The China Syndrome II - No Pricing Power

The problem is that everyone else in the same sector is playing the same game with the result that there has been built a gross surplus capacity at virtually every stage of the manufacturing process. Conversion and product prices have, thus, been driven down to levels that many companies are not, in reality, even covering their operating costs. So the friendly local bank is providing them with working capital in addition to the long-term loans. A month or so ago a senior official from the PBOC stated that as much as 60% of bank loans were for working capital!

The problem for the manufacturing sector is that there is no pricing power, but input costs are rising rapidly from raw materials, to electricity, diesel, water and now even labour. Where are the real profits, as opposed to so many that are published? It is why a senior investment banker in Hong Kong described China as buying expensively and selling cheaply. In fact, on this note I was shocked to be told by the general manager of one Japanese factory that when account is taken of productivity there is now little between the costs of making his product in Japan and China.

See: Simon Hunt @ Prudentbear
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=38021

See: The China Syndrome February 26, 2005
http://naybob.blogspot.com/2005/02/china-syndrome-i-case-for-rate.html