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China Costs Prompt Price Hikes

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?

10 comments on “China Costs Prompt Price Hikes

  1. eemom
    February 15, 2011

    While increasing costs are never good news for manufacturers, I look at it as a long term positive milestone. First, Workers in China get the benefit of higher pay which they desperately deserve.   To me, this may cause a level playing field.  We've seen manufacturing leave the US for the sake of lower costs.  These lower costs come at a price to someone – meaning the Chinese workers.  This may be the first step in a long road in bringing china's labor cost in line with the western world.

    Manufacturers can elect to stay in China and bear the added cost, or move to another country that may present cost savings.  The problem with moving manufacturing for lower cost is the cost of the move itself has to justify long term cost saving measures.  However, if China's labor cost have to go up, who is to say that the next country they move to doesn't start to experience the same cost increase in a few years. 

    Maybe the labor cost increase in China will just present a more level playing field among companies.  Maybe this will deter others from moving manufacturing abroad or better yet, bring some back to the US.  I know that sounds incredibly optimistic and it probably will never happen, but that is why I say this is the first positive step….

  2. AnalyzeThis
    February 15, 2011

    I think this is less of an issue of workers “deserving” higher pay and instead an issue of workers NEEDING higher pay.

    There's an article on CNNMoney I was reading today about China's inflation rate and the increases to its consumer price index.

    As the article points out, one of the downsides to China's modernization is that not only is less food grown due to the land being re-purposed, but less people grow their own food, leading to increased demand overall.

    Obviously, these things are more of a problem in the urbanized areas where much of the manufacturing is done, so raising worker pay is more of a necessity than a nicety: starving workers aren't very productive!

  3. Jay_Bond
    February 15, 2011

    This is an issue that was bound to happen. As China's economy has grown, other areas need attention. In China inflation is rising, costs are rising, supply is starting to dwindle. The middle class of China is growing. These workers are realizing that some things are now within their reach financially. The government wants to increase tax revenue, which means the already underpaid workers have to fork over more money.

    The rising cost of goods globally is inevitable. Supplies of key materials are running short and labor costs have globally increased. As manufacturing costs rise overseas, some companies might have second thoughts about locating jobs in other countries.

     

  4. prabhakar_deosthali
    February 16, 2011

    In another blog on EBN,  a clear trend of  manufacturing returning back to US has been mentioned. I had commented there, that the reason for this trend is the rising cost of living  and hence the rising cost of hiring in the developing countries like India and China. The same thing hold true here. The US companies which have outsourced to Chia have either to increase their prices or relocate back their manufacturing to US. With globalization, some day, the labor costs will become at par in most of the countries . It will then make good sense to keep the manufacturing in your own  local country. The country which is the source of raw material will be the producer of  the final product.

  5. stochastic excursion
    February 16, 2011

    It seems like the costs of globalization are similar to those associated with the product life cycle.  There's an initial barrier to entry that has to be overcome, and as the global relationship matures, margin falls off.  We can expect some further cycling as the US, the biggest importer of China's exports, balks at absorbing the costs incurred by China's industrial growth.  Maybe there will be some “onshoring” to compensate.  In any case, the balance of trade may converge on some kind of parity.  This is good news for the middlemen, distributors, etc. , who facilitate the international transactions.  Good news also for US workers if China holds out for more, but with energy and raw materials production remaining flat, it's likely both shores will have to take a haircut.

  6. SP
    February 17, 2011

    With almost all manufacturing happening in China, any price hike in labor cost or raw material will defintely prompt overall price rise. China has made or we can say the world has become totally dependant on China for manufactuing. Let us see if something changes in future.

  7. Barbara Jorgensen
    February 17, 2011

    If or when the playing field is level in China, it will be interesting to see if electronics manufacturers chase low-cost labor  around the world. I'd rather they didn't–it continues to signal labor is the most important criteria in manufactuirng and for many electronics compnaies, that's not the case. Much of the manufactuirng is automated. I'm not sure about assembly and other processes, but for many electronics companies labor isn't the biggest piece of the pie.

    It will also be interesting, if costs become equalized, how China will continue to compete in the global market. There are many variables, such as currency, etc., and the talent China has developed will play a key role going forward.

  8. Mr. Roques
    February 17, 2011

    Very interesting article! Are all labor costs rising? (or are some that will rise more than others?)

    If they decide to move somewhere else, what other countries are in the hunt for that extra income? India? Any in the Western Hemisphere? 

    Thanks!

  9. seel225
    February 20, 2011

    Nice article with good information. As the living standards increasing day by day, there is hike in the wage rates in most of the asian countries. Now i guess most of US companies follow couple of options. First one, they may have to pay the higher minimum wages to the workers while being profitable. The other option is that they have to move back the manufaturing sector to US. This is in turn can create jobs in their country.

  10. hwong
    February 25, 2011

    While U.S. want China currencies to become more expensive so that our trade deficit will decrease (higher export $ and lower import$), China is intentionally trying to keep the exchange rate low so that it will remain competitive for other countries to invest. So in the near future, U.S. will still rely on imports from China but it won't be as much.

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