On April 12, 2008, the exchange rate between the RMB and USD broke seven RMB.

Craig Pepples, Global Sources' Chief Operating Officer was repeatedly asked by reporters at the China Sourcing Fair: Electronics & Components about the concerns of international buyers due to the appreciation of the RMB.

Pepples replied: "Yes, of course. The USD is an important currency. About 80 percent of our buyers' orders are made using USD for settlement." In fact, before the US subprime crisis started 6 months ago, most people predicted that 2008 would be a difficult year for China-made export products.

As a B2B media company, Global Sources facilitates trade between international buyers and China manufacturers and the company's revenues are generated from providing trade shows, online and magazine services to suppliers. At present, Global Sources helps suppliers to promote their products to a community of over 700,000 active buyers in more than 230 countries and territories.

Tommy Wong, General Manager of Global Sources Exhibitions commented that the Company was aware six months ago the RMB might break seven and the related problems it would cause.

The US-led economic slowdown, rising labor costs, a reduction of tax rebates and increasing raw materials costs. All these constitute the "5 major crises" for China exporters.

Wong said, "In the past year, our export clients in electronics industry have been forced to increase prices by about 5%." Not only are these exporters worried about price increases, it also put international buyers who used to source "low-priced" China products into a painful dilemma.

Wong elaborated that international buyers are price-sensitive, but there isn't much room for price negotiation.

This spring, China Sourcing Fair: Electronics & Components featured over 2,400 booths – a 26 percent increase compared to April 2007. There were more than 1,800 booths from mainland China exhibitors, a 33 percent year-on-year increase.

These figures demonstrated that the China electronics industry is not much affected by the "five major crises". Otherwise, they would not exhibit at this Hong Kong show.

So, who is suffering most from the crisis?

84 percent exporters plan to increase production capacity

Judging from figures, the China electronics industry is still on the rising track.

Global Sources' China Supplier Survey on electronics products shows that 84 percent of electronics suppliers in Greater China plan to increase production capacity and more than half of them are planning to limit price increases to 5 percent or below. This is despite higher costs of raw materials and RoHS compliance. Most surveyed manufacturers prefer to keep export prices stable.

Global Sources' researchers interviewed 322 makers across 10 electronics sectors in Greater China, with the majority of manufacturers located in southeastern China. More than half of respondents were based in Guangdong province, while Fujian and Zhejiang were other key production hubs.

The survey covers access control, battery chargers, Bluetooth headsets, DC motors, digital cameras, in-car TVs, IP cameras, PC cameras, media players and USB flash drives.

Global Sources' President of Electronics Business Unit, Mark A Saunderson, said that the pressure from rising production costs is apparent, with 37 percent of respondents saying that fierce price competition is their top challenge.

"Greater China suppliers are facing a number of challenges, including higher manufacturing costs and an appreciating Yuan," said Mark A. Saunderson, publisher of the report. "Meanwhile, price competition hasn't let up. However, most suppliers expressed their willingness to hold export quotes to maintain market share."

Twenty-three percent of surveyed suppliers are most worried about rising raw material costs; while 10 percent said labor shortages are their major challenge.

In such a situation, why do electronics manufacturers still plan to expand their production capacity?

Due to global demand, suppliers are optimistic about sales this year. Among surveyed suppliers, 39 percent are planning to increase capacity by at least 20 percent while 47 percent are primarily targeting exports to the EU.

To what extent does the US economic slowdown affect US sourcing power? Tommy Wong said it's difficult to quantify, however, according to the number of buyers' registered for their Electronics & Components show, US registrations increased by 7 percent, while numbers from India, Russia, South America and Turkey increased by over 50 percent.

Wong commented that the U.S subprime crisis might affect buyers' sourcing power in the short term. However, for general merchandise goods, including consumer electronics products, buyers still need to replenish their stocks.

Generally speaking, there are two types of electronics suppliers: high-end ones from Europe and Japan; and those that produce lower-end consumer electronics products which are mainly China exporters.

During an economic slowdown, the purchase of large-scale equipment will be affected more than consumer electronics. This explains why China manufacturers still plan to expand their production capacity.

Buyers must accept the price increase

Pepples emphasizes: "When facing these challenges, I would like to remind China exporters that first, they need to diversify to export markets other than US and Europe; second, the US is still their primary market."

In fact, the exchange rate for RMB against USD has increased from 8.277 to below 7. For Chinese exporters, that represents a loss of 15 percent just based on the exchange rate. They still need to bear other costs such as the rising raw material and labor costs.

Pepples thought that the "Strong USD" still prevails. He said, "Around 80% of global trade is still settled in USD, even in those countries using Euro." Everyone can imagine the pressure for China suppliers that used to have a cost advantage.

Pepples, however, is still optimistic about the future: "According to the industry pattern, export enterprises will transform in two ways: first, keep the low-priced strategy but move to places with lower production/labor costs. This is what happened last year with manufacturers shifting north. The second way is to move up the value chain and increase price by providing added value services."

Pepples continued, "At present, nearly all of our suppliers are trying to move up the value chain, following a similar path as enterprises in Japan, Korea and Taiwan. After two decades of development, the China electronics industry is moving from "price advantage" to "value chain advantage". Pepples quoted an example of a Xi'an enterprise. "Their R&D and customer service is totally different compared to 10 years ago. In the past, they didn't pay attention to corporate image but now are very brand conscious."

David Xiao, Associate Sales Director of Hong Kong THTF Co., Ltd. commented that, if China enterprises want to increase prices, they need to first improve product features, design as well as customer service. With all these criteria met, buyers usually accept the price increase.

Pepples said it's a natural process to increase price if the product's quality and services have been enhanced.

Tommy Wong added: "Buyers are price-sensitive, but sometimes they are forced to accept a certain price." It will take at least two years for international buyers to develop another supply chain as there are issues, including QC and infrastructure, that need to be addressed. As a result, it's a "painful" process to shift suppliers. Therefore, in terms of scale, cost advantage and QC, China is still the first choice for global electronics buyers.

Wong elaborated that, at present, India has a greater advantage in light industries such as arts & crafts, embroidery, home textiles, garments as well as stainless steel products. However, in terms of the production, design and product integration for electronics products, it has yet to catch up with China.

In view of this, buyers in US and Europe do not have much choice but to accept the price increase.

Move away from the US-reliant model

Starting last year, Global Sources, a veteran of China export trade, started introducing new markets to China suppliers. The company decided to host the China Souring Fair: Electronics & Components in Dubai and Mumbai each year.

Wong explained: "The reason for exploring these markets is to respond to customers' needs. Although US and European buyers still account for over half of the market, in the future, we believe the US/Europe, developing countries and China domestic markets will each occupy one-third of the world market."

One video recording supplier confirmed with the reporter that Global Sources indeed invited them to join their India show. "We are still considering and need to know more about the market demand there." He admitted, however, that in the future they still need to diversify their client base and cannot rely too much on the US market.