Women’s Wear Daily
04.16.2014
business-features
business-features

Number 2: Challenge in the East

China's manufacturing sector took a big hit this year, but a fast-rising middle class has spurred growth from the retail side.

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Coach

Coach in Shanghai.

Photo By Courtesy Photo

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In China, 2011 might be remembered as the year the wheels finally came off the world’s giant manufacturing engine.


In nearly every aspect, the news went from bad to worse for China’s production sector, with continuing increases in costs of labor and raw materials squeezing profit margins and driving thousands of producers out of business. The first to fall have been smaller factories in the manufacturing hubs of Zhejiang province and the Pearl River Delta, regions already weakened by several years of declining orders thanks to the global economic crisis that took hold in 2008.


As a result, manufacturing this fall declined for the first time in three years, marking what experts said was potentially the start of a serious slump and big changes ahead in China’s growth engine. Textile and apparel makers have not received any major policy assistance from the government and are beginning to recognize that the industry may never be the same.


For November, the purchasing managers’ index, a main gauge of production, slipped below 50 for the first time in 32 months. A level below 50 indicates manufacturing is contracting.


Compounding the problem for factories this year was a major credit crunch that squeezed smaller and medium-sized companies across the country. The credit crisis, brought on in large part by tight controls on bank lending to curb inflation, hit hard in the Zhejiang manufacturing center of Wenzhou, where hundreds of businesses closed their doors when the city’s intricate network of private lending began to collapse.


Economists have said the problem exists to some degree everywhere in China, however, and could force a more widespread trauma if the economy slows further than expected. Banking experts say up to 9 percent of business lending in China is in the form of private loans, without any regulatory oversight.


While the scene was bleak on the manufacturing side this year in China, the outlook continued to be rosier than in other parts of the world for the retail scene. Major international fashion and beauty brands maintained their expansion plans around China, as the country’s appetite for luxury goods and global brands continued to grow. Analysts expect that growth to be sustained, as the Chinese government maintains its push to boost consumerism and personal incomes grow.


Though real numbers are elusive, marketing consultants generally place China’s middle class at around 150 million people, a number that could double in a few years. International brands have increased their share of China’s retail market from less than half a percent several years ago to 3 percent in the past year, according to industry analysts.


On a related note, international retail brands this year showed an increasing savvy about doing business in China, honing their expansion efforts and reaching out into untouched markets in the hinterlands. While the key markets of Beijing, Shanghai and Guangzhou remain critically important, smaller cities across China are growing in demand and consumption of global fashion and beauty brands.


The list of brands landing or expanding in China stretches from designer to moderate labels, and from all corners of the world. Among the dozens of companies to enter, expand or discuss expansion plans in China this year were Louis Vuitton, Coach, Calvin Klein, Prada, Lanvin, Zegna, Fendi, Forever 21 and Gap. Piazza Sempione opened its first two stores and has plans for 10 more, while Lane Crawford said it planned three new stores on the Mainland over the next few years. A Bathing Ape opened in Beijing, and I.T Limited, a Hong Kong-based retailer, also is gearing up to open Galeries Lafayette-branded department stores in Greater China through a new partnership with the French chain. The first in Beijing is set to open in 2013.

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