Feeling powerless

Is China’s low-cost manufacturing model unravelling

Feeling powerless

Factories may be losing price edge

It must feel like a tough time to be a Chinese factory owner. Even as demand from overseas picks up, labour costs seem to be on the increase, and a renminbi strengthening is on the cards. And now the once plentiful supply of state-subsidised electricity is starting to look vulnerable.

The devastating drought in the southwest is hampering the generating capacity of the region’s hydroelectric dams, which is having a knock-on impact elsewhere.

In WiC54, we reported that Yunnan province had stopped supplying electricity to nearby Guangdong. That’s starting to have a serious effect on manufacturing businesses in the coastal province. Brown-outs have already been reported in the factory town of Dongguan, with local factories forced to go without electricity one day a week in order to guarantee supply to residents. The situation is expected to get worse as demand picks up in the coming months.

So far, most factories have been able to fall back on diesel generators – but that costs 30% more than grid-generated electricity. “Some costs such as electricity are rising so fast and beyond our control that it will be lucky if a factory doesn’t lose money,” Yeung Chi-kong, the vice president of the Toy Manufacturers Association of Hong Kong told the South China Morning Post last week.

One fear is that business could be lost to new low-cost producers like Vietnam, Indonesia, and Bangladesh. “We are trying to pass the extra costs on to customers, but so far they are bargaining extremely hard,” Yeung told the newspaper.

The country’s electricity policy has long been geared towards keeping prices as low as possible for exporters. In practice, that means low profits – and sometimes even losses – for power generators.

But there’s pressure for that to change. The Global Times recently reported that the top five electricity firms (Huaneng, Datang, State Power, Huadian and China Power Investment Group) were teaming up to push for higher electricity prices, especially as hydropower production was undermined by the ongoing drought, and as increasing coal demand pushed up the price of coal.

Regulators are likely to resist those efforts for as long as possible. “This year will be tough for coal-fired power plants,” Xue Jing, director of the statistics and information for the China Electricity Council told the China Daily, “Domestic power companies are likely to incur losses.”

China’s leaders will be worrying that ongoing power shortages will constrain economic growth potential. One option is to buy up energy resources around the globe in search of a stable supply. State-owned companies have been buying into natural gas deposits in Australia (see WiC52), as well as coal mines in Mongolia, Indonesia and elsewhere. But there is often local political resistance to ceding control to Chinese shareholders. And even as the purchases progress, fossil fuel prices continue their upward climb.

Another tactic: allocate the electricity more efficiently. Government planners are banking on a ‘smart grid’ to help them do this (see WiC45) although it is a scheme still billions of dollars and many years from fruition. In the meantime, power producers may find themselves in the red, even as Chinese manufacturers nervously eye their shrinking profit margins.

For the past 20 years China has been the undisputed factory of the world. Cheap electricity was one of the contributory factors in that success. But if power bills cannot be kept close to earlier levels, another of the “China price” advantages can be struck off the list. And with a rising minimum wage in many provinces (up 20% recently in Guangdong), as well as the pressure to strengthen the yuan, some of the country’s factory bosses may be wondering whether their manufacturing model has already seen its best days.

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