Bcb,China/WMT affair might be in jeopardy:China's Next Export
Could Be Inflation As Its Own Costs Rise
By ANDREW BROWNE
Staff Reporter of THE WALL STREET JOURNAL
November 8, 2004
GUANGZHOU, China -- The world's biggest microwave-oven maker complains that it can no longer profit doing business with the U.S.'s largest retailer, Wal-Mart Stores Inc.
"Wal-Mart is only price, price, price," says David Shen, marketing director of Chinese appliance maker Guangdong Galanz Enterprise. He says his company will ship 14 million ovens this year, 700,000 of them to Wal-Mart under other brands from which it will earn no profit.
With global oil and commodity prices soaring, Chinese manufacturers are being squeezed like never before. And unless commodity prices start to ease soon, some economists believe that China's next big export to the U.S. will be in the form of rising inflation.
Some economists have long argued that the ability of Chinese firms like Galanz to absorb cost increases has provided a cushion against inflation for the rest of the world. By not passing along in full the rising costs of oil, steel, copper, zinc and other items, these companies are helping to sustain one of the key supports of global economic growth: the big-spending U.S. consumer.
With a population of 1.3 billion and a pool of surplus rural labor officially estimated at 150 million, there has been ample scope for Chinese manufacturers to keep prices low by screwing down labor and other costs. Rising productivity has helped pad the bottom line. U.S. officials complain that China has been supporting its exporters by pegging its currency to the U.S. dollar, thereby keeping prices unfairly low. China recently has been signaling a readiness to relax the tight peg to the dollar.
But at this year's Canton Trade Fair, held here in the southern city of Guangzhou, a number of Chinese manufacturers said they are starting to run out of ways to keep a lid on prices -- and that has implications for the U.S. "Chinese prices are the lowest on the street," says Dong Tao, chief Asia economist at CSFB. "If China manages to raise prices to the U.S.," it could provide room for non-Chinese manufacturers to raise prices, too, and soon you have the beginning of an inflationary cycle.
Some Chinese manufacturers are coming up with strategies to nudge factory-gate prices higher without scaring off customers. Yinhe Motorcycle has added new safety features to its four-wheeled All Terrain Vehicles for children, including a remote control that allows parents, while overseeing their children, to cut the engine. New features don't cost much to develop but give the sales force more leverage, says general manager Huang Qixin.
Tiger Wang, a manager at Guangzhou Flashlight Industrial Corp., says his company is ramping up production of rechargeable and keychain flashlights, which are gaining popularity. "We've never had this kind of pricing pressure before," says Mr. Wang. But innovation in a low-tech product can only go so far. The state-owned company is now shedding workers by accelerating its retirement plan, and through strides in productivity. In the past, one worker looked after one machine that stamps metal flashlight barrels; now one worker feeds 10 machines, says Mr. Wang.
It isn't just raw-material costs that pressure Chinese suppliers of everything from brass door knobs to car radios: Power, water and transport charges are also going up. (See related article.) So, too, are wage demands. The Pearl River Delta, home of the Canton Trade Fair, is short an estimated two million workers as factory employees vote with their feet against uncompetitive pay in the region.
China's exports accounted for 10% of all exports to the U.S. last year, notes Huang Yiping, Citigroup's China economist. That equates to 1.4% of U.S. gross domestic product and 2% of total personal-consumption expenditure. "The impact of China is still relatively small," Mr. Huang says, adding that it's a "big hypothesis" to suggest China could influence U.S. inflation. And even if inflation in the U.S. does pick up a little, it would be starting from such a small base. Despite rising oil prices, consumer prices in the U.S. rose a modest 0.2% in September.
Nevertheless, some economists are starting to worry. "When push comes to shove, I'm betting you will see a combination of margin squeeze, but also higher prices," says Jonathan Anderson, chief Asia economist for UBS.
Mr. Shen says Galanz started selling its bottom-of-the-line microwaves to Wal-Mart two years ago at below cost to get a foot in the door. It hoped eventually to sell more-sophisticated models at a profit. But Galanz, which boasts it has 35% of global microwave sales, hadn't counted on paying 90% more for plastic and 30% more for steel over the past year.
In a written response to questions about Galanz, Wal-Mart said it recently asked Galanz to quote a price for ovens, but the quoted price was higher than all its competitors, and a purchase decision hasn't yet been made.
"Every year Wal-Mart is pushing the price down," Mr. Shen says, adding that it has reached the point where Galanz is rationing pens to its office staff to save a few pennies -- and customers will have to pay more for its microwaves. "If they can accept, we'll continue. If they can't, we'll stop," he says. |
