The prices on many Chinese goods have increased by 10-50% in the last half year – a significant increase. After falling for years, the price index of goods from China rose 2.4 percent in 2007, according to the U.S. Bureau of Labor, the largest annual increase since the index was first published four years ago.
Price increases were in part muted for awhile, as China maintained a constant currency valuation against the U.S. dollar even as the dollar fell hard against other major currencies. But while that strategy protects U.S. buyers against price changes based on currency swings, it can hammer the profitability of Chinese manufacturers – forcing them to raise prices just to stay even. In some cases, contracts also kept a lid on prices even with rising costs, but many Chinese suppliers are demanding double-digit price increases for new contracts in 2008.
Reaching the Break Even Point
Companies have different thresholds in reaching “make versus buy” decisions, or in deciding to go with a China sourcing option versus a domestic one.
A manager at Abbott Labs, for example, said last year that given all the other costs and risks associated with offshoring, Abbott looked for a per unit cost reduction of about 30% before they would decide to go to Asian sourcing.
Whatever the particular threshold or savings expectations, double-digit increases in per unit costs, plus potentially greater transportation costs as well, obviously have the potential to dramatically change the cost-benefit equation for sourcing Chinese goods.
The Washington Post story says China’s Nantong Eurofield Art's Toys, who has customers such as Target, Wal-Mart and Toys R Us, had to raise the prices of some products by more than 50 percent. A little more than half of its customers accepted the new prices, and just under half did not renew their contracts.
In some cases, if a Western buyer is working through an Import-Export company, that middleman may absorb some of the price increase so that the full hit is not passed immediately on to buyers.
Do you think rising costs/prices in China goods will impact Western sourcing decisions? If yes, will it mean some return to domestic manufacturing – or simply a move to even lower cost countries? Let us know your thoughts at the Feedback button below. |