Rising labor costs drag down Zhejiang’s garment-making industry

By Ma Jingjing and Xie Jun Source:Global Times Published: 2017/3/8 20:13:39

Fraying at the seams

The garment-making sector in East China's Zhejiang Province is undergoing a difficult time as its profits continue to shrink. Some factories have closed, while others have held on by the skin of their teeth. Garment makers said rising labor costs are primarily to blame. One expert said the decline of lower-end manufacturing is inevitable, but new industries will rise to replace them.

A textile company worker spins yarn in Hangzhou, capital of East China's Zhejiang Province, in July 2016. Photo: IC

After a wave of shutdowns swept through the garment-making industry in Zhuji, East China's Zhejiang Province, Ren Zhiyu was relieved his company managed to weather the storm.

"Most of the clothing factories in Zhuji are original equipment manufacturers (OEM)," Ren told the Global Times on Monday. "In the last two years, with high product inventories and rising competition, many local garment producers, including well-known names like the Zhejiang Kai'er Clothing Co, started to hit the skids, and some of them had to terminate their business."

Zhuji is more than 200 kilometers away from Shanghai.

According to a report of the China Central Television in September 2016, the number of clothing companies in Zhuji had shrunk to 200-300 from a peak of about 650.

Ren's company, which manufactures women's clothing, has felt the strain. After two years in the business, he watched as capacity overtook demand, making it increasingly difficult to make money.

In 2016, he decided to entirely cut his cloth manufacturing business to focus on cloth materials. Currently, his company mainly produces jacquard materials for a stable of clients including H&M and Etam. 

Garment makers are struggling across Zhejiang.

A garment company owner surnamed Wei said that he opened his factory around 2000 in Xiaoshan ­district in Hangzhou, provincial capital of Zhejiang. But shrinking profits forced him to give up the ­business around 2013.

"When we first started, we could earn about $2 or $3 on an $8 dress. Now we can only earn a few cents," said Wei, whose company used to export women's clothing to the US and Europe.

"I didn't think it was worth holding on to the business once its profit margin shrunk to such a negligible level," Wei told the Global Times on Monday.

Wei said that many companies in Xiaoshan, also in Zhejiang, face the same problem.

A garment factory owner surnamed Lu told the Global Times on Monday that her plant is also struggling. Established in 1996 in Quzhou, Zhejiang, the factory primarily makes suits, shirts and business attire.

Lu said her factory no longer has a cost advantage over competitors in countries such as Cambodia and Vietnam. Lu's company exports 40 percent fewer products than a few years ago and she has had to cut the number of workers at her factory to 50 from nearly 140 in 2013.

If profits remain low, Lu "may close the factory in a few years," as she told the Global Times.

Still, the situation isn't as bleak for every garment maker in the province.  Members of Fashion Ningbo, a local garment industry association, have done OK in recent years, said one of the association's employees who didn't want to be named.

"Some, like those that make children's clothing, may have a bit of difficulty, but most have adopted successful strategies to adapt to the changes in the industry," she told the Global Times on Monday. "There haven't been any large-scale shutdowns as far as I know."

Rising costs

Most clothing manufacturers interviewed by the Global Times said that rising labor costs have been the "prime culprit" behind the local industry's decline.

Xiaoshan garment manufacturers used to be able to pay skilled labor a little more than 1,000 yuan ($145) a month around 2000, when he started his business, according to Wei.

"But nowadays [in 2017] you can hardly hire one for 7,000 yuan," Wei noted.

While labor costs have risen, Wei has not been able to raise prices on his customers, presumably to keep their business. Instead, he simply had to accept lower profit margins on his products.

He also noted that such a large jump in labor costs cannot be offset by other favorable factors, such as the depreciation of yuan.

Lu also noted that over the past five years, labor costs at her factory have almost doubled. "Rising labor costs have cut our profits by more than 30 percent," she said.

The average hourly wage of Chinese manufacturing workers grew to $3.60 in 2016 from $2.20 in 2011, according to a report by the strategic market researcher Euromonitor in February.

It makes sense that labor costs in Zhejiang, whose economy is relatively developed, have risen faster than other regions in China, said Ye Hang, a professor at the College of Economics of Zhejiang University. Still, it has increased the burden on the province's OEMs.

Ren said some companies' poor strategy has also hurt their businesses. For example, Zhejiang Kai'er expanded into the real estate sector rather than improving its main business, which crippled its competitiveness, he said.

Business shift

To deal with the difficult situation, Zhejiang garment manufacturers can shift their manufacturing facilities to places with lower labor costs, Ye said.

"But this strategy is better suited to large garment makers," he told the Global Times on Tuesday.

The aforementioned industry association employee said that some local garment makers have already adopted this strategy. Suit maker Youngor, for example, has moved its manufacturing to Northeast China's Jilin Province, which has lower labor costs.

Although Chinese OEMs have higher costs than many of their competitors in Southeast Asia, they can still make money serving high-end apparel brands, according to Ren.

Wei noted that some local garment makers have started to explore the niche market of making qualified clothes for e-commerce vendors.

"The orders are small, but they have high profit margins, which helps offset the increase in labor costs," he noted.

From a larger perspective, it's not entirely a bad thing that Zhejiang's traditional OEM industry is in decline, as many new industries, particularly high-tech industries, are mushrooming in the coastal province as China upgrades its industrial structure, Ye said.

For example, during a recent visit to a village in Lin'an, Zhejiang, he was impressed with the fact that many local villagers have made a big fortune manufacturing energy-saving lamps.

"Currently, the rise of enterprises with high-added value is still slow compared with the fall of traditional low-end industries, but the situation will change in three to five years," he said.  


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