The lighting export fundamentals remain strong. However, due to the pandemic, the liquidity under the easing monetary policies worldwide is excessive, and the recovery of the end market is severely impacted, resulting in the inflation in upstream costs and deflation in downstream markets, leading to the phenomenon of “orders without profits” of the majority of exporters in 2021 despite the boom in export data.
The problems faced by lighting exports in 2021 include: soaring material costs, chip shortages, sharp increase in freight costs, exchange rate fluctuations, energy restrictions, domestic epidemic resurgences, etc., the cause of which lies in the impact of COVID-19 on the global supply chain, featuring a strong outbreak momentum, wide range, long duration, difficult prevention and control, and deep impact.
1. Materials and chips
The price fluctuations of upstream raw materials, which are originally a cyclical event driven by commodities, are amplified by the sudden outbreak of the pandemic, and the expected production rhythm and decision-making logic are completely disrupted, resulting in a phased and structural imbalance between supply and demand since 2020Q4. As a result, the prices of almost all products in the manufacturing supply chain such as IC chips, MCUs, MOS tubes, rectifier bridges, aluminum substrates, PCBs, passive components, plastic parts, and paper products have risen sharply, accompanied by varying degrees of shortages of goods.
The reasons for this round of rising commodity prices and the global chip shortage are complicated, which lie in the combined factors such as inflation, supply disorder, hoarding, strain on capacity, demand subject to a fall-rise pattern, and anticipation anxiety transmission. With commodity prices approaching a turning point, supply chain restructuring, supply-side capacity release, demand-side growth narrowing and market expectations returning to rationality, the current rising prices of raw materials and the shortage of chips have been alleviated to some extent as we have predicted in the report on the export of 2021H1.
Since 2020Q4, affected by the pandemic, the global manufacturing demand has experienced a fall-rise pattern. As the accumulation of goods combines with the port efficiency reduction, the unavailable shipping space, the shortage of containers, and the sharp rise in prices in the international shipping industry have been common.
The direct impact of sharp increases in ocean freight on exports mainly lies in delayed delivery. Most lighting manufacturers offer FOB prices, and do not need to consider the direct impact of increases in ocean freight. They even list the ocean freight directly on some orders to avoid the uncontrollable factor of ocean shipping. The indirect impacts of shipping disruptions on exports include: first of all, the sharp increases in ocean freight increase the purchasing costs of overseas customers, who are less willing than before to purchase and then reduce their orders; besides, it also forces overseas customers to ask exporters to reduce prices, thereby narrowing profits.
The chaotic internal shipping system and the shortage of containers lead to difficulties in booking and slow delivery for overseas customers, high probability of light goods, extended delivery and collection period, affecting the speed of capital turnover and increasing the liquidity risk of exporters; in addition, the overstock of products to be exported in domestic manufacturers’ warehouses affect their overall operational turnover efficiency. However, delayed delivery is the main reason.
3. Exchange rate
Last updated on February 24
The exchange rate of the CNY against the USD once appreciated from a high peak of 7.2 in 2020 to 6.3. The sharp appreciation of the CNY against the USD was also the main source of profit loss for exporters in 2020. The situation was relatively better in 2021; however, the exchange rate fluctuations in the future will always be a major variable affecting lighting exports.
In 2021Q4, the National Development and Reform Commission issued the Plan for Improving theControl of Energy Intensity and Energy Consumption, pointing out that those energy-intensive and high-emission projects should be firmly curbed and the results of the control of energy intensity and energy consumption will be taken as an important basis for the assessment of provincial people’s governments. Immediately afterwards, large-scale power cuts began to sweep through the manufacturing industry across the country. This round of restrictions on industrial power consumption featured wide ranges, strong attacks, and vigorous implementation.
In particular, provinces with huge energy consumption such as Jiangsu, Zhejiang, Fujian, and Guangdong, implemented varying degrees of power cuts and production suspension measures for the enterprises under their jurisdictions, thereby significantly affecting the supply chain cohesion, logistics efficiency, and capacity delivery of many lighting enterprises.
