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Chinese Manufacturers’ Alleged Relocations: A Wild Goose Chase?

As we settle into the new year, our Sourcing Summit Companion Report looks ahead at ways to optimize processes and performance.

China’s apparel exports fell 20 percent in March 2014, after a 17 percent year-on-year hike in February and a 13 percent fall in January.

For many commentators, this proved China’s global domination was moving into reverse. I’d say something was going on to make monthly data misleading.

In the first three months of the year that’s almost always the annual changes in the dates of the Lunar New Year break. The number that really counts is the year-on-year change in the whole first quarter. This year, garment exports were up 2 percent on 2014. That’s clearly slower than the 4.9% export growth in 2014, or the 11.2% in 2013: but there’s still no sign of the mass overseas flight Chinese manufacturers are supposed to be planning.

But there is real evidence of another kind of overseas flight.

In 2002, Hong Kong-owned firms employed 11 million workers in China’s Guangdong province. By 2014, half those firms had closed, leaving just 5 million employees in the province. The chairman of the Taiwanese-invested Enterprises Association of Guangzhou said in February that 30 percent of his members had left over the past couple of years.

But the province’s working population grew over those 12 years. Indeed the number employed by companies based in mainland China grew from 41 million to 61 million.

About a quarter of them have temporary migrant status. At the end of this year’s Lunar New Year break, the number coming back to Guangdong from their home villages was almost identical to the number in 2014. Like every year, there were more jobs waiting for them than there were returning migrants.

So why are the overseas Chinese leaving?

During the 1990s, led by the apparel industry, companies based in Korea, Hong Kong and Taiwan began moving much of their production offshore as wages at home started to take off. Guangdong province, and especially the Special Economic Zone established around Shenzhen on the border with HK, was specially designed to attract these businesses.

But however perfect for efficient operations, to those Koreans and Taiwanese—and even to many Hong Kongers—it was still a foreign country. For many of them, the past decade’s rising wages have been an alarm bell. A number have said on record that China’s about to price itself out of the market, so now’s a great time to find another foreign country to do the same thing all over again.

Those companies began to change fundamentally when they moved some production to Shenzhen. Their office in Seoul or Hong Kong is now for the big strategic decisions, while manufacturing is done overseas. But they may raise money in London, source IT in California and plan their marketing in New York. They’ve become almost rootless—and they’ve become known in China as the Flying Geese. It’s easy for them to see China’s wage inflation as nature’s way of telling them it’s time to move production to wherever might be the next Shenzhen.

There’s not much evidence, though, that firms based in China think the same way. Certainly, many spinning, weaving and dyeing companies are seriously looking at new plants overseas, where power may be cheaper, real estate easier to acquire and laws about pollution less onerous. There have been a number of plans reported for massive overseas textile and garment complexes costing hundreds of millions—but I can’t find many of those reports materializing. Among the saddest recent rituals of our industry in the past few years have been the “$500 million textile project, creating 30,000 new jobs” reports from Africa which, three years later, have just disappeared without trace.

More importantly, I can’t find a single substantial example of a mainland China textile or apparel firm actually shutting up shop and moving overseas. I believe that’s because the mainland Chinese firms differ from the Flying Geese in several crucial ways:

Customer base. The Flying Geese manufacture for clients who are–as in the ’90s–primarily in North America, Europe or Japan. So did Mainland Chinese businesses 20 years ago.

But as China’s domestic retail market overtakes America’s, more and more of them see domestic sales as a crucial part of their medium-term strategy. All the reasons U.S. or European buyers would like to produce more onshore apply just as strongly to Chinese buyers. But China doesn’t have the problems U.S. and European factories have in finding staff prepared to work on sewing lines.

Overseas relocation is a bigger challenge for some. The Mainland firms’ entire history has been about managing a domestic workforce, and moves to Bangladesh or Ethiopia are a real management challenge. When the Flying Geese–especially those from Taiwan and HK–got their first taste of overseas production by setting up in China, they were dealing with a country they or their parents had been born in.

Where does abroad start? Mainland firms have the option of moving production within China: for many Flying Geese, moving, say, to Xinjiang in China’s far west is a much greater cultural barrier than moving to Vietnam or Cambodia.

You can’t move your connections overseas. Chinese suppliers’ ability over the past five years to keep apparel prices down while wages soar comes partly from the country’s fabulous infrastructure and access to raw materials suppliers. But don’t forget the complex connections successful Chinese businesspeople have with local officials and banks: competitive advantages they can’t take to another country.

Obviously, some Mainland Chinese businesses will want to become global players, and at some point some will be as comfortable outside Greater China as any Hong Kong business.

But for the next few decades, most mainland manufacturers will see overseas production much as Walmart sees its operations in the U.K. or Canada–a useful part of the portfolio, but never likely to be the center of attention.

I suspect we’ll see flying pigs before most Chinese garment makers become flying geese.


Mike Flanagan, CEO Clothesource. Clothesource offers consultancy on the world garment industry using the wide resources of The Clothesource Knowledge Base – the most comprehensive collection of information anywhere about sourcing for the apparel industry. He can be contacted at Flanagan@clothesource.net.

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