Special Report: Sourcing: The China Question

No one has many answers when it comes to near-term sourcing in China, but there was an air of determination rather than resignation among some of the Chinese apparel manufacturers at Apparel's 2nd annual China Sourcing Fair.

The Chinese refer to the city of Shanghai as "The Head of the Dragon." While the description carries symbolism tracing back many dynasties, it also seems particularly poignant to describe the role this modern, sprawling metropolis plays in today's apparel world -- devouring orders from around the world, feeding the economies of surrounding provinces.

Shanghai provided the backdrop for Apparel's 2nd annual China Symposium & Sourcing Fair this past September, which featured a full day of educational sessions, some 300 exhibitors, a day of tours and a networking golf tournament. Apparel publisher Susan Black summed up the pervading sentiment about China sourcing well at the event's opening ceremony when she compared last year's heady enthusiasm -- an almost palpable anxiousness to take advantage of opportunities in China -- with this year's cautious wariness.

Despite ongoing uncertainty over U.S.-China politics, trade deals and safeguard measures, China continues to export more apparel to the United States than any other country. And with China's abundance of cheap labor and the U.S. market's insatiable appetite for cheap prices, it is unlikely the Chinese "dragon" will starve for U.S. textile and apparel business for very long -- though it may feel a few hunger pangs in the next few years.

The short-term outlook: doubts on all sides
Speakers at Apparel's China Symposium tempered their remarks with repeated calls for caution about near-term apparel sourcing in mainland China. Thomas Haugen, president of major trading firm Li & Fung U.S.A., said for the next two years his firm is not planning to increase its apparel sourcing in China from the 27 percent level it holds today because of restraints on Chinese exports to the U.S. market.

"Uncertainty is the only thing you can't live with," he said. "Now it's like roulette."
Haugen said that "in a free world, China would take over the lion's share" of the apparel market because it has the best speed, quality and raw materials. But he added that he doubted there would be free trade between the United States and China for many years. Beyond 2008, when safeguards are set to expire, the United States could enforce anti-dumping cases that could further stimey Chinese exports.

Mohan Komanduri, principal and Asia-Pacific regional director for Kurt Salmon Associates (KSA), also pointed to the strong sense of uncertainty that characterizes China sourcing, and said: "It's all about politics."

But for better or worse, politics matter. Because of the lack of predictability about how many Chinese goods will be allowed into the United States in the coming years, KSA is advising clients to hold their allocation of production in China to less than 30 percent for the mid-term.
In 2009, there could be "a free for all" of apparel sourcing in China as safeguards and other restraints are lifted, he said. But like Haugen, he added a disclaimer: "But maybe not."

Still, Komanduri said apparel companies would do well to keep an eye on the promise of freer trade with China post-2008, and to focus on "getting on the ground and getting a bite of that capacity" now.

For firms interested in keeping a steady presence in China, Komanduri said he is recommending outward processing arrangements (OPA), whereby goods can be cut and partially sewn in China but then transformed into garments in other, non-quota-restrained countries, such as Hong Kong. But he cautioned that there are not many factories that "can legitimately do OPA."

Komanduri said there is a lot of overcapacity in China, and that "a lot of people have been burned" by the safeguard restraints. He said the Chinese consumer market would not be able to use up all of the capacity "overnight."

The long-term future: China building up
China has shown a few signs that it is concerned about the overcapacity issue. In the keynote presentation at the symposium, Jin Bosong, deputy directing researcher on foreign trade and the Japanese economy for China's Ministry of Commerce, said there was "some overheating" of China's economy last year and that the government was "trying to take care of it."

China adjusted the value of its currency up about 2 percent against the U.S. dollar in July, and imposed export tariffs on some textile and apparel exports last December to try to slow the apparel export explosion.

The Chinese government also is pushing for higher domestic prices for its country's farm goods in an effort to give its population in rural areas a chance to enjoy some of the economic prosperity experienced by those in its cities -- and to encourage more of its rural population to stay put on their farms rather than flocking to cities for industrial jobs. This move and other factors could continue to drive up the cost of labor for factories, and help cool down China's super-nova economic growth.

