One of the great mysteries of life is how in the hell do some Chinese companies manage to sell products at "below cost." For example, I have heard about super low prices for children's markers, 50% cheaper than a Hong Kong owned factory in China can offer.
Maybe they can pay less for labor than the foreign-owned firm. Maybe they can skip a lot of regulations. Maybe they use poor materials or have a sweetheart deal with a state-owned supplier. Maybe they just want to make a tiny profit. Still, its hard to see how that comes out to 50% cheaper and below the cost of raw materials.
But now I hear this complaint coming from a local Chinese factory owner discussing the office chair market. There is an area in China that has become a hub for office chairs (Anji in Zhejiang, I believe.) All the buyers flocked there to buy chairs for a while. The prices were super low and seemed to be below cost. This factory owner said he checked into their costs for labor, and found it was not much lower than for Dongguan. Land was cheaper, but that should not matter as much.
His theory is that many of these factories are simply not planning to pay their suppliers at the end of the day, and take all of their "profits" and invest in land, hotels, etc. in their own personal name. No wonder they can offer prices below cost, because they don't plan on having any costs.
And this is not a Chinese thing, because I have heard there was once an American importer of office chairs who went from province to province placing orders and then never paying his factories. This guy of course had all of Wal-Mart's orders. Everyone in the industry was going bananas for years trying to figure out how those prices were possible. They weren't.
This year I also had to compete against "bankruptcy pricing" with two different factories. I sure felt better when they finally died off, owing millions of US dollars to their suppliers, and my customers shut up about my price increases. Hey, I could keep prices low too if I never planned on paying for any materials.
Another theory on how some China factories can quote below cost is that they are not actually in the business of making products for profit, but instead are laundering money for corrupt officials or criminals. These officials need to get their ill gotten loot out of China and pay up to 15% to have factories help them do this. Since the factories are really in the money laundering business, they quote below cost to get some big orders fast. They are willing to lose 50 cents per piece to get a nice steady flow going. I would guess they would also choose large-volume low-tech industries like marker pens or office chairs. Supposedly Zhongshan is a big center of this activity.
I find both of these theories to be pretty compelling.
Of course, the first theory depends on suppliers being willing to offer credit to their customers. At some point, the suppliers who survive (and most don't) would wise up and demand payment in cash. Guess what? That is now the situation in China. You have to pay cash to get most materials. And funnily, enough, prices are rising in China, perhaps reflecting not just Chinese growth but an end to using bankruptcy pricing.
Coincidence or evidence?
