WSJ: China Manufacturers Survive by Moving to Asian Neighbors

Discussion in 'China' started by mylegend, May 1, 2013.

  1. mylegend

    mylegend Regular Member

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    SHENZHEN, China—In a corner of a sprawling factory in this coastal southern city, sewing machines that stitched blouses and shirts for Lever Style Inc.'s clients now gather dust. As the din on the factory floor has dropped, so, too, has the payroll. Over the past two years, Lever Style's employee count in China has declined by one-third to 5,000 workers.

    The company in April began moving apparel production for Japanese retail chain Uniqlo Co. to Vietnam, where wages can be half those in China. Lever Style also is testing a shift to India for U.S. department-store chain Nordstrom Inc. JWN +0.09% and moving production for other customers.

    It's a matter of survival. After a decade of nearly 20% annual wage increases in China, Lever Style says it can no longer make money here.

    [​IMG]
    A board shows workers' statuses at each production line at Lever Style's factory in Shenzhen, China.

    "Operating in Southern China is a break-even proposition at best," says Stanley Szeto, a former investment banker who took over the family business from his father in 2000.

    Companies from leather-goods chain Coach Inc. COH +1.01% to clogs maker Crocs Inc. CROX +0.25% also are shifting some manufacturing to other countries as the onetime factory to the world becomes less competitive because of sharply rising wages and a persistent labor shortage. The moves allow the companies to keep consumer prices in check, although competition for labor in places such as Vietnam and Cambodia is pushing up wages in those countries as well.

    Some migration of apparel manufacturing from China is expected, and even encouraged by the government, as the country's economy matures. As other Asian nations become efficient at mass manufacturing, China must embrace research and high-technology production to transform its economy as South Korea and Japan once did. But healthy economic growth requires that China expand its service sector and create higher-skilled manufacturing jobs at a rapid clip to compensate.

    "If costs continue to rise, but China is unable to become more innovative or develop home-grown technologies, then the jobs that move offshore won't be replaced by anything," says Andrew Polk, a Beijing-based economist for the Conference Board, a research group for big American and European companies.

    China continues to be the developing world's largest recipient of foreign direct investment, attracting $112 billion last year. But that was down 3.7% from a year earlier. And exports still are rising in the double-digit percentages, though growth is slowing.

    Here in the manufacturing hub of Guangdong province, Lever Style's factories provide a glimpse into the future of China's apparel industry.

    The company, which is based in Hong Kong, used to manufacture its clients' clothing at three factories in China. But rising labor costs have forced the apparel maker for Armani Collezioni, John Varvatos and Hugo Boss to focus on what it is best at: helping clients develop clothing while the company outsources a growing part of production.

    In five years, Lever Style expects about 80% of its production to be outsourced to factories it manages throughout Asia.

    As it shifts production to Vietnam, Lever Style says it is able to offer clients a discount of up to 10% per garment. That is attractive to U.S. retailers, whose profit margins average 1% to 2%, according to the U.S.-based National Retail Federation.

    This shift is already well under way. Lever Style expects that a few years from now, 40% of the clothes it makes for Uniqlo, one of Lever Style's biggest customers, will come from Vietnam and 60% from China.

    As China production slows for Uniqlo and other clients, Lever Style plans to return one factory here to the landlord and consolidate its shrinking workforce at the other two.

    [​IMG]

    Uniqlo, the biggest apparel chain in Asia, says it makes 70% of its clothing in China but would like to cut its production in the country to two-thirds, mainly to reduce costs. A spokesman for parent company Fast Retailing Co. 9983.TO 0.00% says the retailer has an "ongoing dialogue" with contract manufacturers of its 70 factories world-wide about where to produce its clothing.

    Nordstrom, which works with 450 factories in nearly 40 countries, says cost is important but so are product quality and factory working conditions. The company hasn't seen a "material change" in how much of its apparel is being made in China in recent years, a spokesman says.

    But Coach plans to satisfy at least part of its new production needs elsewhere. That effectively will reduce its overall production through third-party manufacturers in China to about 50% by 2015 from more than 80% in 2011 so that the handbag maker isn't too reliant on one country, a spokeswoman says.

    And 65% of Crocs's colorful shoes are expected to be made in China this year through third-party manufacturers, down from 80% last year.

    Many retailers are less concerned about where a product is made than about price, delivery and quality, says Lever Style's Mr. Szeto.

    Still, he says, while China's transformation of its economy is "the right move for the country, I see this as a huge challenge for us as a company."

    http://online.wsj.com/article/SB100...566416.html?mod=WSJ_business_LeadStoryRotator

    FYI: Some of non-wage labor cost included the mandatory Social Security payment that firm require to put in at least 2/3.
     
    Last edited: May 1, 2013
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  3. badguy2000

    badguy2000 Respected Member Senior Member

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    No other developimg country has infrastructure industry chains and labour as quality as good as china.the above 3 factors erode the cheap labour .as a whole,inland china is on a better position to attract plants moved from coastal china than chinese neighbour.
     
