Closing soon: the great sale of China
FOR years, American consumers have enjoyed falling prices for goods made in China thanks to relentless cost-cutting by retailers such as Wal-Mart and Target.
But the spate of product recalls in recent months - Mattel announced another last week - has exposed deep fault lines in Chinese manufacturing. Manufacturers and analysts say some of the problems are a result of financially strapped factories substituting materials or taking other shortcuts to cover higher operating costs.
Now, retailers that had largely dismissed Chinese suppliers' complaints about the soaring cost of wages, energy and raw materials are preparing to pay manufacturers more to ensure better quality. By doing so, they hope to prevent recalls that hurt their profits and reputations.
But the added costs - for items ranging from toys to frozen fish - will mean either lower profits for retailers or higher prices for consumers. "For American consumers, this big China sale over the last 20 years is over," said Andy Xie, a former chief economist for Morgan Stanley in Asia who works independently in Shanghai. "China's cost is going up . They need to get used to it."
William Wilhoit, the president of the Seattle-based Skyway Luggage Co, which makes all of its products in China, said that a year ago retailers wouldn't even consider price increases. "It's a different story today. Now, they are willing to listen," he said.
Although Skyway hasn't raised prices for retail buyers, Mr Wilhoit said the company was "at a point where we have to if we want to remain profitable".
Business executives don't expect significantly higher prices this holiday season, because Christmas goods have already been ordered. But prices for goods from China are likely to creep higher over the next 12 to 18 months, they say.
Already there are signs: the price of imports from China rose 0.4 per cent between June and July, the largest monthly increase since the price index was first published in late 2003. Prices had declined steadily over the previous three years, helping to keep inflation under control in the US and elsewhere.
Most economists believe that manufacturing prices will have to rise by at least 10 per cent to reflect China's current production situation, although it is unclear how much of that could be passed on to consumers.
Large retailers might be forced to absorb all of the extra costs on products that they commission for their own labels.
Costco Wholesale Corp, a warehouse chain with jumbo sizes and bulk prices, has stepped up inspections and monitoring of its Kirkland brand as well as other goods the company imports directly.
That increased vigilance, as well as new quality controls put in place by many manufacturers that supply Costco, was likely to result in modest price increases on some products for sale next northern spring and summer, the company's chief executive, James Sinegal, said.
"It probably is just a penny here and a penny there, we're not seeing big incremental cost increases, although that may come," Mr Sinegal said. "I don't think we have a choice. A product is either safe or unsafe - if it is more costly to ensure that the product is safe and being produced properly, somebody has to pay the cost."
Wal-Mart, whose billions of dollars of purchases from China are a key part of its low-price strategy, has said it is expanding testing and oversight of toys but declined to comment on price issues.
Los Angeles Times |
