Excerpts from CLSA Asia-Pacific Markets' July 22 report…

Analyst: Oliver Campbell

We spent the last 2 days visiting factories across a range of industries
- software development, hardware components, consumer electronics, automotive and apparel/footware - in Shenzhen/Dongguan. Unsurprisingly margin-pressure from wage increases dominated the conversation.

Rather more surprising was
factory managers’ pragmatism about perceived headwinds. Having spent the past 5 years working through ongoing wage hikes, currency appreciation, demand volatility and raw material inflation, managers did not appear particularly concerned about the outlook for 2H10.

Image
Average manufacturing wage growth in China (YoY %)


Guangdong is evolving

Ø  Guangdong is a dichotomy of high-tech R&D and commodity manufacturing.

Ø   Margin pressure dominated discussion, specifically wage hikes.

Ø  Other margin debates centred around RMB appreciation, raw material costs, pricingand end-demand.

Ø   We came away feeling that concerns are overdone, as these so-called headwindsare not new to the tech industry.

Image Wage concerns overdone

Ø  Wages are rising (10-15% per year), staff turnover is high (5-20% per month) and retention is tough.

Ø  Wages have been rising at 15% per year over the past 5 years anyway.

Ø   Many firms’ overtime puts them between RMB1500-2000 for unskilled labour.

Ø   Wage hikes are across the board, a degree of costs can be passed onto customers.

Currency, raw materials, pricing and demand

Ø   RMB started appreciating in 2005 and is resuming in 2010.

Ø  Commodity prices boomed in 2008, yet firms remained profitable.

Ø  Tech ASPs drop around 10% every year, manufacturers have been able to deal with it via automation and input cost reductions.

Ø  Outlook for 2H10 seems positive with TV channel inventory at Skyworth “lower than the market believes” and two PC component makers suggesting 20-30% QoQ shipment growth in 3Q10.

Chinese takeaways

Ø   In Guangdong manufacturing, labour as % of Cogs not as high as other components like raw materials

Ø   Moving “inland” or “to Indonesia/Vietnam is not as simple as it sounds.

Ø  Consensus among manufacturers is that wage-hike can now be passed on in higher ASPs.

Ø   We believe concerns are overdone. Regarding tech we remain positive on Hon Hai, Compal, Quanta.

Image
Source: CLSA Asia-Pacific Markets

You may also be interested in:


You have no rights to post comments

Counter NameLastChange
AEM Holdings3.280-
Avi-Tech Electronics0.250-
Best World1.7100.030
Broadway Ind0.091-0.001
China Sunsine0.395-
ComfortDelGro1.300-
Delfi Limited1.130-
Food Empire1.090-
Fortress Minerals0.310-
Geo Energy Res0.280-
GSS Energy0.027-0.001
Hong Leong Finance2.4900.010
Hongkong Land (USD)3.2000.010
InnoTek0.410-0.005
ISDN Holdings0.3350.005
ISOTeam0.040-
IX Biopharma0.0440.001
Jiutian Chemical0.026-
KSH Holdings0.3000.010
Leader Env0.052-0.001
Medtecs Intl0.1410.001
Nordic Group0.400-
Oxley Holdings0.100-
REX International0.164-0.002
Riverstone0.6200.010
Sinostar PEC0.135-
Southern Alliance Mining0.660-0.010
Straco Corp.0.470-
Sunpower Group0.2500.010
The Trendlines0.091-
Totm Technologies0.038-
Uni-Asia Group0.900-0.005
Wilmar Intl3.580-0.040
Yangzijiang Shipbldg1.5100.020
 

We have 1104 guests and no members online

rss_2 NextInsight - Latest News