But among Chinese apparel firms interviewed by Apparel at the September sourcing fair, there was an almost unanimous common theme: Plans to expand. And many firms referenced plans to extend their operations into China's western provinces, saying the Chinese government is encouraging the development of business and the economies in the West.

Several firms said that some of their expansion will result in increased sales to China's domestic market, but most said their ultimate growth goal and reason for building new factories was export growth.

In his symposium presentation, Haugen said China will have more miles of throughways than the United States by 2008. And he, too, pointed to the prospect of growth in western China, noting that the Chinese government "is helping develop" the region.

He said high gas prices are "the only hope Central America has going" to compete with China and other lower-cost countries in the apparel business. This is because gas prices raise the cost of air shipping products to the United States, creating a lead-time incentive to source in Central America. But he added that China probably will subsidize the cost of petroleum to help its companies stay competitive, or buy an oil company to ensure a steady supply.

It is in conclusions such as these that China's unique combination of capitalism and communism add up to the ultimate in global competition.
As swimwear executive Seth Schreiber of A.H. Schreiber summed it up: "China redefines capitalism."

Dr. Harry Lee, head of TAL Apparel Group, one of the largest apparel companies in the world with headquarters in Hong Kong, said this about the relationship between the Chinese government and the country's economy: "In many respects, China is more capitalist than many other countries."

Lee said that the Chinese people have become increasingly entrepreneurial, especially in the past few years. Normally a communist system of government would inhibit economic growth, but in China, entrepreneurialism is driving growth, he said.

Chinese firms: their ambitious game plans
That entrepreneurial spirit, only at times tinged with a touch of the government's party line, was evident among Chinese firms at Apparel's China Sourcing Fair.

Many foreign trade managers, even for large companies, appeared to be in their early 30s, if not late 20s. And they had ready, confident answers to just about every question about their business' short- and long-term strategy.

Donghua Textile Group, for example, is focused on five key goals for the future: 1) building its organic cotton apparel brand, Marvellous, both domestically and internationally; 2) creating several new casual wear brands for the Chinese market; 3) entering into a joint venture with a foreign firm with the objective of adopting the foreign firm's management best practices; 4) expanding its Occidental brand in Europe; and 5) taking over a U.S. or Italian brand.

The vertical firm (cotton to finished product) employs 5,000 in the Jiangsu province and has plans to break ground in mid-2006 on a new industrial park on 300 acres in western China. In addition, by the end of this year, Donghua expects to build a new dye house on 60 acres near the Jiangsu city of Wuxi.

The firm's general manager Li Wei and vice managers of international cooperation Shidong Xu and Ma Qiang said they hope a new agreement between the United States and China will lead to freer trade. Li said he thought an agreement modeled after the China-EU textile and apparel bilateral would be good, though he believes higher export growth levels should be allowed with the larger U.S. market.

In the meantime, Donghua's plan for riding out the safeguard storm is to ship its fabrics to Cambodia and Vietnam for CMT. It also may build its own factories in these countries.

Hongdou Group, which describes itself as China's second-largest apparel company (after Younger), is eyeing export opportunities in markets such as Japan, Australia and other countries that are not limited in their number of Chinese imports. The firm also is looking into production of garments not likely to be affected by safeguards. But it will be hard to make up for the loss of U.S. orders anticipated because of safeguard restraints.

The multi-faceted Hongdou employs 20,000, many at its 4.8-square-kilometer industrial park in Wuxi. The sign on the building in front of its sewing plant proclaims: "Welcome to the Largest Workshop in Asia." Inside the building, about 4,000 workers make textiles and apparel (the balance of Hongdou's employees produce tires, motorcycles, batteries and other products).

Hongdou was a state-owned company until 2001, focused primarily on producing goods for the domestic market. But exports account for about 15 percent of its business today, and it wants to grow this portion to 30 percent. Hongdou has the capacity to produce 4,000 suits and 20,000 shirts per day, and is building another sewing factory in the industrial park for suit production.

Henry Yang, chief of the CEO's office for Hongdou, said the safeguard situation "is a very big problem" for the company because Hongdou worries about not having enough orders to keep workers busy. In turn, its employees may leave its factories to find work elsewhere.
"It's not fair," said Yang, noting that China's textile and apparel industry employs 100 million from the cotton field to the finished products, whereas the U.S. industry employs far fewer (a little less than 1 million).

