2012 1st QTR Manufacturing Outlook – The Effects of ‘Stagflation’ and Migration
If Europe and US demand decreases further there will be steep competition between these factories. With this competition comes reduced price margins and this will likely mean compromise on quality as these factories fight to survive. When your products become secondary to the factory’s survival, it is time to spend extra attention to make sure you are still getting the quality you expect.
When the bottom line is threatened, this is when quality problems arise. Instead of focussing their energies on maintaining the standards of your product, factories will be trying to get as many of your products completed as fast as possible so the next order can go through. Factories will likely also attempt to bolster their profits by blaming wage increases and raw material costs. Short-sightedness being a regular player in Chinese business, many factories will let all this happen at the detriment of your relationship with them as a customer.
Chinese New Year, following the lunar calendar, this year falls on the 23rd of January 2012 and many workers will leave their jobs to return to their hometowns from the beginning of January onwards. Some (read: many!) workers will not come back to their jobs and go elsewhere. This happens for a myriad of reasons from family commitments to finding better pay elsewhere. Needless to say, because of this, January and February production capacity in China for many markets will be greatly diminished. With the economic outlook for exports to Europe and US from China the way it is, I expect this to have a profound impact on many manufacturing industries.
The buzz word recently attributed for China’s manufacturing scenario has been, ‘Stagflation’. Stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment begins to increase.
I speak to many factory owners each week and the most common complaint and fear surrounds finding enough workers both qualified and unskilled. They all dread the “mafan” (麻烦) of Chinese National Holiday time as it is a period of real uncertainty. Their fears are not unfounded.
This year Guangdong increased the minimum wage for factory workers by 18.6% and more recently Sichuan increased the minimum wage for factory workers by 23%. The reason given by both provincial governments was to combat inflation. The wage hike will be a significant reason for many workers to go to these regions to look for jobs after Chinese New Year. Clearly this was the intention of the wage hike and only serves to pressure other provinces to increase their minimum wage.
In the short term, it will lead to massive employee shortages in other provinces and manufacturing industries. In fact, the migration period that follows every national holiday may be extended this year to facilitate the boost in an already titanic national moving of the masses. In the long term, you can expect other provinces to increase their minimum wage over the coming months to balance the worker shortage and this will lead to your products increasing in price.
Despite all of these hurdles it is not time to panic! It is still possible to maintain your price and quality in 2012. As with several companies and SMEs we represent, we’re now locking in purchase prices for a 12 month period and visiting factories over the production periods to maintain and improve quality levels at all stages. Working with factories we know and trust (and who know and trust us) allows us to provide purchasers with the best options for doing business in China during this uncertain climate.
If you would like some help or advice on dealing with your 2012 orders, get in touch anytime.