End of the "China Price" Era

In December 2004, Business Week magazine published a special report on The China Price:

They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable -- from furniture to networking gear. The result: A massive shift in economic power is under way.

That certainly happened--but it's over. Inflation is accelerating in China. Although the consumer price index has been pushed up by food prices, factory prices are up by about six percent (more details at the Times).

In a change not widely recognized in this country, the yuan has appreciated against the dollar by about seven percent in the past year.

So the same old stuff is about 13 percent more expensive in dollars paid by the American importer. However, that importer may be spending more to verify the quality and materials used by the Chinese manufacturer. An importer would be crazy not to have a formal testing and evaluation program in place. That adds to the cost. It really should have been a cost of doing business of a few years ago, but many companies thought they could cut that corner--turns out not a good corner to cut.

At the same time that China prices have risen, U.S. producer prices for non-energy, non-food goods are up only 2.1 percent. The pendulum is swinging the other way.

Business strategy implications: If you have not been outsourcing to China but are thinking about it, give the issue less urgency. If you have a successful outsourcing program, you should test the waters with some U.S. suppliers, to see if your China source is still the best buy. I say test the water because good vendors should not be discarded casually, regardless of their nationality (also make sure that you are doing proper product testing and evaluation, in case that's not obvious to you).

Economic implications: American manufacturing companies will have a slightly easier time competing with the Chinese.

Will China's Economic Growth Slow? Yes, but not by a lot. They'll lose some business they otherwise would have had, but solid growth is still most likely.