How Can Textile Factories Continue to Operate in Expensive China?

Report on Dongguan’s Textile Industry By Neale O’Connor

With reports of the textile industry moving to cheaper South East Asia and third world countries and out of China, China continues to dwarf the other top five textile exporting nations (Thailand, Cambodia, Indonesia, Vietnam and Honduras) to the U.S. in terms of exports. As much of the reason for China’s staying power can be put down to scale and the logistics of packaging and transport, we need to understand how and why textile factories are continuing to survive in China, especially those in the expensive coastal regions.

Visit to two mid-range factories in Dongguan

The first textile firm we visited produced sweaters using wool, cotton, rayon, etc.  We went there to get a quote on some product designs which would sell for about US$44 which means about US$11 (FOB) price per unit goes to the manufacturer. One factory (120 employees) is solely focused on finishing (knitting is done at other factories inland).

The other factory (60 employees at the site we visited) outsources and also does its own knitting. It has four locally built computer knitting machines that cost about 100K Yuan each. The investment plan is for the machine cost to be spread over 5 years – Each machine runs for 22 hours per day and can do a side panel of a garment every hour – ie about 10 garments per day. Although this varies depending on the pattern. On average the machine needs to produce 300 Yuan per day in profits to break even after accounting for the labor costs and maintenance costs of running the machine.

Big Challenge for small factories in China

1. Getting new Orders and short Lead times – Most manufacturers are suffering from shorter and shorter lead time but the customers want delivery yesterday.

2Powerful trim suppliers –

Case in point a renowned zipper manufacturer usually has 75 day lead time. In contrast, a local brand manufacturer has a lead time of only days to weeks.  The renowned zipper manufacturer has sales staff to contact their customers to ensure that they insist on using the renowned brand as part of the contract for new orders. In addition, the zipper manufacturer requires a minimum order amount (e.g., 100 pieces) per colour, per size so unless the order is large, there is little chance for small manufacturers to fulfill customers’ order requirement.

3. Costs Squeeze and outsourcing

How the textiles manufacturers are coping? Now the squeeze comes from buying prices (materials and trimming costs) and labor costs. As a result, much of the knitting is being done inland and sent to factories in Guangzhou in secret unbeknownst to the customer. It is secret because of certification limits. That is, most buyers enforce a rule to “scrutinize” factories before entering business.  In most cases, they even require enforcing production under one roof in addition to relative terms & conditions.  If the result is to their satisfaction, they will give their seal of approval in a form of a certificate to the factory in question.  In this connection, factories need to be super careful with the unique knitwear manufacturing practice.

4. Getting Paid – Problem of letters of credit – the new middle man

Getting paid before/when goods are delivered or getting any form of guaranteed payment terms before shipment does not happen.

Factories cannot get letters of credit (LC) financing from local financiers and financing from underground banks is expensive (20%). In Hong Kong, by contrast, vendors can get 60-70% financing.

At the same time, customers are having difficulties in getting trade financing from home – due to lower margins, less cash flow from their own markets.  Indeed, most buyers prefer not to open LC as they do not have sufficient collateral to put down.  Thus, customers push the supplier(s) to consider payment terms: possibly up to 100% of invoice value 30 days by T/T upon receipt of goods, terms which the factory cannot accept?

In the face of a shortage of financing options for both vendors and factories the upshot is that large middlemen – third party logistics providers (3PLs) can provide value added service in bring a financial bridge to both parties. 3PLs can bring security of financing to both parties. So the middlemen who up to 5 years ago were in risk of becoming extinct, are now viewed as a key player in the supply chain. The international buyer will not kill the middle man while the buyer is coming from the struggling developed nations.

The family textile enterprise is still alive

The family textile factory enterprise continues to stay a sustainable form of enterprise for several reasons

1.     Small is beautiful! – They are under the radar of official labour laws and so can survive at lower costs including cash basis of trade. For example, Pay is in the form of a minimum allowance (smaller than usual) and piece work. Pay is employed to tackle reducing revenue. The use of piece rate which gives the factory flexibility in surviving low order periods. For example, business not as good as 12 months ago – The critical part will be after CNY – Employees decide whether to come back, and new orders come in from overseas customers. They can lay off workers very easily unofficially but officially it’s complicated.

2.     Government and family business go hand in hand! – In 2008 the provincial gov’t was forced to quietly hand out subsidies to the factories to keep them alive as they have employed so many people. Thus, factories are able to survive and continue to operate. As much as the Guangdong government wants to modernize, the established eco systems of Chinese family owned firms will not move to another province. They will always survive as the family is the basis of the Chinese culture.

3.     Complex business supported by extended network! – There are hundreds of knitwear factories in Dongguan doing the final and not the full assembly – ie more of the knitting is done in lower cost areas – Everyone knows but customer doesn’t need to know the arrangements. In other words, knitwear manufacturing is a complex undertaking.  It involves more departments than other textile items.  Each department demands a kind of expert knowledge & skill.  It is difficult for a mid-range factory to afford to house all departments. Outside experts often render better services in terms of quality & cost-effectiveness.  Buyers may not like to know this!  They would like to have the cake & eat it!

Neale O’Connor, Director of The China Lab, Silk Road Associates and The China Supplier 1000 Project


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