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Waiting for the inventory bounce

Posted to Far East Maritime (by on November 4, 2011

After months of holding back, the inventories of Europe and US retailers must be pretty low by now. Surely it is time for restocking.

Orders from European and US importers have hit all time lows, pushing the thousands of mainland factories to the brink and many over the edge.

With many operating at limited capacity, factories have been battling to cope with a sharp drop in orders in the past few months. Forget breaking even, factories have been focused on limiting losses.

Most of the factories in the Pearl River Delta are Hong Kong owned, which is why trade figures always mention “Hong Kong exports”, despite the city having sent its manufacturing over the fence 30 years ago.

Sunny Ho of the Hong Kong Shippers’ Council expects many factories to close down in the face of rising costs and dwindling orders.

And even when the orders do come in, the prices are so low that factories cannot build in a margin that makes it worth their while.

Even more troubling to the factory owners is Beijing’s pressure for them to move their operations inland. It works for the makers of high value electronics products that use air freight to get their lighter goods to market. There are many domestic services connecting new electronics hubs like Chongqing and Chengdu with Shanghai, and scheduled freighter networks now serving Hong Kong, Taipei and Incheon.

But for makers of low value items that are shipped in ocean containers, the options are limited to waterway and in a small way to rail. That means boxes are floated down the Yangtze and exported via Shanghai, all adding to the costs of transport.

Ho reckons many factory owners have moved their operations to other Southeast Asian countries, usually Vietnam, Cambodia, Bangladesh and Indonesia. In Vietnam, for instance, labour costs are US$1 per person per day, so it makes sense for worker-intensive industries such as toys and garment makers.

It is not only a bleak Christmas that awaits Hong Kong’s multitude of mainland factory owners, but a bleak future. With the European Union heading for a meltdown and the US economy still struggling, the road ahead is going to be a bumpy one.

In theory, the inventories will need to be rebuilt and everyone involved in the supply chain is hoping for a replenishment bounce similar to the end of last year.

In practice, however, battered consumers in developed markets may decide to hunker down and cut all non-discretionary spending.

That will make 2012 another year to forget.

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