Faced with a perfect storm of a strong yuan and the rising cost of raw materials, China’s home appliance manufacturers are fearful of booming exports orders caused by the coronavirus as profits decline, leaving some on the verge of bankruptcy.
On one hand, overseas demand for appliances is rising amid lockdowns and work from home arrangements in the West, but on the other, firms are seeing profits vanish as the Chinese yuan continues to rise, meaning they will receive less for the orders which already cost more to produce due to rising copper, aluminium and cold rolled sheet steel prices.
“We are in limbo. At this stage, more orders is not a good but a bad thing,” said Lisa Ye, a sales manager at vacuum cleaner producer Ningbo Chinaclean Household Appliance Manufacture, who described the surge in orders last year as “significant”.
“Our profits are diminishing and are now close to minimum. We may end up losing money in a few months.”
Companies usually receive payments months after the orders are placed, meaning if the yuan continues to rise against the US dollar, they will receive a smaller return on the price they have already agreed.
“All our profits are gone, and now we are losing money,” said Cara, a sales manager at Jiangmen’s Homemaster Electric Motors and Appliances, which manufactures and exports kitchen blenders. Cara declined to give her surname. “What’s worse is that as we produce more, there are not enough [shipping] containers for us because the space is limited.
“On the one hand, we won’t receive the payment until our clients receive the blenders, on the other hand, our suppliers are chasing us for payments. We are in a really dire situation.”
The yuan has been rising since the end of May alongside China’s rapid economic recovery from the damage caused by the coronavirus pandemic.
On Wednesday, the Chinese currency improved to 6.4604 against the US dollar, having appreciated nearly 10 per cent since the end of May, when it was at it weakest level before the current surge. A smaller exchange rate figure indicates the yuan has strengthened, since it means it takes fewer yuan to buy one US dollar.
Some economists see the yuan strengthening into 2021 due to strong growth of the Chinese economy and weakness in the American currency due to a coronavirus-induced slowdown in the United States, although others say Beijing will step in as it could hurt the nation’s competitiveness and put its policy agenda in jeopardy.
Ningbo Chinaclean have raised their prices in an effort to offset the currency exchange loss, and while this has led some buyers to reduce their orders, some have seen it as an opportunity to place orders for the whole year at once.
“We only take orders for one month because what lies ahead is unclear,” added Ye.
“Once we accept an order for the whole year, we cannot raise the price in the future. That means if the yuan continues to surge this year, we may go bankrupt.”
Upended by the pandemic, the global supply chain is shifting its focus back to China as overseas customers have turned away from countries such as India, which is still battling an out-of-control pandemic.
Backed by strong external demand, China’s home appliance exports enjoyed a V-shaped recovery last year, with shipments rising by 20.6 per cent in the first 11 months of 2020 compared to the year-earlier period.
The number of newly registered home appliance manufacturers has also surged, with the figure increasing from 12,000 in February to around 150,000 at the end of last year, according to a public company registration system using data provided by the government.
But the new companies have all also had to contend with the continued rise in the prices of raw materials, as well as the strong yuan.
This week, copper prices are up 26.4 per cent year on year, aluminium 9.6 per cent and cold rolled sheet steel 42.76, according to a report by the Beijing-based Cinda Securities on Tuesday.