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Yuan's appreciation not all bad for China makers

The strengthening currency has been reducing exporters' margins and ability to set fixed price points. But it has also made importing materials, components and machinery more affordable.

China's export manufacturers may be reeling from the effects of the yuan's continued appreciation, but a number of them concede there are some benefits to be gained.

Yuan's appreciation not all bad for China makers

For one thing, importing raw materials, components and equipment has become less expensive and may sometimes be a more cost-effective option. This is assuming there are no changes in other factors determining prices, which are quoted in US dollars.

Chile is one of the main sources of paper pulp globally. But because of this year's earthquake in the country, prices have risen significantly. The stronger yuan, however, has made paper pulp more affordable. Instead of paying 4,896 yuan for a $720 per ton contract price at a 6.8 exchange rate, China importers only need to shell out 4,572 if the conversion is at 6.6. This translates to cost savings of 144 yuan per ton.

But the inadvertent discount can only be gained if manufacturers import directly from suppliers and not buy from local distributors. One downside, however, is the long lead time. A maker of CCTV cameras and monitors, and car rearview and media systems, SharpVision Co. Ltd purchases key components such as lens in South Korea and IC chips from Sony and Sharp in Japan. Unlike those sourced from local distributors, imported components come in their original sealed packaging. Some of those available from domestic agents are assembled in China. But apart from the shipping time, manufacturers have to wait at least 20 days before the imported components can be cleared and released. As such, buying directly from overseas suppliers is not a viable option if the components need to be acquired urgently.

The stronger yuan has made it less expensive for companies to bring in imported machinery as well. Guangdong Galanz Enterprise Group Co. Ltd, for instance, was able to save almost 3 percent when it bought machinery from Italy for its refrigerator, washing machine and dishwasher factory in Zhongshan, Guangdong province. The company is now planning to import more equipment in the next two years to boost production capability.

Nudge to move upmarket

While there are other compelling factors, the yuan's appreciation is gently pushing makers out of basic, low-end manufacturing.

Many China suppliers have grown complacent with simply processing and assembling entry-level goods for OEM clients. While there are makers with enough experience and financial capability to shift to upscale production, particularly those in Guangdong and Zhejiang provinces, most do not want to take the risk. They do not want to invest significantly in labor, materials and time with very little assurance their efforts would be successful.

The continued appreciation of the yuan, however, has gradually made businesses more receptive to moving upmarket. Several companies launched high-value lines this year, products that helped them gain leverage during price negotiations and maintain profit margins.

Among these is Foryou General Electronics Co. Ltd, a manufacturer of car DVD receivers, TFT monitors and GPS devices. Manager Peter Zhong said the company boosted R&D spending nearly 15 percent this year and launched more premium car DVD receivers. High-end models now account for 40 percent of exports, compared with 25 to 30 percent in 2009.

Shanghai Pinrui Medical Equipment Co. Ltd developed in-house technologies to manufacture its own line of dental polishing equipment. The products received FDA certification in H2 2010 and are now ready for export. Shanghai Pinrui boasts the dental equipment has a longer life span than some European models. The company is confident its products will be well-received and does not think it will have to raise prices in the near future, even if manufacturing costs increase. Sales manager Rose Wang said margins currently exceed 5 percent.

But while there are a growing number of China suppliers that now want to shift to upscale production, most businesses do not know how to make the switch. Many suppliers in mature and labor-intensive industries, including gifts and hardware, associate moving upmarket with simply using better materials, increasing the product size and bundling in gift sets. Those in the consumer electronics sector, meanwhile, may not have sufficient capital and skilled personnel to launch high-value models.

Further, China Securities Research analyst Liu Zhi Yi said although the stronger yuan made it less expensive to procure materials, components and machinery overseas, cutting edge technologies cannot be imported. China manufacturers have to fortify their R&D teams to be able to make their own breakthroughs, something many companies are still unable to do.


Note: This article "Yuan's appreciation not all bad for China makers" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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