(April 18, 2008) — If you want an intriguing snapshot of the state of China's injection molding industry, look at the earnings of one of the country's largest press makers, Chen Hsong Holdings Ltd.
It describes how unexpected events starting last July — from Chinese tax policy changes to the wave of toy recalls in America and Europe — caused “massive” losses for its export-oriented customers. The losses caused a clampdown on new investment.
It could be an indicator of trouble in China's export sector, or just a momentary glitch for what has been a juggernaut.
But Hong Kong-based Chen Hsong said there was an abrupt shift from the 20 percent sales growth it saw in China before July, as Chinese exporters struggled with the tax policies, higher interest rates and raw material costs, and the toy recalls.
The change in value-added-tax policy was particularly strong. “Since the policy came into effect during the middle of the export season, many of [Chen Hsong's] export-oriented cus- ¼tomers were stacked with massive losses,” Chen Hsong told the Hong Kong Stock Exchange.
The toy industry, where Chen Hsong is a major supplier, was hit even harder.
“The series of toy recalls did not only mean massive potential liabilities to domestic toy manufacturers, [it] also destroyed [the] confidence and future prospects of an entire industry, resulting in an almost complete dearth of machine purchases,” Chen Hsong said.
Toys accounted for about 15 percent of Chen Hsong's business, so Chen Hsong might have been more vulnerable than some competitors. To give a full picture, the company still reported 14 percent sales growth, as other sectors of its business picked up.
What makes Chen Hsong's report of trouble interesting is that China-watchers regularly debate whether the country is in danger of losing its crown as the world's favored location for low-cost manufacturing. Others have noted slowing growth in China's plastics export sector. In a speech at K 2007, China Plastic Products Processing Industry Association President Liao Zhengpin said China is rapidly expanding its imports of plastic products, but the growth rate of exports hasn't been maintained.
In the first half of 2007, however, China still managed to export more than $11 billion worth of plastic products, up 16 percent up from the year before.
Of course, you can't draw too firm a conclusion from one or two snapshots of trouble, and companies will adjust. But the reasons China adopted the tax and monetary policies, such as pressure to reduce its trade surplus or cool an overheating economy, will continue.
Steve Toloken is