New Way to look at China as a resource

Changing patterns in business seem to come faster these days. It took Japan 40 years to go from being a producer of cheap goods to becoming the guys who make Lexus and robots. By contrast, it's been only a fraction of that time since many companies began buying direct in China. Perhaps the original reason was because of price. But I suggest that this paradigm is already changing.

But old habits die hard. Let's look at Brazil as a familiar reference. At least from the American perspective, Brazil became a major direct source of natural stone in less than 10 years. This all began with the economic collapse in Argentina in 2001, which brought down all the region’s economies. In just 18 months, Brazil’s currency dropped 57% against the dollar, making granite direct from Brazil radically cheaper than buying the same stone in Italy. Today however, Brazil’s economy is booming, and the currency has returned to historic exchange rates, so Brazil is no longer as cheap. And yet, we Americans still try to buy the cheapest stones out of Brazil. Why? Certainly, a contributing factor is the now well established supply lines, and habit. Certainly a whole industry has built up now around traveling to Cachoeiro to select slabs, and to visit the Vitoria Fair each February to see what’s new (and be honest, to escape our northern winters!). But much of it is fixed thinking, that hasn't responded yet to new realities.

China too seems to be following this pattern, but for slightly different reasons. At first, China was just a source for cheap stone. However, much has been written recently about The Growing Cost of Doing Business in China (see article in this month’s Inc. Magazine). These changes make us rethink why we went to China in the first place, and how it affects our stone purchases there in future. I was just telling a customer earlier this week about the rising costs in China. He had approached me, as so many do, thinking about China as a source of nearly free material. But I think that is soon to be dated thinking, not only because of the exchange rate story (five years ago, the dollar bought more than 8 Yuan, six months ago 6.83 Yuan, and now it’s 6.67), but there is an increasingly serious labor shortage along the coastal cities, causing upward pressure on wages. China’s labor rates have been considered by many to be artificially low anyway, depressing domestic demand - something the government there wants to change. Harvard Business Review reports that “Workers' wages are bound to go up in future; the Chinese government wants consumption at home to rise." see article

To be sure, China is still a relatively economical source, just not as much as it once was. And it will take a lot of price increase to get companies to move their purchases elsewhere, "especially for companies that have spent years and untold sums fine-tuning a network of Chinese suppliers". Therefore, it will be a long time before China loses its premier role as the world’s dimensional stone producer.

But the nature of buying in China is bound to change.

I believe the only way we can do this is alter our focus from the bottom of the market to the middle. We might sell less, but at a profit. I’m talking about materials which sell FOB factory from $7.00 to $17.00/sf. It’s not materials like Ubatuba and Santa Cecilia – no matter how fast they move, the profit just isn’t there. I’m talking middle level materials like Cosmic Gold, Juparana Persa, Typhoon Bordeaux, Soapstone, Antique Brown, etc. See some other options

China has materials at this level too, but I am rarely asked about it. And that’s a shame, because The Linley Company can really shine at this level. China has so many colors in this range. Why not ask us?

As most of my regular followers know, my business partner Steve Thoner leaves for China today for one of his many regular trips - see article . He is there every other month, for a month at a time. He has an American’s perspective on the market, with unsurpassed understanding of the Chinese market and just which factories to work with. And he keeps a seasoned eye out for materials of value that can be profitable for all concerned. He will be busy selecting materials and controlling orders for our discerning clients. What can we select for you?