Clothes factories confronted with hard times

Liao Shunping manages three production assembly lines and some 280 workers as a day-shift operation manager at a sports apparel factory in Foshan, South China's Guangdong Province.

He works four days a week and so do the factory workers in his team, ever since the Labor Day holiday.

"In the late 1990s when I was only an assembly line worker, I worked six days a week and 14 hours a day to complete piles of overseas manufacturing orders," Liao, 47, from Central China's Henan Province, told the Global Times. "The number of orders and the volume they require have dropped drastically and workers can have a three-day weekend now."

Qinshun Knitting, where Liao works, is in the heart of Foshan's Shunde district - China's second-largest garment manufacturing base after Ningbo in Zhejiang Province. The factory employs over 1,200 workers and it boasts a monthly production volume of 650,000 garments.

"The output volume has dropped significantly. The factory produces less than half as much as it did during its production peak in 2005," Liao noted. "Also, factory workers' monthly salary, which depends on the number of pieces they assemble, has dropped from some 4,000 yuan ($628) a month to less than 3,000 yuan."

Liao's factory is not the only garment manufacturer in China's Pearl River Delta that is suffering from a plunge in the number of orders. Adding to the climate of anxiety, the local media reported recently that sports apparel giant adidas is planning to terminate its cooperation with hundreds of factories across China.

Left behind

Adidas has over 300 original equipment manufacturer (OEM) factories in China - OEMs produce goods on behalf of foreign companies who then sell the goods under their brand name. Adidas has denied that it is planning to terminate the manufacturing contracts with its Chinese factories.

The German sportswear brand told Xinhua News Agency in late July that it was closing its one wholly owned factory in Suzhou, East China's Jiangsu Province as a strategic transition to fully subcontracted production.

Chen Qi, a spokesman with Adidas Greater China, said in a prepared statement that the move aims to "realign its global resources" and that adidas has no plan to terminate the partnerships with its local OEM factories.

A Bloomberg report in early August also said some of the OEM factories had received a promise from adidas last year that the cooperation would not be terminated until 2015 and the sportswear brand has increased its fixed investment in those factories. But the report also cited a garment industry insider who said that the upward trend in labor costs is still the main factor driving away foreign investment from China's manufacturing sector.

Foshan's manufacturing index in the first quarter of 2012 indicates that the local manufacturing sector still saw steady growth, according to a report released in July by the Foshan statistics bureau. The city's manufacturing industry had total revenue of 386.6 billion yuan from January to April, a 9 percent year-on-year increase. But sales dropped by 0.3 percentage points compared to the last quarter of 2011.

Sun Lijian, deputy director of the School of Economics at Fudan University in Shanghai, told the Global Times that the manufacturing figures of Foshan and in the rest of China do not realistically show the current struggles of traditional producers.

"China is in the transition phase of breaking away from the 'Made in China' economic model," Sun said. "Many traditional or what I'd call 'obsolete producers' will be left behind in this economic transformation."

Sun said that while the overall manufacturing index still looks promising across China, with a projected GDP growth of 8 percent in 2012, many manufacturers are finding it hard to survive during this transitional process.

"Those who fail to create their own brand and merely survive as an OEM will eventually die out during this 'natural selection' for the Chinese economy," Sun noted.

Rising costs

A number of overseas brands have relocated their manufacturing bases from China to other developing countries, such as Bangladesh, Vietnam and Cambodia, in recent years, according to Dong Xiaolin, deputy director of the Guangdong Economics Association.

Dong told the Global Times that many OEMs in China, particularly in Guangdong Province, had seen their profit margin continually squeezed.

"Garment producing had a relatively low profit margin even in the 1980s, but they could survive because labor costs and raw materials were cheap back in those days," Dong said.

But in recent years, the rapid appreciation of the yuan and rising labor costs have made China a more "expensive" country in which to make clothes, he noted.

"The global economic downturn in 2009 has already put pressure on China's manufacturers as they depend greatly on exports, but they could survive by selling more goods domestically," Dong said. "But now they can't survive as they have lost their competitiveness with other cheaper manufacturing countries."

A macro-economic research report released by Deutsche Bank in June predicted that if the yuan appreciates by 3 percent against the US dollar per year, it reduces GDP growth by 0.2 percent and export volume growth by 0.7 percent.

"A 10 percent appreciation in the yuan will raise unemployment by 0.4 percent," the Deutsche Bank report said. "A 0.4 percent reduction in labor demand implies 3 million jobs, relative to the 780 million labor force."

The value of the yuan has risen by 23.28 percent against the US dollar since the Chinese government started allowing the currency to appreciate on July 22, 2005, according to the US Administration of Foreign Exchange.

Wu Libo, macro-economic professor at Fudan University, told the Global Times that the OEMs can only survive if they start establishing their own brands. But she predicted that at least 5 to 10 percent of OEM factories will close over the next year.

"Branding is important as manufacturers can start setting their own prices and having their own sales channels," Wu said. "But some of the OEM factories will still close despite their efforts to participate in the economic transition from 'Made in China' to 'Created in China.'"

Wu added that another way out for traditional OEM factories would be to switch to the high-tech sector, which has seen rapid growth in China.

"Switching to a high-tech, less labor intensive factory requires technology and costs money. Traditional plants need investment to stay afloat."