Heading for new networks?

After three years of pandemic and supply chain chaos the global trade is returning to a new normality. Whilst not only cargo, but also passenger flights are commuting between the West, East and South again, a lot of changes have occurred in the production regions. Which challenges is the import business facing in the year 2023? eppi magazine heard what the European professionals had to say on the matter.

All of a sudden everything came to a standstill Factories, cities, whole regions shut down, business people, who previously had jetted backwards and forwards several times a year between Frankfurt and Shanghai, Austin and Hong Kong, London and Dhaka, didn’t set foot on a continental flight for years. A two month lockdown period in Shanghai Harbour – the largest container port in the world – led to huge bottlenecks in the movement of goods. Just under a year later most of the occurrences seem to have faded into the past: In April 2023 promotional products players from all around the world travelled to the relevant trade fair hubs in Hong Kong or Guangzhou for the first time again. They met up with partners and friends from all over the globe, whether at trade show booths or in the evenings at the appropriate social spots.

The joy this brought many of the importers cannot however make us lose sight of the fact that many changes have occurred at the trade fair locations in the Far East. For example, with 1,829 exhibitors the first post-pandemic HK Gifts & Premium Fair in April 2023 was significantly smaller than prior to COVID. 56,000 buyers attended the trade fair alliance comprising of five shows, including also the Gifts & Premium Fair. In 2019, around 50,000 buyers had visited the HK Gifts & Premium Fair alone and 4,320 exhibitors had taken part.

“I had the opportunity to attend the Hong Kong and Guangzhou trade shows this year. On comparing them to pre-COVID dynamics, I noticed that the volume of visitors was not the same and there was a noticeable increase in the share of Chinese visitors,” reported Alexandre Gil, CSO of the Portuguese full-range stockist, Stricker. Marcus Sperber, CEO of elasto, made similar observations: “Everything felt ‘normal’ at the trade show in Hong Kong, the show was similar to the previous years, however one noticed that there was a much stronger Chinese participation than before, both in terms of the exhibitors and visitors. The same was true in the city itself: It was indeed busy, but here too significantly more Chinese.” “I travelled to China in June to visit all of my suppliers directly,” added Emilio Estelles-Zanon, General Manager & CEO of the Spanish import company, encender y escribir. “All of them confirmed that the fair was not very good this year because of the difficulties getting a visa and because of the fear of COVID restrictions in China.”

Back to normality

After all, shortly beforehand the business had been unpredictable for both the Chinese companies and for the international trade and freight transport. The dramatic bottlenecks, which happened directly or as a consequence of the chain of events caused by the pandemic and which kept the global economy on tenterhooks until well into the year 2022, however seems to be under control in the meantime, as Gil reported: “The transport costs and availability of the ships has improved significantly over the last twelve months. But we still face an average of ten days delay regarding the transit time compared to pre-COVID times. The ship prices have significantly decreased, but they have not returned to the pre- COVID levels. We don’t expect that is ever going to happen, the present pricing is now the new normality.”

Estellés-Zanón commented, “It is true that we have faced many challenges over the past three years, COVID, high freight rates, a lack of raw materials, etc. Now the situation is much better and all these uncertainties have made us stronger and more adaptable to the changing conditions. The rates for freights are now acceptable. They may go up in future, but not as much as they did during COVID.”

The disruptions in the flow of global raw materials and goods by no means only affected the importers, who focus on China. Particularly textile companies that have goods produced in Bangladesh or other regions of South Asia were impacted too – such as the German textile professional Daiber: “Because we didn’t have many lockdowns in our main import countries, productions continued without major or longer interruptions. Whereby it was also difficult to get hold of containers or freight routes – and once the containers were on the ships, they often couldn’t be discharged because the harbours had so many backlogs,” stated Kai Gminder, Managing Director of Daiber. “Luckily this situation has more or less returned to normal now.”

