Makers emphasize product innovation to fend off appreciation

An Expert's View about Custom Manufacturing in China

Last updated: 27 Jun 2012

Upscale models are promoted to increase profit margins and urge buyers to settle in yuan.

Faced with a strengthening yuan, China suppliers are launching high-value products that allow for more room during price negotiations, thereby shoring up profit margins.

Such releases have enabled select makers to quote prices in the local currency, minimizing exchange losses when the yuan appreciates against the US dollar.

According to Yang Guo Jing, general manager of BlueSea Lighting (HK) Co. Ltd, these products have to be new or boast standout designs or features. “Otherwise, buyers will not be as open to settling orders in yuan.”

BlueSea, a maker of LEDs, started accepting payments in the local currency in 2010. Now, 10 percent of orders are quoted in yuan. Based in Shenzhen, Guangdong province, the supplier adopts SMT, and has four automatic sealing lines and an ERP system. The consequent 20 percent reduction in manpower naturally lowered labor costs.

Security products maker Ocean Electric Ltd has also started settling orders in yuan. The company quotes rates in the local currency, accepting payments in US dollars converted based on the day-to-day exchange rate.

Such arrangements, however, remain unviable, especially when dealing with US-based buyers and clients whose banks do not provide yuan settlement service.

Ocean has been able to adopt this mode of transaction with two customers. Both are from countries with even stronger currencies than the yuan. The Australian dollar is an example.

Yuan settlements are also not common in low-value industries. “Buyers would rather accept higher prices in US dollars than receive quotes in yuan,” said Simon Huang, sales manager of cap maker Dragon One Headwear Ltd. Some clients are concerned that the local currency is heavily influenced by government policies, which are difficult to anticipate. Rising labor and raw material costs, in contrast, are easier to factor in.

Backed by an annual R&D allocation exceeding 10 percent of revenue, Shenzhen Hanwal Technology Co. Ltd can release at least three new models every month. The supplier, which collaborated with well-known universities for its latest video surveillance research, offers mainly DVRs, and CCTV, IP and high-speed dome cameras.
 

Exports steady despite high yuan, prices

China makers will leverage the domestic supply chain to sustain exports in the years ahead amid projections of the yuan’s further appreciation, albeit at a slower pace. The local currency is forecast to climb between 2 and 3 percent against the US dollar in 2012. This is relatively lower compared with the 5 percent appreciation rate over the past two years.

Nevertheless, companies are looking at increasing prices to stay competitive in coming months, particularly as production costs stay high. Suppliers spent 30 percent more for manufacturing-related expenses in 2011 and rates are not expected to go down this year.

Aware of buyers’ heightened price consciousness, many makers are observing market developments, adjusting quotes appropriately and setting weekly or monthly validity periods.

 

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Posted: 02 May 2012, last updated 27 June 2012

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