"Too expensive," a buyer from the US at a trade show in Guangzhou says shaking his head in disapproval when told 100 zippers would cost him $2.1. Watching the buyer walk away, Ye Yiren, a sales manager of the zipper company, sighs: "I have already offered him the lowest price possible."
Given the soaring metal prices in the world market and the rising labor cost in China, the $2.1 for 100 zippers, or about 0.1 yuan apiece, is already dirt cheap. But Ye says foreign buyers can always find even cheaper rates with small Chinese traders.
The company Ye works for, SBS Zipper Manufacturing Co Ltd, is the world's second largest zipper maker, next only to Japan's YKK Co. It is one of the many Chinese manufacturers, textile makers in particular, that are feeling the chill of a slowdown in the US economy, faster yuan appreciation, removal of export tax rebates, and a general transformation of China's manufacturing industry.
To reduce the soaring trade surplus and curb energy-intensive industries, China last year reduced export tax rebates on textile products and garments. On top of that, the yuan appreciation has picked up pace since the second half of 2007 and recently crossed 7 to the US dollar, dragging down the earnings of exporters. The onset of a recession in the United States has also made consumers in that country, major buyers of Chinese-made clothes and garments for long, a hesitant lot and Chinese exporters are in a bind as American buyers demand even lower prices while costs keep rising at home.
The mood in the textile business is thus decidedly gloomy, with many of the players in the industry saying this is going to be the toughest year ever.
Zipper maker SBS, though not in the textile business per se, is inextricably linked to the industry. Some 70 percent of its buyers are domestic textile companies, requiring zippers for the trousers, coats and handbags they make and export. With the textile industry taking a hit, their demand for zippers has fallen, denting SBS.
"We've seen business decline in the domestic market since the end of last year," says Huang Weihua, vice general manager of the company. "Textile companies often cancel their contracts even while we are making their zippers, because their contracts have been cancelled. Also, when foreign customers bargain down the prices of garments from China, textile manufacturers in turn force us to cut zipper prices."
Margins squeezed
His clients, Chinese textile companies, have been hurt more directly. There have been reports about small textile enterprises in southern China closing down. A report by China Chamber of Commerce for Import and Export of Textiles show the profit margin of textile companies is now as thin as 3.9 percent.
Continuous yuan appreciation has further eroded that margin. There is generally a two-three month lag between the time a contract is signed and the money is paid, allowing for time for manufacturing and shipment. "Because of yuan appreciation in the interim, we end up losing millions," laments a trader.
"This is the toughest year for China's textile industry," says Zhang Xi'an, a spokesman for the chamber. Citing data from research by the chamber, Zhang says many small textile companies are closed down, laying off workers or have suspended their business.
Even the big companies have suffered. According to Dai Minjun, a sales manager with Hongdou, one of China's largest textile companies, its exports have fallen in the first quarter of this year. "Exports to US, in particular, have plunged. There are less contracts, and contract values have also become smaller," says Dai.
But some companies see an opportunity in this crisis, a chance for industry consolidation and introduction of more advanced management. The majority of China's textile manufacturers have long been competing in the low end of the market. As foreign buyers look to other countries for even cheaper options, the local industry is realizing that it needs to compete on quality and design, not price, if it has to survive.
Quality is king
Li Xiang, a sales executive of Trans-America Co, the largest trading company in East China's Jiangsu province, one of China's major export bases, recounts how hat designs determined their prices at his booth in the recent Canton Fair. Hats with simple patterns wouldn't fetch much as the customers can easily get those made in Vietnam or Indonesia. "But for more sophisticated hats with delicate embroidery or good design, the buyers would finally accept the prices we offered since they cannot find them elsewhere," says Li.
Companies that realized the importance of quality years ago are in a good position now. Jiangsu Sunshine, a large Chinese textile company that supplies materials to the likes of Armani and Hugo Boss, saw its business growth slow down a bit this year, but still remaining stable. "We have the best quality in the world, and we won't give in if we think the price offered is too low," says Pan Jinshan, general manager of the company. "Our clients understand our position and often accept it."
As for losses because of yuan appreciation, big companies often manage to negotiate prices with suppliers by factoring in anticipated appreciation and share the burden together. "We have our own distributors in over 40 countries, and we face the challenge together," says Huang from SBS.
Some Chinese companies have also transferred their production lines to neighboring countries, hoping to stay competitive with the lower labor cost there. Hongdou has set up several factories in Cambodia, where wages are around 500 yuan a month, less than a third of China's, says sales manager Dai.
The current situation has also prompted some enterprises to explore the domestic market deeper. Wu Liying, from Beyond Garments Co Ltd, one of the biggest exporters of jackets and men's suits in Jiangsu, says his company has only been exporting but has now started to set up stores in China. Hongdou's Dai says while exports drop, the domestic market is doing well. Sales of men's suits in China, for instance, went up over 40 percent this year.
The textile industry is labor-intensive in China, employing about 25 million workers across the country, mostly migrant workers. That means any slight drop in exports can have a major impact on tens of thousands of workers.
"We support industries like textile by providing information and services, and will ensure the stability of these industries," says Commerce Minister Chen Deming, making it clear the government would not endanger the livelihood of the army of textile workers.
