China's export manufacturers are in a conundrum. Overseas demand is picking up, but with the shortage in key materials and labour, suppliers are now finding themselves in a situation where they can be selective in accepting orders. While this means they are in a position to charge higher prices, it also raises the possibility of slower growth for the rest of the year. 

The deficit in parts, components and labour has made it difficult for many factories to finish goods within traditional lead times. Companies are extending their delivery schedules by at least 15 days, which sometimes results in frustrated buyers and cancellations. Fuzhou Hunter Bags & Luggage Mfg Co. Ltd said a handful of its EU buyers cancelled orders because lead time were not met. Production was delayed due to labour shortages at the fabric mills, which made it difficult for them to supply materials as scheduled. The situation is likely to extend through Q4 2010 and even beyond for some industries, including LEDs. 

To balance manufacturing difficulties and on-time shipment, suppliers are quoting more expensive rates or requiring larger quantities per transaction for them to prioritise an order. Depending on the product and specifications, prices can be 5 to 30% higher. The MOQ, on the other hand, can be as large as three TEUs especially, for garments and electronics. This measure, however, is implemented only as a last resort as it cannot shield businesses from cost spikes. Most companies, including Fuzhou Hunter, are also accepting and finishing orders from clients they have been working with for at least two years before they accommodate new customers. Furthermore, some are keeping close contact with their buyers to help the latter monitor raw material sourcing and production schedules, which would then enable both sides to react quickly to unexpected developments. 

Although various provincial governments have lifted the minimum wage, the measure has done very little to ease the labour situation. It is estimated that factories in labour-intensive industries are still 10 to 30% short of hands. Specialists that dye fabrics for Zhejiang Weida Industry Investment Co. Ltd used to need only one week to finish the process. Now, it takes them 30 days. Because it does not have enough dyed fabrics, Zhejiang Weida had to prioritise orders, accomplishing those from long-term clients and with large volumes first. Until the fabric mills and dyeing specialists are able to speed up turnaround, there is not much garment manufacturers can do, especially since it is not easy to find suitable alternate sources. 

In the electronics industry, the scant supply of components such as LED chips is a factor slowing down production. Global demand for LED chips increased 100% this year to about 200 billion pieces. In contrast, worldwide output is projected to reach only 100 billion pieces. Analysts believe the only way for supply to outstrip demand is if there are 3,000 MOCVD machines, which are the key equipment in producing LED chips. But as of 2009, there are only 1,200 units globally, with 150 of these in China. Roughly 350 machines are expected to be put into use this year, of which 130 will be installed in Chinese factories. This still leaves a deficit of 1,450 units. 

Besides LED chips, electronic components such as digital signal processors, tantalum chip capacitors, optocouplers and amplifiers are also in short supply and have become more expensive, some doubling in cost. AVX 10µF 16V tantalum chip capacitors, for instance, was RMB 0.26 each in April. In June, quotes reached RMB 0.60 per chip. iSuppli senior analyst Gu Wenjun said in a report published in the Yangcheng Evening News, a Guangdong province-based newspaper, that many leather, luggage and mining businesses in Wenzhou started to invest in electronics last year. But they are believed to be hoarding the components they procured to inflate prices.  

Because of the deficit, some consumer electronic manufacturers are transacting with several upstream suppliers to see which one can deliver the fastest. Once the orders arrive at their factory, pending deliveries from other providers are cancelled. This practice, however, may cause more harm to the industry as it increases the operational risk at electronic component plants. Once the shortage eases, factories with large stockpiles may face significant losses.