Yang said he believes the United States should allow a free flow of imports of Chinese apparel in exchange for sales of technology and high-tech equipment and services to China. He pointed out that Hongdou has invested in CAD/CAM technology and automated cutting, sewing and textile processing equipment from Europe.

"No one can compete with China," he said, noting that a Chinese worker can typically produce 15 pairs of pants in the same time it might take a worker in another country, such as Bangladesh, to produce five pairs.

While it hunkers down to deal with the U.S.-China trade lull, the Hongdou Group, like Donghua, has its eye focused on international expansion of its own brand, which carries its company's namesake, which in Chinese means "love seeds," and is associated with a well-known Chinese story similar to "Romeo and Juliet." Hongdou is building up its design center, bringing Italian designers to its headquarters to help train local employees.

High Fashion (China) Co. Ltd., a silk garment producer, also is investing in training with Italian design houses on its quest to grow its August Silk brand into the largest silk clothing brand in the world. Sina Zhang, manager of the sales department for the firm's knits business, said High Fashion wants to absorb the best design techniques and concepts from Italy and other leading design centers, and combine this with the firm's own style. She said she believes this mixture of Eastern and Western cultures is a very good thing.

Like the others, High Fashion's design and brand expansion agenda is accompanied by ambitious construction plans. The 5,400-employee firm expects to double its employment level after the completion of a new "silk basement" in the Xiao Shan region.

Ningbo Mingda Knitting Co. Ltd. also has big expansion plans. The firm, which employs 4,000 at 12 factories, is expanding into China's west, or innerland, as the firm's Helena Luo called it. The company expects its new factory in the city of Wuhu in the Anhui province to be completed in one to two years. There is cheaper labor in Anhui, said Luo, and the Chinese government is encouraging local development in the area to help raise the quality of living for its western population.

"We pray our business will be better so we can expand our business and develop the innerland," said Luo.
But the company is not sitting still while it waits for its prayers to be answered. It has a three-pronged game plan for sustaining its business through the safeguard period, and then growing it thereafter.

First, it plans to focus on exports to South Africa, the Middle East and Australia, to help make up for business lost to the United States and Europe because of quotas. Second, it is ramping up production of baby wear, fabric and other goods to sell to the U.S. market that it does not believe will be blocked by safeguards. Third, it is signing deals with U.S. customers to guarantee them capacity after 2008.

The temporary safeguards "don't decrease our passion to develop customers in America," said Luo.
Frank Cheung, vice general manager of Shanghai G.S.E. International Trade Co. Ltd., also said: "We've never given up on the U.S. market."
But he holds a bit more pessimistic -- and perhaps realistic -- view of the U.S.-China textile and apparel trade situation.

Cheung is a former textile industry professor turned businessman. His firm owns a relatively small sewing factory, but is primarily a trading firm, buying and selling goods made in other Chinese factories. Cheung said business with the United States was going well until the safeguard quotas hit. He has seen this type of business downslide before, such as when the Japanese economy hit tough times in the late 1990s.
Like the others at the sourcing fair, Shanghai G.S.E. also has a solid plan for coping with new apparel quotas from the United States. But unlike the others, this trading firm is poised to shift its trading business significantly out of apparel and further into the real estate, spa, media and education markets if the textile trade picture does not improve.

If U.S.-China apparel trade negotiations do not produce a positive outcome, Shanghai G.S.E. likely will downsize its textile trade volume from 90 percent of its overall sales down to 50 percent to 60 percent, Cheung said.

Cheung indicated that Shanghai G.S.E. probably would be OK through the next few years, half-joking that if anything, he personally faces some career risks because of his textile-focused background. But Cheung took on a much more serious demeanor in noting that his diversified company is not typical, and that many Chinese firms, focused 100 percent on the apparel business, could be hurt badly by new quotas and embargoes. "I'm worried about them," he said.

KATHLEEN DESMARTEAU is editor in chief of Apparel. She can be reached at 864-627-0276 or [email protected].

Editor's Note: Watch for information about Apparel's 2006 China Symposium & Sourcing Fair on apparelmag.com.