Richard Gottlieb

An article you must read
November 12, 2007

I do a great deal of reading and it is rare that I see an article as important for toy industry citizens to read as “China’s factories feel the squeeze” in the November 8, 2007 Chicago Tribune. It is an in depth look at the dynamics in China that are causing the safety problems, the migration of factories and the rise in costs. 

The Chicago Tribune has probably been doing the best job of any newspaper in the US covering the toy safety issues. This article, by Michael Oneal, provides an insightful look at the train wreck caused by the downward pressure on pricing by American buyers finally meeting up against the upward pressure on costs in China. Here are just a few quotes. It’s a long article but I strongly recommend you read all of it:

On the impact of the retail buying community:

"A lot of Chinese companies have a saying," [a Chinese manufacturer] said between drags on a cigarette. "Do you want to kill yourself? Then do business with Wal-Mart."

“For decades, the economic relationship between the United States and China has been based on a crystal-clear calculus: American consumers wanted low-cost goods, China delivered them. But exponential growth . . . has triggered sharply rising costs for everything from labor to plastic. And as the Wal-Marts of the world continue to press for lower prices, Chinese manufacturers are getting squeezed.”

On why costs in China are rising:

“For years, migrant workers have flooded to Chinese factories on the coast providing a seemingly limitless supply of dirt-cheap labor. Now, the government is trying to rebalance the economy by encouraging industrial development inland, allowing more workers to stay home and forcing companies to come to them. In coastal cities like Shenzhen and Dongguan, this has translated into a labor shortage. Amid China's ravenous appetite for raw materials -- oil in particular -- other costs are rising too. . . Add in a rising Yuan against the dollar and the region's low-cost advantage is beginning to slip away.”

“Labor costs . . . have jumped by half over the last several years. But that's just the beginning. ABS plastic, a basic raw material in model cars, has more than doubled. Nickel, the key ingredient in batteries, has rocketed from around $16,000 a ton to almost $47,000. Meanwhile, everything has been made more expensive for exporters by the government's policy of letting the value of the Yuan float higher in response to U.S. complaints about its trade deficit with China.”

How rising costs cause safety problems:

“. . . [W]ith costs rising precipitously in China; many experts say the pressure to shave pennies through bad behavior has increased, especially as foreign buyers continue to exploit the market's chronic overcapacity by shopping door-to-door for vendors who will do whatever it takes to win business.

Mistaken assumption by American importers

“Quality control experts used to working in China say the mistake companies like Mattel and RC2 have made is assuming that China -- still a developing country -- offers U.S. companies a mature and stable manufacturing platform. China is certainly capable of manufacturing high-quality products. But Kurt Schneiders, co-founder of PRO QC Systems in Hong Kong, said a combination of overcapacity, lax regulation, rising costs and pressure from buyers has encouraged the desperate, uneducated or unscrupulous to do whatever it takes to win business.”

China’s days as the low cost supplier are coming to an end. One has to assume that American companies who continue to place their long term bets only in China maybe looking for trouble. 

Posted by Richard Gottlieb on November 12, 2007 | Comments (0)