China Flexing Its Muscles
By Gary Guernsey
November 1, 2011

     Starting in late May, we have been receiving letters from
our vendors announcing drastic price increases and future supply uncertainties
for several types of bulbs that are critical to our customers and thus to our business:  fluorescent tubes and compact fluorescents.

     Virtually all of my 2011 price lists are already obsolete.
My favorite six or seven vendors don’t even publish a printed list anymore. I
must either look online or more commonly, I’m forced to call for current
pricing on nearly every item. My time spent buying has almost doubled in the
last couple of months.

Why is this happening now?

 There are 5 primary contributing factors:

1. Hardly any of these bulbs are made inAmerica anymore.
2. In the interest of saving electricity, the European Union and over time, the U.S. has mandated the use of compact fluorescent bulbs instead of incandescents.
3. The Chinese now control over 90% of the rare-earth minerals that go into these
   bulbs.
4. The Chinese domestic demand has skyrocketed.
5. Our American dollar grows weaker by the day compared to many other world
   currencies.

 Let’s take a quick look at each of these factors.

     First, let me state outright that I would LOVE to carry USA-made light bulbs, ballasts, and fixtures. I’m all for American jobs that produce goods that Americans need. But the truth is, only a handful of vendors still manufacture in the U.S. and then, only a very limited selection of items. If all I sold was American-made goods, I could simply not serve my customers’ needs and I’d be out of business. The same problems that have plagued all U.S. manufacturers have devastated the lighting industry:  wages compared to other countries, health care costs, environmental restrictions, lack of locally-produced raw materials, rising fuel costs, and trade and tax policies that favor developing nations over our American-based companies.

     Second, in the interest of saving electricity, the European Union and over time, the U.S.
has mandated the use of compact fluorescent bulbs instead of incandescents.  Thus, whoever produces these bulbs has a captive (forced) market. Incandescent bulbs can no longer be sold in Europe and are being quickly phased out here in the U.S. So as demand drops, those U.S. manufacturers who did make them are dropping them from their lines.

     But the restrictions are not limited to incandescents versus compact fluorescents. Even the ubiquitous 4-foot T12 cool white tube will no longer be sold in the U.S. starting in August of 2012. Instead, the government is mandating that we switch to T8’s or higher-lumens tri-phosphorous T12’s and of course, they cost more than the $1.49 tubes we still sell by the hundreds monthly. To be honest, this has been a boon to distributors like Saddleback Lighting. But we can’t overlook its role in changing demand and thus the marketplace for all bulbs.

     Third, the Chinese government and its state-owned corporations now either produce or control over 90% of the rare-earth minerals that go into fluorescent products. The main ingredient is phosphorous. Its price has increased over 900% (yes, you read that right!) just since January of this year.  They own and operate mines around the world and control the world’s supply. So they can choose to charge any amount they want and consumers around the world are being forced to pay it.

     Fourth, the Chinese domestic demand has skyrocketed. Using accumulated funds that have been generated from exported goods, China is now building entire new cities at a breathtaking pace. Moving millions of people from the countryside into urban areas has
caused their demand for electric lighting (and hundreds of other commodity items of course) to rise sharply, and in truth, they could keep and use everything they make there if they decide to do so. They realize it’s not smart to cut off their key income sources (foreign customers) but that doesn’t mean they won’t raise prices to further fuel their growth as a superpower.

     Finally, for numerous financial and political reasons, our dollar has been taking a beating in the world markets when compared to the currencies of many of our trading partners. That means it takes more dollars to buy the same goods and more dollars to get them here on tanker ships. Thus, price increases.

     How does this impact YOU, our valued customer and us?

1.  We are holding down our prices for as long as we can but every reorder we place is costing us more for the same goods we’ve always bought. Unfortunately, our prices simply must go up. Our competitors are facing the same pricing pressure. All of us will be increasing prices as our old inventory depletes

2.  Our vendor’s quotes to us are now good for 1 or 2 weeks, no more.

3.  Our vendors will not guarantee prices on items they backorder to us, or they      simply won’t keep an item on backorder, period. So if they don’t have it when we order it, we may have to call and tell you a new price when it does finally come in, and we hope you’ll still accept it. For this reason, we are drastically increasing our stock-on-hand. This is risky but we are trying to mitigate this very situation by keeping more of our most popular items on hand every day. We currently carry more bulbs and ballasts than anyone else in Southern Utah.

4.  Quotes to our customers are only good for 2 weeks, which is especially hard on our government and school customers, whose turnaround time is typically longer. We’ll do our best to honor quotes but can’t guarantee them more than 2 weeks.

     What’s next? We have excellent relationships with several of the most prominent suppliers in the lighting business. Many of them have given Saddleback special deals regarding price and obtaining product.  I’ve done business with some of them for over 30 years. They have candidly shared with me that they fear there will be shortages of some items in the next few months. That could create real hardships for our customers so that is one of the main reasons we are increasing inventory. This will help to keep our customers supplied with our products.  I’ll keep you posted here on our website and in our Hot Buys news.