We've been hearing in general terms that China's labor costs are increasing, and here's some data that shows just how much this is affecting business.
Today, Hong Kong-based Global-Tech Advanced Innovations Inc. announced its financial results for the quarter ended September 30, 2010. Net sales for the second quarter of fiscal 2011 were US$25.0 million, compared to $29.0 million for the corresponding quarter in fiscal 2010. Net loss for the second quarter of fiscal 2011 was $0.9 million, or $0.29 per share, compared to a net income of $1.6 million, or $0.51 per share, for the second quarter of fiscal 2010. (See: Global-Tech Reports Q2.)
The company has an interesting business model -- floor care products and electronics, including CMOS camera modules -- and while electronics did well, John C.K. Sham, the company's president and CEO said:
- Our overall gross profit margin remains weak as operating costs, particularly labor and energy costs, continue to increase. This increase in costs was attributable, in part, to rising inflation that has been taking place in China. Additionally, our fixed cost absorption rate increased due to declining activity. Accordingly, the company must continue to refine its focus on productivity and efficiency...
We do not expect significant improvements in our floor care business during the remainder of fiscal 2011. Accordingly, we are increasing our efforts to incorporate proprietary elements into our electronic component business and improve efficiencies in our EMS business in an attempt to position and strengthen the company’s prospects for growth in these businesses in the near future. The company’s continued emphasis on the expansion of our business in China remains vital to long-term growth.
The success of Global-Tech's electronics business may indicate that sector is less vulnerable to increased costs: Much of high-tech's manufacturing is automated, so labor is a variable factor. On the other hand, manufacturing is an energy-intensive business, which requires upgrades to become more efficient.
Additional data on China's inflation can be found at TTI's MarketEye.