Prama Bhardwaj, CEO and founder of the London-based textile specialist Mantis World, emphasised the value of long-term, respectful relationships to the producers: “When COVID hit, many big brands were cancelling orders that were already produced, demanding discounts from suppliers. We do not agree that all the risk should be pushed to one end of the supply chain, while the bulk of profits are enjoyed by the other end and so we did not cancel any orders, accepted higher prices and also gave factories extra time to produce so that the production process could be organised safely. Our suppliers have not forgotten this and went the extra mile for us to secure our supplies. As a result we have a lot of stock and now the pendulum has swung the other way with factories having excess capacity. Trying to keep a balance between unpredictable supply and demand is the challenge and the only way to succeed is if all parties concerned cooperate.”

The importers had no other choice than to trust their producers to a large extent anyway after not being able to visit them personally for years. “We were actually a bit nervous about what we would find after neither ourselves, nor our auditors or certifiers had been able to pay personal visits,” continued Bhardwaj. “However, we were very pleasantly surprised when we visited the factories – many had used the downtime to upgrade their facilities and improve efficiency. Our partners’ energy and appetite to improve was inspiring.” Daiber has already travelled to its production countries again on personal visits, as Gminder reported: “We have already been in Bangladesh and Pakistan. Life is carrying on as normal again in both countries and production is running smoothly.”

Deflation in China

The same is not quite true for China, which is still the number 1 producer by far for many importers and product groups: “COVID affected a lot of the small and inefficiently-managed companies in China, many of them have gone bankrupt,” remarked Estellés-Zanón. “Now we are observing that the availability of new products and designs is reduced, innovations occur almost exclusively in the field of new, environmentally friendly materials.” Ignacio Mitjans, Sales and Marketing Manager at Makito, added: “While the supply chain situation is now at pre-pandemic levels and we don’t expect any other crisis here, the deflation scenario in China is generating some concern.”

Because after the end of the pandemic the Chinese economy is recovering slower than most of the economists predicted. According to the Chinese Statistics Office, the consumer prices fell by 0.3% in July compared to the previous year. The producer prices that the manufacturers demand for their products had declined for the tenth month in succession and fell by 4.4% in July compared to the previous year. A price deterioration that the experts are among others attributing to the ongoing weak consumer demand – and the problems on the plummeting real estate market: In June alone the real estate sales decreased by almost 30% compared to the previous month. Nationwide China is sitting on a huge portfolio of more than 50 million apartments, for whom no buyers – let alone tenants – can be found. As if that wasn’t enough, after strong declines in the previous months, the exports dropped by 14.5% in July year-on-year.

Increasingly modern and sustainable

Whereby the Xi Jinping administration actually has ambitious goals and the economic downturn comes at an unfavourable point of time when large reorganisations are taking place: The 14th five-year plan for the period 2021-2025 is promoting the setting-up and development of modern production clusters in a bid to push key industries and technologies. At the same time the manufacturing sector’s share of the gross domestic product is on the decline: It fell from 28.1% down to 26.2% between 2016 and 2020.

The country already plays a pioneering role in many technologies today – at least as far as their sales and distribution are concerned: For instance, according to an analysis by the Centre for Solar Energy and Hydrogen Research Baden-Württemberg (ZSW), the number of electric cars in China increased up to 14.6 million vehicles by the end of 2022 – according to the ZSW that is 53% of the 27.7 million electric cars that exist around the world.

“China is catching up,” ruled Sperber. “For example, the country is much further than us in the area of e-mobility, one almost only sees Chinese cars everywhere and most of them are electric. The product design is however typically Chinese: One takes two or three existing designs and turns them into a new one.” Mitjans stated too: “The situation in China is evolving rapidly and we expect a radical change in technology, design and production.” Estellés-Zanón added, “Now the best companies are playing an important role in developing new technologies and setting the future trend of promotional products.”

