Power Shortage Lengthens Lead Times in China

Delivery can now take as long as four months as makers have to schedule production around power cuts. Export prices are likely to increase in H2 2011 as well.

Dubbed as China’s worst electricity shortage since 2004, this year’s deficit and subsequent rationing are forcing manufacturers to switch work to night shifts or use generators to meet their production schedules.

Electricity is generally rationed based on the products made. Factories producing low-value products in high energy-consuming industries are hit the hardest, having to reset their manufacturing plans frequently. Because of preferential government policies, high-technology companies such as LED makers are assured of sufficient supply. Manufacturers typically lose power one or two days per week. Factories may have electricity for three consecutive days, none the next and power again for the following three. In other weeks, they may have electricity for five days and none for two.

The lack of electricity is compounding the challenges makers already face with the labor shortage, particularly in terms of meeting production deadlines. As many are concerned about the fines buyers could charge them for late deliveries, there now is hesitation in accepting large-volume orders.

Beijing Light Stationery Mfg Co. Ltd general manager Li Zhi Zhong said some stationery and furniture makers in Hebei province have staggered production with deliveries scheduled up to March 2012. Lead times have been extended from 45 to 60 days to between three and four months.

Guangdong Galanz Enterprise Group Co. Ltd’s overseas market general manager Liu Gui Zhong said the power rationing may force them to subcontract production to ensure on-time delivery. This is particularly crucial during the peak manufacturing months of July and August.

Apart from extending lead times, the rotating power schedule has had a major impact on manufacturing costs. Factories with back-up generators are spending more on diesel than on electricity fees. Shenzhen Stanford Power Equipment Co. Ltd said regardless of wattage, a generator needs 5 to 6L of diesel to run for an hour. It costs $0.31 to generate 1W, 100 percent more expensive than state grid charges.

The Q2 electricity gap in Guangdong province is estimated to reach 4GWh. In Foshan, where electricity has been rationed for a month now, ceramic tile makers are likely to raise export prices 10 to 15 percent in the next few months. The director of the city’s China Ceramic Industry Association office, Lan Wei Bing, said some suppliers are also extending deliveries by 10 to 15 days.

In Shunde, some makers of hardware parts that bought 50kW generators years ago now intend to procure 100kW version in preparation for the peak season. Purchasing the units and running on generators through the power cuts are expected to raise costs by at least 5 percent.