An expected weak demand caused by the US economic recession may drag down the sales of Hong Kong’s garment exporters this year, with a leading one saying yesterday the year would be “challenging”.
“About 60 percent of our garment orders are indirectly tied with the US market. We worry that exports to the US will see a drastic drop this year as a result of the slowdown in the country’s economy,” Gordon Yen, executive director of garment producer Fountain Set Holdings, told reporters yesterday.
The sluggish US market would make life more difficult for local apparel firms, which are already suffering from rising operating costs, Yen said.
Prices of raw materials and labor in Guangdong Province, home of most Hong Kong manufacturers'production units, are going in tandem with the inflation.
Yen said the prices of petrochemical products and cotton have risen 10 to 30 percent and 5 to 10 percent, respectively, and it is hard to pass on the cost to the customers because of furious market competition.
The increase of cost would outweigh the increase of market prices over the coming 12 months, he added.
To cope with the tough situation, the Hong Kong-listed firm would shift part of its production lines from Guangdong to the soon-to-be-operating plant in Yancheng of East China's Jiangsu Province.
Land and labor costs in East China are generally lower than those in South China's Guangdong, which is the most affluent part of the mainland and is plagued with a shortage of workers.
With the opening of the Yancheng plant in early 2009, Yen said that some of the manufacturing operation in Dongguan would be transferred to the new plant. “We hope the shift could alleviate the cost hike,”Yen said.
The plant covers more than 370,000 square meters. Its production capacity will reach 10 million pounds of fabric per month when the plant operates at full capacity.
The company’s capital expenditure is about HK$550 million for the 2007-08 financial year, that is a 57 percent increase from the previous financial year. Yen said that about HK$300 million of the expenditure is earmarked for the expansion of the Yancheng plant.
As for the mainland market, Yen said: “Its casualwear market is dominated by high-end and foreign brands. It is not easy for middle-end players like us to penetrate the market.”
The gloomy industrial prospect might affect the company's dividend payout. Yen said the company’s payout ratio was 37 percent for the last financial year, but he could not guarantee the same ratio this year due to market uncertainties.
Recently, Fountain Set has diversified its business to equipment manufacturing for the garment-making industry. A company’s spokeswoman predicted the segment could constitute 5 percent of its overall revenues in three to five years.
