|
BRF Global Report, January 2009
A difficult 2008 paves way for opportunities in 2009.
|
December 2008 marked a big anniversary in China, thirty years since Mainland China opened up to the outside world. The month also brought the first direct air, shipping and postal service between the Mainland and Taiwan. More than 1-million Taiwanese investors, employees, residents and students live and work on the Mainland; they can now travel between the two countries in a 1-½ hour flight. No more days lost changing planes in Hong Kong.
Optimistic though these tidings might be, they came at the end of a very difficult year.
Slowing growth results in manufacturing sector contraction.
Growth in Mainland China, forecast to slow to 9.5%, actually came in at 9%. The forecast for 2009 is 8%. While this may seem high compared to a U.S. economy that grows 3% in good years, it takes a toll on China, where the economy grew 11% in 2007.
The National Development and Reform Commission (NDRC) reports that in the Guangdong province alone, 60,000 small and medium-sized enterprises (SMEs) closed and more than 20-million people lost their jobs. China’s 4.3-million SMEs provide about 60% of China’s GDP and 75% of the jobs. Roughly 25% of China’s SMEs are in Guangdong.
Guangdong appears to have taken the hardest hit in 2008, mainly because the slowdown started there early in the year. Generally, these factories import raw materials and process them into designated products for overseas clients. By the middle of the year, though, the slowdown spread North to Zhejiang and Jiangsu provinces, areas more focused on high-tech products and many independent brands. By October, the slowdown had spread to the far north areas of Tianjin and Beijing areas.
In Novermber 2008, Shanghai customs reported the biggest monthly fall of foreign trade since 2001. Exports and imports fell 9.7% to $45.4 billion. They had averaged over $50 billion per month from January to July. Exports alone experienced a sudden drop of 2.4% to $31.4 billion, after having grown a robust 20.8% the previous month.
Many SMEs closed to avoid bankruptcy, opting to “take the money and run” before there were significant losses. However, the full impact of the global financial crisis will not be felt until first quarter 2009 when 90-day terms come due. A lot of companies banking on accounts receivable may find that their customers are simply not able to pay.
Opportunity: If your company is strong and can pay its bills, you can wrangle new concessions as factories work to keep their better customers. There may also be opportunities to pick up inventory at fire sale prices, where companies that placed orders could not afford to take delivery. These purchases can then be passed on to the customers as special opportunity buys. However, many of these products could be sub-par, so retailers need to have proper quality assurance systems in place.
Outlook for 2009: Falling prices will help the strong get stronger.
While the last 18 months saw purchasers of Chinese exports accept price increases of anywhere from 10% - 50%, prices are starting to drop.
Raw material costs are at their lowest in years. Oil went from a high of about $150/barrel in July to $44/barrel in December, iron ore prices fell from $200/tonne to $72/tonne as steel prices halved, and aluminum is at a 20 year low. Meanwhile, all the tax rebate incentives that were slowly taken away in 2007 are coming back to help boost exports. For example, the plastic resin products tax rebate had dropped to 5%; it will go back to 9%.
And though costs will drop, production volumes in the better factories will remain the same, or perhaps grow.
Many businesses in 2008 saw dollar volumes rise, mostly by passing price increases on to consumers. In some factories, business measured in dollars doubled even though production volume increased only 50%. Now, these same factories expect their dollar volume to drop 20-30% for 2009, while production volume will be constant or, in some cases, increase modestly.
Opportunity: With weaker factories closing and stronger factories lowering prices, opportunities exist to negotiate better rates from better suppliers.
Will the Yuan fall to boost imports or rise to improve quality?
Right now, nobody knows how the government will manage the national currency. Since China scrapped a policy that pegged the Yuan to the dollar in July 2005, it has climbed 21%. It reached its high in July 2008, yet dropped 5.5% by December 1st.
There is some speculation that the Yuan can slide 3% - 7% over the next year. Many believe the Chinese government will prevent the currency from strengthening in order to help exporters weather the global financial crisis and economic slowdown.
Others, however, suggest that the Yuan will continue its long, slow and painful appreciation in 2009. They believe the Chinese government may stop the Yuan’s depreciation, so factories will be forced to produce better products. The government would like to eliminate the high-profile quality issues that hurt China’s reputation in 2007 and 2008, however the image of low-price, low-quality goods will not turn around overnight.
Opportunity: A movement towards higher quality goods, even as prices drop, would present a rare opportunity to develop higher-quality private brand programs and roll them out at a reasonable cost.
Loss of disposable income hits home channel retailers hard.
The home center business in China today is more of a decorative business than a building material business, so as the economy toughens, there’s less disposable income to spend in the home center retail shops. Beijing Review reported in Dec. 2008 that Kingfisher, Europe’s largest home improvement retailer, lost 17 Million Pounds (USD$26 million) in China in the third quarter because of diving sales and over-expansion. All retailers worldwide need to be cautious going into 2009.
Opportunity: Retailers who have not revisited purchase orders placed before the global slowdown need to do so now, or they will find themselves taking delivery on more inventory than they can sell.
Conclusion: Now’s the time to negotiate the best deals in China.
Weaker factories are closing. Stronger factories are scrambling to keep and win business. Raw material prices are falling. This convergence of events presents a rare opportunity to gain concessions, expand product lines (especially private labels) and deliver better quality products for lower prices. This opportunity, however, needs to be managed prudently in light of the expected global slowdown in retail sales.
BRF Global Solutions, through our extensive network in China and experience in the home channel industry, can help you identify and capitalize on the best opportunities for your business and brands. For more information contact Bonnie Fitch at Email info@brfglobal.com or call me at (404) 510-1020.
|
|