HONG KONG - Midway through another turbulent economic year, apparel manufacturers seem to be adjusting to a more challenging and less profitable environment.   The “green shoots” that the mainstream media claimed to be seeing as early as spring 2009 have yet to germinate for apparel exporters who are finding that each new season brings with it new headaches. 

This week at Hong Kong Fashion Week (HKFW) manufacturers told Inside Fashion that business this year was about the same or slightly worse than last year.  The decline in orders from Europe and the United States, coupled with higher raw materials and labor costs, and currency appreciation (for those exporting from China), has taken a heavy toll on profits.

Manufacturers complained of the lack of traffic at the fair but said they participated anyway in the hopes of finding new customers or at least keeping touch with the old ones (many of whom they found didn’t come to the fair this year).   It was more often a case of “hope” rather than actually meeting new prospects.   The top markets exporters eyed included Latin American (especially Brazil and Chile), Russia, the Middle East and Scandinavia.

Although there’s lots of talk about selling into China’s booming retail market most manufacturers said  they preferred to stick with the business they know, which is exporting.  The preference is to look for additional customers in new export markets rather than try and adapt to a new business model, which is required to sell domestically.

Those that have opted out reason that the competition is too tough and the business risks are too high. “China has a different way of doing business, you must make sure to receive the deposit of payment before [you] ship the goods or you might not get all your payment,” said Mr. Lo from Po Fung Fashion Limited. To sell domestically requires creating a brand, which in turn means investment in advertising and marketing, which can be very costly. Unlike exporting, when selling into the domestic market companies must be prepared to lose money for several years until their brand is recognized.

Manufacturers are troubled by numerous factors including weak markets in most of the developed world.  Most said their amount of customers and the size of the orders continued to decline.

Wages in China have increased by about 12.5 percent from last year, which has eased the way for wage hikes in Bangladesh, Indonesia, Vietnam and India.  China, in particular, is facing increased competition from Bangladesh (low prices) and Turkey (closer to the European market). 

Rising raw material costs is yet another challenge vexing manufacturers.  Wool has increased by about 40 percent since last year because of a strengthening Australian dollar, and because many farmers had to kill their sheep due to bad weather.  China has also experienced bad weather within the past year, causing linen prices to rise by about 40 percent.  Weather conditions in Pakistan reduced its cotton output, and shortages in India prompted the government to put a cap on cotton exports.  The cost of synthetic fibers has risen by about 20 percent due to increasing crude oil prices. Cotton has also increased by 20 percent since last year, prompting mills to look for new blends to reduce costs and add value.   

Manufacturers are trying to manage production better and use computers to maximize productivity and minimize costs.  In tough times efficiency can mean the difference between “black” or “red” on the Profit and Loss report.

There’s also the option to move production further inland within China.  However many manufacturers are opting against it.  Moving further inland is too far away [from their headquarters] for some manufacturers.  Transportation prices are expensive, and they feel that they would lose control over their business.  Inland China is still lacking a sophisticated supply chain, which can also dissuade manufacturers from relocating.  Some manufacturers are willing to send only their basics there because of the lack of trained workers. 

Bangladesh is another place where manufacturers have considered relocating their factories.  However, the general consensus from Hong Kong and China companies was that Bangladesh is too difficult to control and it is too hard to familiarize themselves with a new government and a new set of laws and regulations.  It is also too far away from the raw materials that come from China, which would increase costs drastically.

“If you move out from China you have to ship [raw materials] in, pay duty and that increases costs,” said Wang Kejia, Manager of Inner Mongolia Fujia Industry and Trade Co.

Although manufacturers were divided when it comes to selling into China, those who are prepared to do so are looking to balance a decrease in exports by selling to the domestic market. 

Segmenting markets is another key strategy.  Many vendors are targeting the high-end market that is willing to pay more money for apparel.  The desired shift is towards smaller orders at higher prices, instead of the traditional big volume at rock bottom prices. Other vendors are simply trying to wait it out, hoping that the market will rebound soon.

While many manufacturers have a brand, it’s not a recognized brand – and that makes all the difference in the world when it comes to being able to move from an OEM or ODM manufacturer to selling a branded collection.   Having a branded collection remains more of a dream than a reality for most Asian manufacturers.  The biggest hurdles are knowing how to build a brand and being willing and able to make the long-term investment needed to accomplish this.  It’s a step most exporters are reluctant to take right now.