Com­pa­nies build brands to avert a cri­sis brought on by ris­ing costs

China Daily (Canada) - - FRONT PAGE -


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.”



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