beyondbrics

$11 for a pair of jeans. $9.50 for a pair of running shoes. $6 for an electric toaster. For years now, consumers in the west have been able to go shopping for next to nothing, thanks mainly to the China price – ultra-low manufacturing costs for products made in high volume and in quick time.

But rising costs, especially wages, have put that model in jeopardy. For one of the biggest players in the China supply chain, alarm bells are ringing.

Li & Fung, the multinational goods export group, has built its business supplying supermarkets and chain retailers with a whole new segment of almost throwaway items – from shoes, to clothes, to electricals. But there are signs that the days of the $7 dollar kettle are numbered.

Li & Fung – listed in Hong Kong – helps source goods and manage supply chains for foreign retailers including Wal-Mart, Gap and Abercrombie & Fitch.

The economic downtown was a further boon for the company, as price-conscious consumers plumped for the cheapest goods on offer. Li & Fung charges on commission: if it costs less, it gets paid less, and so must increase volumes to compensate.

Acquisitions followed. But now the costs of producing in China are going up – in large part thanks to rising wages, as Li & Fung itself noted in an earnings statement:

With the entry of China as a major supply market from 1979, the world has basically been in a low supply-cost era for the last 30 years. The change in wage policy in China in 2009 and the subsequent significant higher export prices brings this status quo to an end.

The statement is an ambiguous one for the Li & Fung.

The admission that the Made in China status quo, which has served the company so well, is done, is a clearly bad news. Sure enough, last week L&F reported a disappointing set of earnings.

And yet, the company also announced increasing margins in 2010 – the highest in over 10 years.

But despite the higher margins, the market remains unconvinced that Li & Fung is immune. Its shares have tanked 13 per cent in the past two days.

Related reading:
Chinese companies struggle to find workers, FT
Rising Chinese wages pose relocation risk, FT
Li & Fung warns of end of cheap China goods, FT
China file, beyondbrics