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What’s Next for Chinese Manufacturing?

According to Israel, China’s huge pool of qualified people includes a lot of operators who are no longer interested in manual labor and there are far fewer workers than there were 10 to 20 years ago. “It used to be the way to get off the farm and make a future. Now they’re more interested in instant gratification,” he said. “Every year we get the reports and forecasts of labor rates and that’s what always burns our margin because suddenly all of our suppliers have had to raise their rates.”

“Labor is longer a commodity,” Mostofsky echoed, noting that the only way for China’s factories to continue attracting and retaining workers is to adopt good corporate social responsibility policies. “[Today’s Chinese workers] do not have the expectations [of their parents] that they are responsible for the next generation’s success. They expect that success,” he said, adding, “The positive to that is the ability to sell into China.”

But rising wages aren’t the only thing that’s driving up costs.

“We decided a year and a half ago to shut down all the [hard goods] manufacturing that we did ourselves [in China] and bring it back to the U.S.,” Israel said, noting that between free trade zone policy, city policy, provincial policy and national policy, it was becoming too tough to predict what the government would want. “Not being able to understand an obscure, abstract concept of a rule that we had to comply with was maddening for us and it cost us a lot of money. We decided it was just easier to make things in the U.S.”

While his firm is still making a lot of soft goods on the ground in China, he calls the country “a moving target.”

In addition, when Chinese authorities shut down factories for days (sometimes weeks) because of pollution, it pushes back orders.

“That’s a headache for everyone,” Zhirong admitted, quickly adding, “For shirting, it’s not a problem. For dyeing, it could be a problem.”

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“We have to remember that almost all sewing factories have to have product that had been dyed somewhere along the line, and if we end up with a supply chain that shut down we could end up with a very significant issue for the industry,” Mostofsky countered.

And while the wealth of Chinese consumers continues to increase and a recent report from Boston Consulting Group said spending looks set to reach $6.5 trillion by 2020, the country sells a lot of knockoffs.

“How do you enter the Chinese market when the biggest e-commerce site—Taobao—is probably selling a counterfeit version of it?” Mostofsky asked, adding, “Over 200 cities will have over a million people in just over two years. How do you approach that market? Is it a single market or 200 different markets? Will the second or third company to go in selling a particular type of product get the same bang for their buck as the first company?”

What does that mean going forward?

And yet, more opportunities to sell to Chinese consumers is also incentive to keep manufacturing local in a lot of cases. Not to mention, while manufacturers are increasingly investing in cut-and-sew facilities in Vietnam and Bangladesh, a lot of raw materials are still sourced from China.

“We’re manufacturing the same product for the same brands both in China and outside and if the product is going to look the same in the store, the raw materials have to be the same. For now it’s strictly Chinese raw materials, from the packaging down to the yarn,” Mostofsky shared.

“The more commoditized fabrics are definitely coming out of China,” Israel reiterated. “It’s not as labor intensive so there’s not as much pressure there to move it. You’re not chasing the needle as much with the raw materials as you are with cutting and sewing.”