Economy

Coach soon departing

American bag maker decides it’s too expensive to manufacture in China

Soon not to be made in China

Our largest geographic opportunity” is how Coach CEO Leo Frankfort referred to the China market last week.
But he doesn’t mean in manufacturing, it seems, on news that the company, a bag and accessories maker, will shift production away from its Chinese factories.
Currently 85% of Coach goods are China-made, say company executives. But that will fall to 50% within five years, by shifting capacity to lower-wage destinations like India, Vietnam and the Philippines.
On the other hand, the company says its sales in China are forecast to grow to $500 million within three years, having reached $100 million last year for the first time, according to the Financial Times.
As such, the news is further evidence of some of the changes in the “Made in China” model that WiC first mentioned early last year (in its first Focus edition). We have also discussed the impact of wage increases (WiC101). That discussion got another fillip at the beginning of the month, with the release of a new study by Boston Consulting Group.
“If you work the math out using today’s numbers you’d still say it’s a good idea to go to China,” according to Hal Sirkin, a senior BCG partner. “(But) around 2015, you get to a point of indifference between producing in the US and producing in China.”
That’s because he expects Chinese manufacturing wages to rise 17% a year in the next five years, compared with only 3% annually in the US.
In fact, BCG research still suggests a major disparity between the average cost of direct pay and benefits for US workers (at about $22 an hour) and those in China (at just $2). But that ignores much higher worker productivity in the US, which bridges some of the gap in terms of final output.
Not all of it, of course. But the BCG report seems to suggest that the US could be on the verge of a manufacturing renaissance – at China’s expense – if the wage gap continues to narrow.
Not everyone agrees with them. One concern is that American manufacturing has hollowed out to such a degree that it will be tough to restart operations in many businesses. Caixun.com, a Chinese financial website, argues that the “American Dream” has moved on too. People want to work in Silicon Valley or on Wall Street, not in the manufacturing sector.
But that is not where BCG has been basing its research. The study draws comparisons between wages in low-cost US states, like Alabama and Mississippi, and pay in the Yangtze River Delta, one of the highest-wage areas in China.
It predicts that pay on the Yangtze will get to 69% of that in Mississippi by 2015, and that this narrowing will see company executives spend more time looking at other cost differentials in Chinese production, including geographical distance from US consumers, and lax intellectual property protection.
Goods made in smaller volumes and likely to require plenty of design changes could gravitate back to the US first. Items churned out in greater quantity and with little variation – like televisions – will continue to be made in China, even for sale in the US.
But Anthony Chan, writing on an FT blog for Alliance Bernstein, says that the headlines on China’s rising costs have been missing another key point. While it’s true that wage spikes have seen goods like footwear  increase in price, China’s factories are also getting better at producing more advanced items at lower cost.
As the FT points out, that means that yes, we might spend an additional $5 on our next pair of jeans but could save much more when it comes to the latest flat-screen TV purchase. Thus the ‘Made in China’ net effect remains disinflationary.
In fact, Chan argues that – once you adjust for the changes in the composition in exports – the China price is still lower than it was a year ago, and down some 20% on 2003.
Clearly, as a debate this one is going to run and run…

“Our largest geographic opportunity” is how Coach CEO Leo Frankfort referred to the China market last week.

But he doesn’t mean in manufacturing, it seems, on news that the company, a bag and accessories maker, will shift production away from its Chinese factories.

Currently 85% of Coach goods are China-made, say company executives. But that will fall to 50% within five years, by shifting capacity to lower-wage destinations like India, Vietnam and the Philippines.

On the other hand, the company says its sales in China are forecast to grow to $500 million within three years, having reached $100 million last year for the first time, according to the Financial Times.

As such, the news is further evidence of some of the changes in the “Made in China” model that WiC first mentioned early last year (in its first Focus edition). We have also discussed the impact of wage increases (WiC101). That discussion got another fillip at the beginning of the month, with the release of a new study by Boston Consulting Group.

“If you work the math out using today’s numbers you’d still say it’s a good idea to go to China,” according to Hal Sirkin, a senior BCG partner. “(But) around 2015, you get to a point of indifference between producing in the US and producing in China.”

That’s because he expects Chinese manufacturing wages to rise 17% a year in the next five years, compared with only 3% annually in the US.

In fact, BCG research still suggests a major disparity between the average cost of direct pay and benefits for US workers (at about $22 an hour) and those in China (at just $2). But that ignores much higher worker productivity in the US, which bridges some of the gap in terms of final output.

Not all of it, of course. But the BCG report seems to suggest that the US could be on the verge of a manufacturing renaissance – at China’s expense – if the wage gap continues to narrow.

Not everyone agrees with them. One concern is that American manufacturing has hollowed out to such a degree that it will be tough to restart operations in many businesses. Caixun.com, a Chinese financial website, argues that the “American Dream” has moved on too. People want to work in Silicon Valley or on Wall Street, not in the manufacturing sector.

But that is not where BCG has been basing its research. The study draws comparisons between wages in low-cost US states, like Alabama and Mississippi, and pay in the Yangtze River Delta, one of the highest-wage areas in China.

It predicts that pay on the Yangtze will get to 69% of that in Mississippi by 2015, and that this narrowing will see company executives spend more time looking at other cost differentials in Chinese production, including geographical distance from US consumers, and lax intellectual property protection.

Goods made in smaller volumes and likely to require plenty of design changes could gravitate back to the US first. Items churned out in greater quantity and with little variation – like televisions – will continue to be made in China, even for sale in the US.

But Anthony Chan, writing on an FT blog for Alliance Bernstein, says that the headlines on China’s rising costs have been missing another key point. While it’s true that wage spikes have seen goods like footwear increase in price, China’s factories are also getting better at producing more advanced items at lower cost.

As the FT points out, that means that yes, we might spend an additional $5 on our next pair of jeans but could save much more when it comes to the latest flat-screen TV purchase. Thus the ‘Made in China’ net effect remains disinflationary.

In fact, Chan argues that – once you adjust for the changes in the composition in exports – the China price is still lower than it was a year ago, and down some 20% on 2003.

Clearly, as a debate this one is going to run and run…


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