China battling to keep production costs down

by Aaron Young on 2010-11-25 07:17:05

On my recent bi-annual trip to Asia I took some time to visit & study a few companies & businesses other than the Storepro racking factories in China and Malaysia. 

Shanghai, a city with a skyline that resembles Manhattan,  continues to be one of the true powerhouses of the world. Rapidly rising property prices now make it the wrong place to get return on manufacturing plant investment.  Many companies are unable to afford huge rent increases, forcing closure or relocation to China’s less developed inland areas. 2010 has also seen the cost of many raw materials increase by over 25%, with the price of cotton and steel, for example, escalating.   Storepro Ourselves have a financial interest in a large steel racking factory in China ensuring consistent service and quality, and some sort of consistency around pricing.  Perhaps the biggest problem, which will have long term ramifications, is the spiralling cost of labour and the mind set shift of China’s workforce.

A population of 1.4 billion who have previously tirelessly for very little has been the backbone for China’s low labour costs.  A large portion of the population lives a modest rural lifestyle , however a number of factors point to future changes. Most of the factories that the Western world source from are located in the east or more developed areas, however much of their workforce  temporarily relocate for work,  living in dormitory or boarding house conditions.   Of the 150 staff at the Storepro venture factory, around 70 % are employed and live on site.  Increased government spending in the less developed west of the country means many people are now staying put in their hometowns, mainly because they can. This has dramatically reduced the amount of cheap labour available, meaning many factories are running at less than 75% capacity, resulting in further cost pressures.

2010 also saw the “Foxconn effect” evolve.   As the main supplier for electronic products to Apple, including the I-Phone and I-Pod, Foxconn have experienced heavy product demand placing extreme pressure on their 400,000 factory workers. With factories being described as labour camps and reports of widespread worker abuse and illegal overtime, it wasn't a shock when a young employee succumbed to the stress and suicide by jumping off the top of the factory building. Although management attempted to do the right thing by announcing a substantial payout to his family, the unfortunate result has seen more than a dozen copy suicides drawing attention to the less than satisfactory working conditions.  An outcome of  this, a 30% increase in wages for all Foxconn employees, has now spread to most factories which could be the beginning of a national wage reform.

So the equation is straightforward:  minimum 25% increase in raw material costs, 30% increase in wages, a workforce shortage limiting factories  to production at  75% capacity and escalating rental or land costs all must equate to sizeable increases in costs for NZ consumers.  Consumer goods and racking will all be included!  Some analysts are saying the cost of finished product could more than double in 12 months. The rest of the world will continue to look to cheaper options such as Vietnam, India, Indonesia, Cambodia and even Mexico, but lack of infrastructure, unreliable transport systems, difficulties with communication, and inconsistent quality mean they are not an obvious answer at least for Storepro where raw material plays as bigger part as labour.   Visit our website today for more specific product information: www.storepro.co.nz


About Storepro

Storepro offers you over 50 years experience in New Zealand between three people. No one knows the local industry and regulations better. With widespread involvement throughout the Australasian market, Storepro’s experience began with Acrow and then Capital Racking and dates back to before the boom in large-scale high stud warehouse and bulk retail developments.