This is China! BLOG

Pricing Pressures in the Middle of Nowhere in China

I recently had the pleasure of meeting an old Shanghai Chinese friend in Shanghai, Greg. He is tall, early forties, a handsome fellow with broad smile and a reserved demeanor. I always enjoy getting together with this friend, who travels a great deal within China, between China and Japan, and between China and Canada. He is a fluent speaker of Japanese language – having lived in Japan for nearly nine years – and buys components from Japanese manufacturers to sell on to Chinese handset makers. Years before we used to tear up the Japanese Karaoke scene together. Good fun.

We caught up on Nanjing Xi Lu, near the Mandarin Hotel, at a local Shanghai eatery. I asked Greg how his factory in Jiangxi was going. Jiangxi Province is just south of Anhui province, and abuts Zhejiang Province to the east. The province is mountainous, and the transportation infrastructure in its infancy. Greg has been involved in China’s mobile phone industry for nearly seven years now.

Four years ago Greg was telling me how the price of the components was already quickly sliding downward. Indeed, the cost of most of the components that went into mobile phones in China were on a downward trend. New companies seemed to enter into the mobile phone industry on a monthly basis, and the Chinese drive toward market share over margins was turning what had once been the exclusive purvey of high-technologists into commodities. Greg was finding it difficult as a middleman between Japanese producers and Chinese buyers to make any money for himself.

So Greg became a manufacturer. He established a components factory in Nanchang, capital of Jiangxi Province, three years ago. My experience with Jiangxi workers has, in general, been positive: they seem to be hard workers, conscientious, with a quirky sense of humor.

He said, “I cannot get operators from the city. Now there are jobs in restaurants and hotels the workers can get that pay more than the factories. I have to get workers from the countryside.” Workers from the countryside do not have the same level of education and industry experience as city workers, so Greg’s cost for training and hiring and supervision are higher than he had expected. The average monthly salary for workers in Jiangxi Province in 2007 was 360rmb per month; compared with 750rmb per month in Shanghai and 690rmb per month in Suzhou during the same period.

I asked him about logistics. How does he get components in, and products out. He said, “I truck components in, and fly finished goods out of Nanchang airport to Shanghai. From Shanghai, I distribute to wherever I need in China. I also truck straight out of Jiangxi to neighboring provinces.

“I am working for my employees now,” he said with a sigh, “they are not working for me.” I asked if he had any plans to move the factory anytime soon. He nodded. “And I have to move up the value chain. The components I’m making now are really commodities.”

He went on, “Everywhere in China is now is the same. Everyone is feeling pressure. Everyone is closing their factories or moving them.”

China, it seems, is growing up.