Home > Uncategorized > Garment Maker Succumbs to Shift in China’s Policy

Garment Maker Succumbs to Shift in China’s Policy

Wall Street Journal

12/02/15

TAL Group plans to close a factory, unable to cope with rise in wages, as China shifts to high-value manufacturing

Inside TAL Group's garment factory in southern China. The company plans to close the unit in 2016 and shift production to Vietnam. The company says it is unable to cope with rising wages. 

Inside TAL Group’s garment factory in southern China. The company plans to close the unit in 2016 and shift production to Vietnam. The company says it is unable to cope with rising wages.

Dec. 2, 2015

DONGGUAN, China—When TAL Group opened a pants factory in this southern Chinese city in 2007, executives said they expected it to be there for at least two decades.

Instead, the Hong Kong-based apparel maker will close its factory of 2,400 workers next year, unable to keep up with rising wages that are edging out low-cost consumer-goods manufacturers.

 “We always knew China was going to be a challenge” because of rising labor costs, said Roger Lee, the chief executive of TAL, one of Asia’s largest manufacturers and maker of pants for brands like Banana Republic and J. Crew. “The last two or three years, we’ve been losing money” at the pants factory, he said.

TAL already has begun transferring pants orders from China to Malaysia, where it has another factory, and is expanding in Vietnam. The manufacturer plans to keep open its other factory in China, a 4,000-employee plant that makes dress shirts. The shirts can be more complicated—and therefore more profitable—to sew than pants, because the fabric is thinner and puckers more easily. TAL says it makes one in every six dress shirts in the U.S.

The apparel maker’s experience reflects the difficult decisions that manufacturers in China are making as the world’s second-largest economy—once the global factory floor for cheap goods from clothes to toys—pushes through a transition to higher-value manufacturing in industries such as cars, aircraft and electronics.

Labor costs in China are expected to increase 8.6% this year. 

Labor costs in China are expected to increase 8.6% this year. Photo: Kathy Chu/The Wall Street Journal

China’s government has championed automation and unveiled a 10-year plan meant to put the nation at the forefront of technologies like 3-D printing and high-end machine tools.

Local governments are also raising minimum wages by double-digit percentages in many cities in China, forcing embattled manufacturers to close factories in more expensive coastal cities and move inland or overseas. Companies from Coach Inc. to Samsung Electronics Co. have shifted some manufacturing from China to Southeast Asia.

Some manufacturers warn that China’s slowdown—economic growth fell below 7% in the third quarter for the first time since 2009—could push thousands more factories over the edge, if both domestic and foreign demand for manufactured goods drops.

“The situation won’t get better,” said Stanley Lau, former chair of the Federation of Hong Kong Industries, a trade group for 3,000 manufacturers, mostly with factories on the mainland. He expects that between 2014 and 2017, 10% of mainland factories owned by Hong Kong-based manufacturers would close.

The number of Guangdong factories owned by Hong Kong companies fell by a third to 32,000 in 2013 from a 2006 peak, partly because of rising wages and difficulty in procuring workers, an analysis by Justina Yung of Hong Kong Polytechnic University for the federation shows.

ENLARGE

This year, wages and benefits in China are expected to climb 8.6%, lower than the previous year’s 10.3% growth rate, according to the Economist Intelligence Unit.

Still, China’s average labor cost of $3.27 an hour in the manufacturing sector is two-thirds higher than Vietnam’s and a quarter above Malaysia’s, the firm’s data show.

The shuttering of factories is starting to change China’s Pearl River Delta, the region where Dongguan is. It became an economic powerhouse in the 1990s as manufacturers moved their plants from Hong Kong and global companies set up factories.

Now, “for lease” signs cling to deserted factories and worker dormitories inside an industrial park.

In Zhongshan, an industrial city 90 kilometers from Dongguan, Gong Guo Mou, 45, opened a restaurant in September after closing a small shoe factory, which had struggled to win orders from the West.

