China Report: A Manufacturing Migration

Asia’s rising middle class and higher labor costs continue to drive factory operations to move from eastern and coastal China to central and western pockets of the country. While the transition presents logistical challenges, market watchers cite increasing domestic demand as a major opportunity in the coming years.

“We’ve seen an influx of factories being built in central, northern and western China as people are less willing to remain migrant workers,” said Mike Jeppesen, Wolverine World Wide Inc.’s president of global operations.

The production of leather shoes in China remains concentrated in Fujian, Zhejiang and Guandong provinces, where the combined output accounted for 69.6 percent of China’s total leather shoes in 2013, according to a recent publication by China Market Research Reports.

Despite this, footwear manufacturers in these provinces continue to face rapidly rising operational pressures. In fact, many experts predict the output will drop in the coastal provinces as it increases in areas such as Hunan, Chongqing and Sichuan, where labor is more abundant and the pay scale is lower.

“This trend will continue as the labor supply in central and western China [becomes] more stable. Workers are no longer as willing to travel as far as in the past,” said Stephen Chi, CEO of Stella International’s women’s footwear business division and retail business.

“Nowadays, more of our workers in China are becoming what I call ‘resident workers’ more than migrant workers, as we, too, have shifted some of our capacity inland,” he added.

Meanwhile, China’s new regulation on value-added tax, which went into effect on Aug. 1, 2013, has increased charges on Chinese exports, Jeppesen said.

A benefit of the shift inland is a sharpened focus on sustainability, said Matt Priest, president of the Footwear Distributors & Retailers of America.

“As factories move inward and west, it’s not as urban and there are fewer people, which puts less of a strain on the environment,” he said.

But the factory migration is not without its challenges.

“When you shift production, you create transportation and logistical problems, and it’s more difficult to access raw materials, although this is more of a short-term issue,” said Nate Herman, VP of international trade for the American Apparel & Footwear Association.

At the recent AAFA annual summit in Washington, D.C., Michael McBreen, Payless ShoeSource’s division SVP of global sourcing and product development, said the company has been combining its factories and streamlining production processes in an attempt to mitigate supply-chain risk.

“We’ve consolidated our factory base dramatically in the last two-and-a-half years. Part of that has been not only consolidating but migrating, because migrating with a smaller number of core factories is much easier to manage,” McBreen said.

Shared knowledge of systems, culture, values and production methods has allowed Payless to meet the changing competitive landscape while also utilizing the existing infrastructure and skillset of workers within its factory base, he added.

Still, producing and growing within China isn’t easy.

One of the roadblocks facing U.S. brands seeking to expand in China is the need to strike partnerships with domestic players, noted Scott Mendelson, president and partner of JVR Group Ltd.

BBC International Chairman and CEO Bob Campbell agreed: “The country is fast becoming ‘China for China.’ The only way you can expand there is by partnering.”

On the increasing number of joint ventures between China-based companies and foreign brands, APLF Ltd. director Perrine Ardouin said, “The shrinkage in the export market is forcing many Chinese footwear manufacturers to focus on the local Chinese market. Due to the lack of experience in brand building, some Chinese manufacturers are now partnering with foreign brand owners to jointly target the massive footwear market in China.”

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