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Heading for a fall

Now, the header of this article is intentionally ambiguous. We are entering the autumn of 2015, and the situation in China keeps progressing downward, unfortunately.Gregers-Lindvig-300

I can pat myself a bit on the back, confirming my assumption in the last article; prices have not increased over the last two months, and there are still no signs that they will. But that is about the only positive thing I can conclude in this article. Some factories have sent out increased price lists in desperation, with the only result that they are ignored or replaced by another, hungrier one by the global buyers.

I think anyone will agree that fighting the price wars is harder than ever. We have seen trading companies now sending out prices a few per cent below actual cost, hoping to be able to squeeze the cost by waving the order at the factory, and if they fail, they will simply tell the client that capacity is full or feed them some other excuses as to why the order can’t get through. Some factories are indeed sending out incredibly low pricing, but only to grab market shares for their own brand, and they hope to turn profitable within months upon market entry.

At the same time, two other developments are worth noting: the Chinese government has decreased support for the so-called “polluting industries,” making it harder to obtain or extend short-term bank financing for the tyre factories; and several years of decreasing profits and increased investments have dried up the accounts almost everywhere. Solidity is key, and when some factories are close to having no equity at all, being fully dependant on external investors and banks, they are extremely sensitive to loss of profits. The situation is complicated, because some factories are very solid, but still lack cash flow as they have invested too aggressively and can’t extend their short-term bank loans; while others brag about having all the money they could ever need, just ignoring the fact that it’s all borrowed.

By Gregers Lindvig

Full text in October/November issue

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