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Steak House Prices for Chinese Take Out?

April 3, 2008

In what was either the biggest coincidence of the day or the most prophetic news story I have ever heard, National Public Radio covered a story this morning about the rising cost of goods coming out of China. Within five hours of that story, I received a FAX from Hanamint announcing a 5% across the board price increase. The reasons they give were exactly what the NPR reporter outlined – the Chinese monetary unit has risen almost 8% against our dollar, material and labor costs have gone up, and Chinese tariff exemptions have begun to expire.

As all of you know, it is anathema to outdoor manufacturers to have to announce a mid-season price increase. The first time I remember this happening was in the late ‘80’s or ‘90’s when inflation was running in double digits. The NPR reporter talked a little what these price increases could mean. Since much of what we consume comes from China, even moderate price increases will affect almost everything we buy. When prices go up without corresponding increases in features, that means just one thing - inflation!

This is not a temporary condition which will resolve when the dollar is worth more. There are other factors at play in China. Labor costs are going up from the accepted third world levels of a few years ago. Ten years ago, factory wages were higher than farm wages causing a migration from farms to cities. The high cost of living in the city is sending many of these same farmers back to their hometowns. Those who stay in the city want higher salaries. They can and will go into other sectors which can pay them if manufacturing can’t.

Pollution is a big problem in China, too. So much so that the government is forcing plants around Beijing to close during the Olympics in an attempt to clear the air. Although this is a temporary measure, permanent ones are on the way. The government has become sensative to the long-term effects of pollution. New laws governing pollution are in the pipeline. Conforming to pollution laws will be no less expensive in China than it is over here. Another reason for price increases.

Some manufacturers are considering moving to Viet Nam, India, Brazil, and even some African countries where wages might be cheaper. The problem is China has developed industrial sectors. Everything a manufacturer needs to do business, carton manufacturers, suppliers of containers, trucking depots, raw material plants, are all within a 100 mile radius of main production facilities. This infrastructure hasn’t developed in other countries. Imagine the time and investment it will take to establish areas like this in Africa!

That is not to say manufacturers won’t find ways and places to produce product more cheaply. I am sure they will, but the same thing will happen in the next country, perhaps even faster than it happened in China. Globalization levels economic playing fields. Look how far the Japanese have come. The Chinese will be the next to get there, then India, and so on and so forth.

Does that mean manufacturing may move back to the States? Maybe. There are already call centers moving back from India to cut costs.  But it will be as difficult and costly to open a Hanamint-like factory in the States as in Brazil. Where will the factory workers come from? U. S. factory workers who lost their jobs when their employers moved to China have retrained, found other jobs or pulled themselves out of the work force. The ghost towns created when North Carolina mills moved won’t rise from the living dead if a factory wants to reopen there. Roads, housing, schools, and more will have to be brought back up to speed. But the question that is most bothersome is, “Does the U. S. even have the will or desire to become a manufacturing country again?”

Hanamint is the first, and probably not the last, to raise prices in the middle of the 2008 season. All of us will understand why they are doing it - none of us will like it. Pre-market is going to be a barrel of laughs, don’t you agree???!!!!!

Yours in confused retailing, Bruce