Credit Suisse, Rising Emerging Market Costs --- The impact to margins and corporate strategy

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New survey: A new proprietary Credit Suisse global survey of
senior corporate executives indicates that cost pressures from
emerging economies will continue to rise over the next 12-24
months, pressuring profit margins.
● Costs: Labour costs continue to be a major area of concern with
China and India posing the largest threat. Executives are also
worried about commodity and transportation costs.
● Margins: While only 21% of respondents expect to have enough
pricing power to maintain margins, this is actually up from 7% in
our August 2010 China cost survey.
● Strategic reaction: Almost 50% of respondents said they would be
at least ‘somewhat likely’ to move sourcing in reaction to
continued cost acceleration, although this could require
considerable time and resources.
● Investment conclusions: We think the key is to identify industries/
companies with sufficient pricing power to offset the relentless
cost increases discussed in this report.
Survey indicates cost pressures to continue to rise
A new proprietary Credit Suisse global survey of senior corporate
executives indicates that cost pressures from emerging economies
will likely continue to rise over the next 12-24 months, pressuring profit
margins. While this continues to be an area of significant worry for our
surveyed executives, the level of concern has fallen compared with
our August 2010 China cost survey, perhaps due to the continued
economic recovery and associated boost to executive confidence.
Notably, 40% of our 84 respondents were from private companies.
Among the results of our survey
Costs: Labour costs continue to be a major area of concern with
China and India posing the largest threat. Executives are also worried
about commodity and transportation costs. Examples of companies
exposed to rising EM costs (especially labour costs) include BBY,
DKS, TGT, FL, MFB, Home Retail (HOME.L), Tieto (TIE1V.HE), Nitori
Holdings (9843 – Japan), Anhui Conch Cement (0914.HK) and China
Overseas L&I (0688.HK). The other side of this issue is that rising EM
labour costs do represent a structural bull case for some consumer
companies – one of our key strategic themes (e.g., Tingyi (0322.HK)
and Belle Intl. Holdings (1880.HK)).
Margins: While only 21% of respondents expect to have enough
pricing power to maintain margins, this is actually up from 7% in our
August 2010 China cost survey.
Strategic reaction: Almost 50% of respondents stated they would be
at least ‘somewhat likely’ to move sourcing in reaction to continued
cost acceleration, although this could require considerable time and
resources. Notably, 80% respondents are considering greater
investment in tech and automation to offset higher sourcing costs.
Potential beneficiaries include ROK, ACN, ORCL, SAP, TXN, MXIM,
ABB (ABBN.VX), Schneider (SCHN. PA) and Keyence (6861 – Tokyo).
Investment conclusions: We believe the key is to identify industries/
companies with sufficient pricing power to offset the relentless cost
increases discussed in this report. Perhaps surprisingly, consumer
discretionary companies appear relatively confident about their ability
to raise prices while health care and telecom respondents were less
optimistic on average.