Recently, Randy Chen opened an e-mail from a Chi-nese factory bearing this news: The rainbow gel pen he’d ordered wasn’t coming. In fact, the factory, which was being forced to relocate in light of rising

production costs, was in the midst of a full-scale riot after break-ing the news to employees. Workers reacted by holding orders hostage and smashing equipment. And those 150,000 pens, ordered by Chen’s Cherry Hill, NJ-based supplier, Impex? They would be on hold – indefinitely.

Fortunately, the rainbow gel pen in reference wasn’t ordered for a particular customer, but to refill inventory. But if Impex runs out before new pens arrive, “we just tell customers, ‘I’m sorry, you can’t have it,’ ” says Chen, the company’s president, who adds that, while riots might not be an everyday occurrence, factory relocations and employee strikes are a common enough phenomenon in a market still undergoing serious changes.

Two years ago when Supplier Global Resource reported on the state of the Asian marketplace, the outlook was troubling. Employee wages were increasing. Factories were in disarray. Raw material prices were soaring. Not much has changed. In China, the economy is slowing, and an increasingly unhappy middle-class employee is complicating matters nationwide.

Throughout Asia, labor costs are rising while infrastructure stumbles. Certainly there are promising developments, but much of what’s ailed Asia in recent years continues to plague the region.

The Rising Cost of BusinessIn recent years China’s production lev-els have been so intense that it’s created a need for better infrastructure around the country. And the Chinese govern-ment has responded, pumping billions into everything from roads to high-speed trains, allowing manufacturing to move inland at a lower cost. That’s rea-son enough to keep many suppliers com-mitted to Chinese manufacturing, says Chen. “Can we go to different countries? Sure,” he says, “but it’s hard when you bring in supplies from one area and you

move items from different countries” for the assembly of one product.

And there are other headaches. Move production to a place like India, where costs may be cheaper, Chen says, and suppli-ers run into bigger issues, such as road blockages. “You don’t have stability in other countries,” he adds. Still, the fact that infrastructure, much like manufacturing and other high-growth activities in China, is subsidized by the Chinese government,

Still the world’s production hub, China’s explosive manufacturing continues to cause troubling shifts for

the heart of Asia’s work zone.By Betsy Cummings

“the hard cost of testing products is no different when you’re

making 5 million pieces versus 2,000

pieces.” – Randy Chen, impex

DRAGON IN DISTRESS

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leaves many experts wondering if it’s a move that’s unsustain-able for the long term.

Then there are the Chinese workers. Despite reports that plenty of China’s factories are sweatshops forcing workers to stand for hours and work days on end, there’s no denying the fact that more empowered employees are also demanding higher wages and better working conditions. Certainly their pay has risen in recent years. “The Chinese got a 13% increase this year” in wages, says Garry Hurvitz, owner of Counselor Top 40 supplier Ash City, based in Richmond, Ontario, and this year’s Counselor International Person of the Year. “They’re demanding a 15% increase next year.” As a result, he says, “a lot of factories are working at cost, if not at a loss, right now in a lot of parts of China.”

And, although prices are trending lower right now, they’re bound to go up, say Hurvitz and others, mostly because the cost of doing business is going to drive them increasingly higher. That’s due in part to the fact that “demographically the Chinese workforce is shrinking,” thanks to a diminishing population

of age-appropriate workers, says Jonathan Isaacson, owner of Counselor Top 40 supplier Gemline, based in Lawrence, MA.

As a result, China’s rate of growth, which has slowed some-what in recent years, and it’s now undergoing major shifts as the price of doing business continues to rise under the strain of these and other business costs. “It’s difficult to sustain pricing,” says Trevor Gnesin, president of Counselor Top 40 supplier Logomark Inc., based in Tustin, CA. “Prices used to be very stable, and now every time you place an order there’s a 5%-15% increase on the product.”

That can most likely be attributed to the rising price of fuel, labor costs and other charges, such as product inspection and documentation fees. As employees continue to demand higher wages, they drive up the price of every aspect of manufactur-ing. LTL (Less than Truck Load) costs, for example, have risen as much as 22% on some Logomark shipments from China, Gnesin says. Admittedly, shipping costs undergo seasonal fluctuations, he says, but adds, “I just did a shipment for a client, and the freight cost was more than the cost of the product. Five years ago it would have been a lot less than the cost of the product.”

And those cheaper factories inland? They may not be so cheap by the time you get there. Suppliers complain of China’s domestic airfares and train tickets that have doubled in recent years, along with fuel prices that make even driving an expensive proposition, if there’s any time for that.

For that reason, the industry isn’t likely to see price reduc-tions any time soon, even though the prices of materials like cotton, for instance, have been reduced to a fraction of what they were a few years ago.

