Adidas pullout highlights rising labor costs
By Ding Yining |
July 25, 2012, Wednesday
|
Print Edition
Print Edition
SPORTSWEAR giant Adidas last week confirmed the closure of its only wholly owned factory in China, citing a "realignment of its global resources" but more likely signaling the reality of rising labor costs on the Chinese mainland.
The German-based athletics sportswear company said it would shutter manufacturing operations in the city of Suzhou in Jiangsu Province in October, affecting 160 employees.
Adidas said it will continue to source goods from about 300 factories across China.
There has been speculation Adidas would move its manufacturing to cheaper labor countries such as Vietnam or Myanmar, but the company said it doesn't have any immediate plans to relocate the Suzhou operations elsewhere.
Three years back, US-based sportswear rival Nike shut its apparel and shoemaking factory in Taicang City in Jiangsu Province to move to other Asian manufacturing sites.
Squeezing profits
Rising labor costs in the past few years have been squeezing profits at mainland factories.
"The Adidas move is not surprising because China's competitiveness in terms of labor costs has been eroding in recent years," said Ma Gang, an independent market watcher in the clothing industry.
The German company has made it clear that it isn't abandoning the world's fastest growing major economy.
The 21st Century Business Herald reported last week the company will set up a new distribution warehouse in Tianjin by the end of this year. That would be in addition to a current warehouse in Suzhou, which serves as a distribution channel sending Adidas products to areas of inland China.
Colin Currie, managing director of Adidas Group China, said in a recent media interview that the company plans to move its marketing into smaller cities away from the east coast metropolises and will open up to 600 new inland shops by the end of this year.
About 80 percent of 1,856 export companies surveyed by the General Administration of Customs late last year reported a significant rise in costs.
The monthly minimum wage in China rose from US$59 in 2005 to US$160 in 2011, exceeding wages in Vietnam and Indonesia.
Does this signal the demise of China as the "world's factory?"
According to a survey this month by KPMG, entitled the "Future for Multinational Companies in China," senior executives identified labor shortages and wage inflation as their single biggest challenge in China.
Despite the popularly held view that China is no longer a cheap site for manufacturing or outsourced production, China's vast exporting capacity and its mass consumer market suggest the nation's status as the world's manufacturing hub is not over yet, the study concluded.
Wang Zhuo, director of the China National Garment Association, said it's a natural process for multinational companies to shift production sites every several years as they chase lower costs.
As China tries to move up the value chain in manufacturing and other fields to attract more foreign investment, labor costs naturally rise.
The bulk of new investment is flowing into three broad areas: finance, information technology and software, along with scientific research and development.
China still has advantages
Mei Xinyu, a researcher at the Ministry of Commerce, said there's no reason to look askance at the Adidas withdrawal from Chinese manufacturing. Rather, it is an acknowledgement on their part, that it's cheaper to source products in China than to manufacture themselves.
Mei, writing in a column published in Guangzhou Daily last week, said China still has strengths to offer. Its human resources system, ever-improving infrastructure, efficient public services and relatively stable economic situation give it advantages over other regional rivals, he said.
"Infrastructure and other support facilities are still lacking in other Southeast Asian nations, and there is still strong demand for raw materials made in China," said Li Peng, director of the Asia Footwear Association.
Still, China can't afford to rest on its laurels in a rapidly changing world.
There have been calls for more government support to underpin smaller manufacturers and for more stimulus measures to encourage innovation in Chinese industry.
Industry watcher Ma Gang suggests that local companies must pay more attention to original design instead of relying solely on production for overseas labels.
Like Adidas, these companies need to reposition themselves to avoid the pitfalls of a slowing world economy and to take advantage of new opportunities.
The German-based athletics sportswear company said it would shutter manufacturing operations in the city of Suzhou in Jiangsu Province in October, affecting 160 employees.
Adidas said it will continue to source goods from about 300 factories across China.
There has been speculation Adidas would move its manufacturing to cheaper labor countries such as Vietnam or Myanmar, but the company said it doesn't have any immediate plans to relocate the Suzhou operations elsewhere.
Three years back, US-based sportswear rival Nike shut its apparel and shoemaking factory in Taicang City in Jiangsu Province to move to other Asian manufacturing sites.
Squeezing profits
Rising labor costs in the past few years have been squeezing profits at mainland factories.
"The Adidas move is not surprising because China's competitiveness in terms of labor costs has been eroding in recent years," said Ma Gang, an independent market watcher in the clothing industry.
The German company has made it clear that it isn't abandoning the world's fastest growing major economy.
The 21st Century Business Herald reported last week the company will set up a new distribution warehouse in Tianjin by the end of this year. That would be in addition to a current warehouse in Suzhou, which serves as a distribution channel sending Adidas products to areas of inland China.
Colin Currie, managing director of Adidas Group China, said in a recent media interview that the company plans to move its marketing into smaller cities away from the east coast metropolises and will open up to 600 new inland shops by the end of this year.
About 80 percent of 1,856 export companies surveyed by the General Administration of Customs late last year reported a significant rise in costs.
The monthly minimum wage in China rose from US$59 in 2005 to US$160 in 2011, exceeding wages in Vietnam and Indonesia.
Does this signal the demise of China as the "world's factory?"
According to a survey this month by KPMG, entitled the "Future for Multinational Companies in China," senior executives identified labor shortages and wage inflation as their single biggest challenge in China.
Despite the popularly held view that China is no longer a cheap site for manufacturing or outsourced production, China's vast exporting capacity and its mass consumer market suggest the nation's status as the world's manufacturing hub is not over yet, the study concluded.
Wang Zhuo, director of the China National Garment Association, said it's a natural process for multinational companies to shift production sites every several years as they chase lower costs.
As China tries to move up the value chain in manufacturing and other fields to attract more foreign investment, labor costs naturally rise.
The bulk of new investment is flowing into three broad areas: finance, information technology and software, along with scientific research and development.
China still has advantages
Mei Xinyu, a researcher at the Ministry of Commerce, said there's no reason to look askance at the Adidas withdrawal from Chinese manufacturing. Rather, it is an acknowledgement on their part, that it's cheaper to source products in China than to manufacture themselves.
Mei, writing in a column published in Guangzhou Daily last week, said China still has strengths to offer. Its human resources system, ever-improving infrastructure, efficient public services and relatively stable economic situation give it advantages over other regional rivals, he said.
"Infrastructure and other support facilities are still lacking in other Southeast Asian nations, and there is still strong demand for raw materials made in China," said Li Peng, director of the Asia Footwear Association.
Still, China can't afford to rest on its laurels in a rapidly changing world.
There have been calls for more government support to underpin smaller manufacturers and for more stimulus measures to encourage innovation in Chinese industry.
Industry watcher Ma Gang suggests that local companies must pay more attention to original design instead of relying solely on production for overseas labels.
Like Adidas, these companies need to reposition themselves to avoid the pitfalls of a slowing world economy and to take advantage of new opportunities.
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