Problems in the jeans

Why the ‘denim capital’ of China is suddenly lacking zip

Problems in the jeans

Cuts in Jun’an

It was 140 years ago that a Nevada tailor called Jacob Davis sent a letter to dry goods merchant Levi Strauss asking for a business partner. Davis had come up with a new way to make jeans, using rivets to strengthen the pockets. The next year they secured the patent, and the iconic Levi’s brand was born.

When the original concept was pitched to Levi Strauss in San Francisco, he would never have envisaged that a whole town in China would become dependent on his hard-wearing trousers.

But that is the situation in Jun’an. It now has more than 2,000 denim factories, turning out 200 million pairs of jeans annually; 80% of which are exported at a sales value of Rmb10 billion ($1.58 billion). All told, Jun’an gets over 45% of its taxes from the denim industry.

However, as the National Business Daily points out, that over-reliance on denim clothing is now proving problematic. China’s “denim capital” is “trapped in an industry crisis” due to rising costs, labour problems and falling demand from the West.

A journalist from the newspaper visits Foshan Changshuncheng Garment (Jun’an is part of the city of Foshan in Guangdong province). The factory opened last May, with a capacity to turn out 900,000 pairs of jeans a year. But since early December Changshuncheng has been in crisis. The boss has absconded, owing Rmb510,000 in wages. Work is now suspended.

The general manager of the firm explains it has a cashflow crisis. It’s not hard to see why: in the three months after the factory opened, the company received overseas orders for just 8,000 pairs of jeans.

Changshuncheng is not an isolated case – a broader crisis faces Jun’an and other parts of Foshan.

Problem one: volatile cotton prices. Till last March prices had soared – peaking at $4.84 per kg. That led to frenzied buying among jeans factories – at toppy prices. Many were then caught out when prices for the raw material plunged 58%, reducing the value of the cotton they’d hoarded.

Problem two: rising costs – and not just for cotton. The complaint is that customs clearance fees have doubled, with jean shipments now taking 20 days to clear customs rather than eight. Labour costs are also up by a double digit percentage, thanks to a hike in the minimum wage (see WiC101 and 96). Minimum wage levels in nearby Shenzhen are slated to rise another 15.9% this year. Exacerbating problems is an appreciating yuan, which has also hit margins on exports.

Problem three: less foreign demand. The National Business Daily spoke to a manager in the sales department at Jun’an Haizilan Garment Factory, which exports most of its jeans to Europe and the US. “Foreign denim orders fell by half in 2011,” he reported. CCTV has given bigger picture numbers, suggesting denim exports from Jun’an fell by 17.5% last year. Partly that’s because some of the town’s foreign customers switched their orders to cheaper Vietnam.

Jun’an’s denim crisis is symptomatic of a broader problem faced in Guangdong by many other Chinese exporters. For example, the Southern Metropolis Daily reports that Nanhai’s biggest toy factory has laid off 1,000 workers over the past four months. Prior to 2008, the Zhongmei plant was exporting 20 containers a day – that’s been steadily reduced to 10. Meanwhile a shoe manufacturer in Huizhou noted that foreign orders are down 20% versus this time last year.

That leads to a narrative in which the ‘workshop of the world’ seems to be struggling. A survey of 749 small and medium-sized exporters in Nanhai found that 37% had no orders at all for the first half of the year, and that many had mothballed production while they waited for the situation to improve.

The survey’s author, the Nanhai Inspection and Quarantine Bureau, offered an understated conclusion: “The situation is not optimistic.”

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.