China’s Manufacturing Confidence Drops to 6.5 Year Low; What That Means to You

Last week the Purchasing Manager’s Index* for China dropped again after another similar drop last month. The drops were led by new orders falling off considerably. Clearly manufacturers in China see a slowdown which is more surprising when you know that last month’s production numbers include early Christmas builds and strong demand for the new iPhone production. Without those 2 factors, the Chinese PMI would have been much worse. That means 2 things to US manufacturers:

First, the Chinese government will need to re-allocate resources to bolster Chinese manufacturing.   This means either artificially stimulating domestic economy through government spending or lowering the lending rate to reduce Chinese financing costs. Both will drive greater demand on military, aerospace, infrastructure and construction. The later, reducing finance costs, may make Chinese manufacturing more aggressive on global pricing. Chinese pricing, which has been climbing, might stabilize or shrink as manufacturers fight to maintain their growth expectations.

Second, the Chinese Yuan might weaken against the US dollar.   This happened in August causing 1 – 2% drops across global markets, but also reducing the cost to US buyers of Chinese goods. This will definitely make it more difficult for US manufacturers to stay competitive globally. At its worst, the continual depreciation of the Yuan could trigger other countries to lower their lending rates – first to neighboring Asian countries and then globally. While this is unlikely (China is committed to a stable Yuan and many governments already are at near 0% lending rates), we should expect Asian pricing will remain very competitive until the Chinese domestic market or global demand picks up.

Are you prepared for another re-quote? Through no extra effort, a weaker Yuan will mean that Chinese quotes will be lower this month than last month. American manufacturing plans cost reduction in years and quarters. Not many companies plan each month for a new cost reduction project. Most will just re-quote with their same Chinese supplier. But what about the rest of us that source locally? Either we will absorb the difference in our profitability or we rely on our existing improvement projects to deliver the monthly results necessary. Here at ETM, we have improved productivity by 40% in the past 2 months alone.  Do you have sheet metal manufacturers will to do this for you?  If not, call me at 978-486-9050 and we can schedule a FREE supply chain assessment for you.

* In China, the Caixin Manufacturing PMI Purchasing Managers’ Index measures the performance of the manufacturing sector and is derived from a survey of 430 industrial companies. The Manufacturing Purchasing Managers Index is based on five individual indexes with the following weights: New Orders (30 percent), Output (25 percent), Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stock of Items Purchased (10 percent). (Source: TradingEconomics.com)

from ETM Manufacturing http://etmmfg.com/3544
from American Quality Management http://aqmauditing2014.tumblr.com/post/130270446700