November 2011 Newsletter

Nothing seems to go as planned anymore!  Whilst the planning of our trips in Asia become easier as more and more transports links are opened up, nature seems to be intervening to disrupt our plans. Floods and torrential rain were the problems on this occasion. The volcanic dust clouds now look like a minor inconvenience when compared to the havoc being caused by the floods that are now affecting Vietnam, Laos and Thailand. Whilst in the UK, the reporting of these problems seems to be focused around the disruption to tourism in Thailand, the true economic and social effects are going unreported.  Only now after weeks of flooding are the real problems coming to light.  Thailand, is one of the worlds largest manufacturers of computer components and electrical circuit boards for the automotive industry. The area where these are produced outside Bangkok is completely flooded and supplies are now drying up. The knock-on effect of this is that the price of components for computers will start to rise. Only today it was reported that Honda in the UK have to put their workforce on a three-day week due to a shortage of circuit boards. In addition to these economic problems there is also a huge social cost. Thousands of people are being moved away from their homes and the threat  of disease resulting from the contamination of the water supply is now very real. In the poorer areas of Vietnam and Laos, the winter rice crop which represents the staple food for millions of people has been destroyed and the price of rice is rising rapidly.

Our latest trip to Asia was interrupted by these events but our problems are totally insignificant when one looks at the global picture. China is often reported to have caused and profited greatly from the problems that we are currently facing in the Western economies. Whilst there can be no question that the cheaper labour and production costs available in this part of the world have led to the closure of many European manufacturing businesses, it should be pointed out that many of the factories are actually joint ventures between European, American and China in order to increase their profits during the time of the economic boom. Many of the goods being produced in Asia are not sold in our markets but in the local markets. Asia is now a major profit centre for leading car manufacturers such as Volkswagen and Mercedes and also for the luxury goods producers. The owning and display of luxury goods are regarded as a huge symbol of social standing in this part of the world. Whilst health concerns are influencing our governments to restrict the sales of tobacco and alcohol, this is not the case in Asia. Companies such as Imperial Tobacco and the Diageo are now making a large proportion of their profits from consumers in this part of the world.

Whilst the EU is looking to China to provide the backbone of the latest rescue fund to bail out the stricken European economies, one should not lose sight of the fact that the downturn in the Europe and American is starting to have its effect on the Asian economies. Asian businessmen are spending hours on the internet disseminating information and trying to work out the economic ramifications of the failure to bail out Greece. They believe that Greece is only the beginning and that Spain and Portugal will follow. Whilst these economies are not key markets the knock-on effects could be very damaging to Chinese economy. The lessons being learned in Europe and America are causing consumers throughout Asia to become more conservative and once again become savers rather than consumers.  
China and Vietnam do have their own problems. Inflation in Vietnam is now out of control and running at an annual rate of 19%. As a result of this the bank interest rate is now approximately 23% and some businesses that borrow working capital in order to manufacture goods have taken the view that it is more sensible for them to stop production and wait until inflation falls as it is unprofitable to manufacture. Whilst on the face of it this seems to be a strange decision when you realise that they are borrowing on average for a period of six months in order to produce goods for export, the interest rate on these borrowings at 10% over this period of time will completely erode any profits that they would make. One of our factories has invested over $6 million in the last two years in its production facilities and is now finding itself running at only 50% of capacity as the owner does not want to borrow any money from the bank. He is actively turning business away! This scenario is being repeated throughout the country. Many factories in the furniture industry have decided to closed down completely due to the combination of  these factors and falling demand levels. Clearly, there are many industries that continue to prosper but these are mainly in the area of essential products such as food and basic clothing.

As mentioned in our previous recent monthly reports, fraudulent trading is on the increase. However, we could never have predicted the epidemic that is now sweeping through China. Factories who have borrowed large sums of money from the local governments are closing overnight and the owners disappearing, leaving the local authorities and customers with the resulting debts. It has become common in the last three years for factories to require deposits on the placement of orders. The rational for this practice was that as the cost of raw materials continued to rise, factories needed to purchase in advance of the production date in order to be able to sell at the prices quoted. It is now becoming clear that this year a number of factories have just taken the deposits, shutdown and run!

The Internet is now being used as the easiest way to perpetuate these frauds. Many individuals in Europe who trade via the internet have never met or visited the people that they are dealing with. This is a huge mistake. We visit and factory audit every company that we deal with in order to be certain that they really exist and can produce the goods we are ordering. Having said this in the current environment even we are not immune from being defrauded by clever criminals.

On this trip we visited Vietnam, Indonesia and China. Our objectives on this occasion were to source products to customer specifications, inspect the factories that are currently producing goods for customer orders and to continue our development of new products.

