The end of the $30 DVD player
China’s role as a low-cost producer has been taking a hit as labor and other costs rise, as I reported two years ago. Now, Alexandra Harney, writing in Slate today, contends that rising prices in China will hit US consumers in a big way. In the article titled “The Last Days of Cheap Chinese: Why American consumers are about to start paying more for clothes, electronics, toys, and just about everything else,” she writes, “Some Chinese factories are now asking their American customers for price increases of as much as 20 percent to 30 percent.”
For the past two decades, she contends, consumers have benefited from “China’s desire to attract foreign investment, rural workers’ hunger for higher wages than they could earn on the farm, and excess capacity in nearly every industry….” In addition, she says, the renminbi was undervalued, wages were low, raw materials were cheap, and government officials turned a blind eye to factories’ labor and environmental violations.”
But now, she says, “…a perfect storm has hit China’s manufacturers. So far this year, the renminbi has been appreciating at a 16 percent annualized rate. And prices for raw materials, which account for 60 percent to 70 percent of manufacturers’ costs, are soaring.” Further, “China is rolling out wage increases around the country and tightening its labor laws. Wages are rising at double-digit rates in coastal China.” And she further writes, “China’s Generation Y, the children born after the one-child policy came into effect, are increasingly aware of their rights to a legal wage, health insurance, and a certain number of days off every month. Their demands for better treatment will continue to drive up the cost of manufacturing in China.” (Read about the US Generation Y here.)
So what about other low-cost suppliers? “The problem for American retailers and consumers hooked on $3 T-shirts and $30 DVD players is that there is no other China waiting in the wings to make cheap goods reliably for American shoppers.” She says that Vietnam* lacks a sufficient number of workers to take on China’s low-cost-manufacturing role, while India lacks an efficient road and port infrastructure. As for other countries: each, she writes, "offers its own special risks: strong labor unions in one, political instability in another. None offers the one-stop shop appeal of China."
For the time being, she concludes, we will continue buying “made in China” items, but will be paying more for them.
*Not that Vietnam isn’t attractive to firms like Intel, which announced in November 2006 that it would invest $1 billion in Vietnam and employ 4000 people in what would be its largest assembly and test facility. And yesterday, Electronic News reported that Intel may close its test and assembly operations in Makati City, Philippines, which it established in 1974, when its Vietnam facility gets up to speed.
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