No questions about the fact that China is the global manufacturing hub catering to most of the demands arising from every quarter of the world seeking premium finished products of a large variety and has thus kept global supply chains perfectly saturated for long. But these days, Chinese manufacturers are a bit vexed at the rising costs and have stopped listing new order entries, while news afloat that some manufacturing units are likely to shut down for sometime as costs get unbearable.
Clearly, having a broader look at the situation, we can easily fathom this to be the recipe of getting global supply chain under severe strain.
Besides, for the manufacturers with limited set-up, shortage of skilled workforce has added to the miseries.
Some of the manufacturers are lucky enough to communicate the issue to overseas buyers and got a nod to be compensated accordingly while some among them still grope in the dark, for a prime solution with a win-win situation.
In the light of volatility in raw-material prices, Zhongshan Xiliwang Electrical Appliances Company tucked in South China, apprised its buyers in middle of May that it won’t accept new orders for a while as management gets tough.
Since April, as the metals, glasses and switches get costlier; the company has run in red, as per the notification presented to buyers.
Another case, a glass factory in Zhongshan where its owner Xing Jialiang feels the deep pinch of losing a bevy of good options.
This year, about 5% of price hike is there but then costs soared by double of that rate. Moreover, as glass manufacturing is an energy-intensive process releasing CO2 in abundance, some of the manufacturing units were closed by Chinese authorities and this has resulted in raw-material getting costlier.
As a matter of factly, China has pledged for carbon neutrality completely by 2060.
In words of Mr. Xing, “It is possible that we may have to halt production in a month or so if raw material costs continue to rise.”
Alternatively, manufacturers consider dilly-dally in completing orders and are also trying to lessen the production, in a bid to avoid the existing tensed scenario without suffering major losses until raw-material prices are set to normal or demand strengthens. Nevertheless, orders increase as demand, from wrist watches to laptops, is on the rise and also because people in the west enjoy purchasing power pulled through stimulus cheques and savings that accumulated during the times of pandemic. Clearly, such developments lead to contract the global supply chains and which might have resulted in raw-materials getting costlier.
But, dear readers, I earnestly feel that planning would not be a success as long as the raw-material continue to be on the verge of getting expensive or if the demand from west fails to slow down. Not surprisingly, the scenario is replete with anxiety and troubling volatility, if sufficient quantity of goods is not produced within appropriate time, it would lead to shortage and would result in renewed cost pressure.
Economist Mr. Shuang Ding, who works at Standard Chartered, opines, “If input cost pressure persists, more manufacturers in China will either be forced to halt production, or pass it on to consumers at home and abroad.” He acknowledged latter choice to be more palatable as some Asian countries are plagued with Covid-19 re-emergence and Chinese manufacturers could gain an upper-hand in the business negotiations with buyers because of this.
At the end of the tunnel, China’s overseas export spectrum could experience inflation too, which would include US, the country which witnessed a leap in consumer-price index in April since 2008.
“Our research indicates that there’s a strong correlation between inflation in China and consumer inflation in the U.S.,” Mr. Ding revealed.
From their government side, Chinese leaders have also considered the situation in their meetings which is mainly because of the fact that swift economic rise of the country, in the backdrop of pandemic, is rightly ascribed to its robust nitty-gritty of manufacturing framework. Now, if profits are chased by businesses, it would result in sluggish economic recovery as well as in price-hike and unemployment.
The latest graph depicting factory’s activity in China presently, is not so encouraging as indication of slowdown is there while manufacturing purchasing managers index has come down to 51.0 in May while it was 51.1 in April, which is purely the outcome of a frozen demand and new orders. Further, there is also a subindex to cover SMBs, has gone into depression, i.e. contraction, in May following two months of expansion.
Presenting a research note, Julian Evans-Pritchard, who is a senior China economist at Capital Economics, remarked, “Now that the economy is already above its pre-virus trend, we think the pace of growth will wane this year.”
When it comes to higher costs of inputs in recent weeks, concerns have floated and whistleblowing has occurred from official side repeatedly and even those in dominant positions in market, were asked to be lenient in their typical business bubble and to be less manipulative. For instance, not to hoard goods and to abandon certain acts that would bring inflation to raw materials.
Now, referring to index highlighting raw-material purchasing prices, especially for Chinese manufacturers has also gone high and touched 72.8 in mark in May, which, Chinese data indicates is the highest level since November 2010.
Mr. Lu JinZhong, who heads research department at the PBOC’s Shanghai branch published a report in May whereby he mentions about a survey carried out by Shanghai branch of the People’s Bank of China, 47% of producers are willing to adjust prices in coming months, while 37% remain cautious about new orders. However, about 38% of these still feel that raw-material prices would still be increasing, the article made a mention.
As for its currency, it should get evenly powerful, Mr. Lu also indicated, so as to be immune to any impact from imported price-hike in the environment of rising prices of commodities worldwide.
Making matters worse, shortage of skilled workforce is another critical factor that scores of Chinese factories deal with, which is crucial to meet the surge in demand for their seasoned goods on a global scale.
In southern China, there is a place where manufacturing is said to be celebrated widely, known as Dongguan, where, Asia Footwear Association is located at and its General Secretary Mr. David Li, told about the surge in orders in recent months, but many shoe factories in the region faced with a shortage of young workers that hampered the process at length.
In his words, “This isn’t just a problem confined to Guangdong, it’s an issue all over the country. “Young people nowadays would rather be deliverymen than working for factories.”
In Guangdong, province, there is Foshan Modern Copper & Aluminum Extrusion Co., which is into aluminum processing and firm employs around 700 factory workers but laments that the factory still needs around 70 more workers and that it has even declared raising salaries by 10% this year, while in BC era, (i.e. before coronavirus) it was the usual 3% increase annually.
Representing the company, Mr. Huang Ruifeng, informs, “Obviously that’s still not attractive enough for many young people”. “Covid likely prompted more workers to stay in their hometowns instead of looking for jobs.”