The big fairs in South China provide a good indication of the current state of the global economy. Especially the Canton Fair (China Import and Export Fair) with its three phases, which cover almost all imaginable product groups from machines to building materials, chemical and pharmaceutical products, through to consumer goods like watches, bags and textile, is like a yardstick for the buying power on the global markets.
According to the official figures more than 200,000 purchasers from all over the world travel to Guangzhou twice a year to inspect the array of goods offered by the approx. 24,000 exhibitors and place orders to the value of over 36 bil. US Dollars. It seems that this is where the heart of the global economy beats. However, as we already reported in the April/May issue, the economy is still suffering from heart rhythm disturbances. Although the organiser nebulously announced that almost 210,000 purchasers attended the fair, experienced Canton Fair visitors reported that at least phase 2 (consumer goods and gifts) and phase 3 (textiles, bags, food, office materials…) didn’t attract the usual masses. The aisles were empty, the uncertainty tangible.
Particularly a lot of the purchasers fromWestern Europeand the USA didn’t visit the Canton Fair this year, which is a reflection of their flagging economies. “In general I got the impression that the Canton Fair was much less well attended than in previous years,“ confirmed for instance Lorne Spranz, CEO of the Koblenz-based Spranz GmbH. “One noticed that the global economy is still experiencing a phase of uncertainty.“
However, it is not the economic problems alone that hindered the experienced import companies from attending the fairs. The surplus of Chinese shows has led to an oversaturation. Many of the professionals are drawing back, reducing the number of trade shows they visit and making use of the time in theFar Eastto visit their suppliers instead. The fairs in Hong Kong like the Hong Kong Gifts and Premium Fair – the by own accounts largest promotional products show in the world – may offer an overview of the product and design trends and also meet the high Western standards, but they don’t produce any direct contacts to the manufacturers in the country.
To an extent these contacts can be established at the fairs on the mainland. However, the days when one comes home from the Canton Fair with a suitcase full of newly discovered products seem to be over. Across the board the importers complained that there were far too few novelties inCanton. “Many exhibitors at the Canton Fair had the same products at their stands two years ago, they are frightened of showcasing copies. If you want to see novelties you have to go to the showrooms of the manufacturers. We no longer consider the fairs to be platforms for finding novelties and now develop the products ourselves, because there is such a high risk of purchasing copies unintentionally,“ explained Armin Halfar of theBielefeldbag specialist company, Halfar.
And also Stef van de Velde, CEO of Dutch importer GivingEurope, summed up: “TheCantonfair is less and less important. There are hardly novelties on display at the fair because the producers are afraid their products might be copied.”
Mike Oxley, CEO of the British distributor Lesmar, focuses on other shows instead: “TheCantonfair is never good for innovations. The Global Sources Airport Show inHong Kongis a lot better, and I was also surprised at how many innovations could be found at the Hong Kong Gifts & Premiums fair this year.”
|“Permanently searching for the cheapest provider and the constant change of suppliers this implicates reminds me of Russian roulette – but with two bullets.”
Lorne Spranz, Spranz GmbH
Domestic market is booming
The Canton Fair is currently making up for the loss of purchasers from the Western industry nations with an increase in purchasers from the economic boom regions. Spranz was not alone in registering a “high share of visitors fromSouth AmericaandEastern Europe. Furthermore, one encountered considerably more purchasers from the domestic markets.“ “The Canton Fair is developing more and more into a domestic show,“ Halfar observed too.
As such the fair is a true reflection of the Chinese economy in general. The number of export-oriented companies is declining, whereas the number of companies that predominantly produce goods for the domestic market is rising. There are several reasons for this: The demands regarding quality and or the non-use of potentially health-endangering materials inChinaare well below the applicable standards inEuropeor theUSA. The legislations that have to be observed are not as strict, the companies don’t need any export licences and no foreign language skills. Finally: The domestic market is a much more attractive market with dynamic growth rates.
In the last few years the Chinese government has undertaken great efforts to strengthen the domestic economy. The drastic rise in the wage levels implemented has not only helped the working population to achieve more comfort and a higher standard of living, but has also stimulated the private consumption. In the light of the country’s own huge population, the domestic market harbours an immense potential, which is gradually being tapped.
