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China Report 2013: A job for Professionals

Rising prices, structural changes, legal restrictions, fluctuating exchange rates and tough competition once again characterised the production markets in the Far East last year. For importers this means their business becomes more and more challenging.

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Textile factory in Nanhai.

In 2025 at the latest, perhaps even five years earlier there won’t be enough Chinese labourers, who are prepared to work in factories, on building sites and in mines for low wages. This is the outcome of a current survey of two economists of the International Monetary Fund (IMF). According to Mitali Das and Papa N’Diaye from the Asian Department of the IMF, the wages will have increased so sharply that China can no longer continue to be the world’s cheap workbench – a development that occurred in a similar manner in Taiwan in the 1980s.
One doesn’t need any major economic or demographic knowledge to understand this forecast. The end of “cheap China” has long since been a topic of discussion in the general press. The opinions of the industry insiders have been predicting this for some time already. The message has in the meantime also been understood by the users: “The prices have been increasing for years and this has affected all of the market players,“ said Michael Weissenrieder, CEO of the globally-operating promotional products agency Global Brand Concepts. “In the meantime the key customers at least have accepted the fact that China is no longer cheap. The global players among our customers have adjusted to the situation.“
In the meantime enormous demands are being placed on the importers. Most notably due to the wage level, which in China according to the EU Chamber of Commerce is currently rising faster than the gross domestic product. “The wage costs are continuing to increase enormously – we are talking about an 18% increase per year,” reported Oscar van der Spruit, CEO of the Dutch import company, Intraco. “Even if the situation has become somewhat more relaxed in certain areas – such as the prices of raw materials for instance, the wages are still spiralling upwards,” commented Diederik van Styrum, Managing Director of Xindao, and Christof Achhammer, Country Manager D/A/CH of Mid Ocean Brands Germany, confirmed: “The increasing wage levels are still a big issue. However, the products are still in demand, so we have to search for solutions – for instance, more targeted purchasing and above all improved supplier relations. In this way, we were recently able to considerably reduce the prices of almost 250 products in our line-up.“ Meinhard Mombauer, CEO of the company LM Accessoires, adds: “The more labourintensive a product is, the higher the surcharges are that have to be calculated. For example the costs could be extremely high in the case of a hand-polished metal item. The prices of some products have doubled over the last few years.
Not to mention the fact that it is becoming increasingly difficult to find the corresponding personnel for many jobs in the Far East.“

Structural changes

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Chanel subsidiary in Hong Kong: thanks to the generally rising standard of living the domestic market is prospering.

Wage costs are just part of the structural changes, which have also been ongoing for years. A lot of employees in the traditional production centres of the coastal regions have long since found attractive alternatives to the often strenuous factory jobs. And the production plants can rely less and less on migrant workers, who were prepared to sit at sewing machines or conveyor belts in the past: “The industrialisation is taking place all over China, and many migrant workers are staying at home, because there is work there too now,” stated Mombauer. “The result is a permanent shortage of labour, which in turn affects the delivery times.“ An attempt to solve the manpower problem and maintain at the same time a low wage level, is to relocate the production sites into the hinterland. Several Chinese companies are actually taking this step, but according to van Styrum, this is certainly not happening on a wide scale: “There are of course manufacturers, who have successfully relocated into the hinterland, but there are others who have failed too. Especially the big companies are particularly cautious. Because the lower wages are accompanied by a much poorer infrastructure and efficiency level.

Companies often have to completely start from scratch there.” “Companies that relocate might have to pay less, but they have to face greater distances and less efficiency and thus increasing costs in other areas,” continued van der Spruit.
Of course, some companies – as a third alternative – are withdrawing from their traditional business areas: “Some factories are quite simply closing down, either voluntarily or because they have gone bankrupt,” commented Mombauer. “Some producers who have been in the business for decades – they are often Hong Kong or Taiwan-owned pioneers – have had enough and are no longer interested in relocating. There are a few individual cases where a company has simply vanished overnight.“
According to Mombauer when the production plants close down, very few of the locations are occupied by new firms: “Meanwhile there are lots of bureaucratic and other obstacles in China – from tax conventions, to labour law, through to the rent. In addition to this the Chinese Government is striving to develop ‘clean regions’, where certain branches of the industry are not allowed to relocate to, for environmental and image profiling reasons. This is particularly the case on the coast – one example is the region of Shenzhen.“

Furthermore, a lot of entrepreneurs are still orientating themselves on the domestic market, which in view of the generally rising standard of living is prospering and has become an attractive alternative to the export business – especially since a number of regulations, that are involved when manufacturing for the EU market for instance, no longer apply.

