Does responsibility for defective Chinese goods, growing trade imbalance lie with America?

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A good engineering friend of China Briefing, Nick Polimeni, has been talking with us recently about the so-called glass ceiling in China concerning manufacturing, and where the real issues over the Sino-U.S. trade imbalance are. He made some interesting comments to us this morning:

“I suspected, as you do, that the mark up rate for goods imported to the United States is very large, but I’ve only been able to confirm that to be the case with box stores (such as Wal-Mart, et al). They have a nasty habit of gouging both ends.

  1. They come to a Chinese manufacturer asking to have a product copied (with enough variations to stave off fair trade suits), at rock bottom prices, which gives the Chinese a significantly thin margin.
  2. They also negotiate a 90 to 120 day credit line, where the manufacturer will wait a long time to get his money.
  3. They also negotiate that for next year’s production, the price will be reduced by about 5 percent, and again the year following that.
  4. The difference from the factory price to retail is about 10 times.
  5. By the second year, or third year, the Chinese manufacturer can’t even cover its cost with the decreasing margins; however, some will go ahead, in the hope of having some solution down the line. When Wal-Mart (et al) is finished with the manufacturer, they’re [the manufacturer] broke.
  6. They [Wal-Mart, et al] move on to find another sitting duck manufacturer, and start the cycle all over (I’ve met enough Chinese factory bosses who have been squeezed this way, and some have never recovered, and the ones that didn’t close, had a slow recovery of several years).

“When this happens with a large company, as it did with Kelon, it becomes noticeable. A regional sales manager friend of mine in Kelon told me they were negotiating with Wal-Mart, and it was very difficult negotiation because of the 90 day payment delay, plus the price squeeze they were pushing. I told him that if Kelon accepted that deal, they would be hard pressed to deliver, never mind cover their own costs, and they would go under in about six months. Well, the Mr. Gu stuff happen to coincide with the demise of Kelon, about six months later; but running up toward the sixth month, there were some serious local problems between Kelon and its suppliers when Kelon tried to impose the same 90 days on them, and the noise hit the press… and the rest is history.

“Now I can’t support my suspicions since I don’t know if the box store numbers are large enough to create the problem we suspect.

“Most other manufacturers have a 1:4 factory price to retail ratio. And again, I have no real numbers to be able to make any assumptions or predictions.

“I believe that U.S. or Chinese economists, in private, don’t really care about the trade imbalance, since it’s being supported with the U.S. government’s favorite war past time: huge deficit spending to keep up the appearance of a healthy economy. So long as there’s enough currency to keep some level of production going in the U.S., I suspect nobody will reveal the true condition of affairs. The public dreads “deficit” spending because of the somber connotations of the word, but tends to tolerate it in times of war. So long as all this extra spending stays in the securities markets, and only trickles into the consumer market, there will be an appearance of balance that prevents severe inflation.

“The issue of quality also is puzzling from the standpoint that China is still producing quality items which are consumed in the U.S., and at a better price than the same products are retailed in China, if they are available at all.

“I recently spent 40 days in the U.S., and had the opportunity to purchase products made in China at about a 15 percent cheaper price; I could only confirm that on products that were also sold in China.

“So what is the ratio and volume of good quality to poor quality? Once again, because I can’t get my hands on real numbers on these products, I can’t build an accurate model to make any kind of reasonable prediction.

“But I will venture to say that so long that there are real products and value being exchanged, even at a slow rate of increase, we can expect that no serious economic fiasco is on the horizon. So the ‘real quality versus poor quality’ product exchanges are probably the numbers to watch.”

Nick’s comments seem to bear out that a lot of the current problems with shoddy or defective goods – and the larger responsibility for the trade imbalance – actually lies with the United States rather than China. China is merely selling to demand. But if U.S. traders are pushing the limits of volume purchasing to such extremes that margins are just way too low – then the temptation for Chinese manufacturers to cut corners is going to be immense.

A deal has to be fair for both sides. But if American buyers are squeezing Chinese manufacturers too hard – quality can become compromised. An audit of buying practices and purchasing ethics in the United States may well reveal a lot about the circumstantial behavior that is now leading to product failures with imported goods to the United States. But the consumer can’t have his cake and eat it to, even in Washington. If you want sustainable quality, you have to pay for it.

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