Rising Cost Threatens Export Enterprises Of Shoe Leather

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

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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%.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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%, but profit margins dropped sharply.

Companies that are still running are also cutting costs, including many printing and dyeing enterprises.