Troubles in China's 'Christmas town' mean higher holiday prices

More than S$211,000 worth of orders that would have normally gone out by mid-October haven't been shipped yet due to logistics delays. PHOTO: AFP

BEIJING (BLOOMBERG) - This year, the Chinese city of Yiwu - the world's biggest hub for the manufacture of plastic reindeer, twinkle lights and other Christmas paraphernalia - is feeling a Grinch-like pinch.

Factories are being hit by a shortage of raw materials that is raising their production costs, and once goods are on their way shipping snarls are delaying their journey to the store shelves of the West. Since the middle of last month, Yiwu has also been affected by China's ongoing electricity crunch, which has forced manufacturers to hunt for generators, or suspend production altogether.

"I'm so stressed I couldn't sleep," said Ms Lou Ting, the owner of a Christmas ornament factory, as she worked her storefront in Yiwu's biggest wholesale mall.

"It should be great that we're getting more orders than last year, but there are so many uncertainties slowing the delivery process - and there's nothing we can do," said Ms Lou, who like many in Yiwu is battling manufacturing delays and record freight prices as she works to get candy canes and pine cones shipped to the United States and Europe.

Responsible for 80 per cent of the US$6.1 billion (S$8.2 billion) in Christmas products exported annually from China, the city some 175 miles south-west of Shanghai is a microcosm of the challenges faced by manufacturers and retailers as they end another year plagued by disrupted and distorted supply chains. Home to just over one million people, about 45 per cent of what Yiwu makes goes to the US alone.

The majority of orders had already been shipped from Yiwu when power cuts started adding to the travails manufacturers have had to grapple with this year, said Yiwu Christmas Products Industry Association secretary-general Cai Qinliang.

But the delays being seen at sea and at ports, as well as the surge in prices for metals and plastic, mean consumers may still have to pay more for their baubles and tinsel this year, according to Mr Chen Jiang, owner of a factory that mainly produces Christmas lights and trees.

Mr Chen has raised his prices by more than 10 per cent since June due to surging materials costs. The electricity cuts, which forced his factory to reduce production to just three days a week last month, just added to his running expenses at the tail end of the high season, he said. The factory had no lights on during a recent visit.

Christmas Crunch

This was supposed to be a rebound holiday for Yiwu's manufacturers. Business was slashed in half last year, as the pandemic threw the global shipping industry into disarray and major customers cancelled orders. Things looked to be picking up in March as retailers who used up back inventories to get through Christmas last year rushed to place orders earlier than usual to ensure they were well-prepared for the coming season.

Instead, manufacturers' difficulties were compounded, with soaring commodity prices contributing to the fastest factory-gate inflation in China in 26 years in September.

"Ultimately the costs will be borne by consumers," said Mr Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered. "Exporters and global brands may only absorb costs temporarily, but companies will not do business if they are making a loss. If more companies exit the market, supply will decline, and prices will increase further as the remaining producers will have greater pricing power."

At Mr Lyu Xiaofeng's wholesale Christmas tree store, most business has been moved online amid international travel curbs. In previous years, goods spilled onto the sidewalk to catch the attention of visiting buyers from the US.

While sales this year are back at pre-Covid-19 levels, Mr Lyu said he was not sure he would make much profit as the price of steel - used to make faux tree trunks - has almost doubled from last year. Plastic price surges have also significantly raised packaging costs, he said. Mr Lyu expects profit margins, which used to reach 20 per cent at their peak but have declined to less than 10 per cent in recent years, to be even thinner this year.

More than one million yuan's (S$211,000) worth of orders that would have normally gone out by the middle of last month have not been shipped yet due to logistics delays, he said. The power cuts mean he is reliant on a generator that is running 10 hours a day and he may not be able to get the goods shipped by the middle of this month, the last real deadline for getting Christmas goods to the West.

"We keep explaining to our clients that we either need to raise prices or have to cancel the orders," he said, sitting in a store devoid of customers, unable to enter China because of pandemic border restrictions. Instead, Mr Lyu typed away on WeChat, answering inquiries from clients.

"Luckily, most of them are willing to pay more and share the cost burden with us," he said.

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