Rising Cost Threatens Export Enterprises Of Shoe Leather

In the Honghe town of Zhejiang, a fast advertisement sign on the main road reads "a famous Chinese sweater town".

However, the economy of the sweater town is declining, showing a preliminary sign that China's manufacturing industry is entering the middle age.

Over the past 20 years, the town, which is 90 minutes away from Shanghai, has found itself a very suitable place in the global economy.

Not long ago, when the sweater industry was at its peak, more than half of Hong Hong's 100 thousand residents worked in 100 sweater factories and more than 8000 stores, producing and selling about 200 million sweaters a year.

The local government says these companies earn 650 million dollars a year.

Now, many exporters and factories are closed.

Other companies that are losing part of their capacity are also cutting costs.

Many workers who came here to work have returned to their homes.

Manufacturers say their profits have declined due to rising raw material and energy costs.

The price of RMB has forced Hong Kong to export to the United States and other important markets.

In May, the price of Chinese goods rose by 4.6% over the same period last year, a record increase, according to the US Department of Commerce (CommerceDepartment).

Foreign buyers accustomed to cheap Chinese products and worried about their economic weakness usually refuse to pay higher prices.

Some of the initiatives of the Chinese government have also led to a reduction in the profits of these enterprises: the company said that the government has strengthened the protection of workers and the environment, making it more costly for them to carry out business.

Foreign buyers also say that more stringent visa policies make it difficult for them to visit factories or participate in trade fairs in China.

All Chinese businesses are feeling the pressure, but the lowest prices of toys, household goods, footwear and clothing are most seriously affected, and these products meet the needs of the whole world.

Low cost producers are an important driving force for China's economic miracle, helping China become the world's second largest exporter after Germany.

Over the years, these companies have been gaining competitive advantage by increasing production and compressing margins to achieve growth.

With the increase of raw materials and manpower costs and RMB strength, these manufacturers have become one of the most difficult enterprises to digest the above costs.

Such changes are most evident in emerging towns that rely on cheap products to become rich, from Guangdong in Southern China to Honghe County in the Yangtze River Delta.

In recent months, many manufacturing centers have closed hundreds or even thousands of factories, industry executives say.

In Shengzhou, near Shanghai, known as tie production accounts for 1/3 of the world's total output, manufacturers are trying to raise prices jointly.

Dongguan, Guangdong also has many toys, footwear and brush manufacturers closed down.

Peter, MarketingManagementGroupInc. fashion consultant in Hongkong, said: "this is the year when the situation has finally changed." PeterShay, a fashion consultant in Hongkong.

In people's memory, prices have risen for the first time.

For entrepreneurs such as Yao Herong, chairman of Jiaxing Yi Shang Mei Garments Co., Ltd., fate has changed too quickly.

I Naomi is one of Honghe's largest exporters.

In 2005, Yao Rong Rong found a biggest client, Wal-Mart Store Inc (Wal-MartStoresInc.), and the family business flourishing.

Yao Herong said shortly after that, the US market accounted for 20% of the company's business.

But he said big orders from WAL-MART and other US customers are drying up.

On the recent day, dozens of knitting machines were idle in the workshop downstairs of his office.

A spokesman for WAL-MART said in an e-mail that the company had not purchased from Honghe's factory at present, but declined to comment further.

"We are very worried about the business," Yao Herong said.

Although such a plight is painful, it may lead China's economic development into a more mature stage.

China's sweater industry, like many other industries, can be said to be overloaded: at least 6 cities are known as 100 million annual output of sweaters, and Honghe is only one of them.

In such low cost areas, analysts expect a trend of consolidation to improve efficiency.

They say companies will also be forced to innovate so that they can compete in other aspects of the price.

Many Chinese economists and officials believe that China is overly dependent on cost saving and simple production mode to boost exports.

Yu Yongding, a Beijing based researcher at the ChineseAcademyofSocialSciences, a government think tank, said that such a serious reliance on foreign trade is not a good thing for China.

He said that the trade volume between the United States and Japan is about 20% of gross domestic product (GDP), while China is about 75%.

Of course, China will continue to be a big exporter for many years to come.

As China also produces industrial machinery and other high-value products which are less susceptible to wage rises and other factors, the export volume is still huge.

In addition, China's pportation network, as well as a large number of suppliers and enterprises that support manufacturers, are unmatched advantages in other developing countries.

For the companies that want to export and want to sell products in China, the 1 billion 300 million domestic market of China is also very attractive.

In a survey conducted by AmericanChamberofCommerceinShanghai and BoozAllenHamiltonInc. in Shanghai last year, 83% of the surveyed companies said they plan to continue to produce in China.

But as the rising cost weakens China's attractiveness as a manufacturing site, about 17% of the surveyed companies say at least part of their businesses will be pferred to low-cost countries such as India and Vietnam.

