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Manufacturing| China| Footwear
May 2014

The China


SAFLIA executive director Jirka Vymetal dispels some myths about manufacturing in China and Trudi du Toit looks at alternative options to Made in China. Perhaps even closer to home?

Working in China for the past three years changed his whole perspective on footwear manufacturing, says new SA Footwear and Leather Industries Association (SAFLIA) executive director Jirka Vymetal. Instead of the image most people have of Chinese factories — huge halls with thousands of workers busy behind rows of machines — the factories where most footwear for South African brands would be made are small, and the structures very informal, he found. Some of the smaller factories don’t have much machinery — save a few closing machines. “They cut by hand, they last by hand, they tack by hand, everything is done by hand.”

As GM Asia for Jordan & Co, Vymetal’s task was to ensure that the correct quality, correct style and correct colour merchandise was manufactured and shipped from the Chinese factories at the expected time. “China (manufacturing) was a huge challenge for us to keep right. If you don’t know what you’re doing, you can lose a lot of money,” he says. “Chinese factories are brilliant at cutting costs to the detrement of quality.”

There are numerous different footwear manufacturing areas in China, recounts Vymetal, each specialising in making a certain type of footwear — like PU or leather, men’s or ladies, etc. He was based in Dongguan, a city with a population of about 8.5 million, almost in the center of southern China’s Guangdong Province. One of three main footwear exporting provinces, the other two being Fujian and Zhejiang. A lot of cities specialise in either mens or ladies footwear i.e. Huangbu and Jilong for ladies fashion PU, or Wenzhou for mens production.

“There are thousands of little factories in each area,” says Vymetal. “In Huangbu and Jilong alone there are a couple of thousand little enterprises.” The huge factories mainly manufacture for global brands and European and American chain stores. Some of the big brands would have their own factories, employing thousands of people.

“We can’t afford to buy from the big factories, for two main reasons — the cost, as the infrastructure is better, the overheads are higher, and the workers are paid better, and secondly, the minimum order quantity, which could be about 5 000 pairs per style per colour.”

South African brands would therefore have to pay a big premium for our much smaller volumes. Instead, they would opt for the many smaller factories — some slightly bigger than a restaurant in a shopping mall — where about 30 workers would make about 500 pairs in two or three days.

“Most of the workers work on a piece rate — they would be told: here is a 500 pair order and you’ll each get RMBxyz for that order. They will then go off and make it and rush to finish as soon as possible.”

The Quality Assurer’s (QA) job is therefore of vital importance, because his/her responsibility is to make sure that the full batch meets the standards of the sample that was approved. Especially, since the workers would sometimes work till 11-12 at night in order to finish an assignment, with little control over who helps to complete the work. Anybody who believes manufacturing in China is easy money is naive, says Vymetal.

Trading houses

Companies with some experience of manufacturing in China would all work through trading houses. “That is where you build your relationship, not with the factory,” he explains. “You find a trading house that represents 10-15 factories that deliver the right product for you at the right price, and work through them.” This not only saves you the difficult task of trying to find a factory that will be able to make the product you require, but it protects you from unscrupulous factory bosses that might disappear once the deposit has been paid.

But, even though there are some very good trading houses, the brand must still accept responsibility for the quality of the product through regular consignment inspections by QA’s. “In theory the trading house checks that the bulk order looks like the sample — but in reality that does not always happen. You have to check them yourself,” advises Vymetal.

He recommends a good read for anyone importing from China, or intending to do so, a book entitled Poorly Made in China, by Paul Midler. He says it helped him understand the Chinese way of doing business.

Move from China

While Vymetal believes that it is currently not possible to compete with China when it comes to manufacturing PU footwear, “we are now reaching a point where we can seriously ask: when it comes to manufacturing good leather footwear, is it better to do it in China, or here in South Africa? The time is coming close when we will say it is better to make it here.”

That will be one of his tasks at SAFLIA — to promote local manufacturing — which will benefit from the high exchange rate, China becoming more expensive and other potential manufacturing countries not quite on stream yet.

Returning closer to shore manufacturing is a concept discussed across many industries.

In only a few years’ time labour costs in China will be equal to that in Portugal, or Eastern European countries, and closer to market production will become more important, Steve Evans, director of the new EPSCR Centre for Innovative Manufacturing and advisor to the UK government on trends in manufacturing, told the World Federation of Sporting Goods Industry (WFSGI) forum on The Future Of Manufacturing held in Taiwan last year.

Nearly three-quarters of the chief purchasing officers in 29 European and US apparel companies were planning to decrease their sourcing from China, and shift production to countries with lower labour costs, according to a recent study by McKinsey & Company, quoted in the Sourcing Online Journal. Higher labour costs is seen as the main reason for increasing costs, followed by costs of raw materials and fabric and yarns.

The era of Chinese manufacturing dominance built on low wages is coming to an end because there are now other countries with even lower wages, says George Friedman in the Stratfor Global Intelligence report The PC16: Identifying China’s Successors.

After the Industrial Revolution there had been many countries that grew their economies on low wages paid to desperate and large workforces — from England, to America to Japan and Germany after WWII. But, eventually wages rise and the rate of growth slows down, as it is no longer profitable to produce simple products for the mass market — and other countries replace it as a production source. The same is happening in China, Friedman argues.

Clothing and footwear manufacturers historically lead this trend, because they provide work opportunities for a large number of people who are prepared to work for low wages.

