Production capacity in China is starting to bounce back after months of being seriously squeezed, Spencer Fung, chief executive of supply giant LF Europe, has
It is not clear how much additional capacity there is at this stage but Fung, whose company is part of global supply giant Li & Fung, said staff in China had reported a surprise increase.
“It is the first time in eight or nine months that there is available production capacity,” Fung said. He added: “Our priorities used to be price and quality. Capacity was at most number four on the list but it’s been top for the past 18 months.”
Production capacity has been under pressure because of rising domestic demand for goods in China and labour shortages as workers opted for more prestigious
jobs in technology manufacturing and service industries.
However, the increased demand has been partially offset by international retailers and brands moving production to reduce their reliance on Chinese manufacturing because they could not secure capacity and because of rising labour and cotton costs that narrowed China’s competitive lead over other territories. Retailers and brands have also pulled back from China to avoid delivery delays, which hit the likes of young fashion business Super-Group in autumn 10. It was also one of the factors blamed by streetwear brand Fenchurch for its administration this year.
Fung said LF Europe lost two percentage points from its margins last year due to rising cotton costs and because manufacturing delays meant it had to air freight goods. However, Fung added that the apparent sudden availability of production capacity may be skewed as retailers and brands hold back from placing orders because they believe the price of cotton might fall.
“There has been a split. Some people have thought, ‘let’s just order it or we may not have any stock on our shelves’. Others have held out in case the price of cotton falls, but it’s risky. What if it doesn’t? What if you end up with no orders on the shelves?” he said.
Both Debenhams and Next have referenced the prospect of falling cotton prices in recent trading results. Farmers have increased cotton production and a good
harvest is predicted this year.