Could China’s property crisis directly impact your supply chain?

One of China’s biggest property developers is heading for collapse with debt figures that would make even the most experienced head spin. Believe it or not, this could significantly affect the already beleaguered supply chain that delivers your products here in the UK. An industry insider explains all…

It would not be unreasonable for a UK kitchen or bathroom retail business to wonder what the impending implosion of several giant Chinese property developers has to do with them.

It is, after all, 5,000 miles away and seemingly very much a local issue.

But there’s no question the ripples of the impact will stretch across the globe thanks to the truly staggering size of the numbers involved. Evergrande, the largest and most indebted property developer affected, has debts of £220 billion – yes, billion.

Combined, China’s top five property developers owe nearly one trillion pounds…

Might be best just to pause and let that sink in for a moment as the amounts involved in this crisis are bigger than the debts that brought down Lehman Brothers and triggered the 2008 global financial crash.

The vast bulk of this debt is owed to three main sources – investment bond holders, both domestic Chinese and international investors; new home purchasers, who pay in full for their new homes in advance of construction; and, crucially, the property developers’ supply chains…

And it is the supply chain debts owed to appliance and kitchen suppliers that make this impending debt default very relevant for our industry and therefore your business.

As The South China Morning Post reported recently: “Evergrande had about US$104bn of trade payables on June 30, according to its accounts, of which almost 90% are due within 12 months. They can range from commissions on pre-sold properties to materials to outfit its flats, such as Miele ovens, Warendorf kitchen cabinets and Siemens fridge-freezers.”

So, the obvious question is where’s the risk to UK kitchen and bathroom retailers like you?

Over the past two decades, project business from Hong Kong and mainland China has grown to become a crucial component of many European appliance and kitchen furniture manufacturers’ production capacity and turnover. 

All major international brands will have a direct or indirect exposure to this debt, to a greater or lesser degree. Even for manufacturers who are insulated from the immediate loss, it is likely that their local agents and distributors are not. The suppliers that your business relies upon would be weakened by the uncomfortable reduction in future volume and income that any loss of those regional business partners would represent.

On a secondary level, the Chinese factories that produce specialist components and many ‘own brand’ appliances are underwritten by their domestic demand, and some of these may not survive. 

Writing in The Telegraph, Tianchen Xu, from the Economist Intelligence Unit in China, said: “Evergrande is also only the tip of the iceberg when it comes to potential property sector defaults.”

Intervention by Beijing is expected. The Chinese government will not allow the company’s default to spread into the banking system and there’s no question they will want to avoid contagion into the residential and credit markets.

“The authorities are likely to ultimately act as a broker for Evergrande and direct several large state-owned enterprises to restructure the business,” said Xu. “However, the debt restructuring will leave out the smaller firms that make up Evergrande’s supply chain, many of whom Evergrande used for financing. These smaller firms will likely collapse.”

What could this all mean?

KBB supply businesses who typically rely on sales to China for 15% or more of their global sales, could take an unhealthy hit. The reduction of opportunity and profitability in a key market will see a scramble for market share in other stable, global markets. The competition for what remains should become intense.

The most robust Chinese-owned KBB businesses are likely to come out swinging and double-down on their diversification into export markets. The second-tier businesses will adjust their investment cycles and priorities as Evergrande washes through the supply chain, placing even more pressure on the heritage brands in their ownership to regain their viability and reinvigorate their performance in their traditional markets. 

To add an extra layer of complexity, there is noise around potential state controls to actively prevent property speculation being used for wealth generation in China. If accurate, this is likely to lower specification levels and shrink the opportunity for premium global brands in future Chinese new-build projects. The net result being that global, premium brands will find themselves seeking new market opportunities or defending their remaining markets furiously.

Which, believe it or not, could actually be good news for UK KBB retailers. A concerted drive for market share by manufacturers should result in better service levels, better stock availability and attractive partner pricing.

Alternatively, it could embolden manufacturers to push on with ‘direct-to-consumer’ initiatives.

After Evergrande, simple economics says that every brand cannot win in this situation. Significant global volume will be disrupted and possibly changed forever. Inevitability, there will be casualties, as the aftershocks of this seismic event ripple through the global KBB supply chains.

On the upside, it may rebalance the retailer/supplier relationships in mature markets. As retail businesses, you will be courted. It will be your choice to support to the manufacturers and brands that demonstrate they have your very best interests at heart.

Either way, there’s no doubt that this crisis so far away is important for retailers and distributors here in the UK. Disruption is not only coming, it is also hard to predict, as no one can say for certain how each piece of the supply chain will flex, respond or break. Being informed allows businesses to make smart decisions.

For more background, see https://www.bbc.co.uk/news/business-58798625

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