Sunday, December 21, 2008

Crises Heal Export Mypoia?

A Dec. 19 article in the Economic Information Daily reports that this year's turbulent market environment is forcing Chinese food companies to look more closely at domestic markets. Chinese companies and officials have viewed themselves as a success if they exported. The domestic market was for the weak companies that couldn't make it overseas.

This year's food safety incidents (pesticide-laced dumplings found in Japan, melamine in milk powder and eggs), the global economic crisis, and appreciation of the Chinese yuan have all contributed to a more sour outlook for Chinese food exports. The reporter gives the Longda Food Group, China's biggest processed food company, as an example. Longda's export sales (80% of them to Japan) fell 20% this year in terms of volume.

The article reports that most food exporters have been raising prices. This reflects rising raw materials costs (i.e. food price increases), higher labor costs due to a new labor law this year, and other factors. Export revenues are roughly constant event though the volume has dropped. The article seems to be saying that some smaller companies have dropped out (been forced out) of the export market, giving the remaining big "dragon head" exporters more latitude to raise prices.

Profit margins on exports are said to be down from 5-6% before to 2-3% now. This is forcing Chinese companies to take a closer look at costs. They pass on much of the increase in raw materials costs in higher product prices. They are looking for ways to cut waste, reduce power and water consumption, and overhead. Companies are required to give employees insurance at 5,000 yuan per head due to the new labor law. Many are laying off workers to cope with the higher costs.

Now more companies are looking at how to develop their domestic business. For example, Longda Group makes 65-70% of its sales domestically but is looking to expand that share. It has invested in a big meat processing operation with another meat company in Henan and is building a new peanut oil processing facility with capacity of 110,000 mt.

This is a positive development. China has over-emphasized exports. Exports have been under-priced. Labor has been exploited (cruel irony of the last major "Marxist" country) and underpaid. The surge of Chinese production has been tremendously wasteful. It's about time someone started looking at these costs and the degree of waste in this economy. It's about time Chinese manufacturers started producing for market demand instead of just producing for its own sake.

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