Stronger yuan hasn't pinched Chinese ... yet
By Thomas Russell -- Furniture Today, October 10, 2005
Dongguan, China — The revaluation of the yuan this summer so far hasn't had much effect on the bottom lines of Chinese furniture manufacturers.
Still, those manufacturers are keeping a close eye on the currency for fear it could affect their ability to compete by making Chinese products more expensive around the world.
In late June, the Chinese government said it no longer would peg the yuan to the U.S. dollar, linking it instead to a basket of foreign currencies.
The yuan immediately strengthened vis-à-vis the U.S. greenback, but only by 2.1%. As of Sept. 15, that had inched up to 2.3%.
Several Chinese manufacturers told Furniture/Today in late August the change was having little or no effect on their business. For one, the difference in value is small. Secondly, most business, including the purchase of raw materials, already is done in U.S. dollars.
"At this point, to us, the effect is very minimal," said Mohamad Amini, president of case goods manufacturer Lacquer Craft. "We buy raw materials in U.S. dollars and sell (finished goods) in U.S. dollars."
However, Amini and others noted they still must deal in the local currency in some areas such as labor and the purchasing of components, fuel and utilities. But the effects here often are still minimal. Some manufacturers say labor is just 6% to 10% of their cost of doing business.
At the time of the revaluation, some importers and distributors voiced concerns that manufacturers would use it as an excuse to raise their prices. But Amini doesn't think that has happened.
"If someone needs to raise prices, they need to raise prices," he said. "But at this point, I don't expect the yuan to have that big of an impact."
That could change eventually as labor costs continue to rise, mostly because of an ongoing labor shortage and the need to compete with other industries for good workers.
Fuel costs also are expected to continue to rise. One manufacturer estimated that gasoline costs have risen about 40% in the past year.
If the yuan continues to strengthen against the dollar, that could have a cumulative effect on the bottom line — without some price hikes.
If the yuan strengthens substantially, "That would have a dramatic effect on the cost of doing business," said Steven Lee, president of dining room and occasional furniture manufacturer Winny Overseas Ltd.
Some manufacturers said the value of the yuan would have to rise 10% or more against the U.S. dollar to have any significant impact, and many don't see the government allowing it to rise by more than 5% by the end of the year.
"It could be a problem at 10% or more," said Richie Chen, general manager of case gods manufacturer Passwell Wood Corp., adding he doesn't expect that to happen anytime soon.
But some companies, such as case goods manufacturer Omexey Enterprise Co., are looking to be prepared in case of a drastic shift in currency values, or higher U.S. duties on Chinese bedroom imports.
Omexey is building a plant in Vietnam as an alternative source in case it faces higher bedroom duties than its current Section A rate of 6.65%. Senior Vice President Samuel Liu said currency uncertainties also help to justify the project.
"We feel (the value of the yuan) will go up again because of pressure from the U.S. government," he said.