“Small factories can’t survive,” said Mr. Gong, sitting inside his restaurant, where ceramic bowls and metal silverware, still covered in plastic, lie on tables. “They’re not producing fast and cheap enough to compete with the big guys.”

TAL’s two-story pants factory sits blocks away, with a goldfish pond in the front, thought in China to bring success and wealth.

The company was founded nearly 70 years ago by Mr. Lee’s great uncle, and now has nearly a dozen factories in five countries and Hong Kong, with $850 million in revenue last year.

The year TAL’s Dongguan factory opened, wages and benefits skyrocketed 31% in China’s manufacturing sector, Economist Intelligence Unit data show. Costs rose 28% in 2008 but have tapered off to low double-digit annual increases since then.

At the same time, countries in Southeast Asia became more appealing as manufacturing destinations as their infrastructure improved and workers became more skilled. It has become much easier to find workers in Southeast Asia than in China, where young people are often reluctant to work on the overnight shift, TAL’s Mr. Lee said.

In the pants factory, TAL sees 8% to 10% of its employees leave each month, while turnover at its units in Malaysia and Vietnam runs less than half of that, according to the company.

Over the past few years, TAL realized that even if the pants factory increased its productivity substantially, it would still be more expensive to produce inChina than Southeast Asia. “We’ve done the calculation quite a few times,” Mr. Lee said.

What Online Retailers Will Do to Get You to Click ‘Buy’

During a season focused on Web sales, stores are following up with shoppers who abandon digital carts

When online shopping, people will put items into their shopping carts but then hold off on buying. How are retailers combatting this online window shopping? WSJ’s Charlie Wells reports.

Dec. 1, 2015

Sharon Sprague felt as if she were being followed by a rain jacket.

The Boston mother of two young boys recently lingered on L.L. Bean’s website and left without buying anything. In the days afterward, wherever she went online she couldn’t escape ads for rain jackets, both the one from L.L. Bean and others she had looked at on other websites.

“I do a lot of research,” says Ms. Sprague. Before buying something for her children, she bounces from bloggers’ product reviews to retailer websites to digital price-comparison tools. After all that, Ms. Sprague ended up not buying a rain jacket. L.L. Bean declined to comment.

Retailers are struggling with shoppers like Ms. Sprague—digitally savvy and willing to spend hours online. They represent a big source of lost sales. These window shoppers drop many items into their virtual shopping carts—and then vanish, never actually clicking “Buy.”

Window shopping has gone digital. Some shoppers are willing to scour the Internet in the hunt for, say, the perfect pair of boots. They visit many websites and drop many items into virtual shopping carts.  

Window shopping has gone digital. Some shoppers are willing to scour the Internet in the hunt for, say, the perfect pair of boots. They visit many websites and drop many items into virtual shopping carts. Peter Hoey

With the annual holiday spending frenzy skewing heavily toward digital shopping, online retailers are getting savvier about closing the deal and getting shoppers to push the button on that pair of shoes or set of towels lingering in their virtual shopping carts.

Following shoppers around the Web with prodding ads for their abandoned products is one tactic. Many e-tailers also send emails with cutesy reminders about what is left in the basket. “Hello there your closet is calling,” Banana Republic nudged in a recent note.

Other stores are dabbling in text messaging and mobile push notifications to remind customers of what they haven’t bought. Some even point customers to online promotions or discounts, in hopes of making the item left behind more tempting.

Almost 69% of online shopping carts that contain at least one item are later abandoned, according to the Baymard Institute, an e-commerce consultancy based in Copenhagen which analyzed 31 studies over the past few years. That is up about three percentage points from 2012, says Christian Holst, the institute’s co-founder.

The hunt continues as the shopper visits more websites and discovers more options throughout the day.  

