The Impact of Sunk, Opportunity, and Accounting Costs

14 China Economic Review • May 2011

m o n t h i n r e v i e w • L o C a L V o I C E S

Price takers

As the cost of raw materials and labor creeps steadily upwards, many Chinese compa-nies are finding they have nowhere to run. With the government pressuring companies to keep prices stable or capping them outright, mar- gins can only shrink so far before businesses start to topple.

Among the companies interviewed by China Economic Review, some did report price hikes, but none said they raised prices enough to offset the increase in costs. This should be a worrying trend: Despite China’s reverence for Lei Feng, the Communist Party’s answer to Robin Hood, no one makes cooking oil as a public service. Man- agement responses suggest many companies will report slimmer profits this spring, and some could even be shuttering their businesses.

Mr. wang, vice president of Jiangsu Huada Group, a plastics manufacturer with more than 1,000 employees

The prices of our primary materials have increased about 30%, mainly due to the rising price of oil, and we’ve had to raise salaries by about 20%. We’ve increased our prices about 5-6% in response, about

the same as our competitors. The increase in costs has been a big shock for us, and our profits have fallen a lot. However, our relationship with our customers hasn’t changed, since we have fixed partnership agreements. Stable oil prices would be the best fix for us, but the government obviously can’t control that – it can only offer oil subsidies or some preferential policies.

Li Tong, director of ShiMin Software, an outsourcing software development compa- ny with 60 employees

As a software company, our major cost is human resources, and that has increased dramatically. For a junior level engineer, for example, the salary has gone up more than 10%. Human resources ac- count for around 50-60% of our total costs, so our gross margin is definitely shrinking. However, we haven’t transferred the increase in cost to consum- ers, because competition is too intense. In the out- sourcing industry, suppliers tend to be small and have similar products, so they have little bargain- ing power with big purchasers.

Du Jiang, business manager at Shanghai China Coal, a division of China Resources Power Holdings with about 30 employees

The price of coal has gone up about 7% from last year – a fairly mild increase – and we’ve raised prices about 2-3%. Most of our customers are power plants, so we’ve seen basically no change in our business. Electricity is tightly controlled by the government, and there have been no price increas- es. But there is a chance prices will increase slightly in the future. I think the government should use some indirect methods to tighten liquidity, like al- locating resources more fairly, adjusting the inter- est rate, and controlling the foreign exchange rate. The coal industry is already closely supervised by the government, so there’s no need for additional oversight.

A marketing manager at Jeanswest, the mainland China flagship of Glorious Sun En- terprises

We’ve heard the term “inflation expectations” for almost one year. I think it’s no longer an expecta- tion, it’s a reality. The price of food and cooking oil has obviously gone up. The price of our main raw materials, like cotton and down, goes up every year but the increase has been especially strong in the past two years – the price of cotton went up 50% last year. Because the cost of raw materials and labor has risen, we’ve had to make some changes

chinese companies are

cushioning consumers

from increasing input prices – but how long can they hold

out?

GETTING HIGH: Lifting retail gas prices

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15 China Economic Review • May 2011

to our prices to maintain our quality. But we’ve been able to absorb much of the cost increase internally, which gives us an advantage over other casual clothing brands.

yu kai, marketing director for Bai- hui, a subsidiary of PC Stars focused on cloud computing development with about 50 employees

As a software company, our raw materials are mostly intangible. Our direct costs are mostly for buying servers and providing the necessary bandwidth for our service, and these costs haven’t grown much. We haven’t needed to increase prices yet, and we’ve actually seen a dramatic increase in sales during the past few months. Costs are growing for almost every industry, and companies are balancing their spend- ing with less expensive information sys- tems. This makes the advantages of cloud computing more obvious – companies can use it when they need it, pay flexibly and save on procurement, software setup and IT. So we see continuing increases in input prices as more of a market opportu- nity than a threat.

A sales manager at Nanjiren Tex- tile Development, a Shanghai- based company with more than 100 employees

The cost of our main materials, like span- dex, polyester and acrylic, has gone up about 50-60%, while the price of cot- ton yarn has jumped 80%. We have to pass some of that on to consumers. We’ve increased our prices around 25% from last year and all of our competitors have raised prices by a similar amount. Of course this has had some impact on

our business, but nothing too serious. We’ve limited the impact both through our sales policies, like offering promo- tions and activities, and management, by controlling costs and increasing quality. The rising price of goods has reduced company earnings, but at the same time employees are demanding higher sala- ries. This is a contradiction that can’t be reconciled.

Alice, an assistant at a leading buf- fet restaurant chain with roughly 4,500 employees

Our materials range from dairy, poultry and fish to fruit, and the prices for some of these products have increased lately. However, we have long-term fixed price contracts with our suppliers, so their sales price has not increased. Prices are actu- ally a bit lower now and business is slower compared with the peak Spring Festival season, but that’s quite normal for our industry. We have no immediate plan to raise prices. As far as I know, none of our competitors have increased prices yet either. But if PPI continues to rise, our operations will definitely be impacted.

“we see continuing increases in input prices as more of a market opportunity than a threat” yU kAI, MARkETING DIRECTOR, BAIHUI

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