After a recent whirlwind trip visiting herbal fields from Northern to Southern China, I concluded that right now China is facing economic challenges that are impacting our industry, very similar to as seen in Europe and in particular, Western Europe. They both face the same macro forces affecting their everyday business: workforce challenges, climate change, and cost increases.
Economic Challenges in the Herbal Industry
In China, this will continue us seeing prices of Chinese herbs elevated. The floor for the prices will increase due to:
- An aging and shrinking workforce
- Extreme weather events
- Increasing cost of inputs.
So, is there good news? Quite possibly. Where China diverges from the rest of the world is its rapid adaption of digital payments, automation and robotics, which could combat the macro forces in the medium to the long term.
Impact of Workforce Dynamics on Herb Prices
It is well documented that China’s population is shrinking and aging due to its former one-child policy where, for decades, couples could only have one child or otherwise face severe financial and social repercussions. This policy was meant to keep China’s population from further increasing - which it did - but they may have kept it in place too long, as today's major population shrinkage brings its own set of problems. The average city dweller in China is now mirroring those in developed economies who aren’t having as many or any children, causing its workforce to shrink.
The workforce will thereby continue to shrink for the foreseeable future, thus ending years of cheap and readily available labor that China was known for. This is forcing Chinese enterprises to seek solutions to reduce labor costs. Hint, it doesn’t look that different than what we are doing here in the US. This is especially pronounced with items that are wildcrafted because young people don’t want to participate in that kind of work, which we’re seeing worldwide. You have probably seen the prices of wildcrafted herbs from all over the world facing a steady upward march, which is partly labor and partly climate change-related.
Climate Change and Its Effects on Herb Cultivation
According to the World Economic Forum, over the past 20 years, extreme weather events globally, like hurricanes, floods and heat waves, have cost an estimated $2.8 trillion. Climate change is costing the world $16 million per hour.
No matter where in the world you live, over the last several years you have been impacted by severe weather events. While I was there, Gansu province received an unusual amount of rain that will impact crop yield this Fall. This is the third year in a row that weather and natural events have significantly impacted this province: they have experienced earthquakes, drought and then too much rain over the last three years. Jilin, where we are working on a FairWild Organic Schisandra project, received unseasonably warm weather, causing plants to bloom earlier than usual. That unforeseen challenge will impact yield and the quality of the herbs this year. And that is just the weather events impacting prices at field level: there are other impacts as well.
Our building insurance, the equivalent to your home insurance, tripled this year due to the increased risk posed by extreme weather events and related damages that the insurance companies have had to pay out. Has your home insurance spiked due to this? One aspect that people don’t always factor in with extreme weather events, because it’s not as obvious, is the number of work hours lost due to it. For example, in Pakistan, it’s so hot that the number of hours that someone can work has been reduced: the same thing is happening in China and the US as well. The US labor department has just issued new rules related to working conditions and heat.
The last item impacting prices is the cost of inputs. Everything from labor to fertilizer to certification costs is increasing, causing upward pricing pressure.
Three of the biggest inputs that are increasing are labor as discussed above, logistic costs, and inspection fees. There is upward pressure on cost throughout the entire logistic supply chain, everything from inland drayage to the cost of containers, to sea freight, to people working in the supply chain. To illustrate this, the cost of containers in January 2024 was roughly US$2,900 and in June it was roughly US$7,200. USDA APHIS (Animal Plant Health and Inspection Service) fees for clearing an ocean shipment will increase from US $825 to US$2,803 starting October 1, 2024. As you can see, the cost of doing business is up, and thus the cost of goods will also increase to account for this.
Technological Innovations in Herb Production
The good news for the future is that China is adopting policies and technologies that will combat the increasing cost of inputs and labor. This, combined with changing attitudes toward land use, will mitigate the macro factors driving prices up. The Chinese government had divided its land that is not suitable for mechanization into small plots to ensure that each rural family had some farmland where they could work. Imagine, everyone having several acres, but it’s hard to use a combine or other machinery on a small piece of land cost-effectively. As people migrate to urban areas and people are less reliant on farming, people are leasing and combining these small plots to create bigger plots suitable for mechanization.
The Role of Automation in Reducing Labor Costs
China’s rate of technology adaption curve in automation and robotics to address its’ shrinking labor force, among other reasons, is more rapid than I have seen anywhere in the world. They’re retrofitting a lot of their manufacturing lines with some level of robotics to reduce labor cost and to become more efficient. But it doesn’t stop there. The most visible adaptation is in hotels and the hospitality industry, where they are using robots to deliver food and items to restaurant tables and hotel rooms. So instead of having staff bring the items, they just loaded the robots and have them do the last leg of the trip. In fact, their food delivery brings the order to the hotel and then gives it to the robot to bring to the guest’s room. China’s infrastructure is uniquely suited for this adaptation because most of their buildings have been built in the last 50 years and tend to be on the bigger size due to their population. The floors are leveled and wide, making it easier to create pathways for the robots.
Biometric Payments and Technological Advancements in China
In China they are also using automation in ways that we may have imagined but haven’t been able to implement in the US. For example, payment can be done via biometrics as Amazon and other companies only imagined. You can walk up to a vending machine and pay for your soda via a facial scan. There are so many other things that you can pay for this way. By combining biometrics with other technologies, at the Shanghai Airport you scan your passport to get your boarding ticket and baggage stickers. You scan in your own baggage, load it onto the carousel and they scan your face to confirm it’s you. It’s self-service through the entire check in process, thanks to machines and technology. There are so many other examples of how they are combining AI, robotics, and automation to eliminate the need for the human element. This is also happening at the factory level and in other facets of their economy, which should combat the labor shortage.
If they used biometrics to charge you for overweight or extra luggage, which is possible, it could reduce friction and make the lines a lot faster at the airport if there are no technical issues. I expect to see that on my next trip. In the last several years China has gone from a society where cash was the prevalent form of payment to digital payments using one’s phone as the primary method. Now it’s moving from phone-based payments such as Alipay or WeChat Pay (similar to Apple or Google Pay) to paying via biometrics. Pretty soon you can walk out of your hotel or house in China without your wallet, and shop to your heart’s content.
As China faces the same macro forces as Western Europe, it is trying to combat this with technology to help bridge the gaps, in particular population shrinkage. While this may help mitigate some upward pricing pressures, it will impact the herbal preparations and availability of cuts that we are used to. For example, machines aren’t yet very effective in replicating handwork such as creating astragalus slices that look like tongue depressors: they can only manage disc cut slices. Things are changing and will continue to do so because, as a wise person once said, the only constant is change. The trick is to see what’s coming and be prepared as much as one can be.
I want to leave you with a question, as we launch our FairWild Organic Schisandra project this Fall. Is utilizing wild resources which, although slightly more expensive, takes far less inputs worth it? Write to me with your thoughts or if you want to discuss it further email me at Wilson@Nuherbs.com.