The Cost Conundrum for East and West

The Cost Conundrum for East and West

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Purchasing demand for Chinese goods has slowed a tad in the United States as higher manufacturing and shipping costs are prompting US retailers to turn to cheaper destinations in a bid to crank up profit margins.

Though most of the new orders are believed to be flowing into emerging economies, many retail industry experts still say that China still has the best brand equity in the US.

"Retail executives have told me that some low end orders are being routed to countries like Vietnam, Indonesia and Bangladesh," says Erik Autor, the International Trade Counsel for the National Retail Federation (NRF), the world's largest retail trade association. "There might be some empirical data on it but I am yet to see it," he says.

The US Commerce Department, the National Association of Manufacturers, the US Trade Representative and the Toy Industry Association, some of the agencies that provide data on the retail trade in the US, also did not have any figures to support the claim that manufacturing is being routed to newer locations.

The latest CNBC All-America Economic Survey shows that the average American plans to spend $751 (570 euros) on gifts this year, up 22 percent from last year's spending plans. That number would represent a 4.6 percent gain over the actual holiday spending in 2010 as measured by the NRF. It should also come as a welcome relief for US retailers who have been facing a torrid time for the last few years due to the economic woes in the US.

Though much of the spending resurgence will be driven by the wealthy, every income group, including those with salaries of $30,000 or lower, will spend more this year, says the survey.

But the euphoria in the US retail sector has not had a transformational effect on companies in the Pearl River Delta region of Guangdong province in South China. Contrary to earlier years, companies here are languishing as reduced order intake this year from Europe and the US has triggered fears that Christmas orders would eventually be shifted out of China.

"To some extent, Chinese products have become less competitive due to the higher costs. Labor costs have gone up, while the yuan is steadily appreciating," Autor says. But that does not necessarily mean that, "there will be a big rush to the exits (by US retailers)," he says.

However, Autor says the evolution of China's rapidly growing economy is an inevitable trend of economic development.

"China is losing out on the lower-end consumer products like cheaper shoes and T-shirts. But at the same time its manufacturers are steadily moving up the value chain and focusing more on higher-end electronics, computers and capital goods," Autor says.

According to him, the decision by some US retailers to seek alternate manufacturing locations is not necessarily a conscious one.

"Investment just migrates to these places," says Autor. "Vietnam has a skilled work force, low labor costs, and specializes in apparel, furniture, food products, footwear and consumer electronics."

Major US retailers like Walmart Inc and Target have indicated that they have no plans to reduce their retail intake from China. "Our direct sourcing volumes from China have been fairly consistent in recent years," says Megan Murphy, Walmart's international corporate affairs manager.

"China has been and will continue to be a very important sourcing market for Walmart. We are committed to a long-term, mutually beneficial partnership with our suppliers in China. As such, we are working with them in various initiatives to help them meet increasing customer expectations and enhancing production efficiency."

Target, on its part does not even mention China when asked to comment. "Target's approach to sourcing products throughout the world is grounded in its strong business ethics," says spokeswoman Jessica Carlson. "Target's mission is to bring high quality products at competitive prices. We directly import over 30 percent of our products and we continually evaluate the mix of countries from which we source and adjust them for many factors, including production quality and capacity, speed to market, price and risk."

Two other factors that could be adversely impacting China are landed duty costs and higher fuel prices. The landed duty cost is all the costs involved in importing the product including the duties, something retailers look at closely, Autor says.

"If the choice is between China and El Salvador, labor costs may be higher in El Salvador but the transfer fee may be lower so it's all about the balance between the two."

In addition, the spike in global fuel prices makes transporting goods from Central America or Mexico easier than going to Asia.

Autor doesn't think the recent wave of "China bashing" by US politicians has affected retailers' choices. "Retailers don't view China as a threat," he says.

To some extent, the slowdown in external demand for Chinese goods has also been prompted by the 12th Five-Year Plan (2011-2015), which calls for an increased emphasis on Chinese consumers.

"China is going to continue to be a significant economic force, but won't be as competitive as its costs increase. It is no longer going to rely on the (unstable) European markets for growth and instead will be relying more on domestic consumption," Autor says.

"Home textiles were doing well (in the US) during the booming housing market. But when the housing market hit the bubble here, the industry took a huge hit," Autor says. "China now is the best housing market in the world, so most of the companies are focused on the domestic market."