China Would Be The Only Winner From A Price War

Business, China, Company Strategy, Europe, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US

USLLDPEcapacity19Jan2015

By John Richardson

IT IS dangerously wrong to still think of China as just a cheap, copycat low-value manufacturing nation. Yes, cheap, agreed, and to begin with, as was the case with the US, it has copied other countries’ technologies.

But forget low value, as China’s extraordinary growth in the smartphones business indicates. Eventually in this and other businesses, China will be doing it both cheaper and better than many of its international rivals.

This is fantastic for China as it solves two problems, which are:

  1. Tight blue collar labour markets and oversupplied white collar labour markets. China no longer needs lots more new jobs in low-end textile and garment factories. It instead needs lots more jobs in smartphone factories that don’t assemble overseas-made components, but instead make all the components from scratch. It also wants to build its own internationally-strong brands in smartphones etc. This will create lots of local jobs for designers, for engineers and for sales and marketing executives. Before you make unfair jokes about the quality of Chinese manufacturing, think of how South Korea has already achieved a similar transformation.
  2. Rising demand for low cost, but high quality consumer goods at home. Now that the “wealth effect” from the credit boom of 2008-2013 is over, we are left with the inescapable fact that China is a million miles from being a rich country by Western standards. For example, China’s average per capita rural income in 2013 was just Yuan 29547 ($4769). So it makes every bit of sense to make excellent smartphones that cost $300 each, rather than the $650 price tag for Western models. Equally, the West faces long term economic decline as a result of demographics. When you of one the more than 50% of Greeks who are unemployed, you cannot even conceive of buying an Apple or a Samsung phone. You might, though, be able to scrape enough money together for a Chinese smartphone.

How has this rapid move up the value chain been achieved by China?

Through government support for the design institutions that are initially copying, and then improving on, Western designs.

Tax incentives and easy financing terms have also been made available for the right kind of manufacturers.

As a Western exporter to China, or someone who manufactures in China, you thus need to step back and think about how to take advantage of this new strategic reality.

China will still need lots of technical support and advice. Working with, rather than against, China seems to be one of the headline answers.

What you should not do is get sucked into a price war by building too much of the wrong type of manufacturing capacity overseas to serve a China market that looks very different from the China market of just a few years ago.

Hold on, though, isn’t this exactly what the US petrochemicals industry is at risk of doing in polyethylene (PE)?

“The more that the US and the Middle East sell cheap PE to China , and there is going to be a lot more of this happening in 2015, the more competitive the Chinese will become in every end-use application,” said  an industry source.

“They are constantly investing in new more advanced conversion capacity – are fine tuning, are great innovators. They are aiming for tip-top quality so they can deal with their graduate unemployment problem. They will not stop, they cannot stop,” he added.

“And lots of US converters have opened operations in China because they aware that a flood of cheap PE is on its way to China. In so doing, they are transferring their expertise and technologies. The end-result will be cheap, but high quality, plastic finished products being re-exported back to the States.”

So much for the great US re-shoring revival in plastics processing, then.

It is fantastic news, therefore, that the collapse in oil prices might well result in the re-evaluation of some US projects.

The falling oil price underlines the inescapable reality that the demand for all these projects was never there in the first place – and that, if they had gone ahead, there would have only been one winner: China.

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