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Financial Times (London, England)
August 4, 2005 Thursday
Asia Edition 1
SECTION: ASIA-PACIFIC; Pg. 2
LENGTH: 652 words
HEADLINE: Increasing costs and intense competition hit Chinese manufacturers harder than revaluation of renminbi: Industry is seeking ways to maintain profit margins without raising prices, writes Alexandra Harney
BYLINE: By ALEXANDRA HARNEY
BODY:
China's revaluation of the renminbi came as little surprise to Ken Chen. The president of Comix, a leading Chinese office supplies maker, had even written a clause into contracts with foreign customers allowing him to raise prices if the currency appreciated.
But Mr Chen did not count on the shrinking number of applications for jobs at his factory in Shantou, in southern China's Pearl River delta.
A local labour shortage since 2003 has forced Mr Chen to increase benefits for his employees, replacing fans with air conditioners in the dormitories and improving the quality of canteen food. Comix's labour costs have risen 10 per cent as a result.
"The increasing cost of labour is my number one concern," said Mr Chen.
The revaluation of the renminbi is taking a toll on Chinese manufacturers' profit margins, but not nearly as much as rising prices of raw materials and labour.
Beijing's hints about a likely currency move gave manufacturers plenty of time to prepare for an appreciation.
But the surge in prices of oil, steel, copper and other commodities, coupled with intense competition, has proved tougher.
How well Chinese manufacturers cope depends on their industry, market share and management ability. But interviews with several companies in the Pearl River delta, the export manufacturing hub north of Hong Kong, indicated that the revaluation was simply the latest in a series of challenges for factories in the workshop of the world.
Landbond is one of China's better-known furniture makers with a thriving export business. Executives say that, with more than 50,000 companies in China making furniture, competition has whittled the industry's profit margins down to single digits in recent years.
This decline in profitability is common in Chinese industry. A June report by UBS, the investment bank, showed that profit margins were falling in the electronics and machinery and equipment sectors as well.
The report predicted that in sectors with excess capacity, companies would not be able to lift prices sufficiently to offset higher input costs.
Compared with pressures such as these, the revaluation had little effect on Landbond's performance, according to Chen Tao, an executive at the company's headquarters in Foshan, a bustling industrial city in the western Pearl River delta.
Immediately after Beijing revalued, Landbond raised the prices in most of its contracts by 2 per cent, matching the appreciation.
"Everyone knows our profit margins are not high," said William Feng, who oversees the group's international strategy.
Chigo Air-Conditioning's margins are similarly thin. Costs of the air-conditioner maker's raw materials - including steel, plastic and copper - have risen an average 20 per cent over the past year.
Such an increase might be manageable in other industries but raw materials account for 96 per cent of the cost of a Chigo air-conditioner.
"Material costs are increasing, but we can't increase the price," said Li Xinghao, the president of Chigo.
"The competition is very fierce. If we increase the price, nobody will buy our products."
Some companies, including Chigo, said that continuing efforts to improve efficiency helped them to absorb the impact of the appreciation. Chigo has built a new factory where products move along the assembly line more smoothly, reducing costs.
Also, at any given time, about a third of Chigo's products are new models, Mr Li said. These products command higher prices and carry higher margins than older models.
Galanz, the world's leading microwave producer with a 40-45 per cent global market share, brought in executives from Toyota, the Japanese carmaker, to train its workers on efficient production techniques.
"The appreciation may have some impact but, with the structural changes inside the company, we can absorb its effects," said Zhao Weimin, marketing director. "Companies like us had already prepared a lot (for an appreciation)."
LOAD-DATE: August 3, 2005
August 4, 2005 Thursday
Asia Edition 1
SECTION: ASIA-PACIFIC; Pg. 2
LENGTH: 652 words
HEADLINE: Increasing costs and intense competition hit Chinese manufacturers harder than revaluation of renminbi: Industry is seeking ways to maintain profit margins without raising prices, writes Alexandra Harney
BYLINE: By ALEXANDRA HARNEY
BODY:
China's revaluation of the renminbi came as little surprise to Ken Chen. The president of Comix, a leading Chinese office supplies maker, had even written a clause into contracts with foreign customers allowing him to raise prices if the currency appreciated.
But Mr Chen did not count on the shrinking number of applications for jobs at his factory in Shantou, in southern China's Pearl River delta.
A local labour shortage since 2003 has forced Mr Chen to increase benefits for his employees, replacing fans with air conditioners in the dormitories and improving the quality of canteen food. Comix's labour costs have risen 10 per cent as a result.
"The increasing cost of labour is my number one concern," said Mr Chen.
The revaluation of the renminbi is taking a toll on Chinese manufacturers' profit margins, but not nearly as much as rising prices of raw materials and labour.
Beijing's hints about a likely currency move gave manufacturers plenty of time to prepare for an appreciation.
But the surge in prices of oil, steel, copper and other commodities, coupled with intense competition, has proved tougher.
How well Chinese manufacturers cope depends on their industry, market share and management ability. But interviews with several companies in the Pearl River delta, the export manufacturing hub north of Hong Kong, indicated that the revaluation was simply the latest in a series of challenges for factories in the workshop of the world.
Landbond is one of China's better-known furniture makers with a thriving export business. Executives say that, with more than 50,000 companies in China making furniture, competition has whittled the industry's profit margins down to single digits in recent years.
This decline in profitability is common in Chinese industry. A June report by UBS, the investment bank, showed that profit margins were falling in the electronics and machinery and equipment sectors as well.
The report predicted that in sectors with excess capacity, companies would not be able to lift prices sufficiently to offset higher input costs.
Compared with pressures such as these, the revaluation had little effect on Landbond's performance, according to Chen Tao, an executive at the company's headquarters in Foshan, a bustling industrial city in the western Pearl River delta.
Immediately after Beijing revalued, Landbond raised the prices in most of its contracts by 2 per cent, matching the appreciation.
"Everyone knows our profit margins are not high," said William Feng, who oversees the group's international strategy.
Chigo Air-Conditioning's margins are similarly thin. Costs of the air-conditioner maker's raw materials - including steel, plastic and copper - have risen an average 20 per cent over the past year.
Such an increase might be manageable in other industries but raw materials account for 96 per cent of the cost of a Chigo air-conditioner.
"Material costs are increasing, but we can't increase the price," said Li Xinghao, the president of Chigo.
"The competition is very fierce. If we increase the price, nobody will buy our products."
Some companies, including Chigo, said that continuing efforts to improve efficiency helped them to absorb the impact of the appreciation. Chigo has built a new factory where products move along the assembly line more smoothly, reducing costs.
Also, at any given time, about a third of Chigo's products are new models, Mr Li said. These products command higher prices and carry higher margins than older models.
Galanz, the world's leading microwave producer with a 40-45 per cent global market share, brought in executives from Toyota, the Japanese carmaker, to train its workers on efficient production techniques.
"The appreciation may have some impact but, with the structural changes inside the company, we can absorb its effects," said Zhao Weimin, marketing director. "Companies like us had already prepared a lot (for an appreciation)."
LOAD-DATE: August 3, 2005
posted by Eastlaw at 3:48 AM
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