The main reasons for this round of nationwide power cuts are:
1. Lack of coal and electricity essentially.
Over the years, the domestic energy transformation has shifted from thermal power to wind power, hydropower, photoelectricity, and other clean energy. However, new energy is still in the initial stage of development, while the expansion of thermal power is limited; the prosperous manufacturing has increased power consumption demands. Combined with sharp increases in coal prices, high coal washing costs, and the restricted rise of the terminal electric bill due to its relation with national economy and people’s livelihood, which belongs to “market-based coal and planned electricity”, the power supply enterprises operate at a loss, ultimately leading to the shortage of thermal power capacity.
2. Some localities’ surprise completion of the dual-controls over energy intensity and energy consumption.
The so-called dual controls over energy intensity and energy consumption means high energy utilization and strict control of total consumption, which can better ensure national energy security. However, some local managers failed to plan ahead, but rushed to complete the annual carbon emission tasks to meet the national rigid index, thereby carrying out simple and rude one-size-fits-all power cuts to local industrial production sectors.
3. Reduction of low-end and excess capacity.
Under the pandemic, the global manufacturing demand is concentrated in China, which is the leader in resumption of work and production. However, in the context of global monetary easing, factors such as the sharp increases in raw materials in the upstream, the increases in ocean freight, and the exchange rate fluctuations have caused manufacturing enterprises to “have orders but no profits”. This round of power cuts is also a means to actively reduce low-end and excess capacity, urging the high-quality development of relevant sectors.
The lighting industry has entered the post-LED era. As the industry dividend brought by LED technological innovation has been close to the ceiling, the growth rate of the entire industry is narrowing year by year. High-quality development led by intelligent, healthy, green and low-carbon lighting systems will become the only way for the development of the industry.
On the one hand, it is necessary to improve the industrial concentration since the pricing power of products is weak due to low concentration and integration of the lighting industry, and fierce competition among domestic enterprises. On the other hand, in the face of the high-growth order volume brought by the transfer and substitution effect under the pandemic, it is necessary to stay awake, expand cautiously, actively reduce low-end production capacity, optimize product structure, improve the added value of products, and then enhance enterprises’ own international competitiveness.
5. Labor and land
Rigid rise in labor and land costs and structural shortages are prominent, especially in developed lighting manufacturing areas along the southeast coast of China, where recruitment is difficult and land is expensive.
According to China’s seventh National Census, the working-age population decreases by 30 million compared with ten years ago. Compared with going to factories to be engaged in the manufacturing industry, the new generation of laborer force prefers the fast-rising express delivery, takeaway and other service industries in recent years, which is also a common problem faced by China’s manufacturing industry. For this, many lighting enterprises have adopted a “dual-center model”, i.e., headquarters, R&D, sales, and other business centers continue to remain in the southeast coast, while manufacturing centers are moving to central and western regions with lower costs.
6. The pandemic
As a “top student” in global pandemic response, China, which adheres to the “dynamic zero-case” policy, still faced the main challenge of “constant vigilance against imported cases and domestic resurgences” in 2021. However, there were still local resurgences from time to time. Lighting industrial clusters such as Yangzhou, Xiamen, Shaoxing, Hangzhou, Shenzhen, Dongguan, and Zhongshan suffered from the pandemic one after another in 2021, and the physical lockdown policies taken by them in response to the pandemic also affected the production capacity and logistics of local lighting enterprises to different degrees.
In short, if exporters mainly lost their profits due to exchange rates in 2020, their profits in 2021 were mostly squeezed by upstream interlaced costs. Meanwhile, they also had to deal with the impact of power cuts and the resurgences of the pandemic on production capacity, which is the poignancy behind the boom in manufacturing data.
In 2022, controlling the pandemic still poses a difficult challenge; the external environment is increasingly complicated and uncertain, and the global demand recovery slows down. China’s economic development also faces the triple pressure of demand contraction, supply shocks, and weakening expectations, and the export of China’s lighting industry is no exception.
