Thread: Rising Costs in China Seep Into U.S. Market

Here it comes, folks! Chinese junk is going to cost us more!


Rising Costs in China Seep Into U.S. Market
Importers Pay More or Cancel OrdersBy Ariana Eunjung Cha
Washington Post Foreign Service
Saturday, February 9, 2008; D01



SHENZHEN, China -- A year ago, Mei Meng's factory sold foot-tall plush teddy bears, rabbits and ducks for export to the United States for $1.30 each. Now they're $2, and he doesn't rule out the possibility that prices will go up again.

Likewise, manufacturers say wholesale prices of cowboy hats made in China have gone from $1.65 to $2, cotton duvet covers from $3.30 to $4, portable electric ranges from $9 to $10 and office water dispensers from $50 to $56.

A confluence of events -- the weakening dollar, soaring domestic inflation, new labor laws, the end of some government export subsidies, the increasing cost of raw materials, more stringent product safety regulations, and bad weather -- means the cost of goods produced in Chinese factories is rising fast.

Those increased costs are already showing up in import prices. After falling for years, the price index of goods from China rose 2.4 percent in 2007, according to the U.S. Bureau of Labor Statistics division of international prices. That's the largest annual increase since the index was first published four years ago.

The added costs could compel U.S. companies to shift their manufacturing elsewhere -- particularly to Southeast Asia, where countries such as Cambodia have already seen an increase in U.S. investment.

Or the increases could be passed along to U.S. consumers.

That would mean that the cheap goods that were synonymous with China and allowed megastores such as Wal-Mart to dominate the U.S. retail sector will likely no longer be as plentiful.

"We'll see maybe a 5 to 10 percent increase in consumer prices, depending on who has power" in a specific part of the supply chain, said Sun Mingchun, a senior economist at Lehman Brothers.

As contracts between Chinese suppliers and U.S. importers are renegotiated in nearly every industry, Sun said that if consumers are lucky, increased costs could be absorbed anywhere from the Chinese manufacturer to an import-export company to retailers before hitting their wallets. If not, he said, the price of things like clothing and home appliances could jump significantly.

Among some economists, there's a larger concern: that inflation in China -- which was 4.8 percent in 2007, an 11-year high, and which forced the government to freeze prices of staples such as grain, edible oils and eggs -- is adding to inflation in the United States.

"In the past, the pressure of inflation in the U.S. mainly came from crude oil, but now it comes from developing countries like China, from those who provide the U.S. with cheap industrial products," said Li Huiyong, a senior analyst at Shanghai-based SYWG Research and Consulting.

The extent to which rising production costs in China affect the U.S. economy hinges on negotiations between suppliers and buyers. Chinese factory managers describe combative negotiations with U.S. importers regarding prices -- with each side seizing on every possible argument, including how long they have worked with each other, the size of their market and the quality of the work.

Mei, owner of the Nantong Eurofield Art's Toys, whose products are for newborns to 3-year-olds and are sold at Target, Wal-Mart and Toys R Us, has had to raise the prices of some products by more than 50 percent. He said a little more than half of his customers accepted the new prices. The others did not renew their contacts.

Mei said that is more than fair given what his business is dealing with. He said he is not trying to eke out more profit; his sales in 2007 were half what they were in 2006. He is just trying to make sure his company survives.

Mei outlined several factors that are putting pressure on his final price. For example, he said, the dollar is down 12 percent against the Chinese yuan. Also, he said, "the tax rebate is down 2 percent, labor costs are up 20 percent. . . . Raw material costs on average are up 10 percent."

Mei said companies that tried to keep prices stable were not able to pay their operating costs. "In our area, half of the toy factories are all closed due to these reasons," he said.

The situation is similar for Universe Home Textile, whose customers have cut orders by a fourth because of a 20 percent price increase, said Jin Maozheng, who works in the company's foreign trade department. He Wei, a sales manager at Blue Sky Arts Packing in the eastern city of Wenzhou, said her company is also suffering from price increases. The company makes a variety of bags, including the environmentally friendly totes sold at supermarkets. He said his company has had to raise some prices by more than 20 percent to make a profit.

"We lost quite a few customers due to this. The customers feel helpless too," he said.

Chen Baoze, sales manager at the Cagnan Shengguan Cap Workmanship company, has been luckier. He said that when he points out to customers that his company's profit is only 20 to 30 cents per hat, "the response we get from customers are generally, okay, they can understand why we raise the price."

In the same vein, Shao Changping, sales manager of Lamo China, a vendor of home appliances based in Ningbo, said he uses a simple calculation to argue his point. "The rise of our export price is in proportion to the fall of U.S. dollars. The dollars depreciated about 12 percent in the past year; our price went up 12 percent," Shao said.

The effect of these price increases from factories is already showing up in U.S. stores and other retail outlets.

Chris Lu, office manager for the Shenzhen office of Michigan-based NAS Global Trade, sells automotive gauges to service stations in the United States. Because its supplier increased costs, NAS also had to, Lu said. A set of automotive tools last year cost $15; today the company is selling them for $20.

Despite this, Lu said, "we feel we are making less and less money. This year profit is down 15 to 20 percent."

Yao Sheng, who works as a sourcing agent for footwear in Shanghai for Steve & Barry's, a Port Washington, N.Y.-based retailer that operates 200 stores in 33 states, said, for example, that in 2006 the company paid $8.70 for a particular pair of basketball shoes. Now it pays more than $9 for each pair from its Chinese supplier. The retail price for its popular Starbury II sneakers has gone up from $9.98 to $14.98.

Still, he said, the Chinese suppliers -- not importers, retailers or U.S. consumers -- have so far borne most of the burden of increasing costs.

"We won't pay them until we receive products in the U.S.," Yao said. "It takes two to three months for shipping. During those months, their rate falls day by day" -- because of the weakening dollar -- "although we pay the same price. We've had lots of complaints about that."

As manufacturing costs in China rise, the pace at which companies are shifting operations to Southeast Asian countries is accelerating. But Ting Lu, an economist with Merrill Lynch, said he thinks that tactic will keep costs in check only for the short term. "After you move a few there, you're going to push up the labor costs there anyway," he said.

Mei Xinyu, a researcher in international trade at the Chinese Academy of Social Sciences, said the impact of the increased costs of producing goods in China, in theory, should not have such a big impact on consumer prices. Mei said the real problem is the huge markups by U.S. importers and retailers.

"The difference between their sales price and the factories' cost is more than dozens of times, even hundreds of times higher. Therefore, even if Chinese factories double their prices, it shouldn't matter," Mei said.

He said the loss due to increasing costs in China should be absorbed by U.S. importers and retailers rather than Chinese companies or U.S. customers. "I think it be a bit more fair in terms of the allocation of the rewards of world trade."

Researchers Crissie Ding and Wu Meng contributed to this report.



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Who cares, I don't want any of that junk made in China anyway.