From WWD Issue 03/29/2011
Higher labor and materials costs, and the maturing of its economy have pummeled the Chinese apparel and textile production industry in recent months, leading to mass factory closures, cost control measures and a certainty of higher prices to come for customers.
Factories across the manufacturing zone in the Pearl River Delta and on the eastern seaboard have reported cutbacks and closings in the past six months, largely due to soaring cotton prices and the increased salary and benefit demands to attract workers. Factory bosses now say they expect a streamlined, more efficient and higher-end production chain to emerge, but the transition period will be difficult.
In short, big changes lie ahead for the world’s largest maker and exporter of apparel.
“The pressures are coming from two sides,” said Zhang Yunqing, general manager of the Yichuan Wool Knitting Co. in Dongguan, Guangdong province. “One is the increasing price of raw materials and the other is labor. Our production costs are already 10 percent higher than they were last year.”
Zheng Zhaobo, training manager of the Foshan Andongni Knitting Co. also in Guangdong, said a back supply of materials made last year is helping the company through the start of this year, but customer prices will rise in the long term.
“There isn’t much room for us to make alternate choices now,” said Zheng. “We have to pay higher prices because many migrant workers simply don’t want to leave their hometowns these days.”
China has long relied on a strong supply of migrant workers to fuel its factory boom. With an estimated domestic migrant workforce of 200 million people, factories and construction sites have had steady supplies of relatively cheap labor to fuel building and production posts in wealthier cities and regions. But now that prosperity is trickling into the countryside, in part through massive government infrastructure projects like train and road building, millions of migrants are finding decent jobs closer to home and family.
Initially, factory managers had hoped the trend would pass and they could bring workers back to the Pearl River Delta and other hubs. Now, they’re starting to weigh their options and looking at how to move forward.
Textiles industry analyst Kong Jun of China Jianyin Investments said the transition will be painful. The industry here has long attracted small companies relying on thin profit margins. Many of those won’t survive.
“What companies can do now is add value to their products, through
research and development, and increasing quality levels,” said Kong. “Yet it is very difficult for them, and some companies have trouble funding these endeavors. The market situation is also rather disorderly and in order to compete they’ll have to lower prices, while the profit margin becomes even smaller.”
The hit is being felt in every workshop. At Shenzhen Sun Spring Garment Co., production is down by one-third from last year, said Huang Liang, a marketing department employee. Prices are going up by 20 to 30 percent this year, far above China’s already high consumer inflation rate.
“I hope the raw materials prices don’t go higher,” Huang said. “If they do, we’ll have serious problems. Right now we can manage the situation.”
Kong said there’s no good estimate of how many factories will survive the heated competition. Already, scores of smaller production plants lie dormant, with many searching for new workers and advertising significantly higher pay to fill the gap. Meanwhile, the Chinese government has begun encouraging mergers and acquisitions in the industry, and adding tax incentives to lure manufacturers toward the lesser developed western parts of the country.
But the biggest factors facing China’s production line are out of its control. Cotton prices, already more than 15 percent above last year’s level locally and more than double on world markets, will determine much of the fate of the industry in months to come, Kong said.
Zhang said he’s not optimistic.
“It’s not easy to run this business now,” he said. “I worry it will be even harder in the future.”
In Hong Kong, sourcing giant Luen Thai is already seeing changes. Henry Tan, Luen Thai’s chief executive officer, said, “The biggest challenge in our industry is the increase in cotton prices and costs, especially wages. Garment prices will be going up. The consumer will have to face this — prices will be higher.”
Tan explained that coping with increased costs means being able to adjust production facilities and making changes in the working relationship between retailers, brands and manufacturers.
“We are seeing a better working relationship with our customers,” he said. “They are working with us to reduce costs. Some are now willing to listen, for example, when we talk about changing a garment — not changing the look of the garment, but maybe making the sewing easier, which can save cost. This kind of thing has been difficult to get across in the past. It was a one-sided partnership, but it’s come to a point that they have to help us.”
Luen Thai, which supplies end-to-end production for a number of major brands, including Ralph Lauren, Esprit, Limited, Adidas and Coach, is maintaining its current level of production in China, where it operates two Supply Chain Cities in Guangdong province. Chan said any Luen Thai expansion will be in other countries. Luen Thai has recently increased production in the Philippines and Indonesia, and Chan said the company “is seriously looking at Cambodia.”
But this will not be enough to offset increases in minimum wages across the region.
“The U.S. has no new cheap-wage countries to go to,” said Chan. “Even in the cheapest country, like Bangladesh, there are major wage increases.”
Tan said this is the first time in a generation that there is an equilibrium between supply and demand, ending the era of price deflation for apparel.
“The financial crisis, increase in cotton prices and manufacturing costs, and the closure of so many small factories in China means that there is a sort of equilibrium now in supply and demand,” he added.