Vietnam as mentioned above is currently suffering from its own economic problems. Tourism is very important industry and had been growing on an annual basis. The downturn in the Western economies is definitely beginning to damage this industry. The hotels whilst full are charging the lowest room rates that they have done for many years. In 2006 the Sheraton hotel in Ho Chi Minh was asking and getting $400 per night for a deluxe room. This year the same room will cost you $150.

Vietnam is fortunate in having a very flexible workforce that is able to adapt and move between different industries. Whilst growth levels have fallen back they are still positive. Our visits to the factories here were very positive as the owners are extremely enterprising and forward looking. They are very aware of the problems facing the Western economies. They realise that in order to succeed in this climate their products need to contain value added features.  They believe in investment in research and development and this is very apparent in the quality and appearance of the new products that we saw.  One of our factories is now employing 3 European designers for their new product development and this really shows in the quality of the end product.  We are now in a position to be able to offer a complete range of designer PVC Rattan furniture combined in the same containers as our wooden furniture (factory reference IIM).  Another factory, (factory reference XPK) has invested over $2.0M in a new painting facility for both outdoor and indoor furniture.  When the products are looked at closely the value of this investment can be easily seen.  The quality and appearance of the products is quite superb.  This factory is currently working on a plan to move to water based paints and we are hopeful that we will be able to offer this range within the next 12 months.

On this trip which lasted for 10 days, we travelled extensively throughout Vietnam and saw for ourselves the flooding of vast areas of land. In the middle of the country we met with the companies who are supplying granite and stone to Europe.  The quality of these products was excellent and we will be producing our new brochure on these items shortly. Clothing and footwear has become one of Vietnam’s biggest sources of export and we were able to source for a client a range of beach shoes to their specification. Sales of our Ryc-Eco heat logs are going from strength to strength with the approach of winter.  The producer of the logs has been featured on television in Vietnam and Australia as he has won an award from the government for coming second in a competition to find the best Eco product.  Not only did he develop the concept but he also designed the machinery to produce it.  The government are now purchasing the machines to make this product from him and giving them to farmers.  The objective of this is to prevent the dumping of the rice husks, now used to produce the heat logs, into the rivers leading to pollution.

We then moved on to Indonesia where we visited the factories currently producing furniture and basketware for us.  These visits were to inspect the quality of the products being produced.  We have to comment that manufacturers are far less adventurous than those in Vietnam and there is little interest in developing new products. 

Our final stop was in China.  We visited our existing Suppliers to see and inspect our goods in production. At this point in time it is very difficult to start working with new factories for the reasons outlined earlier and therefore we are concentrating our efforts on developing new ideas with our existing manufacturing base.  We have many new items in development which we will be sending our details of in the coming months.

Our last point of call was the Canton Fair that takes place twice a year in Guangzhou.  We visit this show these days to meet old friends and factories who we have not seen for some time. Suppliers attend this show on a very half-hearted basis these days.  In the past this was a major buying exhibition but in common with all other exhibitions it has become a ‘look and see and now video’ venue.  One must comment on the ‘video’ element. As you walk around the show there are people walking up and down every aisle holding mobile phones or briefcases/rucksacks in very strange positions. As you watch them you realise that they are videoing entire halls of products. One of our manufacturer’s confirmed that you can now employ people to carry out this work for you and you will be given a full video of all the products on display in any Hall of the exhibition. The fee for this service is a $50 per floor per Hall. It is for this very reason that no serious manufacturer will ever show his latest products at this exhibition. It is very common for the largest factories to have the smallest stands in order not to attract any attention. On this occasion there were only one or two interesting products on display. Unlike other years, the show was a very poorly attended. There were very few buyers from Western Europe and the USA. The majority of the buyers were actually from South America and certain Arab countries. We visited the show on its second day and already a number of the exhibitors had taken to sleeping on the stands due to a lack of activity.

In summary, there can be no question that the producers in Asia are being affected by the downturn in the Western economies and many factories will close over the coming months. Having said this, successful Asian businesses have already taken into account the effects of this downturn and have made provision to decrease production levels. For the first time for last few years, we were not greeted in our discussions  with stories about labour shortages. Producers realise that in order to sell their products they will have to become more innovative and all the factories are totally aware how sensitive we are to price increases. The main pressure now for price increases is coming from the devaluation of the dollar against the Chinese currency. This is expected to fall by three or 4% over the coming months and the Chinese producers have already informed us that they will have no alternative but to pass these increases on to us. Happy times ahead!

If you require any further information concerning our trip or just want to call to get further information  please do not hesitate to contact us and we would be delighted to assist you with your particular requirements. We are always available on the phone and our showroom is conveniently located near junction 4 of the M1 and we are open every day from 7:30 AM to 5:30 PM. Please call one of our sales executives who would be delighted to meet up with you.