China Manufacturing Hard Hit by Financial Turmoil

Factories in China are shutting down as demand for goods slackens.

Many Chinese apparel factories have closed this year.

BEIJING — The stream of factory closures in China’s manufacturing sector this year risks turning into a hemorrhage of lost jobs and production as global demand for Chinese-made goods slackens because of the international economic crisis.

This story first appeared in the October 29, 2008 issue of WWD.  Subscribe Today.

Business analysts and factory managers in the industrial centers of China said the outlook is bleak except for the largest and most competitive companies and factories. Rising labor costs and more expensive raw materials have pounded the manufacturing sector, and slumping demand from the U.S. and Europe is likely to worsen the situation dramatically.

“I’d say the whole manufacturing industry right now is having a hard time,” said Wu Hang, secretary general of the Guangdong Shoe Manufacturers Association, which represents shoe-making companies in the heart of the Pearl River Delta. “Even before the Western economic troubles began, we were already not making profits due to rising exchange rates and increasing costs. Now it’s really the start of winter for us.”

About 10,000 textile and garment factories shut down in the first six months of the year and 20 million manufacturing jobs were eliminated, according to Chinese government figures.

But the real impact of the U.S. credit crunch and global economic slowdown on China’s textile and apparel manufacturers have not been broadly quantified and will take months to materialize in China. However, individual factories and industry associations report slower orders from abroad and a fast-rising pace in the factory closings that began this year. Anecdotal reports are coming out of Chinese factory towns and into the media about thousands of new jobs being cut and scores more factories shut in recent weeks.

“Of course we’ll see more factories closing down,” said Li Zhixian, a textile industry analyst with Guotai Junan Securities.

Li noted that most factories run their operations on credit and, as export orders slow down and banks begin calling in loans to avoid defaults, many plants will simply be forced out of business. Overall, China’s exports have declined steadily in recent months and the situation is apt to get worse as Western consumer spending lags.

With China’s economic juggernaut still heavily dependent on exports, particularly of lower-end consumer goods like textiles and apparel, economic problems in the U.S. and Europe will most certainly take a toll. The question remains, however, just how big that impact will be.

Third-quarter economic data released last week indicated the global troubles have already hit the Chinese economy. Annual growth in the country’s gross domestic product fell to 9 percent, the lowest rate in five years, primarily because of a continuing slowdown in exports. International banks have revised their growth forecasts for China into next year, predicting that the era of annual double-digit economic gains may have come to an end.

“I have a very pessimistic view about China’s manufacturing industry, and the next half year will be crucial to see what’s going to happen,” Li said.

The pressure on Chinese textile and apparel makers increased last week when Wal-Mart Stores Inc., the world’s largest retailer, said it would impose a tough new series of corporate social responsibility guidelines intended to force Chinese suppliers to adhere to environmental and quality standards. The rules will force suppliers to follow China’s environmental laws and to abide by international quality and safety standards or risk losing Wal-Mart’s business. They are also certain to increase costs on suppliers.

Several factory bosses in southern China said the directives may add costs to their businesses and they will only be able to comply if Wal-Mart helps them foot the bill. Otherwise, they said, their companies will have to stop selling to Wal-Mart.

“It won’t be easy for Wal-Mart to carry this out,” said Tong Jingyi, head of marking for a toy factory in eastern Zhejiang Province. “We just did a 600,000 yuan [$88,000] order with Wal-Mart and we already lost money on that. They gave us a very low price and demanded very high standards.”

A shoe factory manager in Dongguan, the heart of China’s factory towns, said he hadn’t heard the news yet but believed it might mean the end of his company doing business with Wal-Mart.

“The cost of making shoes is already very high for us because of the increasing cost of materials,” said the manager, surnamed Ren. “If they want us to meet their higher standards, who will pay for the cost of the adjustments?”

China’s government this week took further policy steps to help shore up its wounded manufacturing sector. It increased the rebates on export taxes for almost 3,500 products, including raising the rebate on export taxes for textiles and apparel from 13.5 percent to 14 percent. That marked the second such increase in rebates for the sector this year, but industry groups have said the rebate would need to rise to 16 percent or more to make any meaningful difference.

Industry groups and analysts also admit, however, that tough times could be good for the industry as a whole because economic pressures and slow demand will force companies to become more competitive and creative in order to survive.

“The truth is that the total amount of manufactured products is already too high,” said textile analyst Li. “There’s not enough demand and the only solution is for some of the factories to close down to rebalance the equation of supply and demand.”