Thu, Apr 02, 2009 - Page 8 News List

Is the ‘rush order’ effect genuine?

By Liang Kuo-yuan 梁國源

In these times of financial meltdown, China’s economy is nearly unique in that it is still expected to grow. Beijing hopes to attain 8 percent economic growth this year, underpinned by a large-scale fiscal stimulus package. Although not comparable to the US package in terms of size, it is the largest from a GDP percentage standpoint.

As China demonstrates its determination to sustain high growth via concerted efforts spanning all levels of the government, its stock markets in Shanghai and Shenzhen and the Taipei market have rallied in expectation of China’s potential. The three stock exchanges have been the best performers so far this year, as other major markets fell to new lows. Industry sources in Asia have also been reporting news of a so-called “rush order” effect from China.

Taiwan and South Korea are the first outsiders to benefit from China’s stimulus, as firms from both own many mid and downstream electronics manufacturers, in contrast to the upstream technical and raw material suppliers owned by companies from other developed nations.

Considering the special situation between Taiwan and China, and the fact that most Taiwanese manufacturers have relocated production to China, Taiwanese firms will benefit even more than their South Korean competitors. In this context, Taiwan is seen to be in a unique position, where it can perhaps provide first-hand insight as to how the rest of the world can benefit from a recovery possibly driven by China. Accordingly, using Taiwanese firms as a case study is a feasible approach in delineating the contribution China is currently making.

At the moment, the “rush order effect” is the hottest topic in the Taiwanese market. Although the volume is small, many such orders have recently been placed with Taiwan’s electronic manufacturing industry (IC, PC boards, panels, etc). As economists see it, such demand is simply a replenishment of buffer stock inventory that emerged after components and other upstream material prices fell to rock bottom levels, which removed the prohibitive speculative factor that was against inventory buildup.

In other words, the demand was mostly not from the end market, but simply making up for the overreaction of the previous sharp inventory cuts throughout the supply chain. From the market standpoint — which we were all taught to respect in the first lesson of economics — apparently the free open invisible hand considers the phenomenon of rush orders the elixir to this recession and what is leading the Taiwanese economy on a path of recovery.

Examining the rush order sources from an industry standpoint, I find several contributing factors. First, as mentioned earlier, is buffer inventory replenishment demand, which comes from around the world, as the buffer inventory scheme is shared globally.

Second is the “appliance subsidy plan” in promoting home electronics in rural China. It is still too early to reach firm conclusions about this but it does create demand within the distribution channels, as actual products must be displayed in every retail location over the vast market of rural China.

Third, though private consumption is slowing down, China as a whole is still growing fast compared to the rest of the world. With the emergence of white brand notebooks and handsets, Taiwan OEM and IC producers, among component makers, are the first choice for sourcing.

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