January 21, 2018

Profit Protection

 


Structural Cost Inflation
Many multinationals are more profitable in China than elsewhere in the world. However, this may be changing due to both increased competition putting pressure on the top-line, and cost inflation at a rate over and above productivity gains. Cost inflation is already gaining momentum in China, and this is structural rather than cyclical. The underlying drivers include (a) increasing labor, material and utility costs (b) taxation, social security and environmental compliance, and (c) land price appreciation, among others. Cost inflation is natural given the upgrading of China's economy, and this will not be a short-term phenomenon.

Need For Profit Protection
Where our clients used to focus only on gaining market share and growing top-line revenue, most are now starting to consider how their changing cost structures will impact their bottom-lines over the long-term. We work with them to understand their cost curves, and project their cost structures 5 years out. We then assess the implications for their current strategies, and advise on whether and how to respond. Given the difficulty of passing cost increases onto customers, many need to implement alternative strategies.

Outcome Of Our Support
We do not look at short-term cost reduction and efficiency gain programs, but rather long-term strategic initiatives or investment decisions. These may include, for example, global production structure (e.g. shift more production to China), a modified business model (e.g. increased outsourcing or local sourcing), plant relocation (e.g. to an interior province) or manufacturing model (e.g. increased automation). By supporting clients both grow their top-lines and protect their bottom-lines, they are better positioned to perform over the long-term.

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