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HONG KONG — The shifting winds of global trade — from the industrial evolution of China to political wrangling in the U.S. — are likely to get even more turbulent in coming months.
This story first appeared in the April 2, 2008 issue of WWD. Subscribe Today.
Issues in China, including new labor and environmental regulations, rising costs and geographical movement of factories are combining with ongoing actions in Europe and the U.S. aimed at protecting domestic industries to create an uncertain environment in manufacturing circles. But top sourcing executives attending the Prime Source Forum here on Tuesday said there are still growing production opportunities throughout Asia and in Eastern Europe, and that China, with all its problems, will be a manufacturing power for some time to come.
William Fung, group managing director of sourcing giant Li & Fung Ltd., delivered the keynote address and delivered a far-ranging assessment of how he sees the global sourcing industry in the next three years: “The globalization of manufacturing and outsourcing is unstoppable. Young people in the West are no longer willing to work in factories.”
With China accounting for more than 30 percent of Li & Fung’s sourcing needs, Fung emphasized a number of issues it faces, including new labor and environmental regulations, factory movement and protectionist measures imposed by other countries.
“We’re facing the end of the quota regime, but other things will happen,” he said, referring to the possibility of further restraints, such as countervailing duties and antidumping measures, following the end this year of quotas the U.S. imposed in a 2005 U.S.-China accord.
He said the upcoming U.S. presidential election makes predicting the future even more difficult.
“[Sen. Barack] Obama is criticizing things like NAFTA,” Fung said. “I don’t understand that. I don’t know how much is rhetoric, but there will be a big change of government in America.”
Speakers on several panels elaborated on some of the issues Fung highlighted. Thomas Glaser, president of VF International, argued that the reasoning behind U.S. protectionist measures is specious. He highlighted what he called “five big fat trade lies,” including his number one: “cheap Asian imports equal deficits.”
Steve Lamar, executive vice president of the American Apparel & Footwear Association, said: “We’ve been kicking around the word protectionism like it’s a bad word, but in Washington that label is worn as a badge of honor.”
Scott Quesenberry, special textile negotiator for the Office of the U.S. Trade Representative, defended the U.S. position.
“The policy of the U.S. is toward free trade,” Quesenberry said. “The President feels strongly about this.”
He acknowledged the country’s bilateral trade agreements can cause what Fung called the “spaghetti bowl” effect, but said more such agreements are in the works. The U.S. is currently waiting approval from Congress of bilateral trade deals with South Korea, Panama and Columbia.
When positing how trade could become freer, Quesenberry said, “Our biggest hope is Doha — it’s not dead, but we have a problem. We have to see real market access in developing countries.”
The Doha Round of global trade talks, aimed at lowering tariffs and other barriers to international commerce, have been stalled over agricultural subsidy issues, notably cotton, and the tariff-dropping formulas.
Quesenberry added, “At the end of this year, the U.S. will end its quota with China and we don’t see a follow-on. We don’t see how it would happen given the rules set by the WTO.”
The volatility and viability of Chinese manufacturing were analyzed from various angles. John Cheh, chairman and chief executive officer of Esquel Group, who also is chairman of the Foreign Advisors of the Textile & Apparel Committee of China, said it was vital for foreigners to have a voice in China because outside investment is responsible for more than 40 percent of production there.
The group has helped develop transparency, equity and value-based credit in China, but Cheh sees a bumpy road ahead with the possibility of antidumping action in Europe under a monitoring program put in place this year, new labor laws in China, the appreciation of the yuan coupled with a weak U.S. dollar, new environmental standards and labor shortages. Trumping them all, however, is the global economic situation.
“We’re faced with difficult growth in production and export,” Cheh said. “The cost pressure on the supply side is tightening and on [the other] side retail sales are weak among the major markets, especially in the U.S. We have the makings of a very difficult time.”
Fung maintained that even if new measures are not put in place by the U.S. or European Union, China will not be the cheap source it once was given rising costs as a result of new labor laws and environmental regulations, the yuan’s appreciation and an increase in raw material prices. On top of these, the Chinese government is encouraging the apparel industry to move out of the Pearl River Delta and coastal regions to western and interior provinces.
“The government is grappling with two major problems — the disparity of wealth and the desire to upgrade to value-added manufacturing,” said Fung. “The Chinese government, they’re no dummies, they built up the infrastructure before they started the squeeze, while India is still just talking about SEZs” or Special Economic Zones that feature government incentives for manufacturing.
But the move will happen slowly, Fung warned, adding, “People have visions of lifting up factories and moving them, but you can’t leave the suppliers. It’s more like an amoeba breaking off.”
China has one more problem, according to Fung: “China has a real Achilles’ heel — they don’t have raw materials. They are totally at the world’s mercy.”
He said the Chinese have had no choice but to look to so-called “rogue” countries like Venezuela and Darfur for oil because the world’s supply was already spoken for by the time China needed it.
Despite the lack of raw materials, rising costs and the gradual movement of factories, Fung said China will continue to be the first stop for sourcing for Li & Fung, which last week reported sales of $12 billion for 2007 and a target of $20 billion in volume by 2010.
“The follow-up country of China is China,” he said. “Nobody else has the production capacity. Only the Indian subcontinent can rival the population and this industry is labor-intensive.”
But Li & Fung also is “aggressive in Vietnam,” he noted, describing the country as “very interesting and important,” but things move more slowly there. Fung also has production in Bangladesh but is concerned the country “has now taken more orders than it has capacity for.” Indonesia, he said, “is growing and politically it has settled down.”
Across Asia, Fung sees positive developments for sourcing.
“Countries like Thailand and the Philippines are finding their niche,” he said. “[A few years ago], all of them were paralyzed by the specter of China, but now they see it’s not the unbeatable Goliath. How do you compete? On the raw materials front. Indonesia has banned rubber and rattan exports to China. Other countries may try similar tacks.”
Since Li & Fung is developing its European business, it is also looking to expand its sourcing there, especially because European retailers have found success with the fast-fashion model and need quick, nearby production. The company’s Turkey office now has 500 employees and Fung is looking at expansion into North Africa and some Eastern European countries.
“We think that Central European countries entered the EU too early and their costs have gone up,” he said. “Romania and Bulgaria are possible, but perhaps more interesting are the former Soviet states like Ukraine. Our industry is the first rung up the industrial ladder for many of these countries and I’m proud to be a part of it.”