Sewing the seeds for a profitable future
With costs rising and margins being squeezed, Hong Kong's textile manufacturers are having to adopt new strategies
Global growth concerns, rising production costs and the end of quotas with Europe and the United States all play on the mind of John Cheh, vice-chairman and chief executive of the Esquel Group.
The group sells almost 70 million knitted and woven shirts and T-shirts every year.
Even as one of the world's biggest manufacturers of high-end cotton shirts, the privately-owned business is feeling the squeeze. 'For every 1per cent appreciation of the renminbi, it takes millions out of our bottom line,' Dr Cheh said in a recent address to the Textiles and Apparel Committee of the American Chamber of Commerce.
'Every 1per cent reduction in the VAT [Value Added Tax] rebate takes another few million off the bottom line,' he added. 'It's a terrific margin squeeze and there's no way to hedge against those.'
According to Daniel Poon Wing-choi, assistant chief economist at the Trade Development Council, despite Hong Kong's image as a financial business hub, textile manufacturing is still the second biggest industry here.
'There are 1,600 Hong Kong-owned manufacturers employing 24,000 Hong Kong-based staff,' he said. 'It's because of the quota system that Hong Kong was not subject to, so many companies were based here to avoid being limited by them.'
The end of the quota system, he said, was unlikely to see a repeat of the 2005 surge in exports. That year, Hong Kong exports to the European Union (EU) rose 16per cent. To the US, the overall increase was 11per cent.
These days, there's a double surveillance system for exports to the EU that ensures any sudden increase in exports from China can be handled immediately with measures such as anti-dumping duties and product-specific safeguards.
The mainland has been exporting to the EU without quotas since the start of this year and quotas to the US are due to be lifted next year.
Concerns lie more now with rising production costs which, according to Mr Poon, have increased by up to 30per cent. With new labour laws, he added, the cost to employers will only rise.
'Labour costs have increased the most. It has made it very difficult to hire workers on the mainland and the labour shortage has only worsened in recent years, which has pushed wages higher,' he said.
Added to that, raw material costs were rapidly rising thanks to a weak US dollar and an appreciating domestic currency, he said.
'If the renminbi appreciates by 10per cent, then production costs increase by 3per cent,' he said. 'Since June 2005, the renminbi has gone up by 15per cent against the dollar.'
Manufacturers exporting to the US face additional pressures.
'The market is slowing there and the sentiment is poor. Christmas sales increased by just 3per cent compared to 4.5per cent in the previous year,' Mr Poon said. 'You can see that demand is weakening.'
According to Dr Cheh, who recently met with commerce officials in Beijing, the pressures haven't gone unnoticed. 'In China, the textile garment industry employs no less than 20 million people. Think about the impact if the industry declines too rapidly,' he said. 'They were really concerned about cost pressure, renminbi appreciation, VAT rebate reduction, wage increases, social insurance payment increases and the new labour law.'
The Esquel Group's strategy is to continually upgrade the quality of their production and focus on innovating new labour and energy saving technologies.
'That's the way to beat cost pressure and the margin squeeze,' Dr Cheh said.
Mr Poon said: 'This is not necessarily a bad development because cost increases and policy changes prompt companies to think about moving towards more sophisticated and value-added activities and business models.'
Companies, he added, should review production and sourcing bases.
'The Pearl River Delta region's operating difficulties could mean that other places where it's easier to hire a labour force would become more attractive,' he said. 'But if the EU or US imposes additional restrictions against China, there are alternative production bases to overcome these restrictions.
Diversifying the markets they export to was another solution, he said. 'The EU and US aside, new markets should be explored such as the oil-exporting countries in the Middle East, Russia and also commodity-based economies in Latin America,' he said. 'Not to mention China's domestic market with obvious potential, and we're most familiar with that.'