Punitive duties and exchange rates

That doesn’t mean that the leaders in Peking are no longer interested in the export business. “There is indeed a certain downward trend compared to the domestic market, but it is nevertheless still a significant growth factor that generates foreign currency, which is supported by the Chinese Government,” said Achhammer.

In any event, individual industries within the EU currently feel threatened by Chinese dumping prices. The punitive duties that the European Commission imposed at the end of last year on porcelain and ceramic items originating from the People’s Republic of China, which incidentally only occurred after the intervention of European manufacturers, are evidence of this.
For importers merely another obstacle that drives the prices upwards, reduces the margins and makes the calculations more difficult. The latter is already a tricky issue as a result of the exchange rates – and a unanimous opinion prevails here: “The strongly fluctuating exchange rate between Renminbi and US Dollars is still putting pressure on us importers,“ reported van Styrum. Weissenrieder voiced a similar opinion: “The uncertainties that arise as a result of the exchange rates are currently our biggest problem in China. Many suppliers include a buffer in their calculations, which serves to compensate for fluctuations in the US dollar, which is why we have started to transact our deals and enquiries directly in RMB.“

Ongoing theme: CSR

A further factor is keeping the importers – at least those who take their jobs seriously – on their toes and is furthermore also pushing up the costs: the ongoing theme of compliance. “Compliance and related issues such as certifications and audits can be an essential reason why prices are rising,” explained van der Spruit. This is at any rate an indication that in the meantime the corresponding certifications are being requested as a standard by a lot of users and that things are starting to move in China as far as improving the standards is concerned. “One can’t expect wonders, after all the European industry took decades to get there as well,“ stated Achhammer. “But the pressure is on and step by step we are seeing the first results.“ Mombauer confirmed this appraisal: “Not all of the plants are certified by far – in fact many are still miles away from achieving this goal – but many are following suit, because otherwise it is not possible for them to sell anything anymore. In addition to this numerous points are in the meantime firmly anchored in the Chinese law, for example such as minimum wages, fire protection or the ban on child labour.“
One issue that is difficult to solve is the observance of maximum working hours, as van Styrum explained: “A lot of factories have no other choice than to extend the working hours to such a degree that they exceed the legal limit. The employees often do excessive overtime and the authorities don’t check it out. If everyone stuck to the legal working hours, the prices would rocket by a further 20%.”

It is clear that laws and certifications alone will not suffice as a security against unethical working conditions or to ensure “clean“ products, because by no means all of the market players stick to the official rules. This leads to a distortion of competition, as van der Spruit illustrated: “A few years ago when the theme of CSR was not taken as seriously – to put it bluntly – everyone purchased their goods from the same factory. Today there is a big grey zone with black sheep on both the manufacturers and importers side. It is easy to buy a certification. And the decision as to whether one acts in an ethically correct manner or whether one wants to earn a fantastic margin perhaps, is a simple decision between factory A and factory B. Companies who take the theme of CSR seriously are at a disadvantage. We primarily support EPPA’s Code of Conduct campaign, because not everybody is playing by the same rules and there is still a lot of ignorance about. Just recently I visited a customer who had imported an order directly. I asked him whether he had also taken the certifications into account – but he hadn’t got a clue about the subject.”

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Production of storage media in Wuxi: for electronic products, China remains without alternative.

Fata Morgana Alibaba

The fact that it is so easy to make contact with Chinese manufacturers in order to gain a supposed insight into the import market makes the situation even more difficult for the professional importers. Manufacturers of almost any goods are just a few clicks away on portals such as Alibaba and their prices are also often posted online. “The fact that the prices have been made public makes negotiating extremely difficult – even when the prices are totally unrealistic. And yet we are still asked the question as to why a product is offered on Alibaba for half the price,” explained van der Spruit.

