QUOTA, NAFTA HAMPER SHANGHAI’S RISE
Byline: Josephine Bow
SHANGHAI — The China Daily headline proudly proclaims that China achieved record highs in textile and apparel exports for the first six months of 1997, topping $19.8 billion, or a 33 percent increase over the same period last year.
But check with some Shanghai-based garment professionals and they’ll paint another picture.
“The U.S. quota situation this year has been terrible,” said the general manager of an American trading company that sources sweaters and fleecewear from about 25 factories located within a day’s travel from Shanghai. “We think this is due to the strict crackdown over the past year over illegal transshipments, especially from Hong Kong. Everybody’s up here trying to get China quota.” Hong Kong apparel exports to the U.S. for the first four months of 1997 were down 13 percent.
This year, the trading company did a huge knit program and was forced to look for category 347/8 cotton pants quota for the first time. Because of extreme demand, quota premiums have been changing midstream, after orders are booked. For yearend shipments, category 347/8 has reached a whopping $55/dozen.
“We didn’t personally cut any orders, but we know others who have,” said the general manager, who requested anonymity. “Watching for embargo levels to hit is another headache. We’ve got stuff in embargo right now.”
Make no mistake, although China is still an apparel exporting powerhouse, the relentless growth of the past decade now looks set to slow. A countrywide database project being conducted by a large American sponsor has revealed serious overcapacity in most factories, with some of the most agile now trying to build national brands and targeting domestic sales. With purchasing power and retail prices increasing steadily countrywide, profits can often be more lucrative than in tight export markets.
The North American Free Trade Agreement, enacted in 1994, which allows apparel to enter the U.S. quota-free and duty-free if made in the trade zone from U.S. fabric, has made a serious dent in Asian export orders. In 1980, Asia accounted for over 80 percent of U.S. imported apparel market share; by last year, apparel processed in the NAFTA zone accounted for 37 percent of total U.S. share, with all Asia combined dropping to 40 percent.
“We have certainly lost orders to NAFTA,” said Cao Huiqi, manager at CTMTC, a Shanghai-based import/export corporation. But NAFTA is also opening up new markets. Cao reports that some of her largest shipments, cheap sandwashed polyester-padded jackets — the kind no one wants to touch anymore in the U.S. — are now heading to South America via orders from a U.S. importer. Inevitably, some China factories will also be following Hong Kong and other Asian manufacturers, setting up NAFTA production bases.
China also has to worry about garment factories in Thailand, Indonesia, Malaysia and the Philippines, whose now-battered currencies will make prices look more enticing to buyers — provided the factories can stay in business. Serious challenges are also being posed by Bangladesh, India, Pakistan and Sri Lanka, where daily wages remain under the $2 mark while performance improves steadily.
“Shanghai factories are only good for production at mid-range prices and above,” said Patricia Chin, merchandising manager for Charming Shoppes, which sources about 15 percent of its global production in China. The remaining 25 percent of its Asian sourcing is farmed out to India, Bangladesh and Malaysia.
In their defense, the American general manager said that some Shanghai manufacturers have become very efficient.
“We’ve seen tremendous improvement in productivity in very short periods of time, without any drop in quality,” the manager said. “Factories aren’t necessarily investing a lot. They seem to have a better understanding of buyers’ needs and better production management.”
“Shanghai prices are definitely going up, in spurts, as much as 18 percent annually, with some import/export corporations [who provide quota and export documents],” said Diane Long, Shanghai-based general manager for Liz Claiborne, which sources about 20 million units annually out of China, or 15 percent of its global total. “We have very strong relations with both the I/E corporations and the individual factories that we work with. Some of the I/E corporations are still stuck in the old mentality, without any real appreciation of developing business with new partners.
“However, ironically, as we are moving farther afield in order to secure more quota and keep labor costs down, we’re finding that inland I/E corporations, which used to be way behind Shanghai and other coastal cities, are now much more flexible.”
Improved telecommunications, roads and staff make working with inland factories much less problematic than in the past. Many large trading/sourcing operations are now equipped with fleets of their own vehicles and say that monitoring production and shipments is relatively hassle free and inexpensive.
Long said that China’s quota situation on a macro level is much better today than it was five years ago.
“You used to see so many fake export visas,” she said. “Now, we get written agreements by Jan. 1 from the I/E corporations and know about 85 percent of what we’re going to get for the year.
“China is internally managing quota utilization rates much better,” she added. “Beijing signals category-fill rates and holds auctions for unused quota. The problem begins at the micro-level, how individual I/E corporations manage their quota.”
Whether or not Shanghai can move effectively into higher value added production, another oft-heard central government exhortation, or offer the same kind of one-stop sourcing service that has been Hong Kong’s strength, is debatable.
“I’ve heard about I/E corps setting up Hong Kong offices in addition to their U.S. offices,” said Long. “They go by a different name and are more active, for example, offering LDP [landed duty paid] pricing to their lower and middle-end U.S. buyers. But for real Hong Kong-style service, it wouldn’t be the existing I/E structure. It would be new entrepreneurs.”
Independent local sourcing agents, some fly-by-night, some stable professionals, are getting increasingly into the act. Zhang Xiaoming of Shanghai undertakes high-quality production for Italian labels Max Mara and Superga and travels regularly to Italy to meet with new customers screened first by his Italian partner.
“Our prices are always lower than Hong Kong agents by at least 15 to 20 percent because our overhead is low,” he said. “We offer more service than the I/E corporations. We can do on-line quality control — most Hong Kong agents only do QC at shipment time. We have long-term relations with the I/E corporations and also help CMT [cut-make-trim] factories by advancing raw materials.”
But no matter how nimble agents like Zhang profess to be, nobody is counting on Shanghai to take over from Hong Kong anytime soon.
“Shanghai might one day become the one-stop sourcing center for China — geographically it’s better positioned,” said the American trading company general manager, “but Hong Kong is just too important for the region.”