Cheap Chinese Denim – Getting Killed By Rising Labor And Cotton Prices

chinese exports of denim The era of Cheap Chinese denim is over – says a report by Telegraph , UK.
The rising labour costs in China coupled with the effect of Cotton price is killing the Chinese denim exports. The retailers who had a great time buying very cheap denim and retailing them as low as $5 – $10 will now have to shelve out much more amounts to get similar quantity .

Xintang , the Denim capital of the world – with over 260 million pieces of denim production and a very large quantity of jeans production is the worst hit . This city is DEDICATED TO DENIM with over 5000 factories from the very small ones to those who make over 60,000 pairs of denim  a day can be found here. The quantity of jeans produced here is so high that the Pearl River which flows nearby has actually turned Indigo Blue !!!

So what’s ailing Denim Production in Xintang and China in General ?

  • Rising Labour Costs: The labour cost used to be as low as GBP 30 /month  – about 350 Yuan and now is as high as GBP 470 ($760 or 5ooo Yuan)  in some places .Though the actual labor rates will fall somewhere between, it is still a huge increase.  This phenomenal increase in labour cost is crippling the industry and many factories say that they have not made profits for 2 years.  Since the labor class cannot get the price they want to survive in expensive South China, they are moving towards inland China where large construction projects etc are coming up and the cost of living is cheap. This has led to a reduction in availability of labor for production. So its double whammy – high labor costs and reduced supply !
  • Cotton Costs : Cotton prices have hit all the countries around the world and China is no exception. It has been hit more by the reduced production in Pakistan, Australia and reduced exports by India have complicated the position in China which is highly import dependent when it comes to Cotton.  This has led to a very high increase in denim prices in China. Though the buyers are trying to reduce the impact of cotton prices by using polyesters  and marketing as shiny denim,  it is not really compensating too much. However, cotton impact may fade out in a year or so..
  • Factories Loosing : The jeans manufacturers are hardly making profits where they previously could make up 20 percent easily. Now if they make 5% , they consider themselves lucky. The Chinese Govt. is not able to give the kind of support that it used to give before and the units are finding it difficult to survive on their own.
  • Currency Impact : The stronger currency is not helping the matters at all.  Just to give an example, the Chinese Yuan was 7.29 to USD on 1st Jan  2008 and is now 6.57 . That is a 10% increase in about 2 years.
  • Chinese Govt. Apathy : Chinese government seems to have become apathetic to the denim industry . It is tightening the screws on the polluting denim industry and is enforcing the environmental regulations more strictly – closing many of the factories in the process. The govt. has probably reduced priority for this industry and is focusing on generating employment from alternative projects especially in Inland China.  This is not going to help the industry.

So What Does Future Hold For Jeans Manufacturers In China ?

With the current trends, it seems that the jeans manufacturers in China – especially South China –are going to have a tough time making money. They can only survive if they get high priced orders – which are few to come. This will lead to the survival of the fittest with many factories having to either close down or to shift to alternative products.  China may still manage to have the productions shifted to inland China where costs are low, but they cannot do it overnight. It will take a long time .

What are the alternatives to China for sourcing denim garments ?

A number of other countries in the vicinity have developed their industry and are coming up well – whether its Cambodia, Vietnam, Bangladesh etc. However, none of them has the capacity to produce the volumes or has the infrastructure to match that of China.  Even countries like India and Pakistan would benefit  directly by way of increased garment exports or indirectly by way of increased fabric exports.  It will take time for them to come up and match the potential of China.  The US and EU are encouraging these alternative destinations as production centres , one of the reasons why EU passed the New GSP Regulation.

Will all the impact on prices of denim products , can there be a scenario where the demand for denim products actually fall as the retailers try to promote alternative products ?  We have already seen a massive fall in imports of denim products in US in the last quarter of 2010. Is it an indication of things to come ?

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