"TAL example indicates at the larger picture in China where manufacturing anything from clothes to toys was considered extremely cheap once upon a time due to low wages and production costs. However, now with complicated government policies and the country’s quest to move to higher-value manufacturing, the situation is changing."
Production moving to South Asian countries
TAL has already started moving its pants production from China to Malaysia, where it has another factory, and it is also expanding base in Vietnam. However, TAL would continue to run its other factory in China making dress shirts since shirt making according to the company is more complex as well as more profitable than pants, because the fabric is thinner and puckers more easily.
TAL example indicates at the larger picture in China where manufacturing anything from clothes to toys was considered extremely cheap once upon a time due to low wages and production costs. However, now with complicated government policies and the country’s quest to move to higher-value manufacturing, the situation is changing. On one hand, Chinese government is following complete automation of its industries and has also unveiled a 10-year plan to put the nation at the forefront of technologies like 3-D printing and high-end machine tools, on the other, local governments are almost doubling the minimum wages forcing manufacturers to close factories. No wonder, companies like Coach Inc have moved their production to Southeast Asia.
Domestic manufacturers are combating rising production and labour costs in the textile and apparel industry, which has also led to China losing its status as the mass producer of goods. China’s costs have risen so quickly and to the extent that importing countries are moving to many other Southeast Asian countries such as Malaysia, the Philippines, Indonesia and Vietnam that offer low production and labour costs.
Losing status as manufacturing powerhouse
As Stanley Lau, Former chair of the Federation of Hong Kong Industries points out, the situation in China is only going to worsen. Federation of Hong Kong Industries is a trade group for 3,000 manufacturers, mostly with factories on mainland. He forecasts between 2014 and 2017, 10 per cent of mainland factories owned by Hong Kong-based manufacturers would close. The number of Guangdong factories owned by Hong Kong companies declined to 32,000 in 2013 from a 2006 peak, owing to again rising wages and difficulty in getting skilled workers, as per the analysis by Justina Yung of Hong Kong Polytechnic University for the federation.
This year, wages and benefits in China are expected to climb 8.6 per cent, lower than the previous year’s 10.3 per cent growth rate, according to the Economist Intelligence Unit. China’s average labour cost of $3.27 an hour in the manufacturing sector is two-thirds higher than Vietnam’s and a quarter above Malaysia’s.
Many leading western players turned to neighbouring markets like India, Bangladesh, Vietnam, Indonesia, and Cambodia after sourcing from China started becoming expensive. However, despite having sufficient capacities to cater to the needs of western players, India, Indonesia and Vietnam are facing constraints due to recent increase in minimum labour wages. So their attention is now moving to Malaysia, Myanmar and other such low cost destinations.
