China's denim garment
export industry is currently on unstable ground, facing the year
ahead with cautious optimism. Among the major concerns for suppliers
today are a government-imposed export tax, intense post-quota competition
prohibiting makers from increasing export prices and potential US
safeguards that threaten to stunt export growth.
In anticipation of the quota-free market, many small and midsize
makers embarked on expansion projects and capability upgrades to
boost capacity and improve efficiency.
However, in October 2004, various textile organizations in the
US filed safeguard actions capping the 2005 import growth rate of
China-made woven cotton shirts and trousers
which include denim garments
at 7.5 percent. While these petitions were not yet approved as of
press time, there is a high possibility of them being implemented
soon.
In addition, the China government imposed an export tariff beginning
Jan. 1, in an attempt to prevent the US from implementing these
safeguards. Exports in some apparel categories, including denim
garments, are now being taxed by volume at US$0.02419 to US$0.06049
per item per kilogram.
The export tariff is also a means of encouraging suppliers to
manufacture more upscale designs instead of flooding the market
with cheap, low-end products.
The new levy is estimated to increase costs by up to 6 percent.
Suppliers are mainly concerned about orders that were confirmed
in 2004 and are scheduled for shipment this year. In most cases,
the confirmed price is too low to compensate for the export tax
and still yield sufficient profit. This problem is not an issue
for most large companies, who are banking on increased orders as
a result of quota removal to offset the profit loss. It is also
not a concern for suppliers who were aware of the impending tax
months before it was implemented and were able to renegotiate contracts
with clients.
For new orders too, whether or not this additional expense will
be passed on to buyers depends on the size of the company.
Large manufacturers that produce midrange and high-end designs
have more room to absorb these additional costs and, with the stabilizing
cost of cotton, can even drop denim garment prices a bit. Also,
companies with vertically integrated facilities will be able to
absorb the increased tax and keep prices stable.
However, small and midsize suppliers
especially those who purchased additional machinery to boost manufacturing
capacity and become more competitive in the quota-free market
will be hit hard by the new tax. Many of them might not be able
to recover investments made in new equipment, not only due to the
additional export tax, but also because looming US import caps may
curb export growth.
Most of these companies focus heavily on basic, low-value garments
that yield wafer-thin margins. And with competition becoming more
intense now, these small and midsize companies cannot afford to
increase prices of their products, as doing so would essentially
result in lost export orders and could subsequently risk their very
survival.
All of these factors have placed these companies in a precarious
situation. Many have already started looking at ways to cut production
costs and some will undoubtedly even resort to cutting corners.
Some suppliers will use 8oz denim, for example, to produce a garment
that has to be made from 8.5oz denim.
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