March 18, 2008


One of my businesses is involved in the manufacturing of products in China, which supply a specific niche market primarily in the Philippines. The dramatic rise in prices for all the commodities used in my products as well as an increase in labor and operations costs has really sent my team into a spin. Prices have gone as high as 40% on certain goods, which is ridiculous. Material prices fluctuate daily and it is getting to the point where I feel we need to horde when we get a workable price.

Now, I understand I am on the front line for what will/has become a global concern. The 23% increase in food costs is what started this mess and unfortunately it will only get worse. I am in no ways an expert on the Chinese economic model, but there are several points have never really been addressed by Beijing, which undoubtedly will lead to a serious correction in the market.

China’s trade surplus and massive foreign direct investment has led to a massive amount of USD, which the government has handily been purchasing at a fixed exchange. Well, that’s about to backfire. Especially since it is the USD that the locals are using to fund the real estate boom (in for trouble) and the crazy stock market (still crazy). From a social level, the local Chinese have increased their wealth dramatically, which will inevitably lead to a backlash against their current living and political conditions (think Tiananmen Square). Anyone who has lived in China can see that the majority of the population still live the way they did during the communists, but its changing, and rapidly. It won’t be long before they start expecting the same rights as their foreign counterparts, the same freedom- let us see what Beijing does then. While not immediately felt, this growth in wealth will obviously shrink the cheap labor market, regardless if they are almost 2 billion strong. Then again, with the rapid rise of technology I wonder if this will even matter in the coming 20 years.

I always joke about that time I once traveled to this tiny little fishing village town in the Zhejiang region of China back in 2004. Small and completely backwards—it was the pearl growing center of the country. In this small and backwards town, I think every OTHER car had to have been an S600, A8 W12, or a 760. I have never seen so many $100,000 sedans in such a concentrated location. They did not have proper streets, but they were driving the best. Incredible.

Global commodity prices are also on a rise. For a country that is gobbling up massive quantities of oil, steel, wheat, etc. You can expect that this will continue to clobber the economy and help cool what has been a tremendous 10 years of growth for the Chinese. It would be nice however if someone could explain exactly why these material prices fluctuate sporadically? I cannot even use international trading prices as a guide?

How does this affect all of us? Well, I can tell you that for the short term it is really going to hurt. These price fluctuations caught a lot of companies by surprise, its going to take some time for us to correct our prices. For companies with large quantities of stock, they will be able to undercut the rest of us—but again, just for the short term.

The Chinese have always found the greatest competition comes from other Chinese. It will be interesting to see how the factories will react to these new market challenges. Will they bind together or will they undercut and make deals with foreign companies (every man for themselves)? For smaller Asian countries, it gives local manufacturers a chance to breathe. I doubt that prices will drop enough to revive local industries beaten down by china, but it certainly makes those who are still operating, a little more competitive. Wen Jiabao proclaimed that "The current price hikes and increasing inflationary pressures are the biggest concern of the people.” Well, let us wait and see how he does in the coming months.” Who wants to bet it will be more of the same: “Tighter monetary policies.”

Do not be too concerned, Chinese goods will still be dirt cheap, just not at dirt cheap as before.

No comments: