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Dispatch: Latest Perspectives on China

DISPATCH: China

CHINA: A Perspective on Sourcing, Supply and Today’s Economy

The Financial Crisis and the Manufacturing Landscape: What Now?

Mike Hundert

It’s no secret China’s economy has been soaring the past few years. That’s led to a change in their vision of the future. Chinese officials are no longer content with their work force focused on low-skilled, low-cost, low-margin manufacturing. Instead, they are focused on moving up the value chain to challenge the world’s biggest corporations.

The tactics used by the Chinese government includes using incentives to encourage companies to innovate (especially into high technology businesses), but also moving to discourage labor and polluting intensive manufacturers, like those who make eyewear, from operating in southern China. Across the border from Hong Kong, the area around Shenzhen has been the center for quality eyewear manufacturing since becoming a “special economic zone” more than 20 years ago, founded on the backs of Hong-Kong based optical firms encouraged by the Chinese government to move there. There were government subsidies to attract that shift, and the promise of an endless supply of low cost labor.

Fast forward to 2008; the government wants those types of factories to move out and plan for Shenzhen to be dominated by high tech, high profit, high profile businesses that are powerful on the stage of the flattened world. Therefore, eyewear factories are at a crossroads now having to decide the future of their business model given all the other circumstances driving up the cost of doing business and driving down profitability.

Here are a few facts facing those factories, us, our customers, and ultimately the consumer who absorbs cost increases through higher prices:

• Over the past year, minimum wage in Shenzhen has risen 24 percent.
• Another 20 percent increase will be mandated this fall.
• A required pension system now requires companies to create reserves for employee retirement benefits.
• Since the U.S. pressured China to allow their currency to float, the U.S. Dollar has lost 17 percent of its purchasing power in China. Economists predict that trend will continue; the Dollar is predicted to lose another 15 percent over the next year.
• High quality factories buy raw materials, from eyewire spools and spring hinges to acetate and nosepads from European suppliers in Euros with U.S. Dollars. That exchange rate devalued the Dollar by about 14 percent over the past year. The cost of metal in general has gone up as much as 40 percent, much of that bought in the also strong currency of Australia, which has risen 20 percent to the U.S. Dollar over the past year.
• Rice is up 60 percent, and food overall is up 15 percent, significant for Chinese factories which provide meals and housing for their employees.
• That endless flow of laborers has slowed to a trickle as the boom in China has created many jobs closer to where migrant workers live.
• Tougher environmental standards require major capital investments.
• The cost of power, including diesel for generators, has skyrocketed worldwide, especially in China where nearly all oil is imported.

And that’s the short list of this perfect storm.