Words starting with the letter “C” seem to encapsulate most of the challenges currently facing Hong Kong/China print suppliers. Climbing currency, creeping costs, credit squeeze and chaotic weather—all have combined to wreak havoc for the suppliers. (But then again, who has not taken some heat this past year?)
In most cases, China's rising yuan (also called renminbi) is at the root of the problem. The decade-old peg of 8.28 yuan to the dollar was removed in July 2005 following pressures from Washington to free the artificially low exchange rate and, by the same stroke, reduce its trade surplus with the U.S. (Not that Beijing did not see the benefits of a stronger yuan, which would boost imports and curb exports—both crucial to reining in its trade surplus and breakneck economic growth—and stem cash inflows, a source of its soaring inflation.)
Hedge Your Bets
Unshackled, the yuan has been unstoppable, rising 3.24% in 2006, 7.1% in 2007, and up another 4.5% in the second quarter of this year. The hope that the psychological barrier of 7.00 yuan to the dollar would not be breached has vanished. Just before this report went to press, the rate was hovering around 6.82. Ironically, none of the arguments for yuan appreciation have proven right. China's inflation, now at a 12-year high, continues to soar with its consumer prices increased by as much as 8.7% in February. The massive inflows of cash have yet to trickle down; in fact, the first few months of the year each saw $60 billion flowing in, up from 2007's monthly average of $40 billion. Exports to the U.S. are not sluggish, either: between January and April this year, the monthly figure averages $24.6 billion, compared to $23.9 billion for the same period in 2007. However, the higher yuan is expected to result in lower demand for its manufactured goods, which may decimate its GDP by as much as 1.5% (which actually is not a lot considering the projected 2008 GDP of 11%).
Those caught in the middle of this yuan fiasco—in this case, print manufacturers and brokers—are paying the (higher) price. Manufacturing in fast-rising yuan and selling the finished goods in falling dollar is bad news whichever way one looks at it. On average, yuan appreciation has indirectly jacked up production costs by at least 6% since mid-2007.
Care for the Team
To make matters worse, the enforcement of a new labor contract law in January creates immense labor pressures, especially in the manufacturing hubs of Guangdong Province. The new law puts a cap on working hours and overtime, specifies minimum wages and severance pay, and requires mandatory employer contribution to worker insurance and pension. It also stipulates open-ended employment contracts for workers who have been working for at least 10 years and those who have completed two fixed-term contracts with a company. For long-awaiting international labor organizations and foreign governments, it signals China's coming of age in its attitude to worker rights and security.
But do not expect the tens of thousands of employers, domestic or foreign, to embrace it with open arms. For them, it means labor costs increasing by as much as 20% before this year is over. As it is, statistics show that labor costs around the Pearl River Delta (where most export print manufacturers are based) have risen by 25% over the past 24 months due to inflation and skilled labor shortage. Workers are not all rejoicing either: they want more than the mandated monthly overtime of 36 hours. Moreover, the “two fixed-term contracts” rule makes it difficult for companies to hire (and fire) temporary workers to cope with seasonal peaks. After all, there are only that many migrant workers around, and so many times a company can hire (or fire) the same worker without breaking the law.
Clean Up the Field
Meanwhile, Beijing's move to freeze short-term energy prices back in January to combat inflation and escalating global oil prices has been, well, very short-lived. Record oil and coal prices, driven somewhat by China's consumption of one-tenth of the world's oil and one-third of coal, spoiled the good intentions. Electricity prices are expected to go up by 4.7% in July, while gasoline and diesel prices have already climbed about 16% to 18%—all adding to the existing inflationary pressures. Prices for plastic and other petroleum-based materials have already risen by 30%; and since plastic is a major component in toys, plush-and-plastic manufacturers have been hard hit.
An interesting development as a result of the sky-high oil prices is the ban imposed on the production of ultra-thin plastic bags. The country's top plastic bag manufacturer, 20,000-strong Suiping Huaqiang Plastics, closed shop within a month after the crackdown. As of June 1, shops are also forbidden from giving free plastic bags. The ban, which purportedly will save the country 37 million barrels of crude oil used in the production of plastic bags/packaging every year, gives Beijing lots of “eco-credit” on the international stage.
Have a Greener Turf
That brings us to the closure of at least 400 small polluting Chinese paper mills since 2007. The effort to clean up rivers and enforce stricter environmental regulations is ongoing. That is great news for the planet. But for the tight paper market, these closures are driving up prices that are already inflated by Norscan (North America and Scandinavia) capacity reduction and higher shipping costs. Further adding to the woes of the pulp-and-paper industry is the elimination of the 13% tax rebate on exports of pulp, paper and board that use imported logs, wood chips and pulp. Since Chinese mills import most of the furnish materials, and print suppliers either buy from these mills or import directly, the impact is keenly felt throughout the supply chain. Last checked, all factors combined have driven paper prices up by about 20% from a year ago.
