Increased labor costs in China are now having an impact on component pricing in the US. Today, Philadelphia-based Pulse Electronics announced plans to increase component prices in the coming weeks.
“The price increases are necessitated by higher minimum wage rates that will take effect in many provinces in China in March, as well as rising costs for raw materials,” said Pulse Vice President of Sales Dan Jackson in a press release. “We have implemented higher pricing on select new quotes and contracts. We will also implement a broader price increase across most of our customer base and in our distribution channel in April.”
Pulse is a manufacturer of magnetic components, antennas, and connectors; it serves manufacturers in the wireless and wireline communications, power management, military/aerospace, and automotive industries. Separately, the company is experiencing successful recruiting and return of labor in China following Chinese New Year. As such, Pulse anticipates its lead times will remain stable, provided raw materials remain available.
Earlier this year, Hong Kong-based Global-Tech Advanced Innovations Inc. announced its earnings had been impaired due to rising labor and energy costs in China. (See: China Costs Begin to Impair Results.) There is mounting evidence, both formal and anecdotal, that China's advantage as a low-cost labor center is slipping. Additionally, costs of raw materials, such as copper and tin, are steadily on the rise. (See: Materials Prices on the Rise – Buyers Beware?.) All of these factors present the classic good news/bad news scenario in the electronics purchasing community.
The bad news is for buyers who rely on keeping prices in line with corporate expectations. In some cases, component contracts are negotiated from company to company, which means corporations will have to renegotiate contracts. Minus such arrangements, buyers on the frontline have to receive new price quotes from suppliers, relay that information to managers, get approval, and then place an order. Price hikes not only add costs to the process, they add time.
The good news is for component makers that have battled with eroding prices and profit margins for more than a decade. Increasing component prices because of higher labor and materials costs is a reasonable measure. However, if component makers can build in some incremental profit margin in the process, they will. I'm not saying component makers are going to gouge buyers and artificially increase prices. Incremental margin can come in the form of more efficient manufacturing practices, new sources of supply, or the implementation of “lean.” This is an opportunity to revisit existing supply chains and make changes that can benefit the corporation.
The bigger picture is China. As costs continue to increase, manufacturers of all types are going to revisit their strategies and reevaluate their efficiencies. If China begins to lose its edge as a cost-leader, manufacturers will look elsewhere. The question is, will manufacturers continue to chase low-cost labor around the world, or will they use other criteria to establish their next location? There are a lot of pros and con in each direction. What are your thoughts about the next big move?