Price, flexibility will be key issues for Chinese manufacturers in overseas markets

The game of "chicken" that Christmas has become has developed another layer this year.

In recent years, there has been something of a standoff between retailers and consumers over when people begin buying for Christmas and at what price. Retailers lacking sales are tempted into discounting, and consumers being careful with money and sensing retailers' worries, delay purchases in the hope of later bargains. Who blinks first?

For retailers though, there is now an additional problem, exacerbated this year by the slowdown in consumer spending and the credit crunch and austerity-driven recession in Western Europe in particular. If they do not have a good sense of how much they will sell and in what timescales, then how can they know what orders to place and what re-orders to make in what timescales?

When demand is so soft and everyone wants a bargain and is prepared to wait for it, then retailers are engaged in their own game of "chicken" with manufacturers. What should we order, for delivery when, and in what volumes at what times? When those manufacturers are based on the other side of the world, with many of them in China, the problems become magnified.

Now to some extent, these are the standard problems that we find in all supply chains where demand is inherently unpredictable over time, space and product. Retailers and manufacturers have to place bets and best estimates of what might happen.

This year, demand in Western Europe is really poor. The news seems to get ever worse and there are real concerns about the survival of some retailers if Christmas is not successful. Successful in this year is the ability to sell the stock they have ordered at as close to full price as they can and not to have unsold stock over. How are they managing that?

Many retailers have cut back what they have ordered as part of the general slowdown but also in recognition of the problems of a few years ago with over-stocks and the realization that consumer demand is not recovering (indeed it is getting worse). So the orders from China are down due both to the consumer demand problems and the need to control costs and risks. All retailers have to become better at managing their supply system, and this can be at the expense of some manufacturers.

Additionally, many retailers have renegotiated their contracts with their suppliers in China so as to call-off products in a more orderly fashion and to have the ability to reduce the orders and the timings on an on-going basis. Some have gone so far as to see if they can source replacement product from nearer market locations, so that if demand does pick up they can get the products into stores more quickly than having it shipped from China.

All of this is not good news for the Chinese manufacturing sector. The cold that Western consumers have caught and the recessionary position Europe is in, is spreading into the Asian and Chinese market and knock on effects are being felt. In the medium term ongoing austerity measures in European markets will continue to force reconsideration of order and supply positions. Price and flexibility will be key issues for those manufacturers seeking to continue to supply the nervous and demanding (in service terms) Western markets.

The author is professor of retail studies at the Institute for Retail Studies, University of Stirling in Scotland.