China’s manufacturers feel the squeeze as costs rise

November 4, 2013 8:15 am

China’s manufacturers feel the squeeze as costs rise

By Demetri Sevastopulo in Guangzhou

Perched in front of hundreds of vibrantly coloured backpacks, each bearing the name of a famous football nation, a middle-aged woman from Fujian province worries about the squeeze on her wafer-thin margins. Just before lunch on the opening day of the third phase of the Canton Fair – a huge trade show held in the southern Chinese city of Guangzhou, the capital of Guangdong province – Ms Lin has secured no orders.“There are few people and they are only looking,” says Ms Lin, who has been forced to double the price of her bags to about $6 since 2011 to compensate for rising labour costs and the stronger Chinese currency.

After skipping the fair for a couple of years, Ms Lin returned this year in the hope that the 2014 football World Cup would boost demand. But the 4 per cent rise in the renminbi against the dollar during her absence has intensified cost pressures from double-digit annual wage increases that are common across Guangdong.

“This is a problem and the workers’ salaries are rising too . . . [but] customers insist on the older price,” says Ms Lin, who asks to be called by a pseudonym.

Located in Guangzhou at the heart of the Pearl River Delta – a sprawling web of manufacturing cities that includes Dongguan, Shenzhen and Foshan – the twice yearly Canton Fair allows about 190,000 buyers from more than 200 countries to come face to face with roughly 25,000 Chinese manufacturers.

Just two hours by train from Hong Kong, the fair occupies 1.1m square metres – the equivalent of 880 Olympic swimming pools – and houses everything from a giant McDonald’s for people who may prefer Chinese products to Cantonese cuisine to a mosque for Muslim visitors.

Along with the other exhibitors at the 114th Canton Fair, which closed on Monday, Ms Lin is sitting at the crossroads of the global economy where weak western – and more recently southeast Asian – demand intersects with rising costs in China. This mix helped spark a surprise fall in Chinese exports in September.

China’s status as the workshop of the world is under threat. Rising wage demands are increasing costs and other Asian countries such as Vietnam and Bangladesh are now cheaper.

On top of the stronger Chinese currency, wages in the Pearl River Delta are climbing at double-digit rates each year as factories compete for workers in a tight labour market.

Sean Mahon, managing director of an Irish company called Brandwell that owns several accessory brands and has been coming to the Canton Fair for 20 years, says his suppliers charge 20 per cent more each year for the 3,000 products – everything from umbrellas to underwear – that he sources.

For many of the small manufacturers at the Canton Fair, dealing with the rising renminbi is especially hard because they cannot hedge against currency fluctuation. Glenn Stephens, managing director of a confectionery company in Dongguan that makes mints for Manchester United shops, says the strengthening Chinese currency means “everyone is under pressure”.

At the opening of the Canton Fair, Liu Jianjun, deputy director of the China Foreign Trade Center, said the organisers were encouraging companies to settle in the renminbi to reduce pressure on manufacturers, many of whom only receive payment after they have delivered their products months after orders are made.

The shift is part of the central government’s broader push to internationalise the Chinese currency. China Daily last month said 17,000 companies in Guangdong have conducted transactions in the renminbi since 2009.

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Fan Dan, whose employer L&Q Army produces military-style clothes and bags, says she welcomes the push to settle in the renminbi. But she explains that few customers have the capability because they do not have offices in China to help them navigate the process. “We have to accept it,” says Ms Fan.

While the mix of higher factory wages, a stronger local currency, growing domestic competition and weak global demand takes its toll on Chinese export data, the actual pain is felt by small companies such as Ambassador, a Shenzhen luggage factory that manufactures suitcases for Benetton and Gambol of Spain.

Standing inside a large booth at the Canton Fair, Lu Wei, an Ambassador salesman, says his factory made 50,000 suitcases for Benetton last year, compared with 200,000 before the global financial crisis.

Customer pressure to cut costs also means margins have been further squeezed to the extent that it makes only $10 profit on a three-suitcase set that it sells for $80 – and certainly fetches several times that outside China.

Just as western companies are looking to China for sales amid weak demand elsewhere, Ambassador started selling cases in China – a growing market as millions more Chinese travel overseas for the first time each year – five years ago, helping to compensate for slumping European demand. Already, the Chinese market accounts for 30 per cent of its annual sales. “We want to build our brand,” says Mr Lu.

Ambassador is not alone in seeing a strong future in China, particularly as the country shifts from being an investment-driven economy to one where consumption contributes more to growth.

Arif Sethi, a Pakistani trader who has been exhibiting his Chinese-made sporting products at the Canton Fair for 25 years, says European sales had “dramatically dropped” over the past five years. But he says the Chinese market – where leather boxing gloves are his most popular product – promises a “very bright future” as incomes rise and especially as people become body conscious.

“If you have a nice body [in China], you will find a nice partner. If you have a nice personality, you will not impress,” says Mr Sethi.

Additional reporting by Julie Zhu

Changing face of the Canton Fair

The Canton Fair has been held in Guangzhou, the capital of Guangdong province, twice a year since 1957, making it one of the world’s longest-running trade shows. It connects foreign buyers with the Chinese factories that have been anonymously manufacturing their products for decades, and particularly since Deng Xiaoping launched economic reforms in the late 1980s. The fair resembles a gigantic speed-dating salon where buyers roam around halls trying to extract the best price from manufacturers, and haggling or leaving quickly when they are unsatisfied with the price. “It’s like looking for a romantic partner in a sea of people,” says Kenneth Zhang, a manager at Guangdong Textiles attending the latest show. “It’s really hard for both sides to find the right partner. The value of total deals in 1957 was $87m, but that number has risen dramatically, and peaked at $75bn in 2011. The number of foreign buyers who attended the spring session in 1957 was just over 1,200, compared with the record 210,000 who attended the spring event last year. The autumn session of the 114th fair, which ended on Monday, saw 190,000 foreign companies from 212 countries interact with 24,500 Chinese manufacturers. Combined with the spring session, transactions for 2013 amounted to $67bn, a decline of 2 per cent from last year. The fair has traditionally provided anecdotal evidence about the health of the Chinese export market. But observers say the recent decline in attendees and transaction volume masks a change in the market – as more foreign buyers skip the trade show and go directly to factories in the region. The Canton Fair is also facing competition from other Chinese trade shows. And to remind buyers about other options, Alibaba, the Chinese ecommerce company, has billboards in the local subway station that say: “Start sourcing in your language”. Many buyers and exhibitors say the fair has become much more professional in recent years, with visitors displaying more knowledge of China, and local manufacturers having a much better command of English. Sean Mahon, an Irishman who has attended the Canton Fair for 20 years, says the rise of the show mirrors the growth of the cities and infrastructure in Guangdong. “In the early days, you would go into a pothole on Monday and come out on Wednesday, but now the roads here are all superior to anywhere in the world.”