China's Job "Yuan": Confronting Its Challenges

By  Manik Mehta — October 05, 2010

The author says China is faced with apparel production issues related to rising production and labor costs and the appreciation of its currency.

China seemed to be on everyone's lips -- whether it was about China's rising production and labor costs, the appreciation of the Chinese currency yuan or quality control -- at the International Apparel Sourcing Show (IASS), held in conjunction with the TexWorld USA and Home Textile Fabrics Shows in New York last month.

The IASS, dedicated to sourcing of finished apparel and contract manufacturing, was organized by Messe Frankfurt USA in conjunction with China's CCPIT TEX, the Sub-Council of Textile Industry, China Council for Promotion of International Trade.

Many Chinese exhibitors were uneasy over the caution exercised by American and other buyers while ordering new stocks. China's rising production and labor costs are driving away buyers in developed countries, where profits are slipping away. Indeed, there is a quiet migration of a number of foreign and even local Chinese companies to other low-cost sites such as Vietnam, Cambodia and Laos.

James Hoch, the chief executive of Acenovo LLC of Del Rey, California, an associate company of Hongchang Fabric & Clothing Design Holding Co. Ltd. of Shunde, Foshan in Guangdong, which produces jeans at a number of its facilities, agreed that rising costs in China were indeed squeezing profits and discouraging many potential investors. The company supplies high-end jeans in the price range of $ 9 to 15 per piece FOB value.

"You have to produce upper-end jeans because China itself is moving up the value-added chain ladder," Hoch told the Apparel. Hoch added that many companies were relocating from China to Vietnam.

Chinese suppliers were also concerned that the yuan's further appreciation would hit sourcing in China, which is becoming more expensive. But Hoch said that besides currency revaluation, there were other factors such as rising yarn prices, labor costs, workers' benefits, etc. that impacted business. However, Hoch said that his company, which already paid good wages to its workers, was not affected as much as the smaller manufacturers, many of whom had gone out of business because of rising wages and benefits.

Wei Yan, the deputy general manager of Tianjin Excellent Import & Export Co. Ltd. of Tianjin, who was exhibiting woven, cotton, terry-cotton, polyester shirt fabrics, acknowledged that prices of fabrics purchased in China were "dramatically higher" than in past years. "Wages in South China have gone up by 30 percent and in North China by 20 percent," he maintained, adding that some companies, including Chinese, had migrated to low-cost sites.

Sharp rise in China's domestic consumption

Lin Yun Feng, the secretary general of The Sub-Council of Textile Industry (CCPIT) of the Textile Industry Chamber of Commerce (CCOIC), said that domestic demand in China was now outstripping foreign demand. China's domestic consumption of fibers had surged 30 percent to 40 percent. "Domestic demand has become more important than ever before, particularly since the financial crisis hit the global markets," he said in an interview. On the other hand, China's overall exports had fallen by 5 percent to 10 percent due to a decline in demand and the rise in prices.

Lin said that China's prices had increased because of the improved quality of its products. Labor costs had increased in China because the government wanted the standard of living of the workers to improve by offering them better wages and working conditions.

"The migration of companies from China to Vietnam will continue because of China's free trade agreement (FTA) with the ASEAN group of which Vietnam is a member state," Lin explained the relocation of manufacturing outlets from China to low-cost Southeast Asian sites.
The Chinese currency yuan's appreciation in relation to the U.S. dollar has been the talk of the industry for sometime. "Definitely, our textile exports will be affected if the yuan is revalued," Lin acknowledged.

China's textile industry is also closely watching competition from countries such as India, Pakistan, Bangladesh, Mauritius and Vietnam. "These countries have their advantages. I know many Chinese companies that want to cooperate with companies in these countries," he said, declining to name such Chinese companies. "However, I can tell you that these companies are, mostly, in the Shandong province," he added.

Cautious optimism amongst apparel suppliers

Many of the Asian apparel suppliers at the IASS had come to position themselves with the prospect of improvement in the overall business environment, as one Indian exhibitor put it.

Stephanie Everett, the group show director, textiles, of Messe Frankfurt USA, maintained that she had received "positive feedback" from the exhibitors. "The overall feeling is that the recession has started to lift. The overall response has been favorable ... indeed, companies that said during the recession they would not be coming [to the show] are here now," she maintained.

Many exhibitors at the show, including from China, Taiwan and India, used the figures provided by Messe Frankfurt to maintain that there were "positive signs" of an economic recovery. There were some 280 exhibitors at the show compared to 196 in mid 2007, when the economy was at its peak before descending into the recession that followed.

Manik Mehta is a free-lance writer based in New York.

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