Hedging RMB Appreciation with "Internal Strength"

Since the country restarted its exchange rate reform in June last year, the renminbi has appreciated by nearly 3% against the US dollar in more than half a year. Although this wave of appreciation is mild and slow compared to 2008, it still means a lot of pressure for most exporting companies.

The most direct reflection of the appreciation of the RMB is the relative increase in the prices of export products. The price advantage that China's manufacturing has relied on for many years is falling apart in the waves of RMB appreciation again and again. Taking electronic products as an example, some data show that for every 1% appreciation of the RMB, the profit margin of export sales of electronic products will drop by 5%.

Don't forget the past, the teacher of the future. Summarizing previous experiences will help export enterprises to better cope with the pressure of continuous appreciation of RMB in 2011. This issue of "CEConline" magazine talks with Shi Ning, associate professor of the School of Management of Sun Yat-sen University, Yu Xiaoliang, chairman of Shenzhen Aisen Technology Co., Ltd., and Wang Fei, chairman of Shenzhen Cailiang Electronics Co., Ltd., on how to resolve the pressure of appreciation and how to deal with it. The appreciation crisis and other issues will be discussed in depth.

Only by adjusting one's mentality can one deal with it calmly

The exchange rate issue is one of the most unfavorable factors that plague enterprises at present. From an expert's point of view, what is Professor Shi's view on exchange rate fluctuations?

Shi Ning: China's exchange rate system and monetary policy are quite special, and there are many things at the national game level. Future exchange rate changes will depend more on the actions of various governments in economic policy. The monetary policy of the United States is quantitative easing, and so is Japan. Therefore, we should not simply talk about the appreciation or depreciation of the RMB, but also observe the situation of several other economies, such as Europe and the United States, and cannot look at the problem in isolation. President Yu and President Wang, as the helm of export enterprises, what kind of personal experience do you have on the appreciation of the RMB?

Yu Xiaoliang: When we first appreciated in 2005, we were all shocked and caught off guard. At that time, the US dollar was relatively strong, and all the company's deposits and liquidity were in US dollars. As soon as the RMB appreciated, we lost several villas overnight. But since then, we've been concerned about the financial side of things, whether it's accountants or treasurers, or heads of departments. In the past, everyone was immersed in their own business. After this loss, they began to understand that business is not only done by themselves, but also affected by many external factors, and its fluctuations are normal, including many factors, such as political factors.

Wang Fei: RMB appreciation is not necessarily a bad thing, because it is also an opportunity to reshuffle the industry. For those more traditional home-based factories, this process may be painful, but it will benefit the whole industry development. I think companies should not focus on the exchange rate and always respond passively, but think of other ways, such as innovation, such as reducing costs.

Shi: Yes, if your product is cheap to produce and the profit is only 3 to 5 points, and you sell it to other countries, people say you are dumping it, which is actually quite boring. The appreciation of the renminbi forces companies to work on other areas.

Can Professor Shi predict the future exchange rate changes?

Shi: I personally feel that you should not predict the appreciation, because as an enterprise, this is not something you can control. I never give forecasts of appreciation to a few percent. But I can talk about several scenarios: the first is a sharp appreciation, which is unlikely; the other is a sharp depreciation, which is unlikely; I prefer it to fluctuate within a narrow range, and it may also There will be shocks, but not straight up. I don't think that's the main concern of businesses.

In other words, for such an uncontrollable factor as RMB appreciation, shouldn't companies be led by the nose?

Shi: From a macro policy perspective, appreciation is always better than large-scale depreciation. A modest appreciation like this, don't interpret it as too much of a bad thing. For Chinese companies, they must learn to understand and study policy-related things, instead of focusing on the exchange rate. For example, can your export products be produced around new industries? Can we use new raw materials to make our products greener, or have new concepts? We must follow the pace of the country and change our thinking.

To: The most important thing is to maintain a normal mind. We also often hear some news, saying how much the exchange rate will drop this month and how much will drop next month. You have to learn to judge this by yourself. For example, someone said that the number will drop to 6 next year, so he hurried to stock up, or made some preparations for bargaining with the customer, or even told the customer in advance that I would raise the price.