1. Demand contraction
1. External demand suffers from downward pressure
The pandemic has bit both the world economy and the global supply chain, resulting in a decline in market growth. In 2022, the global monetary policy that has been easing for two years is likely to come to an end and enter a new round of tightening cycle. The probability of a financial crisis will greatly increase, and external demand will still suffer from great downward pressure brought by the global economic downturn.
2. High growth in demand for products related to COVID-19 response and stay-at-home economy is difficult to maintain in the long term
Compared with that in 2020, the export of COVID-19 response related products such as lamps used in scientific research, medical lamps and UV lamps, as well as products such as horticulture lamps and filament lamps related to the stay-at-home economy, had declined in 2021, with a weakened boost effect on the overall export. The export of related products is closely related to the spread of overseas pandemic, and it is expected that the demand for the pandemic related products from various countries will further weaken in 2022.
3. Excessive inventory will inhibit new orders
In 2021, overseas customers placed orders in advance and in excess to seize the production capacity and materials of Chinese suppliers based on their prediction of future trends, which, coupled with the low efficiency of logistics turnover, resulted in high product inventories. The cycle to reduce excess stockpiles will affect their willingness to place new orders in 2022.
4. The sustainability of transfer and substitution effect is not strong
In the future, as other industrial countries cannot control the pandemic and then choose to coexist with it, they will gradually resume work and production, and their relevant supply capacities will gradually recover, thus the transfer and substitution effect of China’s exports to other countries will inevitably weaken and its export market share will return to the level in the normal period, which in turn weakens the support for overall export growth.
2. Supply shocks
On the supply side, the lighting manufacturing industry has long faced the common problems of China’s manufacturing industry, i.e., the rigid rise in the costs of materials, logistics, labor, land, energy, etc. Excessive production costs combined with structural overcapacity and homogeneous low-price competition also increase the survival pressure of lighting enterprises, which also need to deal with the difficulties and challenges brought by the pressure of dual controls over energy intensity and energy consumption, the sharp fluctuations in exchange rates, and the continuous resurgences of the pandemic in China.
In addition, in the context of the continuous escalation of the Sino-US trade friction and the De-Sinicization in global industrial chain, the risk of spillover from China’s lighting supply chain will still exist for a long time in the future. In the operation system before the pandemic, the globalized supply chain mainly focuses on cost performance and high efficiency. In the future, it will evolve into the one where security comes first and efficiency is taken into account. The international supply chain model of the lighting industry is likely to follow the “China + 1” model in the future, and some lighting orders will inevitably be diverted to Southeast Asia, India, Mexico and other places.
3. Weakening expectations
In the year of the pandemic, the global supply chain has been hit hard, and major economies have expanded their money and finances, which has also increased inflation, asset bubbles, and debt risks. The uncertainties faced by lighting exports are still increasing, and the recovery of international market demand in the post-pandemic era also shows an uneven trend.
The pessimistic expectations have both increased the demand-side contraction and magnified the supply-side wait-and-see mood, resulting in a decline in the investment willingness of relevant exporters and a rise in the debt-to-asset ratio, which will, to a certain extent, restrict the repair process of external demand. The interlaced variables of global pandemic trend, world economic situation, Sino-US trade friction, CNY exchange rate, etc. also bring many difficulties to the decision-making and planning of relevant exporters.
Looking to the export prospects of China’s lighting industry in 2022, there are both unfavorable policies of removing China from the duty-free tariff beneficiaries from 32 Western countries at the end of 2021 and favorable conditions brought by the official entry into force of the Regional Comprehensive Economic Partnership (RCEP) Agreement at the beginning of the year. Combined with the pressure brought by the above-mentioned demand contraction, supply shocks and weakening expectations, and considering the high comparison base brought by the high export growth in 2021, as well as the recent decline in bulk commodities, which has weakened the price factor, it will be difficult for lighting exports to reproduce the bustling scenes in 2021. It is expected that the annual exports in 2022 will achieve a small single-digit growth, and the possibility of negative growth in individual months cannot be ruled out.
Source: China Association of Lighting Industry