Power cuts raise production costs, extend lead times

Posted: July 19, 2011

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China supplier survey: Power shortage

Electricity shortages in China's export-oriented eastern provinces are adding to expenses as suppliers struggle to meet production schedules.

In a survey conducted by Global Sources, close to 70 percent of suppliers facing power shortages said the ongoing cuts have raised their manufacturing expenses by up to 10 percent. A further 23 percent have seen costs increase 11 to 20 percent. Only 7 percent said there has been no impact on their costs.

Purchasing and running generators is one of the primary direct expenses, with 50 percent of companies having bought one.

Turning machinery off and on many times in a day also increases costs. Equipment needs to warm up, which uses more electricity and takes a long time.

Jessica Meng, Manager of International Department, Kasda Digital Technology Co. Ltd said workers' overtime pay is an additional expense. "Production has to be suspended for short durations as power is cut for a few of hours on weekdays. Workers then have to work weekends and need to be paid for overtime."

When asked how the power outages were affecting their export business, more than 70 percent of the companies facing cuts said they have extended delivery lead times. Twenty-nine percent have had to raise export prices.

In an effort to keep production schedules on track, close to 45 percent of makers are adjusting processes. About 25 percent are subcontracting parts of the manufacturing process, while an almost equal number are increasing work shifts per day.

The situation will also adversely affect export revenue. More than 85 percent of suppliers expect their sales to decline because of lost, delayed or cancelled orders due to the power cuts. The drop will be up to 10 percent for 62 percent of interviewees, and between 11 percent and 20 percent for 20 percent of companies.

Some suppliers have reduced MOQ, while others are focusing on small volume or short-term orders. Using more efficient machinery and investing in solar energy are not high priorities.

More cuts in Zhejiang

A little over half of the 303 companies surveyed said they are facing regular power outages. Fifty-eight percent of these companies are experiencing less than 21 hours of cuts every week. Onethird said they have no power for 22 to 56 hours per week. Only 2 percent have more than 72 hours of weekly cuts.

The situation appears to be worst in Zhejiang province. While half of all Guangdong province suppliers interviewed said they have outages, almost 80 percent of Zhejiang companies surveyed have a power problem. In Jiangsu province, twothirds of makers said they are not facing shortages.

This survey was mostly conducted in the three China export centers of Guangdong, Zhejiang and Fujian, with additional companies from Jiangsu and other provinces. A total of 303 suppliers were interviewed from various industries, including solar & energy saving products, security products, electronics, computer products, auto parts & accessories, home products, garments and textiles, and fashion accessories.

Most interviewed suppliers were midsize companies with annual sales of less than $5 million. While 13 percent had revenue of $1 million or less, 44 percent of companies registered turnover of between $1 million and $5 million. Five percent of respondents were extremely large companies with yearly sales of more than $50 million.

Please contact the editor if you have any questions about the survey or would like additional information.

IMPACT ON COSTS

Surveyed suppliers said their production costs will increase as they take measures to meet production deadlines. For the majority, expenses will rise by up to 20 percent. Only a handful of companies said costs will swell more than 20 percent.

IMPACT ON EXPORT BUSINESS

Companies are extending lead times and raising export prices as they cope with power rationing. Buyers should place their orders earlier than they normally do and prepare for delays.

IMPACT ON EXPORT REVENUE

Orders have been dropped or extended due to the lack of electricity, and this is affecting export sales negatively. Some suppliers are not accepting large volume orders while others are refusing long-term contracts.

SUPPLIERS BY LOCATION

Close to 80 percent of survey respondents are based in the traditional manufacturing hubs in the coastal provinces of Guangdong, Zhejiang and Fujian.

TOP 10 EXPORT INDUSTRIES

The survey covered suppliers engaged in China's mature export industries such as electronics and garments, but also makers in nascent sectors, including solar and optoelectronics.

EXPORT SALES

Close to 60 percent of survey respondents have annual exports sales of up to $5 million. Only 5 percent earn more than $50 million yearly.