Subprime Finance Crunch
by: Richard Jefferies
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How long is China's manufacturing pricing benefit going to last?
Not for long if the white paper issued the American Chamber of Commerce is anything to go by. The Chinese Government's rule of subsidy based manufacturing seems to have come to an unhappy ending which is just breathing its last in the past quarters and Chinese Manufacturers are finding it tough to sell based on their pricing advantage. Some of the common factors which are influencing phenomenal price pressure are:
1) the rising classes of China is no longer thrilled with low wages or an opportunity to migrate to the city….the recent rise in wages have had many American companies balking at the quarterly figures.
2) As government subsidiary pulls back slowly, raw material costs are increasing as are related costs such as transportation and procurement. Real estate, which earlier on was a no-brainer for factories, has also become a precious commodity due to demand and supply.
3) Human resource issues are also making it difficult for American and European companies to run efficiently in China. The communication problems persist at every level.
4) Government practice of regulation terms which are highly complicated and favoring the local businesses are also reducing the charm of the Mainland.
5) Competition from other Asian rising stars like Vietnam is slowly eating into China's manufacturing pie. These South Asian countries are taking valuable lessons from China and ensuring that their path to manufacturing success are bereft of the issues faced in China.
These however, are common problems which can exist in any economy which has largely been manufacturing-driven. In fact, companies are now looking at China as a consumer forum which is an excellent market for their products. This turn from manufacturer-to-consumer has been driven by the growing Chinese middle-class and shows that the economy has come full circle.
The manufacturing giant also faces some tough situations when it comes to the reputation of the 'Made In China' tags. Even though Wal-Mart is said to buy goods worth more than $18 Billion USD from China manufacturers, the recent controversy of bad manufacturing processes in toys have caught on the public's imagination and created high level of negative goodwill for China.
The real problem:
The real problem isn’t even the low-cost pricing by China manufacturers which has driven many US businesses out of business but the fact that American companies are gearing up to sell to the Chinese customers by manufacturing at a low cost in China. This is all fine and is likely to work if US continues to buy at the same rate from China.
But imagine a situation where the US-China trade slows down and China's economy goes into a glut. Not only is this going to affect Chinese manufacturers, it is going to leave the Americans stranded in a land where even ordering breakfast with the help of a translator is a challenge!
Caution is the keyword while investing in China and low manufacturing pricing and awkward balance of payments between US and China might be a bigger problem than subprime for the two companies.
About the Author
Richard Jefferies is owner of finance Ezi a Australian finance broker and financial planner. You can find their site at Financial Planning at Finance EZI
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