HONG KONG–Increasing labor costs, inflation and currency fluctuation have made it difficult for apparel and textile manufacturers to recover from the global economic downturn, according to executives at this week’s Prime Source Forum.
Although some economists are forecasting easing inflation this year, apparel executives had a less rosy view. The forum started Wednesday and runs through Friday.
Kurt Cavano, chief executive of supply chain platform TradeCard Inc., said he sees the beginning of “the big inflation.”
Asia’s emerging middle class “wants to dress like us [in developed countries], eat like us, live in houses like us. But we don’t have the resources to support that increase through any way but inflation,” he said.
With inflation will come big changes, said Cavano, who foresees inflation of 5 percent to 10 percent a year.
Executives also debated the end of the deflationary cycle and what it will mean for manufacturing.
“For the past 20 years, we’ve had a deflationary trend coming off an unlimited supply of labor in China… China is at a turning point. The abundant surplus of labor is running out,” said Stanley Szeto, chief executive of Lever Style.
China’s mighty labor force is shrinking due to a confluence of factors including a growing middle class and China’s one child policy, which was introduced in 1978. Adding to the wage pressure, China’s most recent five-year plan includes doubling workers’ wages. Szeto said he believes wages will more than double in the next five years and pointed out that they’ve already gone up 20 percent in nine months.
But the problem goes beyond higher wage costs, Szeto and others noted. Wage increases and a shrinking labor force means turnover is higher now and productivity lower. Because workers are most productive in the last 6 months of employment, higher turnover means a significant hit to overall productivity and cost per unit, Szeto added.
Wage hikes in China are pushing apparel and textile makers to move to less expensive countries such as Vietnam, Cambodia, Indonesia, Bangladesh and India. Executives even debated Africa’s prospects as the next manufacturing hub, with some pointing out that China has already invested significant capital in Africa, building roads, airports and other infrastructure.
“Where is the next China? Logically I would look at Africa,” said Kevin Burke, president and chief executive of American Apparel & Footwear Association. “It might not be US dollars investing, but Chinese money.” Still, Burke and others said Africa’s prospects in apparel manufacturing are a long way off because of political instability and corruption.
Despite the small shifts to emerging countries, executives also said they continue to see China as an important place for apparel manufacturing for the next decade at least. The industry in China will certainly look very different in ten year’s time with a shift from labor-intensive, low- tech manufacturing, to higher end production, much like the evolution of Italy’s industry.
Meanwhile, further padding manufacturing costs in China is renminbi appreciation, though executives said the effects of currency fluctuation pale in comparison to the impact of wage hikes and rising materials cost.
Ligang Liu, head of greater China economics at The Australia and New Zealand Banking Group Limited, forecasts 6 percent appreciation in the renminbi this year and advised participants to do more business in China using renminbi.
“It makes sense for China, now the world’s second largest economy, to do more trade in renminbi,” he said, adding that Chinese importers are increasingly willing to use renminbi as the invoicing currency. The Chinese government is pushing the internationalization of the renminbi and more and more companies in Hong Kong are settling trade with China in renminbi.
Liu also said he expects inflation to be a major challenge for China’s policymakers this year. Domestic consumer demand is picking up, helped by rising wages, while rising prices of imports such as soybeans, iron ore and oil, which are expected to stay high, could cut into China’s trade surplus. ANZ calculated that if prices of soybeans, iron ore and oil, three significant imports into China, stay at current levels, 30 percent of China’s trade surplus last year could be wiped out by inflation.
The one silver lining to China’s changing landscape, from a US perspective, is that China’s trade deficit with the US could go down, executives said. That means there will be less need for trade restrictions and other punitive measures.
Julia Hughes, president of the United States Association of Importers of Textiles and Apparel, said that despite a lot of talk in Washington about an undervalued renminbi, it’s “not clear anything will go into law or to the president’s desk…there are lots of discussions about currency but not a lot of action.”
Hughes said US politicians are more focused on issues such as intellectual property rights and restrictions on rare earth exports these days. But don’t expect much help from the government on fighting piracy, said Burke. “No one’s died yet from a fake sweater,” he joked, noting that the US government has been more focused on knock-off pharmaceuticals or software.
The Chinese government is taking the issue more seriously, but the issue is so widespread that there’s very little manufacturers can do about it, Burke added.