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| China Needs Better Shoes in the Future |
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China is now the world’s largest footwear producer and exporter, accounting for 66% of global footwear output. But moving into 2008, due to negative factors such as international trade protectionism, rising Chinese currency, rising raw materials cost, labour shortage and new labour laws, the Chinese shoe-making industry is now facing tough challenges ahead.
Hurt by the currency
The rising Chinese RMB, which has now broken the 7:1barrier with USD, has given tremendous pressure to many labour-intensive exporters in China. Statistics show that for every 10 percentage point rise in RMB, Chinese exports will slow by 3-4 percentage points on average. Therefore, every trading company in China is now nervously watching the currency appreciation.
Although industry insiders admitted that a rising currency may optimise industry structure in general, but for labour-intensive exporters, such as footwear companies, currency appreciation has been a huge challenge to them. A veteran textile analyst in China, Ms Fan Min, recently indicated that for every one percentage point increase in RMB, shoemakers will see a corresponding one percentage point decrease in their profits.
A high-cost trade surplus
China’s total trade value in 2007 amounted to US$2174 billion, up 23.5% from 2006. China is now becoming over-reliant on international trades, with a reliance ratio of 70%. On one hand, the long-time policy of encouraging exports is now costing the government huge amount of export subsidies and rebates. On the other hand, demand from the domestic market is far from being satisfied. |
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Dr Liu Shangxi, a senior official from the Ministry of Finance of China, commented that China’s high reliance on international trades has also made the government’s fiscal income sources highly reliant on international trades. At present, income from international trades is accounting for one-third of the Chinese central government’s fiscal income. The issue is especially evident in eastern regions of China, where export rebate payments have placed heavy burdens on local governments.
So from an economic development point of view, it is necessary for the Chinese economy to shift from foreign trades to domestic demands, whose vast size can provide tremendous potential for future economic development.
An industry that needs change
Textile and footwear are an important source for China’s trade surplus. According to the Chinese Customs, between January and October 2007, China had a net textile and footwear trade surplus of US$115billion, representing 54.2% of total net trade surplus (US$212 billion) from the same period.
Chinese footwear exports have long been characterised by their low price, abundant output and voluminous suppliers. But in recent years, due to rising labour costs, land supply tightness and rising commodity prices, China’s comparative advantage in footwear is weakening. Furthermore, the Ministry of Commerce had reduced a series of export rebates and rationalised trade processing industries last year, further contributing to the reduction of footwear export orders.
Although China continued to increase its footwear export to 4.4 billion pairs in the first half of 2007, up 12.3% from previous comparable period, average footwear export price had been maintained at around $2.50 per pair for many years. “This is mainly because in the whole industry chain, multinational trade partners are still controlling the supply of premium raw materials, core technologies, R&D design and marketing,” said Mr Wang Hanjiang, President of China Chamber of Commerce for Import and Export of Light Industrial Products and Arts-Crafts.
This shows that China’s export advantage is still built on its low cost labour and cheap products, which lack long-term competitiveness. On the other hand, the abundant supply, low prices, low quality and some unregulated competition, are all triggers for international trade frictions. In the first half of 2007 alone, there were 127 anti-dumping investigations on Chinese products in the European Union. In addition, the overemphasis on exports has also created acute problems of resources wastage, environmental pollution and disadvantaged workers in China.
New directions
It is obvious that China has a competitive advantage in footwear production, resulting in a prominent share of the low to medium-end footwear market globally. But the Chinese footwear industry now has to learn how to deal with the changing international market environment and domestic survival environment, as well as how to seize more development opportunities.
Industry experts suggested that China’s footwear industry will inevitably evolve from low end markets to medium to high-end markets, as well as from quantity-driven to quality and performance-driven. Therefore, the number of Chinese footwear output and exports may fall in the future, but quality and price should be improved at the same time, maintaining an overall growth of export value.
Industry upgrade and production transfers are the two trends for China’s footwear industry. Some innovative and efficient companies will opt for the path of capability upgrades, while those low cost producers will shift their production lines from costal regions in China to the more affordable central and western China.
Despite the export challenge, China’s domestic market is now growing. For a country with 1.3 billion population, per capita footwear consumption is only 1.7 pairs per year in China. So it is absolutely possible for Chinese people to increase their average footwear consumption to 3-4 pairs per year. Therefore, Chinese footwear companies should start to improve their product design and proprietary innovation capabilities, in order to establish their own brands and distribution channels in the home market.
Brands are also good for expanding international markets. Although Chinese shoes have captured significant market shares internationally, most of them are tagged with foreign brands from OEM (original equipment manufacturing) orders. As the industry is upgrading and market competition is intensifying, Chinese footwear companies should accelerate their process of creating their own brands and distribution channels in the international market, in order to obtain better profit margins and competitive advantages.
Produced by China Business Intelligence; Source: www.chinabgao.com
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