Good news on the global economic crisis front: some manufacturing countries, including China, are looking more kindly on smallish markets like Australia and New Zealand and are becoming more flexible in their minimum order quantities.
Kate Mcdonald reports.
It’s an intimidating thought that China’s economy is considered to be in the doldrums – just like everyone else – and yet it still recorded over six per cent growth in GDP for the first quarter of this financial year. It is part of a somewhat downward trend, however: it wasn’t that long ago that double-digit growth was the norm.
The global economic crisis has had a serious effect on China’s textiles, clothing and footwear manufacturing industry, with many factories closing down due to reduced demand from its major markets, the US and Europe.
According to a recent report in Caijing business magazine, thousands of factories were forced to close last year in the Pearl River Delta region due to both higher prices for raw materials and extreme fluctuations in global demand.
As a result, the Chinese government has twice increased its export tax rebate, and in February this year introduced a revitalisation plan for the local textile industry, aimed not so much at propping up the sector, worth an estimated $US65 billion ($A79 billion) in export revenue in 2008, but more at increasing the development and promotion of local brands and increasing value-added output.
This is actually reasonably good news for Australian importers when allied to the improvement in the purchasing power of the Australian dollar, according to Gary Hirsch, general manager of Sydney-based offshore sourcing firm TCF Sourcing Solutions. What it is helping China to do is to become a little more flexible in its dealings with small markets like Australia and New Zealand.
“All [exporting] countries have been affected by the economic crisis,” Hirsch says. “China’s GDP has dropped for the first time to single figures and they are forecasting it will be eight per cent this year. That is still good growth, but the first quarter this year it was 6.1 per cent – it means they are suffering like everyone else.”
Hirsch doesn’t see any signs as yet that the revitalisation plan or the increase in the export tax rebate has done much to improve conditions in China, and with increasing labour costs and more emphasis on good environmental practice, particularly regarding water and energy use, the country’s manufacturing sector has a lot of problems to face. But it is doing so in inimitable Chinese fashion.
“An interesting fact is that although Chinese exports dropped significantly in the first half of the year, their market share in the US has increased by 3.75 per cent,” Hirsch says.
“They have probably managed the whole crisis a lot better than most other countries. There is no question that a lot of factories have closed down but the good factories are still there and they are dropping their prices, even though their costs are rising, just because they want to survive.”
For Australian clothing importers, the increasing sophistication of the Chinese industry, when added to the economic crisis and more competition, means the global powerhouse is looking more kindly on relatively small markets like ours.
“They are definitely becoming more flexible with minimums – there is no question about it,” Hirsch says.
“At the Canton Fair recently, there were a lot less people than usual and a lot less people placing orders than usual, so I think that because the US and European markets have dropped so significantly, the Australian market has become more important to them again. From our point of view, they are definitely showing a lot more flexibility. They are not showing quicker lead times however, because some of the factories have closed down and the ones that are still going are still busy.”
Fraught times for Fiji
Hirsch, who is well-known in the TCF industry following his decade of work heading the Sydney office of garment sourcing specialist Buncorp, is now heading up TCF Sourcing Solutions, a new arm to consulting firm TCF Services. TCF Services has long worked with about 180 local clients in applying for government grants and other funding, but as subsidies for local production are slowly reduced, new markets need to be opened up.
The sourcing solutions business was added in January this year, and is aimed at helping local TCF companies in two ways: either as a direct consultancy to help companies set up and run an importing department and manage the supply chain, complete with advice on how to deal with offshore manufacturers in a range of countries; and as a direct sourcing service from China, Fiji, Vietnam, Bangladesh and India.
Hirsch has a particular interest in Fiji, having earlier this year been appointed by AusAid to assist Fijian clothing manufacturers to market themselves in Australia and New Zealand. It is an extremely difficult time for Fiji and not just because of the recent military coup.
“Fiji’s costs have increased significantly since the coup, when the currency was devalued by 20 per cent,” he says. “And they don’t have raw materials there, so they have to import the fabrics and accessories and everything, and that’s going to cost 20 per cent more now.
“They have also increased their minimum wage on the first of July by a further 20 per cent – that’s a huge cost increase. And when you add that together with the Australian and New Zealand markets buying less because of the economic crisis, Fiji is battling at the moment.”
Having said that, Fiji offers Australasian companies advantages many others don’t. “They have very small minimums – they’ll do 20 garments,” Hirsch says.
“There are shorter lead times, although that is subject to fabric availability, but certainly their turnaround time is very quick. Another big advantage of producing in Fiji is that the prices from Fiji are still significantly lower than manufacturing in Australia.”
What Fiji really wants is to muscle in on what’s left of the TCF manufacturing industry in Australia, he says. “Production capabilities are shrinking here so the lead times are longish, and it’s hard to find people to make good quality garments here now.”
However, one advantage that Fiji has enjoyed – it has duty-free status as long as 20 per cent of the freight on board (FOB) price of the garment is experienced in Australia or Fiji – is going to be lost next January, when the duty rate drops to 10 per cent.
“It’s 17.5 per cent at the moment and is dropping to 10 per cent, and that really isn’t much. That’s why we think a lot of people who are making here are going to go offshore. Look at Pacific Brands. It was a very unpopular decision but it’s probably sensible.”
Cowboys and India
Another sphere of interest for Australian brands looking to go offshore is of course India. Hirsch says India has been affected more than China by the global slump, one reason being that India has yet to enjoy significant benefits from its government’s three stimulus packages since late last year.
The six per cent cut in excise duty and two per cent cut in service duty have not been as helpful to the labour-intensive clothing and textile industry in India as the export rebate increases have been in China.
For a country with a long history in the textiles industry, there is much lobbying of the newly elected government to introduce a stimulus specifically for the textiles and garment sector, but that has yet to see fruition.
Hirsch points to an historically poor reputation for India as one of the barriers to increased trade with Australia – “there used to be a lot of cowboys in India, so to speak” – but this has improved dramatically and there are now a lot of goods coming out of the subcontinent that are of very high quality, and they are being delivered on time.
In terms of emerging markets, Vietnam has been trying to make an impact for four or five years, but suffers the same problem as Fiji in having to import raw materials. Indonesia and the Philippines are emerging markets to look out for, but Bangladesh is probably the big one. “There is no duty for bringing goods from Bangladesh because it’s a developing market, and a lot of people are experimenting with them,” Hirsch says.
“Some (Australian companies) are bringing in very big quantities from Bangladesh, but having said that, some have had bad experiences so are going back to China. For basic items, especially natural fibres like cotton, [Bangledesh is] very good, but they are still unsophisticated in terms of manufacturing and are less flexible quantity-wise.”
It is, of course, a cycle we have all seen before. As developing countries become more sophisticated they become more expensive. While quality increases, so does price, and there is always a newer, more hungry developing country looking to undercut prices. “China is the big one now and as they became more sophisticated they have become more flexible and make better products, but then emerging markets come through and undercut prices,” Hirsch says.
“But they don’t have the sophistication. At the end of the day, you get what you pay for. If you are paying less, there is a reason for it.”