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Chinese contract manufacturers pinched in recession

English.news.cn   2012-08-29 20:44:03            

HEFEI, Aug. 29 (Xinhua) -- Chinese contract manufacturers are feeling the pain of dwindling orders as many of their clients withdraw production plans amid the global economic slowdown or move to southeast Asia in search of lower costs.

Adidas, the world's second-largest sportswear maker, was reported to have ended cooperation with some contract manufacturers in China this month after announcing that it would move its only Chinese factory to southeast Asia last month.

"We're still producing for Adidas," said a company executive of Tongling Donglong Huadong Garments Co. Ltd. in east China's Anhui Province. "But the batch of 190,000 products is the last order it placed with us."

Donglong Huadong is the epitome of many low-cost exporters in China.

In Suncun Township in the city of Wuhu, Anhui, one of the top garments manufacturing center in China, many small companies likewise face bleak prospects.

The small town witnessed an export boom for a couple of years after many garment makers settled there after moving from the southeast coast to the lower-cost inland years ago.

After years of growth, the contract makers are now feeling pressure as they have to compete with domestic and even southeast-Asian rivals for fewer orders for meager profits. For many of them, the orders from big brands are their only lifeline as they do not have their own brands.

"Years ago, we posted annual sales of over 10 million yuan (1.6 million U.S. dollars) and net profits of over 1 million yuan," said Qian Qiusheng, owner of the Liren Garments Co. Ltd. in Suncun township. "But since last year, we have barely made any profits."

Cut-throat competition and dwindling orders on the back of the global economic slowdown and industry transferring drove down clothing industry revenues in Suncun to less than 900 million yuan in the first six months of the year, much less than half of the 2.4 billion yuan won in the whole of 2011.

Like in Suncun, exporters nationwide have come to feel the pinch from sluggish external demand. China's export growth slowed sharply to a six-month low of 1 percent in July from 11.3 percent in June, strengthening anticipation of weak trade performance for the whole of 2012.

The "honeymoons" many exporters in major Chinese manufacturing hubs have enjoyed with their global contract brands are ending. At this point, restructuring seems like a natural choice, but for many of those struggling, the process could be long and painful.

Meanwhile, China has been losing out on competitiveness in terms of labor costs to southeast Asian countries, thus pushing many big brands to move facilities or place orders there, commerce officials have noted.

"China's labor costs have far surpassed those in its surrounding countries," according to Zhong Shan, China's vice commerce minister.

In Vietnam, the average monthly salary for manufacturing workers is about 1,000 yuan, and the figure in India is only 600 yuan. But in China's eastern coastal regions, the monthly wage is somewhere between 2,500 and 3,000 yuan, Zhong said.

The worldwide industry transferring is in line with market economic principles and both Taiwan and Japan have experienced similar painful periods, added Cheng Biding, an economic counsellor to the Anhui provincial government.

The retreat of global brands may not be a bad thing since the contractors churn out high trade volumes but low added-value, the counsellor said. "A college student couldn't always do the work of a primary school kid."

A complete industry chain and a huge number of skilled workers lay a solid basis for nurturing own-brands as a way to restructure low-cost manufacturers, in the view of Guan Yingping, director of the administration office of the Suncun economic development zone. Many have made initial progress in this, he said.

Wang Guanzhong, owner of Haifeihe Garments Co., said, "Starting from the first half of 2011, we have been unable to meet demand for our products." Haifeihe was once a contractor, but now it is committed to developing its own kids' garment brands.

"We have over 100 sales outlets nationwide and our new online shop now sells 200 to 300 clothes a day," said Wang.

A lighting factory in Anhui's Yuexi County has bustling business while many rivals that produce for contracts from big European brands like Philips are struggling.

According to Chu Chengkai, president of Lite Lighting and Electric Technology Co., its own-brand products are selling well in emerging markets like Nigeria and Pakistan.

"We're expanding production capacity to meet rising market demand. The new plant is built and we are ready to recruit new workers," Chu said.

To make through the hard times, China's low-cost manufacturers should come up with innovative products and launch their own brands to move up the value chain. Meanwhile, they should explore emerging markets, rather than sticking to traditional ones like the United States and the European Union, economists advise.

"Governments have rolled out measures to help small and medium-sized companies through hard times with trade finance and credits," Cheng Biding said. "The policies are not fully implemented in practice. Also, more bold measures are needed."

Editor: An
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