In these times of financial meltdown, China’s economy is nearly unique in that it is still expected to grow. Beijing hopes to attain 8 percent economic growth this year, underpinned by a large-scale fiscal stimulus package. Although not comparable to the US package in terms of size, it is the largest from a GDP percentage standpoint.
As China demonstrates its determination to sustain high growth via concerted efforts spanning all levels of the government, its stock markets in Shanghai and Shenzhen and the Taipei market have rallied in expectation of China’s potential. The three stock exchanges have been the best performers so far this year, as other major markets fell to new lows. Industry sources in Asia have also been reporting news of a so-called “rush order” effect from China.
Taiwan and South Korea are the first outsiders to benefit from China’s stimulus, as firms from both own many mid and downstream electronics manufacturers, in contrast to the upstream technical and raw material suppliers owned by companies from other developed nations.
Considering the special situation between Taiwan and China, and the fact that most Taiwanese manufacturers have relocated production to China, Taiwanese firms will benefit even more than their South Korean competitors. In this context, Taiwan is seen to be in a unique position, where it can perhaps provide first-hand insight as to how the rest of the world can benefit from a recovery possibly driven by China. Accordingly, using Taiwanese firms as a case study is a feasible approach in delineating the contribution China is currently making.
At the moment, the “rush order effect” is the hottest topic in the Taiwanese market. Although the volume is small, many such orders have recently been placed with Taiwan’s electronic manufacturing industry (IC, PC boards, panels, etc). As economists see it, such demand is simply a replenishment of buffer stock inventory that emerged after components and other upstream material prices fell to rock bottom levels, which removed the prohibitive speculative factor that was against inventory buildup.
In other words, the demand was mostly not from the end market, but simply making up for the overreaction of the previous sharp inventory cuts throughout the supply chain. From the market standpoint — which we were all taught to respect in the first lesson of economics — apparently the free open invisible hand considers the phenomenon of rush orders the elixir to this recession and what is leading the Taiwanese economy on a path of recovery.
Examining the rush order sources from an industry standpoint, I find several contributing factors. First, as mentioned earlier, is buffer inventory replenishment demand, which comes from around the world, as the buffer inventory scheme is shared globally.
Second is the “appliance subsidy plan” in promoting home electronics in rural China. It is still too early to reach firm conclusions about this but it does create demand within the distribution channels, as actual products must be displayed in every retail location over the vast market of rural China.
Third, though private consumption is slowing down, China as a whole is still growing fast compared to the rest of the world. With the emergence of white brand notebooks and handsets, Taiwan OEM and IC producers, among component makers, are the first choice for sourcing.
Fourth, the consumer electronic sector continues to introduce new products in the intensifying battle for market share, creating demand for components despite the poor sales outlook.
However, I am skeptical about all four factors being strong driving forces to recovery.
First, the inventory demand for buffer stock is rather small and unsustainable compared to demands driven by the needs of daily transactions (that is, in the case for retailers, when there is demand for final goods), as demand will drop when the supply chain is restocked to higher levels.
Second, despite generous subsidies, non-agricultural income that used to contribute 60 percent of a rural family’s cash earnings has fallen due to job losses among migrant workers. This has affected the purchasing power of rural Chinese. Moreover, the program is mostly for China’s local brands (such as Haier), limiting the role of Taiwanese suppliers. To date the most popular product sold under the plan are refrigerators, not really the type of product the electronics sector had been placing high hopes on.
Third, notebooks and handsets are still on Main Street, but how much can China actually contribute in retail sales regarding these non-essential goods is still in question.
Fourth, brand names are more or less supported by the belief “supply will create its demand” as well as “if I don’t, my opponents will.” But whether the demand for components will be sustained depends on whether consumption of end products will actually emerge.
In conclusion, the four factors are either temporary or lacking concrete demand. With global demand still sluggish, even with strong orders from China, Taiwanese manufacturers can accommodate most of the demand via their production capacity located in China. The value is kept in Taiwanese firms, but it is not factored in Taiwan’s GDP. Rush orders do help Taiwan and the rest of the world, but their contribution to the GDP of other economies is still small.
Before buffer reloading ends, before China finds out its promotion plan has only limited effects, before merchandisers realize demand is hard to create, global demand still needs to pick up. The key to global recovery depends on a global demand rebound. China is a strong player but relying on it to bring the world out of the economic doldrums is naive.
Liang Kuo-yuan is the president of the Polaris Research Institute in Taipei and adjunct professor of economics at National Taiwan University.
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