Too Much CompetitionAs China’s middle class grows, so does its demand for luxury goods. Shopping malls, which are being erected like Lego sets, are showing up in towns that, a few years ago, didn’t even exist, complete with new office and high-rise apartment buildings. Experts contend that China is taking the adage, “if you build it they will come” to new extremes, and warn that such manu-factured, explosive growth can’t be good for the long term. For now, though, it’s creating a domestic shopping spree that’s feed-ing a robust, growing middle class with money to burn. “Their malls dwarf our malls,” Gnesin says, recalling some that are 11 stories tall and filled with luxury retailers. “I can’t even afford to shop at some of these shops.”

Essentially, the country’s manufacturers have turned their focus inward, producing goods for the hungry Chinese con-

sumer, and away from the supplier looking for factory incen-tives that aren’t likely to come. “The local market has such an insatiable appetite for merchandise, and consumers want qual-ity merchandise,” Gnesin says. So much so that Logomark, he adds, has responded by selling its products within 10 stores in China with plans for another 35.

As always, suppliers are competing for manufacturing space with some of the world’s biggest big box retailers. While a 2,000-piece order from a supplier used to capture a factory’s attention, now it takes heavyweights, like Wal-Mart, with orders many times that size to make serious demands on a Chinese fac-tory. Yet, suppliers still incur big box retailer-sized costs. “Nike might place an order for 5 million pieces, but we’re not Nike,” says Chen. Yet the associated costs of an order – whether 2,000 pieces or 5 million – can be similar. “The hard cost of testing products,” for example, “is no different when you’re making 5 million pieces versus 2,000 pieces,” Chen says.

Where factories might once have incentivized suppliers with smaller orders, now they’re not so interested. These days, loyalty, suppliers complain, doesn’t exist between factory own-ers and American clients. “Before, you could go to factories you work with every year and work out orders for the year and how you’re going to pay for stuff,” Gnesin says. “Now they’re talk-ing about a 25% increase. The guy you bought from before has become too expensive, so where you used to be able to place the same order year in and year out, now you have to constantly change suppliers.”

Still the Best BetThen there’s the issue of overstock. Not for the promotional product industry, where inventory levels have been up and down, but for China in general. “Right now there’s so much overproduction in Asia it’s not even funny,” Hurvitz says. “If the economy comes back tomorrow, the overcapacity that every-body built over the last 36 months, is not going to get utilized. The amount of extra production factories are putting into the marketplace is astonishing. I watch it and keep saying to every-body, ‘What are you doing? Who’s going to be buying all this stuff?’”

That would seem to work in the industry’s favor – a glut of factories looking for business. But, that’s not how things are predicted to play out. Instead, a predicted drop in the country’s labor force due to a decreasing birth rate and fewer residents interested in factory work bodes poorly for the country’s manu-facturing future. For the moment, at least, the Chinese govern-ment is making sure those factories are working at full capac-ity, leaving little negotiating room for foreign customers. Add to that an increasing domestic demand, and suppliers now have one more issue: a hotbed of consumers within China clamor-ing for more goods as their buying power grows, putting greater demands on factories accustomed to mostly foreign business.

Even so, for now, suppliers say, China offers the best option for manufacturing in Asia. Labor costs are rising around the region (“When I first started going to Bangladesh, workers were making $10 to $12 a month,” says Hurvitz. “Now we have opera-tors doing $80 to $100 a month.”), discounting the appeal of shifting production to other markets in the area.

What’s more, China offers a more aggressive overall supply chain than any other country in the region. “I think going for-ward people will stay put because when you buy from China, there’s nobody in the world who has as quick a turnaround and as sophisticated a supply chain as they do,” Hurvitz says. “No one can produce goods as quickly as they do. And it’s a one-stop shop.”

Betsy Cummings is the senior writer for Supplier Global Resource magazine.

The Big Issuesasia may still be the world’s primary manufacturing hub for many of the industry’s suppliers. But creeping issues continue to fester, making some in the industry anxious. Below, a look at the top concerns.

• Employee Discontent. as asia’s manufacturing might continues, an increase in worker demands rises along with it, calling for higher wages and better working conditions. that’s not new, but it’s continuing to drive up production costs for factory clients.• Increasing Costs. those rising costs are being coupled with higher fuel and shipping costs, not to mention added travel expenses for foreigners doing business within countries like China, where the price of a domestic airline ticket, for example, has doubled in recent years. • Factories on the Move. Factory consolidations along with a move inland where production costs are lower than they are in big urban centers is eroding connections with factory leaders. Where once staff offered pricing loyalty incentives, now suppliers are fighting to garner the attention of facilities interested more in big box retailers.

“Chinese workers are demanding a 15% increase

next year … a lot of factories are working at cost, if not at a loss, right now in a lot of

parts of China.” – gaRRy huRvitz, ash City

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