HK manufacturers fear slump in profit margins

PUBLISHED : Sunday, 05 December, 1993, 12:00am
UPDATED : Sunday, 05 December, 1993, 12:00am

HONG Kong's manufacturers say they still face a tough time despite buyers in their second largest market, the United States, having and spending more money.

Edmund Young, vice-chairman of Hong Kong Toys Council, said: ''Consumer spending in the US has increased, probably because retailers offer a big discount.

''But our customers always transfer these price reductions on to us and it has shrunk our profit margins. It is a difficult business.'' Nancy Kang at Salomon Brothers said: ''Shoppers are still cautious. Next year factory orders to Hong Kong will increase, but only marginally.'' .

Last Thursday, the US Commerce Department announced that personal income for October rose 0.6 per cent to US$5.47 trillion (about HK$42.3 trillion) from September, after a 0.2 per cent gain in August. It is the third increase in a row.

Consumer spending advanced for the seventh consecutive month in October, rising 0.8 per cent to US$4.47 trillion. In September, it was up 0.3 per cent.

Spending on durable goods was strongest, up 3.1 per cent. It rose 0.8 per cent for non-durable goods and 0.4 per cent for services.

The number of Americans making first-time unemployment claims fell by 17,000 last week, which the US Government said showed a steadily improving job market.

Because spending outpaced income gains during September and October, the US's savings rate - savings as a percentage of income - fell in both months. It was 4.1 per cent in August, slipped to 3.9 per cent in September and hit 3.7 per cent in October.

Economists warned that consumers were borrowing and dipping into savings for a portion of their spending power, and probably would need to tighten their belts after the holidays.

Stuart Hoffman, economist of PNC Bank in the US, said: ''Consumers are in better spirits and that will keep the spending [up] through the important holiday season. But afterwards, I think there will be a bit of a breather.

''The economy won't go into neutral but it will throttle back a bit.'' A sales growth index conducted by Salomon Brothers shows it was at 2.9 per cent last month, compared with 3.8 per cent in the same period last year.

Ms Kang said: ''Customers will not spend too much until the end of the Christmas holidays.

''For Hong Kong manufacturers, 1994's factory orders will be better because of the recovery of the global economy. But the actual improvement will be marginal.'' The performance of the US Christmas sales, accounting for 25 per cent of the whole-year retail volume, is an indicator of business performance for the following year.

Henry Tang Ying-yen, managing director of Peninsula Knitters, said after returning from New York last week: ''Although the Government statistics show that the economy and the retail industry [in the US] are recovering, most businessmen are very cautious.'' The sluggish US retail market has prompted most retailers to launch aggressive strategies to attract business; most common are discounts.

However, retailers will, after offering discounts, demand manufacturers to cut their prices, placing pressure on Hong Kong producers.

Mr Young said: ''The production costs in Hong Kong and Guangdong are climbing so quickly, but our prices will never keep up with the inflation rate.

''If you don't accept the price cut, many other competitors will do, and you will then lose the business.'' Over the past few years, the retail industry in the US has gone through a structural change, in which many factory outlets, offering unsold stocks at discounts, have been set up.