands, the millions and the hundreds of millions. It is also because, at least until now, China has been able to do this while maintaining a dependable supply chain.
In fact, we could say that the 21st century toy industry is a product of the Chinese system, which has revolutionized it into one that is volume-and price-driven. If that system falters, we all might undergo another revolution.
For that reason, we all must pay close attention to what is going on in China. There is no shame in adapting to change. There is shame, however, in not being prepared for it. We must be prepared. In doing so, let's consider just some of the disruptions that have been taking place in China, and how they impact the cost of goods and their flow to market.
Labor Strife The Chinese people have had to deal with the conjoined experience of exploding expectations and rising costs. Simply put, too much money is chasing too few goods, and as a result, inflation is running at a brisk pace, while consumers look for lower prices and workers want higher wages.
Inflation is an economic problem that disrupts public order and can lead to protest, violence and even revolution. Just one example of unrest that is resulting from these conditions is the trucker protests that took place in April at the port of Shanghai. The disruptions stemmed from what drivers perceived as the combination of low wages and high fuel costs. The protests became violent and police were called. Fearing that things could get out of hand, the government finally made concessions. The Shanghai protests were not isolated events, and have become a continuing problem across China.
Shipping
Chinese workers have become increasingly reluctant to leave their home villages to work in the south, where most of the country's toy manufacturing has historically taken place. In addition, the Chinese government has been "encouraging" toy manufacturers to move away from the coast, so that manufacturers of higher value goods can take their place (think computers, cars and televisions).
As a result, manufactures have to truck goods over long distances. That is where the trouble starts, because China's trucking industry is a mess. There are thousands of trucking companies in China, and most are owned by independent haulers. They compete with each other by seeing who can provide the lowest cost. This results in unsustainably low prices, so in order to get by, the truckers overload their trucks. Not only is this dangerous, but it has resulted in corruption, as truckers pay bribes in order to pass inspections.
You would think that as a result of this price competition that the costs of shipping goods in China would be low. Well, they're not. I was amazed to learn that it costs more to move products by truck in China than it does in the U.S. According to the American Trucking Association, moving goods by truck in the United States costs approximately $1.75 per mile. Trucking costs in China run from $2.50 to $3 a mile. When you consider that Chinese drivers make 25 cents an hour and American truckers make $17 an hour, it's hard to believe.
The toy industry has not had to be concerned with this in the past because, being near the coast, they had little need for long distance hauling. Now, however, the problems with the Chinese transportation system are our problems.
What this means for the toy industry is that the cost of producing goods in China is going to increase the further the factories move from the coast. Bottom line, disruptions and higher prices due to an unstable trucking system are only going to make moving freight in China harder, less predictable and more costly in money and time.
Electricity
Chinese power plants are primarily fired by coal. And, like any commodity in demand in China, the cost of coal has gone up. In a typical free market economy, the cost of electricity would go up along with the cost of coal. Not in China, however, where it seems that the delicate balance of government control and private sector business freedom are coming into conflict.
Simply put, the Chinese government is not allowing the electric power companies to raise prices. The power companies, concerned that they will go bankrupt, are protesting by cutting back on production.
Many of the power companies are closing for maintenance during the summer. Summer, due to the use of air conditioners, is of course the worst possible time for the companies to close. The provinces in which the power companies are located have already started allocating power and it is only going to get worse as the weather heats up.
This spells big possible trouble for toy companies. The bulk of toy manufacturing takes place during the hot summer months. Toy manufacturers and the toy companies and retailers they serve are going to be at the mercy of government decision-makers as to how many days per week they will have the power needed to run their plants.
What I have recounted here is just a small part of what is happening in China. Smart toy companies and retailers will keep a close eye on China this summer. Decisions by bureaucrats on the other side of the world could make a difference in the prices we charge and the products we sell.
Richard Gottlieb is president of Richard Gottlieb & Associates LLC, a provider of business development services. He has 35 years experience in the toy industry in sales and sales management. He can be reached at Richard@ usatoyexpert.com.
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