Domestically, the latest environmental and energy conservation drive has seen blacklisted companies banned from participating in major trade shows such as the Canton Fair and the China Import and Export Fairs, both crucial platforms to reach international buyers. Banks are also privy to the blacklist and have since instituted “green finance” that subject loans to a company's environmental performance. Fines and eventual closure are Beijing's typical stick-and-no-carrot approach. Companies must also establish pollution treatment facilities and champion recycling. Combined with the global eco-friendliness fever, and you see print manufacturers pulling out all the stops to go green (which, unlike growing grass in the backyard, needs big bucks).
Time Out for Snow and Rain
As if things were not bad enough to make even the most hardy business owners want to howl at the moon, Mother Nature decided to misbehave. For Guangdong Province, it started with severe snowstorms, stranding millions of migrant workers heading home for the Lunar New Year holidays. Manufacturing floors and production schedules were thrown out of whack by the worst winter storms in 50 years. Some workers opted to stay behind and return to work, while those who had already left risked not making it back on time as transportation systems buckled under pressure. Worse, power grids froze, forcing factories to close down or spend tight money on generators and fuel.
Then, before one could take a breather, summer rain and floods arrived. Fortunately, PW has not heard of any major impact on print suppliers, nor from the earthquake that rocked Sichuan some 1,000 kilometers away. Still, to a certain extent, there were loss of production time, delayed shipment due to a crippled transportation network, and affected workers and their families. No matter what, there is a cost to tackling these disasters—something the suppliers can do without.
Call for a Tighter Play
Meanwhile, various product recalls in recent months have Beijing freaking out over its status as the factory to the world. Jittery international buyers are now scrutinizing every little bit and piece that comes with their China-made products. The result? Backlogs build up as laboratories need to conduct more tests, and manufacturers have to deal with longer waiting time and production delays, all costing money (what else?).
Also getting tighter are credit terms. The ripple effect has trickled down, and previous 90- or 120-day terms are now halved. The print supply chain—paper mills, machinery manufacturers, ink sellers, logistics providers, etc.—faces shorter credit terms from their suppliers and banks, and now print manufacturers and publishers are feeling it. Obviously, a U-turn is unlikely anytime soon, given the uncertain global economy and inflation. And in times of rampant closures, fast credit collection is par for the course.
Now, Are You Ready?
Of course, it is not difficult to see the pluses (and good intentions) behind the new rules and regulations: a more flexible yuan, better worker benefits, a greener environment, safer products, fairer trade, etc.—the very things the international community wants from China. So far, so good. But the catch is, everyone has to pay for some of the costs of bringing about these improvements, hence the 15%—30% added to the quotations that you received in the past months.
For publishers, it is inevitable to contemplate sourcing elsewhere. Vietnam, Cambodia, Indonesia, Thailand and India are some of the natural choices because of their sizable labor force and lower costs. However, making the shift is easier said (or thought) than done. For one, not every country is suitable for large-scale book manufacturing. There must be a supply chain of paper, raw materials, accessories, etc., supported by the necessary infrastructure and legal and business frameworks. Otherwise, there will be no economies of scale, efficiency, quality or reliability.
For print manufacturers and brokers, the cumulative cost increase is not as easy to absorb or transfer as before. Some manufacturers have folded, among them Best Tri Printing and Hua Yang. A few others have either exited the field or opted for cash injections from private equity. In times like this, taking stock and weighing options to boost profits—by increasing revenues, cutting costs, improving efficiency or adding capacity—is the standard practice. For the Hong Kong/China print industry, the game has changed and surviving means learning new tricks. (Who says old dogs can't learn new tricks?)
That brings us back to the letter “C,” as in changing industry rules. Notice that the letter also kicks off many positive adjectives—client-centered, collaborative, creative and cost-effective among the most important, which describe Hong Kong/China print manufacturers to a T. That is to say, as far as PW is concerned, this group of suppliers remains an “A” (as in “ace”) when it comes to providing publishers with what they want. Their resilience and adaptability in tough times are unbeatable: think pre-1997 handover jitters, Asian financial crisis, SARS outbreak, and how they braved through them all. True, the seismic waves hitting these suppliers will (and already have) cause some collateral damage. But they will pick up the pieces, and the industry will emerge stronger and better than before. (Frankly, the publishing industry cannot afford to have it otherwise.) So let's get on with the game, new rules or not!
