BEIJING, Oct. 23 /Xinhua-PRNewswire/ -- CCID Consulting, China's leading research, consulting and IT outsourcing service provider, and the first Chinese consulting firm listed in Hong Kong (Hong Kong Stock Exchange: HK08235), releases its article on how PPI is squeezing IT enterprises profit ability.
China's PPI increased by 10.1% compared to August 2007, according to the report released by the National Bureau of Statistics on September 10, which is the highest level in the past 12 years. This increase raises one very important question: Does the rising PPI squeeze IT enterprises' profit ability as the average price of most IT products such as LCD displays, PCs, and mobile phones keeps decreasing?
Does IT Enterprises' Profit Ability Drop?
Interim reports of listed IT enterprises show that the profit ability of most IT enterprises has dropped in the last half year.
Gross profit rate is one of the key indexes to evaluate enterprise profit ability, especially when taking PPI into account. That is, if the gross profit rate of a company increases facing rising PPI, it means that this company can overcome cost pressures and improve pricing accordingly. Otherwise, enterprises can only accept increasing costs, meaning profits will be squeezed.
On August 22, the interim report of ZTE (000063) shows that the operating income of ZTE reached 19.729 billion Yuan in 2008 H1, up 29.5% over 2007 H1. The integrated gross profit rate reached 33.6%, decreasing by 2.9%, among which the gross profit rate of wireless equipment reached 35.2%, decreasing 12.1% due to the decreasing gross profit rate of CDMA and GSM products.
On September 1, BYD Electronic Company Limited's interim report showed that sales income reached 3.638 billion in 2008 H1, up 96% over 2007 H1. However, net profit of BYD only reached 0.43 billion Yuan, down 4% over 2007 H1. Product gross profit rate also decreases from 34% in 2007 H1 to 19% in 2008 H1.
Obviously, ZTE and BYD are IT enterprises with strong competence abilities. Decreasing gross profit rates show that profit ability of the whole industry is currently in decline.
Internal Mechanism of Decreasing Gross Profit Rate Due to Rising PPI
There is no inevitable relationship between PPI and enterprise profit ability, or even that rising PPI may result in improving profit ability. However, taking the reason why PPI increases and the transmission mechanism of PPI, we can say that rising PPI will definitely squeeze IT enterprises' profit ability, or even the profit ability of China's manufacturing industry as a whole.
History shows that the reason why PPI increases lies in the overall issues of supply and demand resulting from an overzealous expansion rate of total demand (for example, remember 1988-1989 and 1993-1994?), or structural breaches between supply and demand (for example, 2004). However, the basic reason of rising PPI in 2008 H1 lies in the imbalance between resource supply and demand.
Moving along with the rapid advance of China's industrialization, urbanization and rapid growth of international trade, economic development sets higher requirements to resource supply, which not only drives the rapid expansion of resource products production, but also increases the import of resource products. Increasing demand leads to rising prices of resource products, and the price of oil products and electricity will also inevitably increase.
Supply and demand issues surrounding resource products bring out cost-driving price increases due to PPI transmission mechanism. Resource products are the starting point of the product manufacturing chain. Rising resource prices will ripple throughout the whole industry. Enterprises have to accept the expensive resources in order to survive. In August, the growth rate of the average price of a raw material such as fuel/power exceeded PPI by 5.2%.
Whether an enterprise can pass costs on to end consumers decides its profit ability. The transmission from industrial product price to end consumer price has the following two scenarios under different conditions. First, rising industrial product price due to increasing costs will pass to end consumers in a seller market. Second, rising industrial product price fails to pass to end consumers due to supply over demand in a buyer market, where enterprises have to squeeze on profit. Hence, the price of middle and downstream products is stable, or even on the decline, and enterprises' profit decreases. In August, CPI appeared to fallback to 4.9% while PPI kept increasing, which leads to cost pressure due to rising industrial product prices failing to pass to end consumers.
In China, the IT market demands tend to be stable and a balance between supply and demand has been established. Mobile phones and other terminal product markets are getting more competitive. The slowing development of electronic exports also intensifies competition. As a result, most IT enterprises fail to deliver cost pressure to end users and profit abilities are squeezed.
About CCID Consulting
CCID Consulting Co., Ltd. (hereinafter known as CCID Consulting), the first Chinese consulting firm listed in the Growth Enterprise Market of the Stock Exchange (GEM) of Hong Kong (stock code: 8235.HK), is directly affiliated with China Center for Information Industry Development (hereinafter known as CCID Group). Headquartered in Beijing, CCID Consulting has so far set up branch offices in Shanghai, Guangzhou, Shenzhen, Wuhan and Chengdu, with over 300 professional consultants after many years of development. The company's business scope has covered over 200 large and medium-sized cities in China.
Based on major areas of competitiveness: industrial resources, information technology and data channels, CCID Consulting provides customers with public policy establishment, industry competitiveness upgrading, development strategy and planning, marketing strategy and research, HR management, IT programming and management. CCID Consulting's customers range from industrial users in electronics, telecommunications, energy, finance, automobile, to government departments at all levels and diversified industrial parks. CCID Consulting commits itself to becoming the No. 1 advisor for enterprise management, the No. 1 consultancy for government decisions and the No. 1 brand for informatization consulting.
For more information, please contact:
Cynthia Liu
Coordinating Manager
CCID Consulting Co., Ltd.
Tel: +86-10-8855-9080
Email: liuyan@ccidconsulting.com
