Made In China: The Way To Solve The Cost Crisis

It is reported that Baosteel's product price will increase by 300 yuan ~600 yuan in the three quarter of this year, which will continue the trend of sharp rise in steel prices in the past few quarters.

At the same time, international crude oil prices have reached a record high, breaking through the $140 mark per barrel.

There is no doubt that the rapid rise of raw material prices has brought unprecedented crises to China's manufacturing industry, which has always relied on low-cost competition.

How to resolve the crisis and change the crisis into opportunities will be the first issue before every manufacturing enterprise.

Prices of raw materials surged

The prices of major raw materials have risen sharply in recent years, and the domestic steel price composite index of MyspiC has increased by 61.3% over the same period last year.

Since 2008, producer price index (PPI) has been running at a high level.

As of May 2008, producer prices rose 9.2% year-on-year, and raw material, fuel and power purchase prices rose by 11.9%.

According to the China household electrical appliances association, the demand for household electrical appliances in China in 2008 was 6 million 200 thousand tons, while the third quarter household appliance steel increased by 1000 yuan per tonne compared with the beginning of the year. The rough estimate is that the impact on the household electrical appliance industry in this quarter is as high as 1 billion 500 million yuan.

The current comprehensive economic environment determines that many industries in China are unable to pmit cost pressure to the downstream, and their profit margins are compressed.

Machinery, equipment manufacturing, household appliances, automobile and other industries are fiercely competitive in the market, the price elasticity of products is high, and the pricing power of the industry is not strong enough to pass the rising production cost to consumers.

In April of 2008, the price of Chery and Jianghuai, which were announced by the cost pressure, dropped by 28.75% and 26.4% in the same month. The decrease was two times the average decline of passenger cars in the same month. The air conditioners, fridges, color TV sets and other household electrical appliance enterprises caused a double stagnation of sales scale and profits due to the increase in prices at the beginning of the year.

The rising prices of upstream raw materials such as steel and chemical materials, first of all, impact on parts enterprises.

Parts enterprises provide complementary products, which are mostly attached to downstream enterprises, and lack the right to speak in the industrial chain, so it is difficult to raise prices.

Auto parts enterprises often have long-term contracts with the main engine factory, and there are default deposits, which can only be increased at their own cost.

Most export enterprises adopt the mode of long term contract pricing. Under the background of rising prices of raw materials, the rise of production costs can not be immediately reflected in product prices.

They do not have their own brands, and they have little bargaining power with large foreign importers, so it is difficult to raise export prices.

According to statistics of the China Textile Industry Association, only 44200 of the textile factories with 1/3 recorded profits.

In 2008, the clothing and accessories of Guangdong exported to US $6 billion 650 million from 1 to April, down 15.1% from the same period last year.

Measures to solve the cost crisis

First, it is possible to purchase raw materials by means of centralized or cross enterprise joint purchase, so as to reduce the cost of incoming goods.

Not only can we purchase large quantities of goods and save costs, but also we can determine the reserves of raw materials by analyzing the market trend, so as to avoid the risk of price fluctuation.

Haier implements the "four major" centralized procurement strategy, namely, "big orders, big customers, big markets, big resources", which centrally purchases large raw materials such as steel plates, chemical materials, electronic components and so on, and saves 20% to 30% of the cost.

Next, we should strictly control costs within the enterprise. Dozens of enterprises including PetroChina, Sinopec and Huadian Group have already begun to reduce non operating expenses and reduce the budget by 5 percentage points or even higher.

The cost management system should be established to identify and eliminate the factors that increase the cost, such as the waste of people, money and goods, so as to compensate for the cost of raw materials.

Again, seek Industrial Synergy, avoid low price competition, and pass the cost pressure to consumers.

Us, GREE, Galanz and other home appliance enterprises in Guangdong seek price alliance, refusing large and low price orders, consistent with the outside world.

7 domestic mainstream commercial vehicle enterprises have jointly established the light card industry alliance, and collectively adjust the price of the light card products.

The second step is to invest or cooperate in the upstream industry chain.

Sun paper set up a subsidiary company in Laos to engage in the construction of nursery and demonstration forests, and to make use of the cheap raw material resources in Southeast Asia to alleviate the cost pressure caused by the sharp rise in prices of raw wood pulp and waste paper.

Finally, we can improve the added value and profit margin of products through differentiated strategies such as brand, technology and new market development.

Some textile export enterprises in Foshan, Guangdong, have made great efforts to develop new export markets such as South America, and have gained higher profits than traditional markets in Europe and the United States. Jiangsu Sheng Hong Group has developed ultra-fine fibers on the basis of producing ordinary polyester fibers for the production of high-grade sports apparel fabrics, and the supply of products is in short supply.

Looking for new opportunities

In the future, PPI will remain high and the cost of producing raw materials will continue to increase. Under the influence of rising international oil prices and the pressure of domestic money and credit rebounding, the pressure of future price rises will still be greater.

The reconstruction after the Sichuan earthquake and the southern rain and snow disaster will stimulate the demand for raw materials in the future. The government's control of oil prices and electricity prices will be gradually liberalized in the future. In order to expand domestic demand, China's wages will continue to rise and the labor cost will be increased.

Enterprises will consider more energy conservation and consumption reduction, improve labor productivity, improve technology, and complete the pformation from cost advantage to technological advantage.

The cost crisis will weaken the competitiveness of China's manufacturing industry, but will not hinder China's becoming the world's manufacturing center.

Not only China, but also the world is affected by the global rise in energy, grain and raw materials and the sharp rise in domestic steel prices.

TOYOTA has begun to increase the price of its North American market models.

In automobile and other key industries, China has huge domestic demand market, perfect industrial system and labor resources, and has international comparative advantage.

China's passenger car market is growing fast and its vehicle grades are high. The automobile industry is stronger than India and other competitive countries in terms of the number of employees, the number of enterprises, the experience of joint venture production and the total output value.

Chinese enterprises can reform the raw material purchasing mode to reduce costs.

Large enterprises can develop international procurement channels and implement effective allocation of resources worldwide.

Panasonic has reduced the cost of steel by using the global procurement network, so its washing machine products can be reduced in China.

Small and medium-sized enterprises can jointly purchase raw materials from different enterprises, so as to gain the advantage of purchasing scale and bypass raw material intermediaries.

Chinese enterprises should improve their weak supply chain logistics system so as to achieve the goal of reducing overall cost.

In modern commodities, logistics and other non productive costs occupy a large proportion. Compressing logistics costs can compensate for the rising cost of raw materials.

From saving raw materials and increasing labour productivity, we turn to establish a new source of profit for efficient supply chain system.

DELL, WAL-MART and other industry leaders, with the help of supply chain management, has created a further improvement of the profitability of enterprises.