This also applies for themes like environmental protection and sustainability in general – “made in China” has long since moved away from being a synonym for low-quality, polluted products from questionable sources. The latter still exist without doubt, one now has to differentiate between the two. “Step by step, China is adapting its production processes. As part of this development, the government usually launches radical measures to meet the environmental regulations. Now, in China, close to 100% of all motorcycles are electric and many of the car manufacturers are launching electric cars, also solar panels can be seen in many factories, so I think they are on the right track. The labour rights are becoming stricter and stricter and the safety and work conditions have improved,” said Estellés-Zanón. “Unfortunately, there is still always the Chinese way of doing things, that needs to be improved a lot.”

That is why it always comes down to whom you work with, which benchmarks one lays down for one’s own supply chain, whether one has a critical eye or not – and what price one expects: “You can get the quality and the environmental sustainability standards you want for almost any product today,” stated Gil. “Chinese producers have that kind of knowledge and capacity. It is just a question of how much one is willing to pay. When I visited the fairs in April, I noticed: There is a clear increase in the level of certification the suppliers are displaying. I emphasised the word ‘displaying’ – since on enquiring, in many cases the exhibitors answered that it was actually ‘work in progress’. Certification is starting to be something tangible everyone is aware of, but we are still far away from this being implemented in a recurrent way.”

Overall, according to Mitjans, there is still a lot of catching up to do in China: “When it comes down to environmental protection, China is still well behind the international standards, and I’m not sure if it will catch up soon. The same goes for social standards, occupational health and safety laws and conformity with CSR requirements: There is some progress, but it is clearly insufficient.” “Environmental protection is also a topic that is being addressed much more than in previous years, whereby it is certainly not the main topic,” ascertained Sperber. “The focus lies more on business and growth.”

Away from the factories

A social structural change is going hand in hand with the economic structural change in China – at least in the more affluent regions. More and more Chinese people can afford a better standard of living the middle class has grown considerably over the past years. As a result many of the industries and the service sector are increasingly paying special attention to the domestic market, their fellow countrymen are becoming an interesting target group. “Mainland China itself is in the meantime focusing much more strongly on China,” reported Sperber. “One hardly even finds English-speaking personnel in the international hotels anymore, the staff communicate with the guests via translation apps. What’s more, it is becoming more difficult to pay using credit cards from the West, WeChat Pay is almost exclusively used for the payment process, which is nigh on only possible for Chinese citizens.”

Many people in China are no longer reliant on having to work in factories, but are elbowing their way into better jobs in other industries, whilst the wage level is noticeably increasing. According to the statistics, the average annual wage in China in the year 2022 was 114,029 Yuan, which corresponds to around 16,849 Euros. In comparison, the yearly average wage in Romania was 14,181 Euros in 2022.

Many Chinese producers are thus relying to a greater extent on automation and in this way are becoming more cost-efficient, but at the same time they are less flexible in terms of the diversity and adaptability of their products. This means they are losing one of their big advantages. The exodus from several segments simply cannot be avoided. “China is investing in automation as well, this reduces the workforce needed considerably. In combination with the significantly lower costs for electricity, the location remains powerful as a result,” explained Sperber. “I still see China unrivalled especially in the electronics segment. Individual industries will however be taken over by other countries, which in some cases I consider to be real alternatives. We had major problems with the global supply chains during COVID. Of course, it is always about the price, but the demand for local production is rising tangibly.” “Step by step, we are looking for new countries to manufacture some of our products,” confirmed Estellés-Zanón, “but the high competitiveness of the promotional market limits the possibilities, as finally the relationship between price and quality is the most important. However, Indonesia and Vietnam could be part of an expansion.“

Most textile companies have long since been placing the focus on their import activities outside of China anyway – above all on Bangladesh, which in Gminder’s estimation will continue to be the centre of the textile industry in the future too: “The country has also made much more progress in terms of environmental protection than is widely known in Europe. When a new factory is built, it normally complies with the prescribed standards. Our biggest supplier already began building a totally new factory before COVID.” Thanks to the latter, Daiber has been able to offer the goods for the last few years that are produced completely Detox to Zero-conform – i.e. in compliance with Oeko-Tex’s verification system for the textile and leather industry with the aim of achieving the criteria of Greenpeace’s Detox campaign in the factories.

