The challenges facing China's Christmas industry foreshadow the difficulties that many low-cost manufacturers will face in the coming year. More than $770 million of Chinese Christmas products come from the country's manufacturing hub in Guangdong province. An in-depth report from China Daily reveals the concerns of companies operating in this extremely low-margin industry.
We have heard reports previously about labor shortages becoming a problem of the future as the Chinese population ages. In Guangdong, serious labor shortages are already a problem.
Chen Shaoyan, the owner of the Zheng Chang Long Carton Factory, complains that at peak production his factory couldn't find enough workers. The factory has been making yuletide ornaments for 10 years. At peak times the factory employs 800 workers. This year he could only find 200 people willing to accept the low wage production-line jobs.
The problem in this case is not an aging work force, but largely the rising cost of city living. China has a large reserve of potential workers in the countryside who are impoverished by global standards. But moving to a major hub like Guangdong and trying to make a living there on production line wages is proving to be an increasingly unattractive prospect, especially with the consumer price index rising at more than 5 percent.
Because profit margins in the yuletide industry are razor thin, estimated between two and five percent, boosting wages is not an easy option for manufacturers to consider.
Some who have taken the plunge have not done well.
China Daily reports that Luo Yonghuang, a manager of Hongfeng Arts and Crafts in Guangdong, complained that even though he raised his workers' wages by 150 percent, the company still experienced a labor shortage.
The industry is also coming under pressure because of rising materials costs.
Non-woven fabric, the most common material used in festive ornaments and dolls, prices soared by 100 percent during this year's production season. Raw materials are estimated to make up 40 percent of the cost of finished goods.
Because of increasing materials costs, some manufacturers complained that they made no profit at all this year.
What can we learn from Guangdong's experience? Like canaries in a coal mine, China's low-margin export industries are always the first to feel the effects of worldwide trends.
The labor shortage is likely an important signal that inflation is beginning to take a toll on the migrant workers who are the engine of China's low-cost industries. Even among urban dwellers in Beijing, the soaring cost of housing has become a theme that reverberates through Internet chatrooms. Many worry that they will not be able to live in the increasingly costly capital city.
Fighting inflation will be one of the key themes in China's economic future. Raising interest rates can help rein in inflationary spirals, but at a cost. Higher interest rates slow down economic growth.
China's weekend move to raise interest rates for a second time are part of a long and difficult effort to bring inflation under control in an economy flooded with cash.
Commodity prices and commodity shortages are another theme that will echo through the coming year. Chinese demand is driving up prices for key commodities including copper, nickel and iron. That's a trend that won't stop in 2011 unless prices hit a ceiling that China will not or cannot pay.
Meanwhile, watch for Chinese corporations to scour the world, looking to buy up resource companies. This is a trend that accelerated in 2010 and that appetite for foreign resource companies seems likely to increase in the years ahead.
China's emergence is such a large economic event that it will affect investors, consumers and workers in ways not yet imagined. From Africa to the Americas, China's increasing economic clout will likely be the premiere event in almost every economy.
China's desire to buy up resource-processing firms will likely drive up corporate valuations throughout the commodity sector. Chinese demand is already pushing up the price we all pay for the planet's raw materials.
Labor shortages in low margin industries will likely push some Chinese jobs offshore to countries like Vietnam and Bangladesh. Increasing valuation of the yuan may put even more pressure on China's ultra-competitive exporters.
For decades, America was able to go about its business, confident of its leading role in global economic affairs. The rise of Japan may have been a temporary shock to the system. But the rise of China is an event that will continue to dominate our economic thinking and planning for decades to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
