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China Costs Begin to Impair Results

We've been hearing in general terms that China's labor costs are increasing, and here's some data that shows just how much this is affecting business.

Today, Hong Kong-based Global-Tech Advanced Innovations Inc. announced its financial results for the quarter ended September 30, 2010. Net sales for the second quarter of fiscal 2011 were US$25.0 million, compared to $29.0 million for the corresponding quarter in fiscal 2010. Net loss for the second quarter of fiscal 2011 was $0.9 million, or $0.29 per share, compared to a net income of $1.6 million, or $0.51 per share, for the second quarter of fiscal 2010. (See: Global-Tech Reports Q2.)

The company has an interesting business model — floor care products and electronics, including CMOS camera modules — and while electronics did well, John C.K. Sham, the company's president and CEO said:

    Our overall gross profit margin remains weak as operating costs, particularly labor and energy costs, continue to increase. This increase in costs was attributable, in part, to rising inflation that has been taking place in China. Additionally, our fixed cost absorption rate increased due to declining activity. Accordingly, the company must continue to refine its focus on productivity and efficiency…

    We do not expect significant improvements in our floor care business during the remainder of fiscal 2011. Accordingly, we are increasing our efforts to incorporate proprietary elements into our electronic component business and improve efficiencies in our EMS business in an attempt to position and strengthen the company’s prospects for growth in these businesses in the near future. The company’s continued emphasis on the expansion of our business in China remains vital to long-term growth.

The success of Global-Tech's electronics business may indicate that sector is less vulnerable to increased costs: Much of high-tech's manufacturing is automated, so labor is a variable factor. On the other hand, manufacturing is an energy-intensive business, which requires upgrades to become more efficient.

Additional data on China's inflation can be found at TTI’s MarketEye.

5 comments on “China Costs Begin to Impair Results

  1. Mydesign
    January 7, 2011

       Barbara, you are true. The post recession era brings up the cost to an extendable level. During the recession periods many of the companies and countries offered many tax benefits and other soaps to beat the recession. This helped both the companies and employees to survive during their tough times. Now almost all countries have survived from the recession period and the hence the government and companies had started withdrawing the earlier offered extra benefits.

        In post era of recession, inflation rate is also increasing which affecting in all sectors includes the living condition too. More over new openings are coming up in other sector also. Obviously employees may look for better remuneration packages and may move to, whoever offers much salary and finally ends up in brain drain. In order to beat such situations the companies also have to do something in favor of employees either by increasing the salary or other perks.  This may internally increase the production cost and burdens to the company. This is a general phenomenon and happening in almost all countries. Since china is famous for its low cost labour, any change in the labour pay may much reflect in international forums.

  2. saranyatil
    January 7, 2011

    Exactly TOMS ,

    a little increase in the cost may also seem high as always their labour wages incured was less, and also with their enormous growth in the manufacturing sector with all these they have aslo gained a different economic standards. recesion is also a key factor.

  3. eemom
    January 7, 2011

    I for one am happy to see China's labor costs go up.  This may not be a popular opinion among many companies but I feel that China's labor costs need to increase so that there is a level playing field for all companies, regardless of where they conduct their manufacturing.  Also, the higher tax impacts and inflation were all bound to hurt costs and therefore profits once the recession ended.  The key here is which manufacturer will learn to keep their cost structure competitive.

  4. t.alex
    January 8, 2011

    It seems the cost in China is rising faster than expected. Just a few years ago, companies after companies are joining the rush to outsource manufacturing to China due to much lower labour costs.

  5. hwong
    January 22, 2011

    Don't forget that Hong Kong dollar is tied to American dollar. Therefore because the US exchange rate has been decreasing against China, things are much more expensive for people in Hong Kong companies. That's why china costs is less attractive factor now.

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