Mantis World also sources the majority of its collection from Bangladesh. As Bhardwaj confirmed the country has made great progress on the topic of technology and sustainability: “Some of the best factories with the highest certification standards are in Bangladesh. Far from just being ‘sewing machines’, we are seeing deep backward linkages in the industry as Bangladesh now has modern and developed yarn and fabric production facilities too. While no cotton is grown in Bangladesh, they have access to a lot of feedstock for recycled materials due to all the textile production happening there.”

Beyond this, both Daiber and Mantis World are active in Pakistan, according to Gminder an aspiring location – in spite of the many political difficulties the country is experiencing: “I am impressed by Pakistan. A lot happened during the pandemic. One certainly doesn’t get the impression one is in a developing country when one is in Lahore.” Bhardwaj also affirms that the location Pakistan has great potential, does however at the same time recommend that companies choose their partners carefully: “In Pakistan, most textile workers are paid on a piece rate, which can put them under a lot of pressure. Our supplier, whom we have known for several years, has workers on fixed salaries. Plus, they have a policy to recruit and promote women as far as possible. In a country with a culture that is extremely patriarchal, we support this policy to the fullest. If the political and trading situation remains stable, Pakistan is definitely a viable alternative.”

Whereby, as Bhardwaj stated, the potential depends strongly on the geopolitical framework conditions: “Floods destroyed half of the country’s cotton production and the political climate can be unstable. Pakistan does not grow enough organic cotton and for political reasons cannot import it from India. We got around this by using other sources including our known and trusted organic cotton farm group from Tanzania.”

And Africa?

According to own accounts, Mantis World is the only company in the industry that produces goods in the East African state. According to Bhardwaj, a “matter close to the company’s heart”: “The factory – Sunflag Tanzania – was built in the 1960s by my grandfather and has remained family-owned ever since. Our factory is fully vertically integrated – from the yarn production to the finished garments. At the same time, we know the organic cotton farm groups we work with in Tanzania personally. So it is the most transparent supply chain possible. Tanzania is the fourth largest producer of organic cotton in the world and the largest in Africa so there is a great supply chain advantage. Sunflag Tanzania is considered to be a beacon of good practice for the region and was the first ever sub-Sahara African factory to gain GOTS certification.”

Whilst locations like Morocco and Egypt are already pretty well-developed in terms of textile production, countries to the South of the Sahara hardly came into the equation until now. Bhardwaj is striving to change this: “I volunteered as Chair of the Pan Africa Sourcing Working Group at Textile Exchange, which was born really to address this low level production and the fact that the continent is as yet unknown. It is very encouraging for us to see so many customers who really appreciate and love our ‘made in Africa’ collection for the way and place it is produced.”

Good stories cannot only be told using products “made in Africa”, many regions also offer tangible advantages – provided that they have´the opportunity to further develop themselves. According to Bhardwaj the right strategies are necessary to activate decisive levers such as the supply of raw materials and water, the production of energy and the availability of staff – as well as the realisation that the regulations that are valid in Asia, cannot simply be applied to Africa. “We hope to see regional blocs coming together to create specialised textile hubs. There is so much potential for a strong, sustainable and transparent textile sector on the continent.”

For example – to mention just one example – there is a ban in many African states on genetically modified seeds. A major advantage for the ecological cotton production in which the integrity of the seeds plays an important role. Bhardwaj noted, “One of the important tasks our working group achieved was an alternative narrative to the giant Agro Industries like Bayer, who are always lobbying governments to introduce GM seeds and the associated chemical fertilisers and pesticides that are so harmful to people and the planet. We produced a white paper on the benefits of organic, which has been presented at many conferences on the continent and now Tanzania is following a strong policy to continue their ban on GM seeds.”

