By Bing Zhang – Research Director, China Market, DisplaySearch
China is the world’s factory, and increasingly, the world’s market. Accordingly, changes in China’s economy and economic policy can have global impacts. Two current examples are changes in the Chinese currency policy and increased labor costs.
In response to international pressure and strong economic growth in China, the Chinese government last week announced that it will allow appreciation of the Renminbi (RMB), also known as Chinese yuan (CNY). The government pledged that the appreciation will be gradual, but could influence companies who produce products in China for export, including many IT, PC and consumer electronics makers.
Since 2005, Beijing has allowed the RMB to float within a certain range, and since 2006 the RMB has appreciated by more than 20%. RMB appreciation can have mixed effects. Generally, exporters are negatively impacted, as they price in US dollars, but pay their workers in RMB. On the other hand, RMB appreciation can strengthen the purchasing power of Chinese consumers, making China a bigger market. In China, people say “RMB appreciation internationally means depreciation domestically,” which means they expect increasing inflation when the RMB appreciates. This inflation might eat up purchasing power and could enlarge the gap between the poor and the rich. The only bright side might be that LCD TV makers in China do not need to reduce the street price so aggressively in an inflationary market.
The second change is increases in base salaries for assembly line workers, which has been as low as $120-150 per month on average in south and east China, where most manufacturers are located. This low labor cost is one of key advantages to investing in China. Because of the pressure for more labor welfare and for social stability, many regional governments have recently raised the minimum salary standard by 15-20%. As is well known, Foxconn, the largest EMS in the world, was the first company to implement this increase, raising pay by 50% in two steps.
Labor is a key cost element for assembly operations, and OEMs might have to squeeze component suppliers more on prices, or increase vertical integration to save costs. Some companies are moving to inland areas in order to take advantage of comparatively lower labor costs, but this can increase the length of supply chains.
On the other hand, the share of labor costs in a LCD TV set is very low—about 3% of total costs—so salary increases will not have much influence in TV costs or those of other home appliances.