China’s replacements

Because of the existing infrastructure and availability of so many raw materials Vymetal believes that China will remain the main sourcing country for at least the next five years.

“While countries like Bangladesh, Vietnam, Camodia, India, etc. have the skills to make the product at a good price, they lack the infrastucture,” he says. They can therefore make shoes in basic colours, but don’t have access to the hundreds of colours available to Chinese manufacturers. And factories situated in rural areas — where labour costs are the lowest — can expect long delays in getting the products to a port to be shipped, because the infrastructure is lacking. Labourers in cities close to ports, on the other hand, are demanding higher wages.

Most global analysts agree on two things: it is time to seek an alternative to China as a manufactuing country — but no single country can replace China. They are therefore looking at several countries as possible successors.

Three-quarters of the respondents to a survey on the future of global manufacturing said they would move their garment manufacturing business to other Asian countries, from 2015 onwards. Respondents were especially interested in manufacturing in Bangladesh, followed by Vietnam and Cambodia, then India and Pakistan, supporting the trend to move manufacturing to low wage countries.

Protests, fires and collapses

But, in the age of fast global communication, even desperately poor workers in low-wage countries are not unaware of issues like workers’ rights and minimum wages. Brands that had moved production to Bangladesh were shocked last September by violent police retaliation against apparel workers demanding an increase of the monthly minimum wage of $38 to $100, which forced 400 of the country’s 5 000 garment factories to shut down. This followed the death of more than 1 100 people in April after a building housing several apparel factories collapsed and prior to that, the death of 120 people in a factory fire.

Recently, workers at a Nike factory in Phnom Penh, Cambodia, were injured and killed during violent clampdowns on demonstrators striking for a better wage, and last year two workers died and nine were injured when a small sport-shoe factory outside Phnom Penh collapsed.

This has made global purchasing officers wary about the risk of moving manufacturing to low wage countries in Asia.

Africa’s time?

Africa with its low wages and relative proximity to Europe and the US, has been named as the next sourcing destination for some of the respondents in the just-style survey, editor Leonie Barrie told a webinar on global manufacturing trends.

“If you follow the money, the next logical places that we’re going to be looking at will likely be in Africa,” Bob McKee, fashion industry strategy director of Infor, sponsor of the just-style survey, told the webinar.

“The next apparel manufacturing country will have a large population moving from agriculture to apparel manufacturing, he says. Central Africa is the most logical next sourcing destination in the next few decades, as there has been a lot of Chinese investment in roads and infrastructure.”

The investment potential of Africa is starting to look more and more attractive — political conflicts have declined, stable economies are becoming the norm, the use of mobile and e-commerce is growing and there is a large dynamic, young population, states a report on Ethiopia — the emerging textile and clothing industry 2014, from Research and Markets.

Nigeria is among the emerging market countries with the fastest growing economies in the world, ranked by GDP, reports Sarah Boumphrey of Euromonitor. Nigeria is second to China in terms of growth, and Euromonitor expects the Nigerian economy to grow by 6.6% in real terms in 2014. China is still the growth leader, with the Phillipines in third place, followed by Bangladesh and India. Kenya, Ethiopia, Ghana, Tanzania and Cameroon have been identified by Euromonitor as the African countries with the highest growth over the next years.

When they selected the 16 countries most likely to succeed China (the PC16) they excluded countries that are growing because of energy or mineral extraction — like South Africa, says Friedman. His model is based on economic growth in undeveloped countries, purely driven by manufacturing, offering employment to desperately poor workers.

He believes the most likely successors are clustered around the Indian Ocean basin — especially in the eastern part of sub-Saharan Africa, namely Tanzania, Kenya, Uganda and Ethiopia. Across the sea are Sri Lanka, Indonesia, Myanmar and Bangladesh. Other possible successors are in Latin America.

Southern Africa beckons

French speaking countries like Mauritius and Madagascar have been attractive destinations for French companies like retail giant Dėcathlon, with their 600-odd warehouse-size sport stores. This also benefitted South African textile manufacturers like Gelvenor Textiles, which is much closer to the factories on the islands than Asian suppliers.

Southern African Customs Union (SACU) countries, especially Lesotho and Swaziland, have attracted international brands seeking African manufacturers — especially since they can import textiles from South Africa and export finished garments to South Africa without paying the 22% duty on textiles and 40% duty on finished products. In terms of the SACU agreement of 2004 these countries retain a revenue sharing arrangement with South Africa for customs and excise duties.

Although factories in these countries are not governed by the same minimum wage legislation as South African manufacturers, a number of factories work with compliance agencies like the Better Works Lesotho (BWL) programme to “improve compliance with labour standards and promoting competitiveness in factories,” says Kristina Kurths. “For brands, particularly those that are US based, participation in the programme is important because it demonstrates a factory’s commitment to a process of continuous improvement,” says Kurth.

“In a factory client-satisfaction survey that we conducted in late 2012, six out of ten factories responded that their order situation did improve since they joined BWL,” she adds. “Several also mentioned that improvements made through BWL advisory services strengthened their relationships with existing and potential buyers.” A 2012 survey of South African suppliers operating in Lesotho, however, showed that they were reluctant to join because they believed the BWL annual subscription fee was too high, she says. Factories were also concerned that they are getting inspected twice, as they are also inspected by the Lesotho Labour Department.

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