The hunt continues as the shopper visits more websites and discovers more options throughout the day. Peter Hoey

Many factors lead shoppers to abandon their digital shopping carts, Mr. Holst says. Mobile phones seem to make people more likely to jump around, he says, putting them into browsing mode. Unexpected extra costs at checkout—sales tax, shipping fees—are responsible for 33% of abandonments, Mr. Holst’s firm has found. Another 23% are abandoned when shoppers are forced to create an account, an often cumbersome task requiring them to think up a username and password and enter personal details. And 18% of abandonments result from a “complicated” checkout process.

Luxury retailer Neiman Marcus says its shoppers often visit an expensive designer item multiple times before purchasing. The company targets follow-up ads with product images and messages about store events and the Neiman Marcus brand. For a regular customer, Neiman says a sales associate might follow up using a messaging app, such as WhatsApp or WeChat.

Follow-up ads can annoy consumers, though, says Krista Berry, chief digital officer of department store Kohl’s, and many aren’t shy about letting stores know when they receive emails that seem incorrectly targeted. “Everyone is working on data to be more real-time and of-the-moment, or curated,” she says. “We have come a long way, but we’re just not quite there yet.”

Kohl’s this year started offering shoppers access to a single digital shopping cart across their devices, whether smartphone, tablet or laptop. That is a cornerstone of the retail industry’s efforts to fully integrate digital and store inventories, a practice the industry calls “omnichannel” retailing.

 

Peter Hoey

That means if you shop on your smartphone in the morning while waiting at the doctor’s office, anything you dropped in your shopping bag will show up later when you continue shopping on your computer at work or your tablet at home.

Retailers say a person who likes to window shop on a mobile device will be more likely to buy later if items remain in the shopping bag. Many shoppers like to narrow down choices on smartphones, then buy later using a desktop or laptop.

Mark Rogers, a 30-year-old Austin, Texas, father of a newborn son, says he feels paralyzed by the thousands of product options, reviews and blog posts he finds when he shops online for baby gear.

“Instead of helping you chose something, these websites present you with 99 other alternatives for a product, and you feel like you probably missed the best one,” he says.

Sheena Iyengar, author of the 2010 book “The Art of Choosing” and a professor on leadership and entrepreneurship at Columbia Business School, says the conundrum is understandable. In the pre-digital world, consumers would shop until they had created a manageable choice set, or realm of available options. They were limited by the number of shops in their town or neighborhood. “But now,” Dr. Iyengar says, “no matter how much searching they do, consumers still feel like there may be something out there they might have missed.”

Neiman Marcus uses what’s known as micro data, specific information about an individual consumer’s geographic location and past digital purchasing behavior among other characteristics, to target reminders to customers who may have abandoned items, says John Koryl, the company’s president of stores and online.

It is a delicate balance of reinforcing the physical product in the window-shopper’s mind and recreating the “moment of inspiration” that may have originally piqued the person’s interest, he says. “We don’t want to just sell you the shoe you put in the cart. We want to form a relationship with you,” Mr. Koryl says.

Ms. Berry of Kohl’s says the company’s digital-research arm has begun to identify consumer behaviors specific to different device types, and to customize the shopping experience according to the device.

Desktop shoppers spend about 12 minutes on Kohls.com, compared with seven minutes for smartphone shoppers, the company says. Customers who have been directed to the site from a promotional email tend to be brand loyal. Customers who arrive from a search engine usually want to get in and get out. Ms.Berry’s team refers to these as “spear fishermen.”

Tony Hsieh, chief executive of online shoe retailer Zappos, says his company tackles the abandoned-cart problem by encouraging customers to call the company on the phone. Zappos’ phone number is displayed on every page of the website and in follow-up emails about abandoned products.

“The call itself doesn’t necessarily turn into an order, but it is an opportunity for us to humanize the shopping experience,” Mr. Hsieh says. “The idea is to develop that feeling that you are buying from a friend and not a faceless corporation,” he says. And after all, he says, people don’t like to abandon their friends.

 

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