The "China Price" dynamic has gone through several iterations.
First, Western manufacturers were panicked over the prices coming from Chinese competitors, which were often 20-30 percent less than they could make it for domestically.
Next, companies in almost all industries looked to outsource production, directly or indirectly, to China's increasingly sophisticated manufacturing sector. While many found the true net savings somewhat elusive or at least less than expected, unit manufacturing costs went down substantially for most companies that took this path.
Then, given the huge growth in manufacturing and the Chinese economy overall, Chinese labor started to rise substantially. In 2007-08, this really began to eat into the savings companies had achieved by moving to China. As a result, especially for low value-added manufacturing, many companies moved further west into inland China chasing lower wage rates, or considered other lower costs countries such as Vietnam.
But then, the financial crisis hit, and China's export volumes dropped dramatically. Tens of thousands of factories in the country have closed, and reports are that millions of urban workers without jobs in Eastern China have moved back to the countryside. This change is putting a heavy brake, for now, on rising labor costs, as suddenly labor demand is much weaker than supply, after the reverse was true for the past several years.
Between lower wage pressures and the fact that most Chinese factories operating at low levels of utilization, Western buyers are gaining more pricing clout than they have had in years.
"Deflation [in China pricing] is here to stay," believes William Fung, managing director at Li & Fung. "Buyers have more of an upper hand again."
That's because export volumes to the weak economies of the U.S., Europe and Japan show no signs of recovering soon. However, there are signs that China's manufacturing sector is recovering on its own, without much help from export customers, as the country's economic stimulus plan and focus on bolstering the internal economy start to pay off.
So for now, it may be time to revisit pricing with existing Chinese suppliers or postpone moves further inland or to other countries. But mid-term, the pricing pressure on Chinese goods is likely to return, especially if the U.S. dollar starts to fall, as many predict it will as the printing presses run to monetize the growing U.S. deficit.
Discussion question: Do you expect higher or lower prices coming out of China over the next year? Why? Will this trend be short-lived, or long lasting?