Cablegate: Unraveling? - Guangdong Apparel Exports to the U.S. Drop

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UNCLAS SECTION 01 OF 02 GUANGZHOU 000498

SENSITIVE
SIPDIS

STATE FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON PGOV CH
SUBJECT: Unraveling? - Guangdong Apparel Exports to the U.S. Drop
Sharply

REF: A. Guangzhou 0414; B. Guangzhou 0406

(U) This document is sensitive but unclassified. Please protect
accordingly.

1. (U) Summary: The apparel export powerhouse that is Guangdong has
become a little less powerful. Global apparel exports dropped 31.3%
during the first half of the year, and exports to the United States
fell 27.3%. Local firms blame demanding U.S. buyers, renminbi (RMB)
appreciation, increased labor costs brought on in part by the new
Labor Contract Law and pressure on the industry to relocate out of
the Pearl River Delta (PRD). Rapid development of the industry in
other parts of China and abroad also threatens Guangdong's
comparative advantage. End summary.

2. (SBU) The first half of 2008 saw a dramatic drop in Guangdong
apparel exports to the United States. According to the Guangdong
Statistics Bureau the province's overall garment exports fell by
31.3%, and exports to the United States decreased by 27.3%.
Guangdong is one of China's top five apparel manufacturing
provinces.

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U.S. Demands High Quality, Lower Prices
---------------------------------------

3. (SBU) Local contacts in the industry have placed some of the
blame on demanding U.S. buyers. Ling Fangcai, chairman of the
Guangdong Textile Import and Export Company, told us that the two
main challenges to doing business with U.S. buyers are the demands
for low prices and complying with U.S. quality standards. Li
Lichang, general manager of the Foshan Xinguang Knitting Company,
complained that U.S. buyers are increasingly enforcing the 'Wal-mart
theory' on imports, requiring higher quality goods, and often higher
volumes, at lower costs. Li explained that she had had several
disputes with U.S. companies regarding quality control and recently
cancelled a major deal with sneaker giant Puma USA because of cost
and quality demands. One factory owner also said the increasing
incorporation of corporate social responsibility (CSR) standards by
U.S. companies is in conflict with some local manufacturing
practices.

4. (SBU) Eric Lo, a factory owner in Guangdong's Foshan city, told
us that Europe and Japan are better clients. He pointed out that
because Guangdong is able to produce high quality products quicker
than many domestic and international competitors, some international
buyers are willing to absorb the region's higher production prices.
He said that European and Japanese buyers place a greater emphasis
on quality, and are willing to pay for it. He believes the U.S.
market is no longer attractive to Guangdong apparel manufacturers.
Foshan Xinguang Knitting Company General Manager Li pointed out that
although she had cancelled a deal with Puma USA, the company is
still supplying Puma Japan and Puma Europe.

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The Dollar Falling, Labor Costs Rising
--------------------------------------

5. (U) Factory owners also complain that the average 6% appreciation
in the RMB over the past few months has exacerbated price demands
from U.S. buyers. As one apparel maker explained, the impact on
factory profits depends on the terms of the contract with the U.S.
buyer -- the longer the delivery and payment terms, the lower the
profits.

6. (U) Apparel factory owners repeated complaints we've heard
frequently from labor-intensive industries in the PRD that the new
Labor Contract Law is driving up labor costs (ref A). In our
discussions with factory owners, they acknowledged that the new law
is intended to balance economic growth with increased standards of
living. However, one owner argued that even though the law might
benefit people in the future, it was hurting enterprises today. He
stressed that the changes forced by the law were too rapid.

--------------------
Factories Relocating
--------------------

7. (U) Guangdong's "double transfer" policy aimed at moving
labor-intensive factories out of the PRD (ref B) also poses a
challenge to Guangdong's apparel industry. The municipal government
of Foshan, one of Guangdong's top apparel producers, is forcing four
types of enterprises to relocate, all of which could include apparel

GUANGZHOU 00000498 002 OF 002

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proactively relocating to the government's target destinations such
as Qingyuan and Heyuan; others are simply relocating to suburban
areas of Foshan. One manager argued that relocating apparel
factories did not make sense, and doubted that the "double-transfer"
policy would be effectively implemented anytime soon. He said
garment manufacturers relied on a sophisticated supply chain that
would have to be relocated as well. He believes this is not
feasible.

------------------------------------------
Increasing Competition: At Home and Abroad
------------------------------------------

9. (SBU) Zhu Zejiang, General Manager of Foshan Sanden Industries
Company, told us that stiff competition both home and abroad is
hurting sales for companies in Guangdong. Domestically, Guangdong is
competing with factories relocating to and springing up elsewhere in
China. In the first half of 2008, Zhejiang, Jiangsu, Shandong
provinces and Shanghai experienced a 20% increase in apparel
exports, according to local newspaper, Nanfang Daily. These
factories have cheaper operating costs due to, among other reasons,
less governmental pressure and oversight. Zhu claims the apparel
industry supply chain is weaker in those areas, but fears they will
develop rapidly and soon gain a comparative advantage over
Guangdong. Factory owners commented that they are seeing more
competition from South and Southeast Asian countries, including
Cambodia, Vietnam, and Bangladesh, because of cheaper labor costs
there. Some of the foreign competition may be coming from factories
previously based in Guangdong.

10. (U) In the long-run, some factory owners believe that increasing
costs and factory relocations won't diminish Guangdong's role in the
global textile and apparel industry. However, one manager suggested
that Guangdong may have to develop new niches such as supply chain
management, rather than manufacturing.

GOLDBERG

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