By Alexander Jung and Wieland Wagner
Manager Huang Hanxin, 68, is fighting the new wave of costs on all fronts. He heads Sha Wan Dian Ji, one of the world's largest producers of hair dryers, which produces some 7 million units a year. The workers, most of them young women, assemble hair dryers that will be sold under the brand names Revlon, Conair, Babyliss and Vidal Sassoon. They put together the plastic housings at an almost acrobatic rate, with 70 women assembling 3,000 units a day on each assembly line.
The factory once achieved a 15-percent profit, but today that figure has dropped to between 3 and 5 percent, says Huang, adding that the revaluation of the yuan against the dollar has been seriously detrimental to the company. Besides, says Huang, more stringent environmental protection laws have added 3 to 5 percent to the cost of production. The European Union recently demanded that manufacturers reduce the content of hazardous substances like lead or cadmium in electronic devices. This, says Huang, means buying different and more expensive materials.
The buyers of imported goods from China are finding that their prices have jumped considerably, especially for ordinary items like clothing and shoes. Top purchasing managers from German trading companies and manufacturers confirm that "made in China" is no longer synonymous with "unbeatably cheap." Sources at German mail-order giant Otto say that they have noticed "significant price hikes," especially for textiles. Kaufhof, a major German department store, has also seen steadily rising prices for Chinese-made products. Company sources say they are "concerned" about the situation. Indeed, the situation is a source of concern for anyone who does business with China, especially small and mid-sized companies.
Chinese suppliers have raised prices across the board, says Mario Moeschler, a marketing executive with Winora, a bicycle manufacturer based in the Bavarian city of Schweinfurt, who says the price hikes vary between 5 and 10 percent. "We have been informed of the price increases," says Moeschler, who receives three or four such letters from China every week.
The explanation for the price increase is always the same, he says: The invoice amount is higher, unfortunately, because steel and aluminum have become so incredibly expensive. Such price hikes are especially detrimental to bicycle manufacturers, who get many of their parts, like frames and forks, from China.
Of course, prices for raw materials have also risen everywhere else in the world. But what is making products from China so much more expensive now is the enormous increase in labor costs. An annual increase of 10 percent and more for wages and salaries has now become the rule.
Nowadays a Chinese engineer earns about €20,000 ($31,000) a year, about twice as much as at the beginning of the decade. In addition, it is growing more and more difficult to find -- and retain -- such qualified workers.
It comes as no surprise that 94 percent of German companies with business relations in China expect wage costs to continue rising, as a survey by the management consulting firm PricewaterhouseCoopers (PwC) and the Federal Association of Materials Management, Purchasing and Logistics has shown. According to the study, the average price saving with Chinese products is now only about 10 percent. Companies say it is not unusual for them to even take a loss.
"As quality standards rise and the level of automation increases, and as time constraints become more restrictive, sourcing products from China is becoming less and less attractive, from a price standpoint," says PwC expert Klaus Schulten.
Importers started looking for alternatives long ago. "Eastern Europe and India," the PwC study concludes, "will become substantially more important as procurement markets in the medium term." It seems that the caravan is moving on.
A Model Employer
And the shoe industry sets the tone. Hundreds of companies have already had to close their factories in China's Guangdong province. In return, hundreds have launched new operations in countries like India, Bangladesh, Indonesia, Vietnam and Cambodia. Ironically, the German shoe industry sometimes runs into old acquaintances there: Often it is the Chinese who develop factories in these countries.
Thomas Schneider, 52, has also set up shop in Vietnam, the promised land of the international shoe industry, where most of his customers -- global brands from the Adidas Group to Timberland -- are increasingly having their shoes manufactured. Schneider inquired with countless industrial parks before finding an area near Ho Chi Minh City, formerly known as Saigon. Beginning in August 2009, 200 workers will be tanning leather for Schneider at the new facility.
Schneider, who learned the tanning business in Reutlingen near Stuttgart, had almost put down roots in China. He developed a leather factory in Taiwan and, in the early 1990s, followed the leather industry to China, the latest low-wage paradise at the time.
Schneider now operates one of China's largest tanneries in Guangdong, where his company, ISA Tan Tec, developed environmentally friendly production systems and provides exemplary occupational health and safety, thereby revolutionizing the notoriously polluted and unsafe tannery industry.
But now his model factory has run into difficulties. Last year, the government in Beijing withdrew tax breaks for export goods like leather. Beginning in April, ISA Tan Tex began paying close to 18 percent of the selling price in duties to supply shoe factories abroad. In the past, the surcharge was only a little over 2 percent.
General price increases -- due to higher wages, a record inflation rate of more than 8 percent and the yuan's rising exchange rate -- have also complicated matters. But the worst thing in China, says Schneider, is uncertainty, because officials in Beijing plan to decide on the level of tax breaks on a year by year basis. This makes it impossible for any company to plan reliably for the future.
Because of high costs, Schneider has already reduced his workforce in Guangdong from 1,000 to 800 workers. Until the planned factory in Vietnam is ready for operation, he is already having leather produced in Vietnam by another manufacturer. After all, his customers are not going to wait for him.
Schneider is also planning his new location near Ho Chi Minh City as a showcase factory. Although he is only required to pay workers in Vietnam just half as much as workers in China -- about €42 ($65) a month -- the shoe companies' strict requirements on environmental protection and safety are just as applicable there. Schneider has no compunctions about complying, because his environmentally friendly production methods are in fact his strongest asset in the fight against his competition.
Schneider even plans to reduce the temperature in his factory by using a heat pump. In addition to lowering CO2 emissions, such techniques also allow Schneider to reduce his electricity costs. Prices are also going up in Vietnam, where inflation is close to 20 percent. During a fact-finding visit, Schneider heard stories from other bosses about how tough the competition for qualified personnel is. After Tet, the Vietnamese New Year, thousands of Vietnamese didn't return to their jobs -- they switched to companies that pay more.
But Schneider has no choice. The next stage in the game is Vietnam -- at least until his customers in the shoe industry decide it's time to move on to the next low-wage country.
Translated from the German by Christopher Sultan
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