The End of the World As We Know It
dealerscope.com
Imagine waking up and reading the following:
“China’s fast growing middle class demanding higher wages and better working conditions.”
“Global demand for raw materials creates 400% increase in manufacturing raw material costs.”
“Major U.S. manufacturer set to recall 20 million products due to traces of banned substances in their product.”
“China’s government reduces VAT refunds reducing manufacturers/exporters profitability.”
It is happening and will continue to happen. The implications are clear that we are entering a new age where we will need to be much smarter at running our businesses.
The last 20 years will prove to have been relatively easy compared to today. What has happened is we have taken advantage of an under-developed country - China - to produce cheaper products with less functionality. We have offered these products to the American consumer at lower and lower prices, which has significantly improved our standard of living of America. But, at the same time, it has complicated the way we will conduct business in the future.
What has led us to this point? First, we hit the bottom of cost decreases in China. There is a limit to how much cost can come out of a product and still have it function properly and safely. The process of producing extremely low-priced goods can’t exist indefinitely in a developing nation without some reaction. Chinese workers are now demanding higher wages and shorter hours. Fewer of them are willing to travel from the west, live in a dormitory and then during Chinese New Year head west again. Many are not returning. The net result is higher wages, worker shortages and the requirement of many factories to move west for a suitable work environment. All of this adds costs.
Labor is but one element of the change. Another major change is the accelerating cost of raw materials driven by global demand. In my business, where rechargeable batteries are 50 percent of the cost of the product, changes in nickel prices earlier this year increased by more than 30 percent in one weekend, which added to a total increase of 400 percent over the last year. Copper, aluminum and other materials have seen similar increase, driving up the bill of materials of many products.
We are also faced with the growing concerns about the quality of the products we import. Mattel’s toys, Colgate toothpaste, clothing, fish. Before the end of the year there will be others. Our drive to lower product costs creates the desire and need to cut corners. I believe that inspectors and others who enforce products standards are compromised as they help their companies ensure low costs and high fill rates. At the end of the day, we are all complicit. Yet, it’s clear that this will change and we will be devoting more attention of product quality and integrity.
Finally, the politics of global expansion will perhaps be the most significant factor yet. I am somewhat amused by the short sightedness of political leaders who believe that forcing changes in China’s currency and taxation policies will not have a major factor on the American consumer. In one weekend in July our costs increased three to 13 percent due to the VAT rebate changes made by the Chinese government. These changes reduced refund rates and even eliminated export VAT refunds for a broad range of products. These actions, like others made over the last few years, were instituted to address China’s ballooning foreign trade surplus.
What do all of these changes mean to the CE industry? We will have to change from an age of selling products that are cheaper each year with more features to one where we will have to sell more expensive products with fewer features. We will have to focus more on building selling environments within our stores. We will have to prepare our salespeople to deal with deeper scrutiny over the products they sell. We will need to build organizations that can monitor and maintain the quality of all our products. We will also need to look for sources other than China. Other countries that are not competitive today will start to look more attractive.
Our customers will have to undergo significantly changes as well. Their expectations will change when they realize we can’t play the lowest-price game anymore. Product prices will increase while the standard of living we’ve enjoyed for the last few years will decrease. Ominous? Yes, but this is the world we now confront and we better get used to it.
Michael O’Neal is CEO of Team Products International, a Pine Brook, N.J.-based marketer.
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