By Mike Hundert
president and CEO, REM Eyewear

 
Mike Hundert
I have just returned from two weeks in China, there to learn about the fast-paced changes that are altering our cost and pricing strategy, its implications, and its effects on strategic planning for both us and our customers. And boy did I get an education.

It’s no secret China’s economy has been soaring the past few years. That has led to a change in their vision of the future. Chinese officials are no longer content with their work force focused on low-skilled, low-cost, low-margin manufacturing. Instead, they are focused on moving up the value chain to challenge the world’s biggest corporations.

The tactics used by the Chinese government includes using incentives to encourage companies to innovate (especially into High technology businesses), but also moving to discourage labor intensive manufacturers, like those who make eyewear, from operating in southern China. Across the border from Hong Kong, the area around the city of Shenzhen has been the center for quality eyewear manufacturing since becoming a “special economic zone” more than 20 years, founded on the backs of Hong-Kong based optical firms encouraged by the Chinese government to move there. There were government subsidies to attract that shift, and the promise of an endless supply of low cost labor.

But now, the government wants those types of factories to move out and intend for Shenzhen to be dominated by high tech, high profit, high profile businesses that are powerful on the stage of the flattened world. And those factories are at a cross roads now having to decide the future of their business model given all the other circumstances driving up the cost of doing business and driving down profitability.

Economists say China’s development is following in the footsteps of Japan and South Korea, which successfully evolved from low-skilled manufacturing to high technology, services and the creation of global brands.

Here are a few of the facts facing those factories, us, our customers, and ultimately the consumer who absorbs cost increases through higher prices.
  • Over the past year minimum wage in the Shenzhen area has risen 24%.
  • Another 20% increase will be mandated beginning in September.
  • A required pension system now requires companies to create reserves for employee retirement benefits.
  • Since the US pressured China in 2007 to allow their currency, the RMB or Yuan, to float the US Dollars has lost 17% of its purchasing power in China. Economists predict that the RMB will continue to get stronger, by at least 15% over the next year.
  • High quality factories buy raw materials, from eye wire spools and spring hinges to acetate and nose pads from European suppliers. Those purchases are made with US Dollars, which lost another 14% in its relationship to the Euro over the past year, with no end in sight to the Euro’s growing strength. The cost of metal in general has gone up as much as 40%, much of that bought in the also strong currency of Australia, which has risen 20% to the US Dollar over the past 12 months.
  • The end of tax breaks for thousands of factories, instead favoring high tech zones. 
  • Rice is up 60%, and food overall is up 15%, significant for Chinese factories which provide meals and housing for their employees.
  • And that endless flow of laborers has flowed to a trickle as the boom in China has created many jobs closer to where the migrant workers live.
  • Tougher environmental standards require major capital investments.
  • The costs of power, including diesel to run generators, has skyrocketed worldwide, and especially in China where nearly all its oil is imported.
And that’s the short list of this perfect storm.

Scores of factories have been forced to shutdown in the Shenzhen area, and in neighboring Dongguan and Guangdong, and even up north in the lower cost region of Wenzhou. In June, one well-known and respected factory owner was so distraught with the demise of his factory, unable to satisfy the price parameters of its customers that he committed suicide.

According to the New York Times, Credit Suisse has forecasted that one-third of all export-oriented manufacturers could close within three years.

One has to marvel at the recent changes in Chinese society. I’ve been going to Shenzhen for about 20 years, my first trip there not long after it shifted from an agrarian society of 20,000 farmers with dirt roads to become the world’s manufacturing hub with a population now topping six million. Today it is a financial capital (it has its own stock market) and business center with a new modern metro, super (and filled) highways, shopping malls with all the finest designers represented, fine restaurants and hotels, golf resorts and spas, and many more things the good life offers.

There is a buzz around the busy streets of downtown Shenzhen, filled with consumers. Yes, consumers. Like never before on my twice annual trips to Shenzhen had I seen so many people out doing things, including shopping. No longer is there just rich and poor. China now consists of mutli-tiered economic classes. There is a middle class, an upper middle class…. They are now connected with the world via the internet and the satellite dishes that top nearly every structure. Globalization has provided Chinese citizens a vision of all the wonderful possessions available, and they want their share.

All of this has led to aggressive collective bargaining, which when combined with all the other price pressures listed above have completely changed the cost of goods paradigm.

Products we have developed over the past few months under certain cost assumptions have changed, some significantly, now that we are ready to order components and go into production. Price quotes are valid for only days or weeks. Reorders now need to be re-quoted according to facts on the ground at the time the reorder is placed.

These are important points to understand, necessary to create new strategies for sustainability and growth. This situation is unprecedented. We’ve never faced having to deal with constantly shifting cost of goods, requiring us to regularly adjust the prices we charge.

Clearly, this will also affect the business models of our customers. Particularly affected are those who have been focused on the value segment. They will need to redefine the word “value.” Eyewear has been a bargain. Anyone who has spent time in a factory understands the complexity of creating, orchestrating materials, and building fine eyewear, let alone marketing and distributing this product. The bargain may continue, but it will be at a different price forever more. All of us, manufacturers, marketers, retailers, and consumers will be forced to face these realities not sooner or later, but today.




Mike Hundert is the president and CEO of REM Eyewear.  A roundtable exploring current changes in eyewear sourcing and supply chain management will be part of the Program of the upcoming Vision Council Executive Summit scheduled for January 28-30, 2009, at the Rancho Bernardo Inn in San Diego, Calif.