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.
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.
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.
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.