April 23, 2008
Filed under: Asia
Hi Everyone —
For those of you who know me, despite my immense capacity for snark and sarcasm, I’m a pretty glass-half-full kind of girl when it comes to my outlook on life. That said, I certainly don’t revel in being the bearer of bad news — but here it is: The prices of promotional products imported from Asia (which is most of them) are going to rise, and soon (and by “soon,” I mean “in the next few weeks”).
Currently, many North American ad specialty suppliers are in Asia for the Canton Show in Guangzhou and the Hong Kong Gifts & Premium Show, among a few others, as well as visiting the factories from which they import their items. As he has in the past few years, Rich Fairfield, ASI’s senior vice president and publisher of its magazines, is in Asia for the shows, along with staff writer Elaine Wong, whose observations from the shows I’ll be posting here on this blog on Friday.
The suppliers who are in Asia are no doubt meeting with their factories to get a handle on just how severe and imminent the price increases will be. It should be said that many of them have been telling their distributor clients that this has been coming for quite some time, to prepare them for the inevitable. The reason it hasn’t happened in such a sweeping, sea-change way is because, frankly, the suppliers have been holding the line and absorbing the cost increases themselves. But, because of a “perfect storm” effect that’ll culminate with most suppliers in the industry — from the smallest to the Counselor Top 40 entities — having to raise their prices and in many cases reprint their catalogs mid-year (a first in the 11 years I’ve been in the industry) to reflect the changes, they simply can’t sustain the cost increases anymore and must pass them down the supply channel. Some distributors I’ve talked to, who are keenly aware international news and markets, aren’t surprised in the least that this will happen; frankly, they’ve been expecting it because their suppliers have been preparing them. Other distributions, though, only hear the warnings as background, white noise because they’ve yet to encounter them. Well, my friends, to paraphrase Bette Davis in All About Eve, “buckle up because it’s going to get bumpy.”
Consider some of these recent headlines and article intros from the consumer business press:
From Slate magazine, in an April 8th article titled, “The Last Days of Cheap Chinese — Why American Consumers Are About to Start Paying More for Clothes, Electronics, Toys and Just About Everything Else.” In this piece, the writer notes that “American shoppers, for the first time in years, are starting to pick up the tab for rising costs in China. Some Chinese factories are now asking their American customers for price increases of as much as 20%-30%.”
From the April 7th issue of Business Week: “China’s Factory Blues: The days of ultra-cheap labor and little regulation are gone. As manufacturers’ costs climb, export prices will follow.” In this piece, Harley Seyedin, president of the Guangzhou-based American Chamber of Commerce in South China noted the following in regard to Beijing deciding to cut or cancel tax rebates for manufacturers on more than 2,000 items for exported goods: “The end of rebates has raised the cost of manufacturing many goods by 14%-17% at the factory level.”
From the front page of the April 8th issue of the New York Times: “Asian Inflation Begins to Sting U.S. Shoppers,” in which it was reported that in China, prices are now rising almost 9% a year, triple the pace a year ago.
As you can see, this issue is prevalent, imminent and will seriously impact U.S. consumers (that’s you and I), as well — of course — as the ad specialty industry.
And while I don’t claim to be an expert on these issues (for that you should chat up David Nicholson, president of Leed’s; Jonathan Isaacson, president of Gemline; Trevor Gnesin, owner of Logomark; Bonni Sandy, executive vice president of Dard; Jeff Lederer, executive vice president of Prime Line; and Randy Chen, owner of Impex International, among many other super-knowledgeable suppliers on the subject), here’s the short-list version of why this will happen:
1. Both the cost and demand for raw materials like metals and commodities like oil-based products (plastics) continue to soar and show no signs of slowing.
2. China has enacted, and recently implemented as of January 1, 2008, a new labor law that varies from region to region. To offset the cost of these new, government-mandated employee benefits, factories will increase the cost of their products across the board.
3. The Chinese inflation, which, my pal Jonathan Isaacson says is “China’s biggest export to the U.S.,” and the rising Chinese Yuan, its currency, continue to favor higher costs of exported goods.
4. The VAT (Value Added Tax), a rebate that Chinese government pays its factories to offset the cost of producing goods, will continue to shrink, which means they’ll nudge their prices higher to compensate.
5. The Chinese labor force, which is realizing they can get paid more and have better working conditions, are leaving their jobs because they know they can get paid more. This is a relatively new aspect of the Chinese marketplace, where workers would once stay at a jobs in perpetuity. Not anymore. The hot-spots for job in Asia are shifting, and with them goes the workforce. What does this mean for our industry? Factories will now have to fill those jobs and the time in which it will take to do so and train replacement employees will affect production output.
Then, just for fun, let’s throw in the upcoming Summer Olympic Games, hosted by China, from August 8 through August 24. Because the Chinese government is trying to get a handle on its horrendous pollution problem, it’s closing some factories — many of which manufacture the products you use as promotional items — to lessen the pollution level and reduce the amount of traffic on main thoroughfares to accommodate for increased visitors. Basically, the output in some areas will grind to a halt. “I would expect that lead-times will continue to lag for several months after the Olympics,” says Leed’s David Nicholson. “Factories will be stretched to catchup heading into the busy retail holiday season and many of the raw material factories will have a backlog of orders. This will disrupt the entire supply chain through China.”
If I was a nice, Jewish girl instead of a sassy shiksa, this is the point where I would say, “Oy gevault.”
Clearly, the list above is just a cursory overview and not meant to be the final word on the subject of rising prices. I’ll be doing an in-depth article on the topic in the upcoming June issue of Counselor magazine, utilizing expert industry, international and economic sources, so stay tuned.
So, what should you do? If you’re a distributor, now is the time to begin preparing your clients for imminent price increases. This is when other aspects of a promotional campaign you can provide — service, creativity, etc. — will become critically important. If you’re a supplier, take a deep breath and know that the time is near when suppliers across the board will begin raising their prices. You can take some measure of comfort in knowing that you’re all in this together.
Lastly, if there’s a supplier you love working with, be kind, thank them and buy them a drink at the next show. They’ve been dealing with this mess for months.
Stay tuned on Friday for a blog featuring Elaine Wong’s impressions of the shows and cities she’s seen so far in Asia. It’s her first time there, so her thoughts will no doubt be much less jaded and insightful than mine. ; )
PS: I know the subject matter of this blog is much more serious than my usual chipper chatter, so if you have any questions, post a comment or e-mail me directly (email@example.com) and I’m always available to offer advice on some knowledgeable contacts and talk you off the ledge.