Changes in Chinese manufacturing and demographics could hit its clothing output, so UK-based retailers and brands may have to rethink their buying strategies if they want to remain competitive.
Last month, an explosion caused three deaths at a technology factory in Longhua in southern China. The impact on garment manufacturing was hard to estimate as Drapers went to press but this has implications for factories all over the country.
The plant in question was owned by Foxconn, which makes products for companies including Apple. It was also the site of an unexplained string of suicides in 2010, when staff jumped from the top of some of its tall buildings.
To retain its 500,000-strong workforce Foxconn doubled wages overnight, forcing other technology firms to follow suit and luring workers away from other manufacturing sectors, including clothes making. It also asked workers to sign contracts saying they would not kill themselves.
Truth be told, garment production sits pretty low in the pecking order of factory jobs in China and garment manufacturers saw an overnight defection. They tried to offset the exodus with wage increases of their own but could not match Foxconn’s, forcing acceptance of a diminished workforce. What’s more, the Foxconn suicides prompted international discussion about the welfare of Chinese factory workers - a debate that requires additional investment to resolve, stepping up operational costs across the board. Most Chinese provinces legally require businesses to increase wages by a set percentage; in some provinces, minimum wages have increased by more than 30%.
Meanwhile, China’s generation of ‘little emperors’, created by the country’s one-child policy, has grown up; each only child is hothoused by two sets of grandparents, two parents and all the resources and expectations that kind of upbringing implies. The sons and daughters of factory workers have their sights set on bigger and better things than garment manufacture - if they can’t make the service industries, then technology or automotive production is the goal.
All of this has had a serious impact on China’s production capacity and contributed to the delivery delays of stock that blighted trade towards the end of 2010. Even big fashion businesses like SuperGroup were affected, as Drapers revealed last November.
On the other side of the coin, the remaining capacity is increasingly being tied up by China’s growing domestic fashion market. In 1998, some 88% of garments produced in China were shipped to other countries. However, according to research company IBISWorld, rocketing domestic demand meant that by 2005 the proportion of garments exported was roughly the same as the proportion that remained in China. By 2009, exports accounted for only 29%. To compound this, orders from the UK - which are inevitably smaller than many of those from larger countries - are being gazumped by their US equivalents. At least one major high street retail group discovered its substantial order had been cancelled in favour of a more lucrative one only when it contacted the Chinese factory to find out why the goods had not turned up.
Room for improvement
Spencer Fung, chief executive of supply giant LF Europe, says at the height of the crisis some UK brands and retailers were going so far as to make down payments on capacity a year in advance; he has since seen a reprieve in the situation. “This is the first time in eight or nine months that there is available production capacity,” he says, although he adds: “We don’t know how much of that is because retailers have been delaying their orders in the hope that cotton prices will fall.”
Production capacity has also been eased by retailers and brands turning to other countries for the manufacture of their goods. Primark is understood to be scouting for new bases in Southeast Asia and Asda continues to work on upgrading factories in Bangladesh, before turning its attention to its China supply base.
However, China is not ready to shake off its reputation as the world’s factory just yet. Garment production there was a £105bn industry in 2010 and Fan Gang, professor of economics at Beijing University, says although wages are increasing, productivity and quality are developing even faster, helping China retain its position ahead of other countries in terms of “wage efficiency”.
“Even a real wage increase on the national level will not undermine competitiveness if labour productivity grows still faster. Wage growth will not threaten the nation’s competitiveness in the next 10 or even 20 years,” he says.
Certainly it is still a growth industry, even if the rate is slowing. According to IBISWorld, there were 17,402 Chinese garment manufacturing businesses in 2010, up 1.4% from the year before, with about 4.31 million workers and an estimated payroll of £10.8bn.
The key change will be where in China production takes place, and in what those areas specialise in. For a long time, China’s eastern and southern coastal regions have dominated: in 2010, Jiangso, Zhejiang and Shandong provinces accounted for 22%, 13% and 12.9% of the country’s total garment manufacturing sector respectively. Guangdong accounted for 17.9% and - thanks to its proximity to Hong Kong - ranks as the third largest export base of clothing in the world.
Together, these regions have drained the relatively impoverished Chinese interior of investment and potential workers, but now those areas are fighting back.
“The message is, ‘go west’,” says Kevin Lam, director of key accounts for Kerry EAS Logistics, who predicts that Wuhan, Chengdu and Chonqing are set to become “the three hottest cities” for new enterprises. “The land value and labour costs are all cheaper, and these cities have large populations that can sustain a large workforce,” he says.
Perhaps even more importantly, the Chinese government is encouraging investment in the western regions on both a national and provincial scale. “It is promoting preferential terms [for new businesses] to encourage coastal suppliers to set up more factories in central and western China,” Lam says. These range from tax breaks and subsidies for new factories to tax holidays for farmers so they are less inclined to leave the region in search of work. The government has also invested heavily in road networks, so it’s quicker to export goods.
The initiatives are working. Many people who, for years, have travelled across China in search of work at factories around Shenzhen (see p24) have spied the chance to cut out the travel and separation from families, and work close to home. The failure of many Chinese workers to return to their jobs after the Chinese New Year for these reasons is well chronicled.
Some are going even further and using the capital and skills amassed in the traditional production regions to set up factories of their own. They may not be as slick as some of the state-of-the-art plants on the coast and their owners may not speak English at this stage, but these factories may represent China’s last production frontier.
Inevitably, communication barriers and lack of experience act as deterrents to international brands and retailers seeking out new manufacturing bases. But as production capacity for exports gets squeezed, it would be unwise to rule these factories out. Smart brands and retailers are working with C- and B-grade factories and helping to bring them up to scratch. After all, the manufacturing skills are there, it’s just the management ones that need work - and those can be imported.