Given all the trouble that Chinese factories are having, are price increases really still a problem?  So far, yes.  Declining demand is leading to factory closures (see previous post), NOT downward pressure on wages.

Our IndustryWeek piece evaluates three strategies for responding to cost increases:

1. Identify the “New China” (i.e., look to new countries)
2. China is the New China (i.e., look at new regions within China)
3. Leverage your suppliers’ networks (i.e., authorize subcontracting)

Would welcome your thoughts, here or over at IndustryWeek.

Growing companies

Yes, there are companies that are growing despite the problems in the economy. These companies are looking for factories to supplement the production capacity that’s been available to them, and they are looking for factories that can help them introduce new products. These customers, though hard to find, will be the most sought-after by factories.

Entrepreneurs

There are always entrepreneurs looking to get new businesses going. Some may be wary of starting a business in the current economic environment. On the other hand, these days being an entrepreneur isn’t much riskier than being, say, a banker… So expect to see a fair number of people taking the entrepreneurial plunge. Traditionally, factories have avoided working with entrepreneurs, because entrepreneurs place smaller orders and their growth is anything but certain. However, in this environment, order-starved factories will be more willing to work with entrepreneurs.

Companies under margin pressure

As I’ve noted in previous posts, lots of companies are facing significant margin pressures, thanks to declining consumer willingness to pay and increases in the prices of their inputs — particularly when their goods are manufactured in southern China. Some companies are trying to protect their margins by moving production to new, lower cost geographies. Plenty of factories will be interested in attracting business of this kind, but they shouldn’t be surprised when these companies move again, when yet another geography offers lower prices.

So, yes, there are companies that are looking for new factories. However, there’s no doubt that factories around the world are having to cope with smaller orders and fewer inquiries from potential customers. A painful situation, to be sure. More on this in future posts.

One of our customers basically predicted The Great Squeeze several months ago.  He argued that consumer spending was destined to slow down (clearly, he was right).  That’s bad in and of itself, of course, but — even worse — he predicted that this slowdown in consumer spending would occur just when the cost of inputs was on the rise.  Indeed, we’re hearing this from lots of our customers these days: the cost of manufacturing is going up, particularly if you’re manufacturing in China (as most are).  Why are manufacturing costs going up, even as the global economy cools down?  First, wage rates are going up, particularly in Southern China, as more and more companies choose to manufacture there and the competition for labor goes up.  Second, Chinese authorities are putting in place new regulations — and enforcing old regulations — that increase the cost of doing business in China.  (These regulations are valuable, because they protect workers and the environment.  However, that doesn’t change the fact that they increase the cost of doing business.)  Declining consumer spending and rising cost of goods — this is a recipe for a sharp decline in profitability for those caught in the middle.

Of course, there’s more to the story.  Evan Clark, in Thursday’s Women’s Wear Daily, highlighted the impact that the credit crunch is having on retail.  Indeed, just as companies are facing declining profitability, they are going to have an incredibly difficult time getting the credit they need to pull through.  Lower consumer spending, rising cost of goods, and limited availability of credit — this is The Great Squeeze.

The key to surviving The Great Squeeze is narrowing your focus.  If you are trying to serve a broad set of customers with a broad set of products, you are going to struggle.  You are going to struggle to stay close enough to your customers to know exactly what they’re going to spend money on.  And you are going to struggle to stay on top of your supply chain and keep costs down.  On the other hand, if you focus on a narrow range of customers, you will know better than anyone else what they will spend money on.  And, if you narrow your product range, you can put all of your efforts into keeping costs down on a manageable number of products — either by improving your manufacturing processes, or by finding lower cost suppliers in new regions.

Narrowing your focus is scary, because you’re putting all your eggs in one basket.  However, today, the only alternative to narrowing your focus is conducting business as usual — in other words, surrendering to The Great Squeeze.