This is actually a mess. Once you are messed up, there will be many loopholes and mistakes in your decision-making. If I treat it with a normal heart, I just regard the appreciation of the RMB as an additive. I know that there is this pressure, and it constantly reminds me where I need to start to save costs.

Differentiated Foundry Competitiveness

The products of Yuzhe Wang's head office are mainly exported to Europe and the United States. Will this wave of RMB appreciation have a great impact on the company?

Wang: We mainly produce electronic consumer products, and the main market is indeed in Europe and the United States, but at present, the appreciation of the RMB does not have much impact on our company. Because we have made some market and product strategy adjustments. In terms of market, we started to explore emerging markets in 2008, including Russia, Brazil and Japan, and we are doing well so far. Although the main purpose at that time was not to deal with the appreciation of the renminbi, it still played a buffer role. In addition, we will not compete with others on price, but make some differences in product design, function, service, etc., and strive to take a route that does not cross the exchange rate.

Yu: Our company has two factories, one is for HDMI, which is high-definition multimedia interface. This year, another new factory was opened to produce nano-energy-saving lighting technology. In both respects, we are at the forefront of the market, that is, at the high-profit stage. On this basis, we have a choice, and we can slowly extend our products, instead of always worrying about survival like some export companies. Therefore, this wave of RMB appreciation has little impact on the company, and we are not too concerned about the exchange rate issue. If we worry about less money every day, then the money will really become less and less.

It seems that going the differentiated route is the answer, isn't it?

Shi: Under the general trend of RMB appreciation, the first path for enterprises to take is to specialize, that is, to differentiate and brand. This requires professional R&D capabilities and good R&D management.

Wang: Yes, for example, we mainly produce digital photo frames. This is a very common product. Many small export companies are doing it, but you can check online to see how many people are doing 3D. digital photo frame? Our digital photo frame can see the 3D effect without wearing glasses, which is unique in China. It's been almost a year since we launched this product, and its profit margin is three times that of ordinary photo frames.

Did the idea for the digital photo frame come from Avatar? Does this mean that the most important thing for differentiation is to have a strong judgment ability and to be able to identify business opportunities keenly?

Wang: At present, 3D film and television works are very popular internationally, and "Avatar" also gave us inspiration. Finding business opportunities is very important, but what is more important is how you differentiate yourself and how to make your products different from others. For example, now everyone is making tablet PCs, but our tablet PCs are different from others. Many people are imitating Apple and following Apple's route, but we are not for ordinary users, but mainly for customization. We are now cooperating with an American game company. He gives us 150,000 per year. We will block some functions of the MID itself and develop it together with this game company.

In addition to customization, we also strive to differentiate our products for ordinary users. For example, a 1.5-inch digital photo frame, the 1.5-inch photo frame that everyone buys in the market can only display photos and watch the time, but we will add some mini games in it, so that it can be used as a handheld game console in addition to displaying photos. What is your general view? What was the last business opportunity your company seized?

Yu: There will always be new bright spots in the market demand. This bright spot is a business opportunity. Whoever catches the first wave is really meaningful, because it is beneficial to the improvement of the company's popularity and the increase of profits. Enterprises can also be more calm because of this, instead of hanging on the same product all their lives.

For our company, the most recent business opportunity seized this time is nano energy-saving technology. In the past, the country strongly promoted LED, because it belongs to low energy consumption, green products. However, it has some bottlenecks that have not been broken, such as light decay, heat dissipation, protection of electrical circuits and so on. Another key issue is cost - this product saves electricity, but not money, and is expensive to repair and replace. We also made LED street light solutions at the beginning, but slowly discovered a good thing, that is, the application of nanotechnology, which is to use nanotechnology in LEDs, and then make some improvements in reflectors, electronic adapters, etc. After this improvement, the life of the product can be increased to 8 times to 10 times, the luminosity is increased by 25%, and the light efficiency is doubled.

Quality customers are the foundation of a win-win situation

Differentiation means that you spend more energy than others in R&D, manufacturing and even sales. Will this increase costs and push up product prices?

Wang: Our price is slightly higher than similar products. Eighty or ninety percent of our products are now customized by customers. The design of these products is not exactly the same as the products made by most factories, including ID design and software. This is our value.

