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Time to fear China inflation? Not yet, say multinationals
December 15, 2010 / 2:21 AM / 7 years ago

Time to fear China inflation? Not yet, say multinationals

BEIJING/SHANGHAI (Reuters) - China’s latest inflation figures may have sent a ripple of fear through global markets, but at many of the multinationals betting on the country’s fast-growing consumer market, executives remain surprisingly unruffled.

The reasons vary but boil down to an essential point -- costs in China might be rising but economic growth, and thus sales, should more than make up for it.

“Inflation is a concern, but we believe technology spending will continue,” said Amit Midha, president for greater China and South Asia for computer maker Dell DELL.O, speaking in Beijing at the Reuters China Investment Summit.

“China was supposed to be part of the global slowdown. But come on -- there’s no slowdown here.”

Chinese consumer inflation has accelerated in the past few months, hitting a 28-month high of 5.1 percent in November and putting pressure on the government to do more to contain it, as especially higher food prices eat into people’s pocketbooks.

That surge in inflation has come along with strong growth in China’s economy, with 2010 GDP growth estimated at 10 percent.

That growth has lifted consumer incomes along with prices, powering a spending binge that makers of everything from cars to tablet computers hope will drive revenue in the next few years.

Acer (2353.TW), the world’s No. 2 PC vendor, forecast its China revenue will more than double next year to $2.5 billion. General Motors (GM.N), which sold 2.17 million cars in the first 11 months of this year, expects its China sales to exceed 2.5 million vehicles in 2011.

TAKING COSTS IN STRIDE

To be sure, inflation will cut those revenues down to size as companies cope with higher wages, rising material costs, and steeper leasing costs, among others.

Rising wages have been the most widely noticed, after a rash of strikes at foreign-owned factories last summer that led to wage rises of 20 percent and more.

For the economy as a whole, incomes have risen significantly -- up 7.5 percent year-on-year in January through September in urban areas, and up 9.7 percent in rural areas.

But for high-tech manufacturers, who bore the brunt of last summer’s wage hikes, the effect has been minimal.

“Labour costs are not a major issue since they make up about 2-3 percent of the total cost of a PC,” said Acer Chairman J.T. Wang.

Other input costs have also crept up, including for iron ore and steel, but many companies are taking these, too, in stride.

“Commodity prices go up and they go down,” said Kevin Wale, president and managing director of GM China. “At the moment there is some increase (in our material costs), but we understand its cyclical nature and have experience dealing with it over time.”

China’s gradually appreciating currency -- one of the tools economists say needs to be used more in the fight against inflation -- could also help firms operating in the country, as Chinese consumers wield their spending power and as yuan earned locally gains value relative to the dollar and the euro.

“Generally, for PC vendors who have a significant part of their revenue not in U.S. dollars, a depreciating dollar will work in our favor,” said Wong Wai Ming, CFO of Lenovo (0992.HK).

“But it’s not just us that will benefit. All of our competitors operating in China have got that benefit.”

GO WEST

Still, some are taking steps in anticipation of higher costs.

Dell is adjusting its operations within the country to keep its costs down: by moving its manufacturing facilities closer to its customers to keep transportation costs lower, and by putting its IT service centers -- which don’t need to be physically close to customers -- in lower-cost parts of the country.

Both initiatives are bringing it deeper into the country’s interior. It has decided to open operations in Chengdu, capital of Sichuan province, giving the company a foothold in China’s fast-growing interior.

“When it comes to the cost of service and support, the difference of a coastal city and a western city is as much as 20-25 percent,” said Midha. “That’s a clear opportunity to put such operations in a Western city.”

There’s another risk in China of course -- that an aggressive move to contain inflation would slow economic growth sharply, cutting commensurately into companies’ bottom lines.

But on this point, too, Dell’s Midha is sanguine, arguing that economic pain would prompt companies to focus on cost savings. That, in turn, would mean higher sales of IT services aimed at paring costs of running and maintaining a company’s servers and software.

“If you project the unit growth slowing down and the cost of resources going up, that always means that IT services will take off,” he said.

Additional reporting by Kelvin Soh, Baker Li, Fang Yan and Melanie Lee; Editing by Ken Wills and Anshuman Daga

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