From slowing global demand to rising geopolitical tensions and a tentative post-Covid recovery, China’s manufacturers are facing some of the strongest headwinds in years.
The story of three factories – spanning footwear and electronics – illustrates how manufacturers are experiencing a slowdown in the world’s second largest economy.
Factory activity, one of the main pillars of economic growth during the pandemic, has slowed for four consecutive months to July 31, according to official statistics. The private Caixin/S&P index on Tuesday also showed output fell last month to a 49.2 reading. A reading below 50 indicates a contraction.
The Chinese Communist Party’s Politburo last week acknowledged the economy’s “lurching progress” since the lifting of pandemic restrictions and promised measures to “actively expand domestic demand”, such as spurring consumer spending.
“Things are pretty bad,” said Alicia García-Herrero, chief Asia-Pacific economist at French investment bank Natixis. Domestic demand “will only recover with a big stimulus”, she added, and “total industrial production will underwhelm”.
This picture has been complicated by President Xi Jinping’s desire for “high-quality” growth, a strategy that favors technology industries over the huge manufacturing hubs that produce basic consumer goods.
‘Our sector is in misery’
Feng Tai Footwear exemplifies the difficulties faced by low-tech manufacturers on which China’s economic success is built. Before the pandemic, it sold around 5 million. pairs of shoes a year for customers like Walmart and Target. This year it will be good to sell 3 million. Orders for the second half of this year – typically filled in July – are down by at least a third compared to last year.
“Our sector is in misery,” said CEO Eddie Lam, which operates more than 10 factories in China and employs more than 3,000 workers. “Orders are often canceled halfway through . . . Some buyers say they no longer have sufficient budgets. The mood is bad.”
“We’re basically at a standstill,” he added. “Our workers sometimes don’t even work their full-time hours.”
China’s monthly export delivery value of goods made with leather, fur or feathers and footwear has fallen by more than a third from 2019, reaching nearly Rmb17 billion. ($2.4 billion) in May this year.
The domestic market is also tough, the company added, as shoes are sold at a “much lower price” online. Yet this is where Lam is pinning his hopes for growth, along with new markets opening up under China’s international Belt and Road infrastructure development initiative.
Some of the company’s customers have asked if they can set up factories outside of China, but Feng Tai has no plans to do so yet.
“The US knows very well that it cannot risk being decoupled from China,” Lam said. “I just don’t see the benefit of moving production to Southeast Asia with higher supply chain costs and additional investment required.”
The Tien Sung Group
‘We can’t put all our eggs in one basket’
Geopolitical tensions between Beijing and Washington as well as supply chain disruption during the Covid-19 pandemic have spurred more manufacturers to move out of China.
Rex Ho’s family business, which makes clothes for Adidas, Puma and New Balance, was an early adopter of a “China plus one” strategy, moving some apparel to Southeast Asia more than a decade ago.
“We have to consider (China) ‘plus one’ or even more,” said Ho, CEO of Tien Sung Group, citing geopolitical tensions and supply chain disruptions. “We can’t put all our eggs in one basket.”
The Hong Kong-based company, which has around 5,000 employees, started operations at its second factory in Vietnam in April. It also has a factory in Cambodia and one in China’s southern city of Guangzhou.
Around 80 percent of the income comes from exports to Europe and the USA. “Our customers still talk about how they don’t want their products to be ‘made in China,'” he said. Labor costs are also a factor. Sewers, for example, are paid about $800 a month in China, compared to about $400 and $600 in Cambodia and Vietnam, respectively.
But moving out of China offers little protection against global economic headwinds. Ho, also of the industry group Hong Kong Apparel Society, said some of his colleagues reported orders falling 20 percent or more in the first half of this year as retailers cleared excess inventory. With interest rates rising, some buyers have demanded payment extensions.
“Growth has been really, really fast”
When Xi declared “robust” measures this year to encourage advanced manufacturing development, electronic component makers such as Anhui Tiger were in the best position to benefit from the policy shift.
The company, based in Hefei in China’s eastern Anhui province, makes electronic parts such as high-frequency transformers and power inductors for cars and green power generation.
They also supply components to customers including US-based Whirlpool and Swiss industrial group ABB.
While demand for consumer electronics has fluctuated, the company grew by around 30 percent annually each year during the pandemic, recording revenue of around 150 million. RMB in the first half of 2023. “Europe is accelerating the transition to clean, renewable energy, so we’ve seen an increase in demand in these sectors,” said general manager Xing Xuhua. “Growth has been really, really fast.”
This is part of a wider trend. China’s industrial production of electrical equipment and machinery rose 15.4 percent year-on-year in May, according to Natixis. Exports of vehicles rose 110 percent year-on-year in dollar terms in the first half of the year, while the dollar value of exports of textiles and clothing fell 8.3 percent, customs data showed.
Western companies rely heavily on Chinese equipment and products for their transition to clean energy, Xing said.
Still, Anhui Tiger is not immune to pressure to expand outside of China. The company is in the process of establishing its first factory in Vietnam. “When customers threaten to drop orders,” Xing said, “we have to say yes.”
Additional reporting by Thomas Hale in Shanghai