To: We need to work hard on cost and added value to provide customers with some high value-added products. This added value does not necessarily turn it into profit, but it can be used as a means of anti-risk and a factor in attracting customers. For me, it may not bring profit, or the profit is not large, but for the customer, it must be able to bring profit, which will help maintain the stability of the customer.

Do customers really mind that your product is more expensive than someone else's? Because many export companies report that it is difficult to negotiate price increases with customers.

Yu: I will mind, but this mind depends on how you define it. Our customers are all high-quality customers, because during the financial crisis in 2008, some companies made some bad actions when their profits were not very good, for example, they used shoddy products, which led to some high-quality products. Customers churn from them to choose quality suppliers. Our company has always attached great importance to corporate image, so during the financial crisis, many companies went bankrupt, but we received a large number of high-quality customers and our profits increased. Therefore, the real high-quality customers are more concerned about product quality, not price. Of course, we are also working hard to reduce costs and pursue high cost performance. For the same product, we must strive to maintain the lowest price in the same industry.

Wang: Regarding customers, it does not mean that customers choose us, we are also choosing customers in many cases. Buyers who simply emphasize low prices are not our target customers. For example, some customers will send you a picture and ask you to make the exact same product for him. We find that there are too many identical products on the market, so we will give him some suggestions and tell him where to make some changes. , so that there will be differentiation compared with other people's products, it will not be too common, and the price can also be differentiated. Can you think that the appreciation of the renminbi has also played a role in promoting industrial transformation?

Shi: In the long run, this effect is definitely there. We have been talking about transformation for more than 20 years, but it has never been turned around. Now we need to promote this transformation. You said that China's national status is suitable for always being an exporter of such cheap products. Do you need to rethink the selection of products and market segmentation? !

Starting from the supply chain to save costs

Nowadays, many companies are taking a different path, such as using some financial instruments to avoid the risk of exchange rate fluctuations. Is this only a short-term strategy?

Shi: The most important thing about financial instruments is the concept of hedging. There are differences in academic circles on whether hedging is good or not. If he always hedges and locks in prices, once the price of raw materials goes up, he will lose money due to too much inventory. If there is no hedging, raw materials have risen, and these inventories of his have become convenient, because they were low when they were bought.

So companies should not rely too much on the hedging of financial instruments, because it is related to many factors, such as changes in the market, raw materials on which products rely, etc. If the shelf life of your raw materials is very short and you cannot hedge them, then you need to hedge; if the raw materials are durable, such as metallic ones, you need to think about the problem more comprehensively at this time. When the price of your product can be transferred to the buyer relatively well, do you still need to hedge? At this time hedging, you will eventually find that it is a loss for you.

In addition, if it is always hedging, the enterprise will easily form a psychological dependence, which is detrimental to the long-term development.

What would be a better suggestion?

Shi: In fact, companies can use better supply chain management to hedge, which can also play a role in hedging the risk of exchange rate changes.

What about supply chain hedging? The first is to manage your inventory. Chinese enterprises are very passive in managing inventory. There are many parts in the product, which are depreciated and which are increasing in value. When to purchase reasonably, and if these problems are clarified, they can be used in the supply chain. Do reasonable hedging. However, domestic enterprises generally do not pay much attention to this aspect.

The other thing is to avoid large and long orders. It used to be mass manufacturing, but now it is mass customization, which can divide customers' orders into small batches and avoid excessive quantities for each order. This is a way for buyers and sellers to avoid risks. Of course, this puts forward the requirements of lean production for manufacturing enterprises, and at the same time, it needs to be more responsive and flexible in supply chain management.

Is it difficult to control costs in the supply chain?

Yu: It depends on how you do it. There is a difference between intentional and unintentional. As long as you are intentional, the cost is actually relatively easy to save. For example, Aisen Technology, our products are all delivered directly from the original factory, because the more times the raw materials change hands, the higher the price will be, and a lot of profits will remain in the channel. We pick up the goods directly from the original factory, and this cost is 20% lower than that of others. Many people's cost savings are based on shoddy charging and making ideas on materials, which is not desirable.

8. Export in RMB in the surrounding market. In recent years, the popularity of renminbi in border areas has gradually increased. If export enterprises in border areas consciously use renminbi as the settlement currency, they can effectively avoid exchange rate risks.