NEW YORK — The expiration of China’s quotas in 2005 is viewed by retailers as primarily an opportunity to lower costs and improve margins.
For factors, companies that take on responsibility for a firm’s receivables for a fee, preparing for an even greater shift toward China has required a change in business strategies. It has meant more client education and the development of expertise in foreign, political and cultural issues.
Factoring executives speculated on how a quota-free China will affect global markets. There is little question, however, that once it does happen, China’s position as the world’s leading sourcing location will only be reinforced.
Mark Bienstock, executive vice president of DCD Capital, believes retailers will initially look for a reduction in their cost of producing goods. “The majority of major retailers will begin shifting [their] sourcing to China because of the overall cost feature,” said Bienstock. “Retailers are going to expect a price cut on the merchandise that they’re buying along the line of 10 to 15 percent. Whether that happens is doubtful, but they feel with the quotas lifting they’re going to be entitled to some cost adjustment.”
As Bienstock points out, China’s advantage over other countries is somewhat evolutionary, having dealt with quota issues for years that has in turn forced it to become more efficient. “Because of China’s advantages in price over time, they have tremendous expertise and abilities in sourcing. It’s a natural progression that they’re doing so much.”
Stanley Officina, president of Sterling Factors, expects improved margins for his clients once quotas expire. “From our point of view we would hope to see some increase in the profitability of our client base,” said Officina. “Cost of raw material and cost of product drops because quota is eliminated and their access to product is broadened. Then hopefully their profitability increases.” However, Officina also realizes this is a best-case scenario for retailers. “In no way is it a gimme that that in fact will happen.”
Mitch Cohen, senior vice president and western regional manager of CIT Commercial Services, views the elimination of quotas as a leveling of the playing field between large and small manufacturers. “Suddenly all manufacturers will be competing on equal footing, resulting in a more competitive, yet democratic, environment,” said Cohen. “It gives both small and large companies the opportunity to export their products to the U.S.”
According to Cohen, once quotas are eliminated companies will look to offer open account payment terms rather than the traditional letters of credit. “We are seeing that as the use of letters of credit declines, Chinese exporters and their financial partners are increasingly seeking the services of factoring companies,” said Cohen.
Ultimately, the factors contend the greater impact will be felt not in China, but in other Asian countries.
Sea changes could occur in those Asian countries that have been the beneficiary of China’s limitations, according to Officina. “When it in fact expires I don’t know that it will affect any of the imports from China as dramatically as it will affect other Pacific Rim nations,” he said. “I’m talking specifically in terms of [South] Korea, whose quotas will still be in place. Malaysia, Indonesia, Vietnam, all of the countries that currently are the beneficiaries of quota issues with China.”
Bienstock believes many of these countries are better prepared than some have anticipated. According to Bienstock, India and Pakistan have spent “tremendous” amounts of money gearing up for the change. “There are plenty of very good opportunities in India and Pakistan to source goods without quota as well,” said Bienstock.
Efficiency, observed Cohen, will be the deciding factor. “Companies located throughout Asia will have to find ways to compete more effectively with China,” he said. “I predict this could have a domino effect as companies throughout the region reexamine their business process to become more efficient. In the end, the consumer possibly stands to benefit from lower costs or better value.”
The lure of lower costs will undoubtedly create concentration issues for some retailers, a possibility that may be unavoidable, said the factors. “You never want to be caught with [either] one source of supply [or] with one customer. Unfortunately, the way we see this market today there’s more and more concentration both in supply and your customer base,” said Officina. “I think [retailers] need to keep the doors open to other sources of supply.”
A little more than eight months remain before the quota deadline is met. In that time, factors and sourcing executives alike believe the U.S. government will step in and implement at least some protectionist measures.
Howard Moore, senior vice president at IDB Bank, believes the industry will suffer as a result of quotas being lifted. “I believe that was evidenced when quota was removed from four categories of textiles and apparel last year. The imports soared, especially from China,” he said.
According to Moore, considering that it’s an election year, pressure from the apparel and textile lobby — however dwindling its power is — should help keep quotas in place. “I think the government will have to ease into the removing of quota from China or they’ll damage our market,” said Moore.
Bienstock agrees, believing the removal of quota will put domestic manufacturers into a “severe crunch for price competition.”
Regardless, the lifting of quotas is no longer a question of if but when. To prepare, factors have had to change their strategies and the very nature of their businesses.
According to Cohen, CIT already has relationships established with more than 10 Asian banks. The company’s western region division has developed an Asian team to coordinate the company’s services with these banks and exporters.
“In our Los Angeles office we have a special Asian team,” said Cohen. “These teams, which handle factoring accounts, have employees who can speak the language,” which requires building a team that can speak different Chinese dialects, such as Cantonese, Mandarin and Taiwanese.
CIT has had an office in Hong Kong since 1994 and also has a presence in Taiwan. More recently CIT established a Shanghai office in the spring of 2003.
DCD, said Bienstock, has poured its resources into developing markets in India and Pakistan.
“We’ve sent new business staff to India for three months to meet with the factories,” said Bienstock. “We have offices in Pakistan, India and Dubai. We’re familiar with the customs and the languages.”
Sterling Factors established its Asia presence approximately three years ago with an office in Hong Kong. “That reaches out to a variety of Pacific Rim areas,” said Officina. “We’ve anticipated the growth of our business being generated in Asia and responded by opening Sterling Asia.”
Simply building teams who can speak the language isn’t enough to achieve success, however. “You have to be understanding, more so now, of culture and language,” said Bienstock. Being attuned to how overseas markets operate and having a pulse on currency fluctuations and changing political issues is also crucial. According to Bienstock, DCD sends its staff overseas regularly, another advantage in a time when other businesses are reluctant to travel. “We’ve already established a foothold,” said Bienstock.
IDB’s Moore believes factors have had to learn how to continually educate their clients about the changing global landscape. “We have to be knowledgeable of the various free trade negotiations taking place, when and where quota is or isn’t removed,” said Moore. “More so than ever before we’re going to have to ensure our clients are knowledgeable regarding changes taking place in quota, free trade agreements and decisions made by our government.”