Warc Blog

Pricing power, profit margins to fall in China

30 September 2010
BEIJING: Pricing power and profit margins are coming under pressure in China, according to research by Morgan Stanley.

The organisation's barometer of corporate expectations over the next six months, based on views from its analysts, stood at 64.8 points in September.

This was well above the 50-point mark indicating neutral sentiment, but slipped behind the 68.2 points posted in August.

Conditions thus appear "less favourable", albeit to a limited extent compared with markets heavily impacted by the downturn.

Larger companies, generally "better-run" and able to manage performance throughout varying demand cycles, seem the best placed.

Half of the firms assessed by Morgan Stanley have reported earnings ahead of forecast during 2010 to date, 41% met targets and 9% fell below this level.

Despite this, only 25% are likely to see their expansion continue at an equivalent pace, with 9% experiencing a decline and the remainder facing a balanced outlook.

As such, September's index of current sales growth hit 89 points, falling to 78 points regarding prospects going forward.

Pricing power is similarly pegged to weaken, as these two figures reached 67 points and 58 points respectively.

Equally, the measure of profit margins now stands at 70 points, but predictions slow to 56 points.

While a majority of enterprises are expanding their Chinese operations, as 57% had hired more people in the last six months, 45% intended to boost headcounts into early 2011.

Just 23% of analysts believed there was a labour gap in China, although consumer goods specialists were witnessing some difficulties.

"Among all sectors, the consumer discretionary sector faces the most serious shortage of skilled labor," Morgan Stanley said.

Rising wages are another feature of the landscape, as 68% of participants agreed salaries were increasing, including 11% saying this leap was "significant".

Such a development has been pronounced in the consumer goods, energy, healthcare and IT industries, which "may reflect underlying labor productivity growth".

But 43% of the panel said surging staff remuneration had not exerted a major effect on profits.

"This means that wages may only account for a small part of the corporate cost structure among our company sample, and suggests that concerns that wage rises would erode corporate profitability are overdone," said Morgan Stanley.

Elsewhere, 35% of respondents stated raising product prices had not reduced net income, perhaps because heightened levels of discretionary wealth are translating into actual purchase habits.

Consequently, Morgan Stanley anticipates the FMCG, IT and telecoms categories might all gain from these positive trends.

"A tight labor market in general and recent broad-based minimum wage increases in particular tend to benefit consumption more," it argued.

This difficult economic climate should impact on carmakers and white goods manufacturers.

"The sales of big-ticket items such as auto and home appliances appear to have entered a plateau," Morgan Stanley suggested.

"Looking ahead, their business conditions may have troughed, as their business conditions expectation index will either improve slightly or remain stable."

Data sourced from Morgan Stanley; additional content by Warc staff

 
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