If your POP displays are being manufactured in China, you may be wondering how the slowdown in China’s economy will impact the cost of your displays in the coming months. After more than a decade of torrid growth that vaulted China to the world’s number 2 economy, economic growth has begun to slow. While not surprising, the more modest growth rate has led to a sharp decline and increased volatility in China’s stock market and stock indices around the world.
Beijing responded to the slower domestic growth numbers by devaluing its currency in an effort to make China’s exports more attractive. As investor fear ensued, China’s government attempted to prop up its stock market by instituting a stock purchasing program, flooding its banking system with cash, and reducing banking reserve requirements to prop up its stock market. While controlling the economy is not something new to the Chinese government, Beijing officials definitely had to dust off the instruction manual to formulate policies to deal with slower growth.
Against this macroeconomic backdrop, let’s consider what this is likely to mean for the cost of manufacturing or procuring point-of-purchase displays in China over the course of a short- and medium-term planning horizon. First, it is important to keep China’s growth challenges in perspective. Despite the slowdown, China has had a remarkable economic run over the last decade, and even its slower growth of about 7% compares favorably to less than 3% for the U.S. Second, we believe China’s growth challenges will continue for the foreseeable future or until the country can demonstrate productivity gains that will largely be driven by automation (since you can only get so far by throwing labor at the problem).
There are a number of underlying forces that will put downward pressure on the cost of POP displays. These include:
1) Currency Devaluation- As mentioned earlier, by devaluing China’s currency the Chinese government’s goal is to make exports cheaper. While this will help to make POP displays cheaper, its impact is likely to be relatively small since the yuan has only depreciated 4% compared to the U.S. dollar (vs. a 15% decline for the Euro).
2) Commodity Price Declines- Prices for all kinds of commodities around the world have plunged in recent months. Raw materials such as steel, which is used as a key material in many displays, have plummeted. Steel prices in China are now the lowest they have been in 20 years and are 35% lower than they were 21 years ago. With weak demand, the price decline is likely to continue. The price of oil has also declined which will help reduce transportation costs.
3) Reduced Demand in Ocean Freight- The reduction in demand for China goods has translated into a reduction in demand for vessels and containers. Many of the largest shipping companies have responded by taking vessels out of service and reducing capacity to better match supply and demand, but the net impact is still likely to be downward pressure on ocean freight costs. Container industry revenue is down by 16% compared to the peak in 2008.
While the 3 factors discussed above might get you thinking that you are about to enjoy some sizable bargains on POP displays made in China, there is one economic factor that we see that will continue to negate these forces at work. That factor relates to labor and continued wage inflation. Despite its enormous supply of labor, China operates what is essentially a full-employment economy. Wages have accelerated rapidly over the last 10 years with annual increases of more than 20% in some areas. As a result, factories have struggled to attract and retain a competent and affordable work force. As an increasing percentage of China’s population achieves “middle class” status, fewer workers want to work in factories, and overall labor rates continue to rise to meet production requirements even in the face of decreased demand.
So what’s the bottom line? Despite the decreased demand, the pressure on factories to accept lower prices to win orders and the increased volatility in the market, we do not see prices for China-manufactured POP displays declining over the next year. While prices for displays might not increase, we think the most likely case is that prices will stay roughly the same. While it is difficult to predict, we would advise anyone planning to purchase POP displays over the next year from China not to bank on price reductions.