Other nations and global players have long since realised this. Many companies are considering the meanwhile richer Chinese population to be a desirable target group. For instance, German car manufacturer Audi sells more of its A8 models to the Republic of China than to any other country, the parent company, VW earns a quarter of its overall turnover in China. “In the foreseeable future the country will also become the most important market in the world for Mercedes, BMW or Porsche,“ wrote the German newspaper FAZ. The situation is similar in other industries, for example in the machine construction, electronics or chemical industries.
|“The Chinese manufacturing market is like a sponge, it has no contour, it changes constantly.“
Michael Diekmann, Die UKW Vertriebsgesellschaft
Is China developing from the “workbench of the world“ into the world’s largest sales market? Significant changes are at least noticeable on the labour market. The interest of the entrepreneurs in work-intensive products is waning more and more,“ informed Halfar. “The workers don’t want to work in the textile industry for instance and are looking for jobs in high-tech firms that pay more, or in the service sector, where the working conditions have improved. The boom cities for example have a high requirement for service personnel in the gastronomy industry.“
The workers are leaving the factories, however the bag specialist doesn’t foresee any immediate delivery problems for his product group: “The poor economy inEuropeand theUSAhas led to a stabilisation of the situation in so far as sufficient production capacities are currently available and the delivery times have returned to normal. However, if the order volumes increase again,Chinawill reach its capacity limits.“
|“Factories in China should refuse to sell to Europe when the item is not in line with the European law.”
Stef van de Velde, Giving Europe
The situation on the labour market is making things very complex. Workers are leaving the companies because they see better chances in other branches of trade, because they want to return to their families or because they are founding their own companies. According to Halfar, “every day around 1,000 new companies are founded in China, mostly trading companies.“ Many of them don’t survive for very long. “In our experience approx. 40% of the Canton Fair exhibitors no longer exist eight weeks after the trade show,“ confirmed Michael Diekmann, CEO of the German promotional products agency Die UKW. The high fluctuation of the businesses doesn’t just affect the distributors, but also the producers. “The Chinese manufacturing market is like a sponge, it has no contour, it changes constantly,“ continued the UKW CEO.
The Chinese are considered to be extremely flexible, but that is not the only reason for this permanent change. Money is a further reason. “The Chinese Government strives to hinder markets from overheating, and intervenes by taking regulatory measures. For instance it is difficult for companies to obtain loans. This in turn leads to entrepreneurs borrowing money in desperation from dubious sources at excessive interest rates,“ explained Spranz. The liquidity is often only secured for a short period of time. If not enough orders are obtained at shows like the Canton Fair, the business has to close down.
|“For product groups that are labour-intensiveChinaremains without alternative.”
Mike Oxley, Lesmar
The Chinese government has a much higher regulatory influence than the Western European democracy is used to. Many measures are very questionable from our point of view, some even appear inhuman – for instance considering the repression of the human rights activists and opposition members. On the other hand the population of the huge empire does profit from certain measures. The situation of the rural population has improved considerably over the last few years: Tax advantages are aimed at encouraging the farmers to stay, the infrastructure and the education systems are also being modernised in the rural regions. There are more opportunities for finding a job. “The work has returned back to the houses from the factories,“ describes Halfar, “the number of migrant labourers has decreased significantly,“ according to Spranz.
Factors that are good for the people in China do however place high demands on the improvisational skills of the importers. Many production firms have shut down only to open up at a different location, whole branches of industry have relocated, the area to be travelled expands continually. As a result only real insiders and import specialists can keep up with the market. “We have got used to the situation in the factories, but there is still a lot of change”, confirmed Oxley.
|“I can’t see that the innovation factor is gaining significance on the promotional products market at present. Especially in the case of large volumes, it all comes down to the price.”
Armin Halfar, Halfar System GmbH
A further problem is that if something goes wrong it is very difficult to enforce recourse claims because of the production market’s lack of transparency. “As a medium-sized company in China we have no legal representation,“ complained Diekmann. “In the event of a complaint next to nothing is done, particularly if the provider doesn’t happen to be located in one of the metropolises.“
The solution is long-standing partnerships, which all of the experienced importers build and rely on. “We work together with approx. 150 manufacturers, whom we have drawn up framework agreements with. This ensures us that we are always able to deliver,“ commented Diekmann. “We have been cooperating with some of our supplier partners for over 25 years.“ “Permanently searching for the cheapest provider and the constant change of suppliers this implicates reminds me of Russian roulette – but with two bullets. The demands have become much more complex, our QC teams have a lot more to do than a few years ago. We thus place our bets on continuity, on reliable partnerships with customers and suppliers,“ added Spranz. Companies that want to secure a certain quality level have to be prepared to invest in such long-term relations.
