Soaring raw material and labour costs cut in to Chinese motorcycle industry’s competitiveness.
By David McMullan
Constantly rising raw material prices are forcing down the profit of Chinese motorcycle enterprises across the board.
According to statistics provided by the Chinese Ministry of Commerce to China Motor Magazine, the prices of all motorcycle production materials including mineral products, rubber, non-ferrous metals, chemical products, energy resources, raw materials for light industry and steel products in China rose alarmingly during the period of 11th to the 17th of October 2011 due to the increasing import prices of raw materials in to China in the first three quarters of the year. This phenomenon (although relaxing somewhat in 2012) is causing a large knock-on effect for the Chinese motorcycle industry’s export prices this year. The statistics from the Chinese Ministry revealed that the prices of crude oil, iron ore and copper incurred a rise of over 40% with the price of aluminium increasing a staggering 87.3%.
Despite the soaring raw material prices, some small and medium sized motorcycle enterprises have not dared (fearing impaired competitiveness) to raise their product prices in line with the hike causing the profit of many of these lower level motorcycle enterprises to be markedly reduced. This has caused consternation at that end of the industry as several companies encounter non-profit situations and stare liquidation in the face.
The motorcycle tyre industry is a pertinent example in which the enterprises under non-profit threat do not just include small and medium sized enterprises but also the leading and listed companies. Huge Chinese tyre enterprises including Triangle Tyres and Aeolus Tyres have upped their prices by 8% for 2012. The Chinese tyre industry in general has increased its prices by a whopping 12% on average but still hasn’t made up the profit loss caused by the raw material price rise.
"We can describe how difficult the current situation is by saying that we will certainly go out of business if we don't increase our product prices quite considerably," said a senior official at Triangle Tyres.
Mao Jianping, the chief analyst for Haitong Futures in the Chinese Rubber Industry, told China Motor Magazine’s David McMullan that natural rubber prices had risen by 300% from 2009 to 2012 leaving motorcycle tyre manufacturers no option but to increase prices. The price rise of tyre materials is indicative of the problems being suffered by the industry in general
According to the September PMI (Producer Price Index) statistics, the purchasing price index of this month suffered an increase of 4.8 percentage points from the previous months. The purchasing price index of 20 subsidiary industries all had a rise of over 50%. Huatai Securities analysed that the sharp increase of PMI may greatly affect motorcycle enterprises' profitability. Under this situation, enterprises are caught in a dilemma: they have to produce in order to maintain the factory and its employees, but are in a non-profit making situation due to the soaring price of raw materials.
However, it is hard to increase motorcycle export prices due to the intense competition. The small and medium sized enterprises which are in the little-profit state have to study their every manufacturing process in order to avoid the waste of raw materials caused by unsound manufacturing processes. The prices of final products are not in connection with the raw material products; those enterprises that can't bear the pressure anymore would find their ways to increase the prices of their products.
Chief economist Zhu Jianfang from Citic Securities analysed the situation and stated that “under the global loose monetary policy condition, the soaring prices of major durable commodities may pose certain threats to China's prices of commodities. In terms of the (PPI), the PPI in September suffered a rise of 4.3% year-on-year, up 0.6% in link relative and the prices of products like motorcycles and cars keep rising. Although the declining rate of the PPI has slowed down many institutions predict that it may rise again due to the increasing price of the raw materials required for the manufacturing automotive industry.”
It’s not just raw material prices affecting the industry as labour costs doubled in 2012. It is becoming increasingly difficult for motorcycle factories to find production line workers due to increases in education and salary rises in industries like coal mining. The motorcycle industry requires around 1 million workers for production lines and has recently struggled to find staff. This has a caused a 100% pay raise for production line workers as the average wage has increased from 1000 RMB in 2011 to 2000 RMB in 2012 causing an adverse affect on export profits.
Glen Yang export manager of Loncin (the biggest motorcycle exporting company in China) commented “these price rises are really affecting our competitiveness on many markets where Indian bikes are now being introduced. While India manufactures motorcycles that are slightly better quality than the Chinese due to the historic influence of Hero Honda in that country their prices were nowhere near as competitive as ours. This is now not always the case; as raw material and labour costs increase so do the export prices. Some countries have a cap on the retail price of their imported motorcycles which means less profit for the importer. The only major Chinese motorcycle importing country where the Indian manufacturers are not a threat is Pakistan for the obvious reasons but they are increasingly looking toward Japan.”
Erdenetsogt Jagar a motorcycle importer from Ulan Bator, Mongolia confirmed Glen’s fears. He comments “Mongolian farmers have a habit of crashing their motorcycles while driving back to their farms from the bar! I make sure that the motorcycles I import are custom made with many steel parts designed to take the punishment, David McMullan calls them ‘drunk farmer bikes.’ The problem is that now these bikes have risen drastically in price and I can no longer justify using the Chinese factory I have used for the last 3 years and am looking to India.”
The Chinese motorcycle industry hopes that the requirements of drunken Mongolian farmers are not indicative of the shape of things to come!