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Safer Chinese products will come at a cost

Analysts expect prices in the U.S. to creep up as retailers here demand better quality in hopes of staving off recalls.

September 09, 2007|Don Lee and Abigail Goldman | Times Staff Writers

Get ready for a new Chinese export: higher prices.

For years, American consumers have enjoyed falling prices for goods made in China thanks to relentless cost cutting by retailers such as Wal-Mart and Target.

But the spate of product recalls in recent months -- Mattel announced another last week -- has exposed deep fault lines in Chinese manufacturing. Manufacturers and analysts say some of the quality breakdowns are a result of financially strapped factories substituting materials or taking other shortcuts to cover higher operating costs.

Now, retailers that had largely dismissed Chinese suppliers' complaints about the soaring cost of wages, energy and raw materials are preparing to pay manufacturers more to ensure better quality. By doing so, they hope to prevent recalls that hurt their bottom lines and reputations. But those added costs -- on a host of items that include toys and frozen fish -- mean either lower profits for retailers or higher prices for consumers.

"For American consumers, this big China sale over the last 20 years is over," said Andy Xie, former Asia economist for Morgan Stanley, who works independently in Shanghai. "China's cost is going up. They need to get used to it."

Business executives don't anticipate significantly higher prices on store shelves this holiday season, because Christmas goods have already been ordered. But over the next 12 to 18 months, they say, prices for merchandise from China are likely to creep noticeably higher.

Already there are signs: The price of imports from China in July rose 0.4% from June, the largest monthly increase since the price index was first published by the U.S. Bureau of Labor Statistics in late 2003. Prices had declined steadily in the previous three years, helping tamp down inflation in the U.S. and elsewhere.

Most economists believe that manufacturing prices will have to rise at least 10% to reflect China's current production situation, although it's unclear how much of that could be passed on to consumers. Companies that import goods from China may have to absorb some of the costs or share them with retailers.

And large retailers may be forced to absorb all of the extra costs on Chinese-made products that they commission for their own private labels.

Costco Wholesale Corp., the membership warehouse store with jumbo sizes and bulk prices, has recently stepped up inspections and monitoring of its private-label Kirkland brand as well as other goods the company imports directly.

That increased vigilance, as well as new quality controls put in place by many manufacturers that supply Costco, probably will result in modest price increases on some products being produced now for sale next spring and summer, said Costco Chief Executive James D. Sinegal.

"It probably is just a penny here and a penny there. We're not seeing big incremental cost increases, although that may come," Sinegal said. "I don't think we have a choice. A product is either safe or unsafe. If it is more costly to ensure that the product is safe and being produced properly, somebody has to pay the cost."

Ronald Boire, president of Toys R Us Inc.'s North American operation, said emergency spot testing, such as the kind retailers and manufacturers are doing in the wake of the recalls, was the most expensive kind of oversight. The kind of broad, third-party testing Toys R Us is doing on all of its private-label products can run $200 to $600 per toy, he said.

For now, those costs are likely to be split between manufacturers and retailers, Boire said, because they affect products already on store shelves. But as federal officials and the toy industry work out new safety standards and regulations, those increased controls will be figured into the cost of making future products. That means a lower cost per item for safety tests, but a cost more likely to be paid by consumers, Boire said.

"We don't believe the costs will be materially higher, although there will be some increases," he said. "We believe the consumer is willing to pay those costs because the products will be increasingly safer over time."

Wal-Mart, whose billions of dollars in purchases from China are a key part of the retailer's low-price strategy, has said it is expanding testing and oversight of toys in the wake of the recent recalls but declined to comment on price issues. Target, in an e-mail reply to questions, said it had expanded testing for its brand of toys but had not made any changes in its sourcing program.

Beyond the problems with toys, there has been a slew of recalls of other Chinese-manufactured products in recent months, including toothpaste, seafood, fans, tires and pajamas.

The Chinese government has defended the quality of the nation's exports, saying that 99% of shipments meet international standards. By value, 1% translates into about $10 billion worth of goods annually.

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