China: Opportunity Mixed With Difficulty. One Company's Perspective

Last week, I flew back to the good old US of A after two weeks in China. This was my first trip and I’ve been with a group of 87 buyers from the EU and US touring five cities and visiting with hundreds of vendors. On my first day, I was interviewed by reporters and camera crews from five newspapers and the national television station of China. They all asked the same question: “What do you think about the quota restrictions that the US is about to impose on apparel imports into the US?”

The answer was clear to me but I don’t think the Chinese see it the same way. The WTO agreement which China joined and anticipated the benefit of phased quota elimination allowed a measured increase of 7 ½ % per year in imports per category. Depending on which time period is selected for the statistics, China, in 2005, increased imported apparel into the US from between 500% to 1500%. My reply to all the reporters was the same: What do you think would happen in any business dealing if the terms were not met? One would assume there would be consequences, of course. The gap between the allowed percentage and the actual is huge and overwhelming, a description that fits my impression of the amazing country as well.

Never have I seen, nor has there been in world history, so much major construction in one country at one time. One cannot look in any direction without seeing multiple cranes perched atop multi-story office buildings, hotels and apartments. But I am sure you have already heard, read about or seen the evidence for yourself. I’m not in the real estate business (yet) so let’s get back to the quota restriction concern.

There are currently restrictions, to my understanding, on seven categories of apparel: cotton bottoms for men and women, woven shirts of all fabrics, knit tops for men and women and underwear. At this time shipments entering the US may or may not have available quota to enter the US. If the shipment is not permitted, the garments will sit in storage until January, 2006 when quota opens up again. All parts of the supply chain suffer. Factories can’t ship their production to the US and inventory replenishment expected from China is delayed for the next six months. This makes planning very challenging and this scenario of shipping all allowed items under quota during the first six months of the year is projected to continue until 2008 when the restriction covenant disappear.

What’s a buyer or vendor to do? There are a few options. One is illegal and certainly the choice of those willing to risk breaking the law by transshipping Chinese made garments to another country with changed country of origin labels. One statistic I heard was that $5 billion worth of apparel enters the US in this manner. US Customs works very hard to police the situation but only confiscated $100 million of this volume.

The legal options include the following. One can source manufacturing in another country using Chinese textiles. Additionally, I learned recently of the OPA (Outward Processing Arrangement) whereby garments can be mostly constructed in China and the finally assembled and finished in another country. The product would enter the US as imported from the country of final assembly where there are no quota restrictions. I am considering this option since we manufacture in the Dominican Republic (DR) but sewing the same garment in two different countries presents quality and logistical concerns. And one can import garments that are not under quota restriction but this is an option of limited value when your customers have specific requirements, obviously.

Three days ago I participated in a panel presentation in Shoaxing, (just a few hours south of Shanghai) the major textile producing region in China with exports over $4 billion per year. The mayor of the city hosted the event attended by hundreds of local vendors. (The local textile market center has 20,000 vendors to give you an idea of the scale.) I told them how my grandfather migrated from Calabria, Italy one hundred years ago to Philadelphia and set up a small pant factory. My father continued the business as a uniform supplier to the US Military. Twenty years ago I started production in the DR under the CBI program. In all those years, apparel has always been an entry level industry seeking low wage workers. The principles have not changed, only the circumstances. With estimates of double world-wide capacity of apparel production available versus demand, this business is competitive. Those supply chain partners who best learn to organize their assets and collaborate effectively to satisfy client needs will attract the available business. How and where and with whom this can be done is what I have come to China to learn. I told the Chinese audience that this current impediment of the quota restrictions will pass too and we will find ways to operate together. With kudos to Gerry Garcia, “what a long, strange trip it’s been.”

Joseph Greco is president of Greco Apparel. Visit their website at www.grecoapparel.com