China starts to chug

The adage that history repeats itself can be applied to the commercial rise of one Asian country after another, in an orderly procession, it would seem. But where the history parallel falls down is the fact that the speed is not repeated. Acceleration is the new order.

After the Second World War, Japan moved from producing "cheap Jap stuff" to being the most trusted, efficient and high quality exporter in the world. China is on its way to earning the same reputation but is doing it in half the time it took Japan. While China is currently in the transition between the cheapest and the best, it can't ultimately be both. I believe history will show that 2004 to 2007 was the optimum period for doing business with China. The latter half of 2008 is already throwing a light into far more costly future in doing business with China.

Let's look at price. Since the beginning of this year we've seen real price increases of Chinese goods exported to Australia rise between 30 and 50 per cent. Several factors have contributed. The most obvious is the depreciation of our dollar. That can't be sheeted home to China but it does make its goods dearer. Rising freight costs have also contributed- as they have to all import price rises - but if you're relying on China as your volume supplier freight has helped push prices up.

Another major factor in China's price rise has been the increase in its internal cost of production as factory workers aspire to car ownership, television sets and travel. Chinese clothing factory labour, once seen as an inexorable, faceless force, is flexing its muscles, finding an identity and wanting more of the cake, not only in wages but conditions too. This has put pressure on Chinese factories to keep faith with their traditional customers who get very grumpy at the idea of price rises.

A number of Chinese textile and garment companies are under threat. China's Central Bank is now looking at ways to aid its textile and garment industry. After raising the rate of VAT rebate on the export of textiles and garments recently, the Chinese government is now taking credit, fiscal and taxation measures to aid small and medium-sized enterprises (SMEs). The government admits that its textile industry is currently facing pressure in three respects: currency appreciation, rising labour cost and shortage of funds at a time of economic downturn. While the first two factors are hard to change because they are seen as a general trend, the shortage of funds may be eased with support from the government. China's central bank recently decided to conditionally increase the annual loan quota to Rmb230 billion to support SMEs with funding difficulties.

Many Australian garment importers which have become wedded to China as their supplier, are now thinking of separation and are looking around for other matrimonial prospects. Currently moving up the dating list is Bangladesh. Dhaka is quickly becoming the new Hong Kong or the new Taipei or the new Shanghai - depending upon when you joined the import square-dance. Already the nimble footed, like Gazal, are established there - but not without confronting some challenges. Bangladesh has a population of 150 million which, given its comparatively small land mass, makes it the most densely populated country in the world and the seventh most populous nation. Ninety per cent of the people follow Islam.

On the minus side is weak government, corruption and a strong disposition to floods, cyclones and monsoons. On the plus side, this is a country that is right into garment production, employing nearly four million people in clothing factories. They account for 75 per cent of the country's export earnings. Quality control will remain an issue until exporters heed the lessons of other, more developed Asian countries.

Currently, Bangladesh garments enjoy duty free entry into Australia, whereas Chinese garments pay 17.5 per cent. Little wonder that companies like Gazal, which trades mostly in price sensitive goods, are paddling through the challenges of Bangladesh to make it work.

There are several other possible alternatives to China. India is often quoted but, apart from the occasional lunge at cheesecloth and other cheap cotton garments, does not yet pose a threat to China.

The previously written-off prospect of Australian garment production rising from the grave is being mooted in several quarters. If anybody could guarantee that our dollar would stay below US70 cents and China would continue to get dearer while other import alternatives began to fizzle, a few factories might come out of retirement to sop up the anticipated growth in Australian unemployment. But for my money there are too many conditions. All overseas problems will do is sustain current production rather than grow output from Australian resources. If you had a lazy million dollars would you put it into a Marrickville clothing factory?