Plus the fact that search engines increase the temptation to have a stab at playing the role of an importer oneself. However, Weissenrieder warns: “Of course it is appealing for distributors to approach the manufacturers directly. It is also great having a reason to travel to Hong Kong. But the search engines only make it seem easier to import goods. Things might run smoothly ten times and then the next time it co

uld get you in to real trouble. In our experience you can forget nine out of ten of the suppliers on Alibaba. At the very latest most of them fail the audit.“

Counting contacts

“Long-standing relations are the be all and end all and are more important than making a fast profit,“ is not the eternal credo in vain. Mombauer cited an example: “Our very first manufacturer that we concluded a contract per handshake with in 1992 in Taiwan is still our partner today. In the meantime, the company is manufacturing in its second generation – still in Taiwan.“ Achhammer reported: “Our main suppliers are still based in the Pearl River Delta. Maintaining intensive relations to our regular suppliers has priority for us.“ “Quality remains to be the better argument, and this can only be achieved if we don’t keep switching backwards and forward, but instead create a basis according to which one can work,” added van der Spruit.
This is the only way that makes it possible to develop one’s own and thus unique products, so that you can stand out from your fellow competitors: “Today anyone can buy everything, which is why we rely on own designs that we protect and market accordingly. However, these can only be achieved through long term relationships with strategic partner factories,” commented van Styrum, whose firm Xindao really is one of the pioneers on the promotional products market in terms of made-in China own designs.
These are convincing reasons why the respective China trade fairs – in particular the Canton Fair and the Hong Kong Gifts and Premium Fair – have become less important for many importers as sourcing platforms than in the past. “The big fairs are still essential homework, but not so much as far as hunting for novelties is concerned,” said Mombauer. “It is much more about grooming contacts and having the opportunity to compare different manufacturers and regions. As well as the events in Hong Kong and Canton, we also visit a lot of other shows, for example in Shanghai, Shenzhen or Yiwu.“
There are however also importers, who completely avoid the individual fairs and rely instead on other contact platforms, such as van der Spruit: “I haven’t visited the Canton Fair for three years and I don’t miss it. I do still visit the Hong Kong Fairs, but factory visits and other network options have become more important.”

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Punitive duties, imposed e.g. on porcelain from China, are another obstacle for importers.

Where is the journey headed?

Particularly the big shows are of course still extremely impressive as a demonstration of the output of the Chinese industry. For many market players there is no mistaking the fact that China will retain its status as the world’s key workbench at least midterm. In the view of the photos: iStockphoto (3); Michael Scherer, © WA Media (3); flickr/Robert Scoble (1); flickr/Ian Southwell (1); flickr/torng-der miauw (1) Trade shows like the Hong Kong Gifts & Premium Fair: networking instead of sourcing? www.quick-goerlich.de shoulder bag X-tension embroidery on cotton Exclusive distribution through promotional product retailers Halfar System GmbH | D-33719 Bielefeld | Germany Telephone: +49 (0) 521 / 98 244-0 | www.halfar.com „Legendary“ Promotional bags by HALFAR®. Building brands. Advertisement improvements in the production conditions sector and in terms of China’s existing infrastructure, many are ruling out once again relocating their production sites to other low-wage countries: “We have completely withdrawn from Bangladesh – all of the factories didn’t come up to scratch as far as we are concerned,“ said Weissenrieder and van der Spruit added: “Vietnam offers good production conditions and a good quality level and a lot of companies, including also Chinese firms, are already manufacturing there. But as soon as a machine has a downtime, the whole factory comes to a standstill for a full week.” This needs to be resolved before it becomes a good alternative.” And as Achhammer explained, relocating to the next low-wage country would be a fatal step backwards: “To move to Africa for instance merely to achieve dumping prices would equate to fleeing back into the past with uncontrollable suppression and the worst possible working conditions. We would destroy everything that we have built up and achieved especially in terms of CSR, and would simply be going around in circles. Relocating is not a topic of discussion for us.“
Some companies are indeed relocating production sites back to Europe, but it is not a generally widespread alternative, as van der Spruit reports: “Individual products are being produced in Europe more and more often, especially Eastern Europe will become increasingly more popular over the next five years as a production region. However, for products in the electronics industry, which are our core business, this is still impossible. I always try to find out what the big bluechip companies on the market and retail brands such as Philips are doing. Because if these companies can still produce in China, so can we.” As such, a careful prognosis for China can ultimately be predicted also for the promotional products industry: Even when “cheap China“ has long since become history, there will still be China importers. Those, who want to belong to them, that much also seems to be clear, will definitely have to be professionals.

photos: flickr/Robert Scoble (1); flickr/Ian Southwell (1) flickr/torng-der miauw (1)

 

2016-10-21T14:23:13+00:00 September 5th, 2013|