So, the hope remains that the political and infrastructural framework conditions will continue to improve in the hitherto very rare African production regions so that more importers follow the example of several pioneers. However, Gminder initially doesn’t see any potential for his company in Africa: “We do regularly keep taking Africa into account, most likely Morocco or Egypt. But it never really leads to any notable results. A few years ago I thought an upswing was taking place due to the Chinese, who invest heavily in Africa and the necessary infrastructure as well as primarily installing a structured management. But things don’t seem to have improved or to be running any faster. For me all African countries are politically speaking simply far too unstable. I think Europe is much more interesting than Africa.”

Home advantage

And Europe as a production location has long since become reality – even for textile companies. “It may be expensive to produce in Europe, but many customers are ready to invest more for a more sustainable production that saves plenty of CO₂ in the supply chain,” explained Gminder. “When the quality is right , the concept works.” For many other product groups the question “Europe or the Far East” is often merely a question of the order volumes – whilst the price structures are continually becoming more homogenous, at the same time local production convinces with short delivery times, uncomplicated communications, small minimum order volumes, flexibility and last, but not least quality.

“The high capacity utilisation at our locations in Sulzbach-Rosenberg and the Czech Republic proves that even after the pandemic ‘made in Europe’ and ‘made in Germany’ are more in demand than ever. That is why this is the absolute focus for us,” stated Sperber. “There will continue to be several article groups, for which local production wouldn’t be profitable due to the location conditions, but with the aid of the automation of the production and our own photovoltaic systems, we try to manufacture as many products as possible in Europe at competitive prices.”

“There is a relevant trend in the increase in demand for promotional products made in Europe. In some segments that is possible, for example in the case of plastic injection products, premium textiles, ceramics or glass,” confirmed Gil, who noted in the same context: “In other segments, however, I would label it as virtually impossible. Exactly the same cotton bag produced in Europe costs between three and five times more than in Asia. This might be acceptable for a number of corporate customers, but definitely not for the bulk of the market.”

Dangerous independence

The end of China as “the world’s factory” has often been proclaimed, however it hasn’t happened. For many product groups there is no region far and wide that could anywhere near compete with China. “The discussion leads to nothing with all due respect,” meant Gil. “People have been speaking for years about diversifying the supply chain away from China. A lot of effort has been put into installing productions in Vietnam, Laos and Cambodia. I don’t see any tangible results other than for some specific productions. The infrastructure is simply not there, neither the factories, the harbours nor the roads.”

In a nut shell that means: The West is dependent on China – that not only applies for vital areas such as medicine and critical infrastructure or retail in general, but also for the promotional products industry. Which makes the current tensions in East Asia all the more disturbing – especially the Taiwan conflict, which is causing many importers sleepless nights and which Mitjans considers to be “probably the most important geopolitical threat to the promo industry”. “Should it come to an escalation, the supply chains in China will presumably come to a standstill,” endorsed Sperber. “And I wouldn’t even dare to contemplate the full extent of an attack.”

“An invasion of Taiwan by China would produce disruptive shockwaves that could have the potential to force the massive relocation of production away from China,” added Gil. “But at the present juncture there is no political and economic evidence for that happening. Therefore, taking any moves in anticipation of such a relocation process carries the strong risk of resulting in a pure economic failure.”

It would thus be downright dangerous to lapse into a state of panic. However, it is worth, wherever possible, keeping an eye on alternatives to China and rethinking the supply chain here and there. Because unorthodox solutions can indeed work out well in the global trade with its complex networks. A cognition that many importers have no doubt learned from the COVID crisis – and which can only be of benefit for future crises.

// Till Barth

Photos: Shutterstock.com; Vecteezy; Freepik