Companies build brands to avert a crisis brought on by rising costs
Sales manager Ma Gaodong believed he had a good chance of winning some business at an open tender for purchasing orders in Los Angeles last month. But he had not counted on his prices being so drastically undercut by rivals in Southeast Asia.
His employer, Hangzhou Kaite Electrical Appliance Co, produces power strips, sockets and plugs.
It is in Jiande county, Zhejiang province, and even though its exports were worth $50 million last year, Ma said he still sees a crisis looming.
“For me, China’s exportoriented small and mediumsized enterprises are at a crossroads,” he said. “They can either switch from original equipment manufacturing to making their own brands, and upgrade their equipment and products with technology, or they can die.”
Labor costs in Zhejiang are rising 10 percent a year, with the monthly salary for a skilled Chinese worker now between 2,000 and 3,000 yuan ($325 to $490). In countries such as Vietnam and Indonesia, but the average wage is the equivalent of roughly 500 yuan, he said.
“We’re losing our labor cost advantage, and we’ ll never get it back. It was the price of our products that drew our clients here in the first place,” said Hu Xiaomin, general manager of Tonglu Spring River Knitting Co, which produces woolen clothing for companies in the US and Europe.
“Our clients won’t consider factors such as the industry chain or the investment environment. Of course manufacturers in Southeast Asia will stand out in price when we have the same production conditions.”
Chinese SMEs also expect the Trans-Pacific Partnership, a pact being engineered by Washington with Southeast Asian nations that has been dubbed the world’s most ambitious trade agreement, to have a devastating impact on Chinese exports to the US, particularly for those in the clothing industry.
“It poses even more of a threat than labor costs,” Hu said. “Exports (from the Southeast Asian countries) to the US will be duty-free, while we will still have to pay tariffs as high as 30 percent for some garments.”
His company has already lost several customers to rival companies in Southeast Asia, he said. “Options should be weighed depending on the types of clients you deal with. If your target customer is fast fashion brands, go to Southeast Asia and open your production units there before it’s too late.”
His company is considering setting up a factory in Myanmar, he said. However, outsourcing production must be coupled with supporting units in China.
Efforts to offset rising labor costs and the shortage of skilled workers in China started in 2010 when factories began turning to automation.
Liu Qiang, head of the Hangzhou Entry-Exit Inspection and Quarantine Bureau’s office in Jiande, said most export-oriented factories in the county have upgraded their machinery, reducing the need for human workers.
“A decade ago, the challenge for factories was to transform from making poorquality, low-priced products to understanding the customers’ needs and providing good-quality products at good prices. Now the challenge is about how they can survive another round of outsourcing and build their own brands,” he said.
Chen Huili, general manager of Jiande Feilong Electrical Appliance Co, said his company is investing 200 million yuan a year in automation. The labor shortage has been deteriorating every year, which he puts down to younger workers being increasingly picky about pay and working conditions.
Ma, the sales manager of Kaite Electrical, said another option for companies is to upgrade their products with intelligent functions. “You need additional features to survive the price competition. If you can’t win the war on price, win over customers with innovative products.”
Some companies are exploring what industry insiders say is the most diffi option: Building their own brands.
Spring River Knitting began developing a clothing line for the domestic market in 2012 and now has an online store on Tmall, a businessto-consumer Web platform operated by Alibaba Group.
Hu, the general manager of Tonglu, said: “China is the world’s largest market, but previously we failed to tap that market.” Although the boom in e-commerce has provided an opportunity to rectify that, building a brand, as well as consumer confidence in that brand, is a lengthy process, he said. “It requires more than money. We are starting from scratch here.”
Kaite Electrical has managed to sell its own-brand products to two market chains in the US, and it is now exploring the domestic market.
However, Ma said he is cautious about the prospect of companies promoting brands overseas.
“Some foreign brands have histories going back decades, some even a century. They can spend millions on promotion,” he said. “For us, we can only try our luck in areas they have not touched and try to win over buyers with unique designs.
“We’re treading a fine line, as embarking into overseas markets turns customers into competitors.”