Q&A: Behind the Seams: Inside China’s Declining Apparel Production
With news of quiet factory closures in former manufacturing hotspots like Guangzhou, retailers and economists are concerned that China’s former production prowess is over. Which countries are reaping the benefit of China’s production decline?
Mitchell Weber is the Vice President of Sales at Herman Kay, since August 2011. Previously, Mr. Weber was Executive Vice President of Sales and Sourcing at Rewire Clothing Company, from August 2010-August 2011. Weber has 13 years of experience with sourcing, design, pricing, and product development for major specialty retailers, department stores, discounters and wholesalers. His extensive customer base of over 100 retailers and 20 importers in the US, Europe and Asia includes companies such as Wal-Mart, Abercrombie & Fitch, H&M, JC Penney, Target, and the Gap.
How did China go from becoming a manufacturing powerhouse to where it is now?
China [was] the perfect storm. They had the best technology, the best infrastructure [and] a supposedly vast, skilled workforce that could never be tapped [out]. Freight on board (FOB) prices, because of the monthly wage and cost base, were quite low. All the fabrics and trims were there, so everything was local. The shipping and the transport, as far as timeframe and cost factor, were also great.
In 2008 and 2009, [in] the deep throes of the recession, a ton of factories closed--in apparel, probably about a third. They just couldn't survive.
Then the demand started to increase again. Raw material cost started to go up, cotton being the basic one. The workers started to protest and wages went up considerably. [in 2009] a monthly worker's wage was maybe around $89 a month. It's now at about $279 to $289. It's projected to go up another 68% this year, and it's projected to double over the next five years.
Meanwhile, the apparel industry is something [China] doesn't want to be involved in. It's labor-intensive [with] very low profit margins. They'd rather be making flip switches. China basically decided, "That's it. We're not giving anybody better pricing. That's it. These are the prices." It was as if every maker in China held hands and said, "Do not budge. Do not change." This started in first quarter of 2010 when, all of a sudden, we started to see these increases in prices, delivery slides, lack of capacity, and all the makers not budging.
Did skyrocketing commodity prices give the manufacturers new leverage?
A lot of it was due to the increase in cotton, but it wasn't just cotton. [If] you wanted to make a synthetic garment, [the cost to produce went] up massively. And you'd say, "Well, why?" There's not much of a cost increase on the raw materials in synthetic.
The only differential was that the workers' cost base went up. But the increase percentage-wise [on synthetics] was a lot greater than the increase in wages. I had orders [in for] 2010 and even 2011, and the makers came back and asked me for price increases after the prices had been agreed upon. Never happened in my 14 years of doing business.
To add insult to injury, the fabric mills [started] asking for another 45 days [to deliver]. They can't get the fabric, it's being delayed, so we need to ask for another month-and-half extension. When this started to happen, people had to sit back and say, "Wow, is this a short-term situation, or is this something that's going to be long term?" People then started to look at all aspects of the supply chain and say, "Well, what can we do to either fix it temporarily or for the long term? What do we have to do?"
The main factors that caused all the increases were raw materials, workers' wages and transportation. Transportation costs represent anywhere from 7% to 12% of a garment, depending on the nature of the garment and the region of the world that it's shipped from. Back in 2006 [in China], a 20-foot container roughly was around $3,000 [to ship]. A 20-foot container today is $9,500, a huge increase.
Are you advising companies to get out of China?
People are looking for alternatives. Is China going to go away? No. They're too big. But people there are also looking at other apparel- producing infrastructures. Everybody is subject to the rise in raw materials. Everybody's subject to the transportation rise. But in places like Bangladesh or Vietnam or Pakistan, you're looking at a lot lower cost base because of the workers' wages there. In Bangladesh, the [wages] could be $89 to $99 a month, a large differential versus China.
Which countries are benefiting most from the production shift out of China?
For me, a large shift has been to a couple of places. Vietnam has a good infrastructure. It's not China's infrastructure, but it's a lot better than a lot of other countries. Bangladesh is critical right now because Bangladesh is probably the lowest-cost base wage in the world. Their garment center is quite large considering the [size of the] whole country, and it's a growing part of their industry.
Other countries are Cambodia, Laos, Indonesia, Sri Lanka, Pakistan, India, and some African nations due to their duty-free status. Some people have also migrated a lot into Mexico. Mexico is known for their denim and T-shirts. What's good about Mexico is its proximity to the United States, but the worker cost-based wage there is twice as much as China and the workforce there is 44 million people. China's is 20 times that.
If producers switch to lower-cost nations, what new production considerations do they have to take into account?
Each country cannot make every type of product, where China can make everything. You can't go to Bangladesh and make a seam- sealed, breathable, waterproof technical jacket; they don't have the capacity to do that. China does. Also, other countries will not take orders of 800 pieces and 1,000 pieces. China does. Still, to this day, most footwear and sneakers are still produced in China.
Even when you move production to other regions, you still have to get your fabric. The majority of the fabric is in China. So you now have another factor when you have to ship in the fabric. Makers [are] going to charge more, because [they] have to pay for the freight. Then there is also a time differential.
What will remain in China?
Luxury items will stay in China for a couple of reasons. A lot of these other countries can't make them. And luxury items have price insulation if costs increase. If somebody's going to be spending $900 for a jacket, if the jacket goes up to $959, they're not going to balk. The person who is paying $5 for a pair of boxer shorts and the boxer shorts are $7.99, they're going to balk.
[China is] too big to fail, but things will change over time. As people start leaving China, capacities will open up a little bit. Once capacities open up, prices from the makers will come down on the [cut, make and trim prices], and will make it a little bit more competitive.
How is China playing defense?
China is funding and opening factories in other parts of the world, [such as] South Africa. Somebody like myself is very happy about that because, if the Chinese are opening up a factory there, I know that their workers know how to do the product. They don't have to be trained.
Even so, I see a huge shift with people taking a certain percentage of their production and moving it out of China. [They're] doing it slowly with certain type of items, but moving out of China because it's getting cost-prohibitive to make certain types of goods there. For Spring of 2011, my costs were up in my [sourcing] business anywhere from 7% to 15%; for Fall of 2011, my costs were up anywhere from 14% or 15% to 28%.