Wages and currency gains eat into profit at Vtech

PUBLISHED : Thursday, 17 November, 2011, 12:00am
UPDATED : Thursday, 17 November, 2011, 12:00am


Vtech Holdings said rising wages and currency appreciation on the mainland were to blame for declining profit in the six months to the end of September.

Vtech, which bills itself as the world's largest cordless phone maker and sells its products mainly to the US and Europe, said net profit for the interim period fell 5.4 per to US$88.5 million, down from US$93.6 million a year earlier.

This was despite an inverse 5.4 per cent increase in revenue, which rose to US$858.1 million between April and September.

'Higher raw materials prices were compounded by further wage increases in China and renminbi appreciation. These factors pressured gross margin and resulted in lower profit,' management said yesterday in a stock exchange announcement.

Vtech's problems are representative of the challenges confronting foreign firms exporting from the mainland, where rapid wage inflation and a slowly but steadily rising currency have been the norm in recent years.

The average monthly income of mainland migrant workers rose to 1,991 yuan (HK$2,437) in the third quarter, up 20 per cent from 1,659 yuan during the same period a year ago, according to National Bureau of Statistics figures accessed from data provider CEIC.

At the same time, the yuan rose 3.04 per cent against the US dollar in the year to the end of September, and 5.59 per cent against the euro.

That makes Vtech's cordless telephones more expensive for its biggest customers. The company's sales to North America rose 2.3 per cent in the six months to September from a year earlier, to US$431.2 million, accounting for 50 per cent of total revenue.

However, profit from North American sales fell 10.8 per cent to US$42.1 million from a year earlier.

Sales to Europe rose 12.7 per cent to US$336.5 million, while profit from shipments to the region slipped 2 per cent to US$39.9 million. The company's shares rose 0.2 per cent before yesterday's results announcement to close at HK$69.15 apiece. The stock is down 24.4 per cent in the year to date.