    Last edited: May 1, 2013
  4. mylegend

    mylegend Regular Member

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    Transportation from inland cost more than Shipping by sea due to highway cost... You are right about infrastructure industry chains and labour quality. However, much to textile industry does not require much skill to produce okay quality especially simpler item such as T-shirt. Currently, the major manufacturing firms that is moving abroad are the one with at least few thousand workers. They have the know-how and capital to replicate their factory in mainland China. Some of long time business friends we know from Hong Kong have set up gigantic factory with over 10,000 employee in Cambodia. People there make about a quarter of what Chinese labor make, making it attractive destination even if their productivity is lower.

    Infrastructure industry chains and labor quality is more important in higher end manufacturing such as electronic and appliances. Things like textile factory is much easier to move. For your information, company like 凡客 vancl is already outsourcing their order to Bangladesh. Some of factory owner I know personally plan move part of manufacturing capacity abroad to try out if it work out.

    Moving inland is not much easier compare to near-shore sourcing, Few years ago, I personally have experience of trying to get a deal with one of large prison in Sichuan Province, we pay the workers about half the wage we pay in our factory in Guangdong, but only 1/10 to 1/4(i dont remember exact amount) of it went to the prisoner(we can not decide how much goes to prisoner), causing extremely low productivity and quality control was a nightmare. The prison officials constantly asking bribe and if we do not cooperate, they cause trouble to our production. We ended up losing quite amount of investment due to missing delivery date and quality issues. We close the operation in Sichuan after 1.5 year. That is my experience. There is other people we know have hard time working with officials in inland province. They gave so many promises before you come, and treat you like shit after you invested your capital. Of course, many other have successful experience. However, many company(mine included) who does not have good 公关 department failed in inland province. Things might work out if we can devolop better relationship with prison officials, but it is just too much hassle to deal with.

    Of course, there is also same type of problem you will face when investing in almost all south eastern asia nations, that is why many choose to stay and move inland especially for those focus on domestic market. Domestic market is much more profitable compare to foreign market.
     
    Last edited: May 1, 2013
  5. CCTV

    CCTV Regular Member

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    That's the process of upgrading, none can change it.

    If firms can not make profit, they will go to somewhere else which has the capability to produce same among of products at lower cost.

    China's neighbors do have wage advantage to China, but their capability is limited by they population, land,eduction, electricity,and any other resources.

    Eg, in clothing industry only 15 % the cost are from labor, and smaller firms or countries have to pay much more on materials if they can't buy a huge amount at a time.

    PS.
    When China don't have any advantage in some industries like clothing, we will glad to see our neighbors to take those industries.
    At that time we will offer them machines to produce goods, electricity plant to support their machines and construction machines to build roads and plants at the best quality and price. Also help them maintain and updated their machines and roads every year.

    If you compare China's export compositions at 2001 and 2012 , I think you can see the trend already. Clothing is not even in top 10 last year.
     
    Last edited: May 1, 2013
  6. badguy2000

    badguy2000 Respected Member Senior Member

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    You were not wise enough to give orderS to prisons.
    Inland china have changed much.
     
  7. mylegend

    mylegend Regular Member

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    Things sure have changed in inlands, but in the early 2000s, that was my experience,and Indeed a bad one. As for working with prisons, most prisons in China are factory, there is no secret in that. However, it might be better to just give them order compare to manage one yourself. Especially if you are not ised to deal with officials.
     
  8. badguy2000

    badguy2000 Respected Member Senior Member

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    As you refered,that was early 2000s,about 10 yEars ago. 10 year means many things have changed.
     
  9. badguy2000

    badguy2000 Respected Member Senior Member

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    in china,one poor may become a millionnare in months,one new city may erect in 2~3 years
    .it is quite unwise to consider cases in china according to the experience 10 years ago.
     
  10. arnabmit

    arnabmit Homo Communis Indus Senior Member

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    :rotflmao: :rotflmao: :rotflmao: :rotflmao: :rotflmao:

     
  11. Singh

    Singh Phat Cat Administrator

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    Chinese are already moving away from labour intensive, and low value addition items. I see it as a good decision by China, and its upto the neighbours to grab this opportunity.

    India because of its myriad issues has not been able to take advantage of this.
     
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  12. Singh

    Singh Phat Cat Administrator

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    Nothing to laugh about. Chinese quality as a whole is tremendously improving. If you want cheap quality, they will give you cheap, if you want good, they will give you good.
     
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  13. nimo_cn

    nimo_cn Senior Member Senior Member

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    Just out of curiosity, are you doing business with Chinese?

    Sent from my HUAWEI T8951 using Tapatalk 2
     
  14. Singh

    Singh Phat Cat Administrator

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    Not at the moment, but I do use Chinese products.
     

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