China loses its edge as costs rise
Tom Mitchell, Hong Kong
The Australian
March 24, 2014
THE competitiveness of China’s manufacturing industries has been seriously eroded over the past year, according to one of the world’s largest trade sourcing companies.
Hong Kong-based Li & Fung group, which manages a $US7.1 billion ($9.75 billion) a year trading business, said price rises crept back into the Sino-US and EU supply chains last year, after at least six years of often “severe deflation”.
Li & Fung managing director William Fung reported an average 2-3 per cent increase in the once unbeatable price its US and European clients were willing to pay
He pointed to a “double-digit” rise in Chinese labour costs, the revaluation of the yuan and higher oil and energy costs for the shift.
“China’s costs are all going up,” Mr Fung said. “It is no longer the most cost-effective country in the region … Anything sourced from China has a higher inflation component than from other places around the world.”
Beneficiaries of China’s rising prices have included textile and garment manufacturers in India, Bangladesh and Cambodia, which were expected to lose orders to China after the quota regime governing textile production expired in January 2005.
They were saved, however, by a combination of anti-surge “safeguards” imposed by the US and EU on select Chinese textile exports in the second half of last year, as well as rising cost pressures in China.
“The safeguards stopped China in its tracks in terms of textiles,” Mr Fung said.
“In Bangladesh, factories are so overbooked – it’s like China used to be,” said Bruce Rockowitz, the president of Li & Fung’s trading arm, who oversees sourcing operations on four continents.
The inflationary pressure extends to all product categories sourced by Li & Fung, ranging from fashion accessories and furnishings to sporting and travel goods.
Li & Fung, which used to buy 90 per cent of its non-apparel products from China, has seen 25 per cent of this “hardgoods” business migrate to cheaper locations in South and Southeast Asia.
It sells about 70 per cent of its sourced goods in the US, and another 20 per cent in Europe.
At its results briefing, Li & Fung reported an 18 per cent increase in group turnover to $HK55.6 billion ($10 billion), with net profit up 20 per cent to $HK1.79 billion.
The company also recorded a rare rise in its “total margin”, which represents the difference between what it pays China-based factories and what it charges overseas retailers. The margin rose to 10.7 per cent from 9.6 per cent.