For centuries, people in the Yangtze River Delta have been engaged in the silk weaving industry.

In 1970s, on the eve of China's pition from a planned economy to a market economy, the local government opened two large sweater factories in Honghe Town, Jiaxing.

Jiaxing is located 70 miles southwest of Shanghai, with many industrial towns under its jurisdiction.

Since the reform and opening up in 1980s, these enterprises imported machines from Japan and Germany to upgrade their equipment.

They set up sales representatives in Beijing to trade with distributors in neighbouring countries such as Russia and Kazakhstan.

By the end of 90s, Yao Herong and other industry veterans began to leave Honghe's state-owned enterprises and set up their own companies.

In 1999, Yao Rong Rong and his two brothers recruited 20 employees and began producing knitted sweaters.

Two years later, China joined the World Trade Organization (WTO), and foreign buyers are more confident of Chinese suppliers.

Yao Herong said that by 2002, he had received orders from Italy and other Western European countries.

Four years ago, Yao brothers expanded and imported new machines with more complicated patterns in the new factory.

They formed a joint venture with an Australian company to increase the annual production capacity of knitted sweaters to 3 million.

Yao Herong, who has 400 employees, said he had outsourced all the links from dyed wool to knitted sweater finished goods pportation to more than 100 enterprises.

Honghe's stores are stacked with a coil of yarn and a pile of elastic bands.

The delivery man peddled tricycles full of knitted fabrics of cotton, acrylic and wool through narrow streets and alleys.

In the Honghe town center, the huge steam engine is dyeing the yarn.

The success of the town has attracted immigrants from the poorer provinces of the mainland of China, where they earn much more than they do at home.

Workers rent houses in villages near the town, and often bring children around.

Three years ago, WAL-MART headquarters in Benton Ville, Arkansas, ordered 160000 knitted sweaters, which marked the arrival of the peak of Yao River's career.

He said American buyers were constantly patronizing him to improve efficiency.

Yao Herong said that their orders were large and the prices were low, making it difficult to do so.

However, when Honghe's business is booming, the policy change from Beijing is facing new obstacles.

In July 2005, under the pressure of international trade partners, China agreed to relax the strict control over the RMB exchange rate.

Over the past ten years, although China's trade surplus has increased rapidly, the renminbi has been pegging the US dollar exchange rate system, creating a stable environment for exporters and foreign buyers, but it has also angered some Westerners, who criticize that it makes Chinese exports cheap and enjoys unfair price advantage.

The rate of appreciation of the renminbi began slowly.

But last year, the yuan accelerated appreciation, up to 20% now.

On the other hand, the depreciation of the renminbi against the euro makes Chinese goods cheaper in Europe.

But for many manufacturers, the benefits are not enough to offset the difficulties they face.

Like many exporters around the world, Honghe's export contract is also settled in US dollars.

As the dollar weakened, the exporters said they did not know how much they could earn or how much they would lose when they shipped the product three or four months after signing the contract.

Yao Herong said we should be extremely cautious about US dollar orders.

At the same time, the Chinese government began to implement some policies to support the sustainable development of the economy, not just the pursuit of speed.

This year, the government promulgated the new labor law, limiting the overtime hours of factories, limiting temporary workers and raising the minimum age of employment by two to 18 years.

The new regulations have been hit by small businesses such as Honghe and other places, which usually recruit and dismiss workers according to the production cycle.

China has also stepped up environmental regulation, which means that Honghe's printing and dyeing enterprises must pay the processing fees for the chemicals they use instead of directly discharging them to the river passing through the town.

Yao Herong declined to reveal the impact of the new cost on his business.

But the buyer of a large clothing company in the US said that the profit margins of Chinese manufacturers on each sweater have dropped from around 2 dollars a few years ago to about 30 cents.

Yao Herong, 50, said he is looking for other small export markets with small profits and low profits, and will try to turn sales to the domestic market he has neglected.

Recently, the packaging workers of the company's large warehouse are putting the "Mr.Price" brand knitted sweater into plastic bags, waiting to be shipped to South Africa.

The retail price marked above is 49.99 rand (US $6.25) per item.

For Honghe, this year would have been a particularly prosperous year.

The Hangzhou Bay Bridge, which cost $1 billion 680 million and 22 miles long, was opened to traffic last month, reducing the local vehicle fleet to the container terminal.

A few minutes' drive away from Honghe City, WAL-MART is building a large distribution center.

By December, the complex textile quota system is about to expire, and China's annual export restrictions on textiles to the United States and other countries will be lifted.

In the interview, the Honghe town government said there was hope for the local industry, and the reduced positions were mainly in the relatively backward factories.

The government said that in the first 5 months of 2008, sales of the largest number of knitwear companies in the town increased by about 25.