China Trade Going the Wrong Way?

Changing patterns in business seem to come faster these days. It took Japan 40 years to go from being a producer of cheap goods to becoming the guys who make Lexus and robots. By contrast, China seems to have accelerated that transition.  Perhaps the original reason many companies began buying direct in China was because of price. But I suggest that this paradigm is already changing.

At first, China was just a source for cheap goods. However, much has been written recently about The Growing Cost of Doing Business in China (see article in this month’s Inc. Magazine). These changes make us rethink why we went to China in the first place, and how it affects our purchases there in future. I was just telling a customer earlier this week about the rising costs in China. He had approached me, as so many do, thinking about China as a source of nearly free material. But I think that is soon to be dated thinking, not only because of the exchange rate story (five years ago, the dollar bought more than 8 Yuan, six months ago 6.83 Yuan, and now it’s 6.67), but there is an increasingly serious labor shortage along the coastal cities, causing upward pressure on wages. China’s labor rates have been considered by many to be artificially low anyway, depressing domestic demand – something the government there wants to change. Harvard Business Review reports that “Workers’ wages are bound to go up in future; the Chinese government wants consumption at home to rise.” see article

To be sure, China is still a relatively economical source, just not as much as it once was. And it will take a lot of price increase to get companies to move their purchases elsewhere, “especially for companies that have spent years and untold sums fine-tuning a network of Chinese suppliers”. Therefore, it will be a long time before China loses its premier role as the world’s dimensional stone producer.

But the nature of trading with China is bound to change.

In a country that has put two men and one women in space, launches their own communication satellites, builds the world’s fastest super computer and of course makes my beloved iPhone, their intended future of high end, quality products seems self evident. Yet we continue to think of them as a source for cheap goods. So what does this mean for us? I suggest we need to revisit our thinking.

With soon to be the largest middle class in world history and rapidly rising wages, China offers the US the opportunity to become our customer, not our supplier.

As I mentioned in my Spring Newsletter, one of the key factors affecting our domestic markets are the eroding profit margins. I believe this is partially self-inflicted. During this bad economic period, downward pressure on prices has caused everyone to operate at minimum or zero profit levels. This means companies are living off of resources from previously better times. At a Distributors Forum this spring at Coverings, everyone agreed, operating like this could only last so long, and that the US market would not really recover until profit margins could get back to positive levels.

I believe the only way we can do this is alter our focus from import to export.  Already, old China hands have discovered this, and several product categories see China now as one of their primary markets – cars, scotch, and jets.

As most of my regular followers know, my business partner Steve Thoner leaves for China today for one of his many regular trips – see article . He is there every other month, for a month at a time. He has an American’s perspective on the market, with unsurpassed understanding of the Chinese market and just which factories to work with. And he keeps a seasoned eye out for materials of value that can be profitable for all concerned. He will be busy selecting materials and controlling orders for our discerning clients. What can we select for you?

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