Unrighteous import practices
Products that correspond with the European norms have their price. Experienced importers sometimes turn down orders with prices that have been set too low, knowing that they may receive the goods at the agreed price, but not at the agreed conditions, i.e. including social audits and compliance certificates.
If a distributor or an end user wants to have a product nevertheless, this can lead to worrying consequences: “If an end customer wants to have a promotional item quick and cheap, distributors are trying to import directly from China to have more margin. And unfortunately, it is a fact that factories are supplying European distributors and suppliers without any test report”, Stef van de Velde said. “Factories in China should refuse to sell to Europe when the item is not in line with the European law. But ultimately, the end customers are responsible if they force the distributor to supply from China for the lowest price.” According to van de Velde, the steering committee of the European umbrella association EPPA (European Promotional Products Association) is preparing a standard code of conduct for the European promotional market to avoid unfair competition between suppliers and end users.
The importers are still suffering as a result of the price increases, whereby the good news is that they are not rising as rapidly as a year ago. However: A weak Euro, higher freight costs, a continued increase in labour, energy and raw material costs mean that in spite of the weaker demand from the global market – the price curve is still spiralling upwards. And experts like Michael Diekmann think the end is nowhere in sight yet: “The price increases will continue due to diverse parameters. For instance due to the increased domestic demand the number of providers who produce goods for export will sink, so the competition will subside. At the same time the quality demands are increasing. We calculate increased costs of between 5% and 10% for certifications by independent testing institutes alone. It is complicated to comply with the numerous EU requirements: It is extremely difficult to cover the costs of product labelling for a 15 cent ballpoint. And the precious raw materials become scarcer all the time and have already been purchased by China in huge volumes. Thus ‘in toto‘ – and in view of the ongoing weak global economy – products are certainly not going to become cheaper.“
So is it worth importing goods from the Far East long-term? Diekmann has already pointed out that the cost advantage is almost exhausted. “The cost advantage gap between the Asian and European manufacturing markets has narrowed more and more over the past years. Europe has in the meantime already become much more interesting for us for certain product groups, such as textiles, especially when taking into account not only the increasing costs, but also the lengthened delivery times from Asia. A year ago we calculated between 10 and 12 weeks for sea freight, now it is around 14 to 16 weeks.“
Own creations vs. fakes
Of course, Diekmann knows that this does not apply for all product groups. For instance electronic products are still at home in China and in spite of all the problems as far as development is concerned China is considerably further advanced than the repeatedly cited alternatives such as Bangladesh, Vietnam or India.
Mike Oxley: “More and more can be produced in Europe at competitive prices nowadays. For instance, we are producing a lot more paper products in Europe than we used to, which is good. But for product groups that are labour-intensive China remains without alternative.”
“China has adapted strongly to meet the Western requirements,“ ascertained Diekmann. “Taking fakes as an example: I demand a written import licence from my customer for every order, because otherwise I can’t get the goods out of the country. The customs didn’t pay attention to fakes up until a few years ago.“
The fact that the “flexible Chinese” meet the needs of the Europeans when required, shouldn’t mislead us, because in many areas a totally different philosophy prevails. The trend towards environmental awareness is not as strongly anchored in the minds of the Chinese as it is here for instance. “If China doesn’t get to grips with its environmental problems, it is going to start losing market shares,“ prophesied Diekmann.
A further difference in mentality can be seen when dealing with the theme “own creations vs. fakes“. Although a current survey of the Technical University of Munich claims that China is moving away from “imitation towards innovation“, this is not yet tangible on the promotional products market. “I can’t see that the innovation factor is gaining significance on the promotional products market at present,“ noted Halfar. “Especially in the case of large volumes, it all comes down to the price, design elements are considered to be very unimportant and the development costs too much time and money.“. “Chinese designers are very strongly influenced by domestic, oriental, South American or US American tastes,“ added Spranz. “And the old Confucius saying that it is an honour to be copied, is still very valid in China.“
So, like Halfar and Spranz many importers have decided to develop products themselves and just have them manufactured in China. Companies that are following this strategy have less and less need for the big fairs. So it is quite possible that the Canton Fair will lose even more significance for the Western European importers. However, the same certainly doesn’t apply for China as a production market.