HONG KONG — Sourcing companies here keep tabs on trade issues in the U.S. and China that affect the region, but they don’t let politics get in the way of doing business.
Various changes that are in the works — appreciation of the yuan, possible countervailing duties and antidumping actions or other protectionist measures after safeguard quotas go away in 2008 — are “certainly not on the forefront of our minds at the moment,” said Peter Solomon, chief executive officer of Linmark, one of the top three sourcing firms here. “Nothing has changed very much.”
Bruce Rockowitz, president of Li & Fung, agreed: “When there are issues in China, it doesn’t necessarily affect any of us.”
This is in large part because established sourcing companies had already diversified their production bases after the uncertainties of 2005, when quotas on China expired, but the U.S. and the European Union eventually slapped safeguard quotas back on after imports surged. The safeguard quotas were allowed under China’s entry agreement into the World Trade Organization. It was a stressful time that companies would not like to repeat.
“People were working 24/7 trying to come up with a solution” during that time, Solomon said. “We learned our lesson the first time around,” so as a result, production is now spread out, he added.
Linmark still does the bulk of its sourcing — 50 to 60 percent — in China. The Indian subcontinent — India, Bangladesh, Pakistan and Sri Lanka — accounts for about 30 to 35 percent, while Southeast Asia accounts for the balance.
Linmark’s sales came in at $288.3 million for the year ended April 30, 2006, a 221 percent increase, which was due to newly acquired businesses.
Solomon said Linmark might adjust its sourcing percentages to account for price changes by falling back to 50 percent sourced in China, but not lower. Then the Indian subcontinent may go up to 40 percent and Southeast Asia may rise to 10 percent, but it wouldn’t be “a huge move,” he said.
Market leader Li & Fung sources about 25 percent of its portfolio in China and the remaining in 40 countries around the world. Between 50 and 60 percent, which includes China, is from India, Bangladesh, Vietnam, Jordan, Turkey, Central America and Indonesia, Rockowitz said.
Li & Fung’s sales for the year ended Dec. 31 were $8.7 billion, a 22 percent jump over the previous year. The company is shooting to hit $10 billion by the end of this year.
Privately owned Lark International Apparel — a second-tier sourcing company — sources about 60 percent from China and the balance in Vietnam, Bangladesh, Cambodia, Thailand and Indonesia. The company plans to stay in those other countries at least until 2010, said Raymond Chan, general manager.
Chan also had a different view on politics. It does “really affect business,” he said. “Don’t overlook the destructive power of politics to the economy.”
While protectionist measures might be a hot topic politically in the U.S., they don’t make sense to executives here.
Even with protectionist measures against China, the bottom line is that jobs aren’t going back to the U.S., but to other countries in the region, Rockowitz said.
“There’s no economic reason for any of this rhetoric,” he said. “Clothing has always been a political football….It does not fly under the radar screen. China is almost a bad word.”
Rockowitz also pointed out that producing in China benefited the U.S. because consumers get low prices and there are goods on the shelves. To produce these goods, China imports quite a bit of the raw materials, like cotton, which may come from the U.S. or India. The true value of a garment “is borne by many places,” he said.
About 25 to 30 percent of apparel that goes to the U.S. is made in China.
As for what will happen after 2008 when this round of quotas on China expires, Lark’s Chan said: “The U.S. will use another tool to block the free trade between China and the U.S., like antidumping or countervailing tax. This will add additional cost or even kick out some companies from the market because of uncertainty and high cost.”
On the other hand, if quotas truly go away — and Rockowitz and the industry don’t think this will happen — then there will be a jump in investments in China with more factories being opened. Quota has “tempered people’s desire to do business in China…and invest in China,” Rockowitz said.
You often hear an argument to drop quotas and just let business do its thing in the markets it wants to do it in, but Rockowitz thinks quotas should stick around.
“The best thing for the market would be to stick to quotas for the moment,” he said. “Three years hasn’t been long enough for the (China) market to evolve….Another three might be correct.”
The reevaluation of the yuan, which is expected to appreciate at 5 to 6 percent a year, won’t put a big kink in business, at least for larger companies. It’s not enough of a tipping point to push people away from China, Rockowitz said.
The change, however, will affect Lark a bit more.
“The appreciation of the [yuan] against the U.S. dollar greatly affects the cost of sales of our company because most of our suppliers and factories are in China, paying cost in [yuan] and the sales proceeds in U.S. dollars,” Chan said. “The combined impact on both factors affects our margin more than 10 percent to 15 percent on a yearly basis. This will accelerate the rate of transformation from low-end product to more value-added product.”