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RR RUEHCN RUEHDT RUEHGH RUEHPB RUEHVC
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R 180535Z AUG 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 7512
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCNARFC/ASEAN REGIONAL FORUM COLLECTIVE
RUEAEPA/HQ EPA WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/CDR USPACOM HONOLULU HI//J00/J2/J3/J5//

UNCLAS SECTION 01 OF 02 GUANGZHOU 000498 
 
SENSITIVE 
SIPDIS 
 
 
STATE FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON PGOV CH
SUBJECT: Unraveling? - Guangdong Apparel Exports to the U.S. Drop 
Sharply 
 
REF: A. Guangzhou 0414; B. Guangzhou 0406 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (U) Summary:  The apparel export powerhouse that is Guangdong has 
become a little less powerful.  Global apparel exports dropped 31.3% 
during the first half of the year, and exports to the United States 
fell 27.3%.  Local firms blame demanding U.S. buyers, renminbi (RMB) 
appreciation, increased labor costs brought on in part by the new 
Labor Contract Law and pressure on the industry to relocate out of 
the Pearl River Delta (PRD).   Rapid development of the industry in 
other parts of China and abroad also threatens Guangdong's 
comparative advantage.   End summary. 
 
¶2. (SBU) The first half of 2008 saw a dramatic drop in Guangdong 
apparel exports to the United States.  According to the Guangdong 
Statistics Bureau the province's overall garment exports fell by 
31.3%, and exports to the United States decreased by 27.3%. 
Guangdong is one of China's top five apparel manufacturing 
provinces. 
 
--------------------------------------- 
U.S. Demands High Quality, Lower Prices 
--------------------------------------- 
 
¶3. (SBU) Local contacts in the industry have placed some of the 
blame on demanding U.S. buyers.  Ling Fangcai, chairman of the 
Guangdong Textile Import and Export Company, told us that the two 
main challenges to doing business with U.S. buyers are the demands 
for low prices and complying with U.S. quality standards.  Li 
Lichang, general manager of the Foshan Xinguang Knitting Company, 
complained that U.S. buyers are increasingly enforcing the 'Wal-mart 
theory' on imports, requiring higher quality goods, and often higher 
volumes, at lower costs.  Li explained that she had had several 
disputes with U.S. companies regarding quality control and recently 
cancelled a major deal with sneaker giant Puma USA because of cost 
and quality demands.  One factory owner also said the increasing 
incorporation of corporate social responsibility (CSR) standards by 
U.S. companies is in conflict with some local manufacturing 
practices. 
 
¶4. (SBU) Eric Lo, a factory owner in Guangdong's Foshan city, told 
us that Europe and Japan are better clients.  He pointed out that 
because Guangdong is able to produce high quality products quicker 
than many domestic and international competitors, some international 
buyers are willing to absorb the region's higher production prices. 
He said that European and Japanese buyers place a greater emphasis 
on quality, and are willing to pay for it.  He believes the U.S. 
market is no longer attractive to Guangdong apparel manufacturers. 
Foshan Xinguang Knitting Company General Manager Li pointed out that 
although she had cancelled a deal with Puma USA, the company is 
still supplying Puma Japan and Puma Europe. 
 
-------------------------------------- 
The Dollar Falling, Labor Costs Rising 
-------------------------------------- 
 
¶5. (U) Factory owners also complain that the average 6% appreciation 
in the RMB over the past few months has exacerbated price demands 
from U.S. buyers.  As one apparel maker explained, the impact on 
factory profits depends on the terms of the contract with the U.S. 
buyer -- the longer the delivery and payment terms, the lower the 
profits. 
 
¶6. (U) Apparel factory owners repeated complaints we've heard 
frequently from labor-intensive industries in the PRD that the new 
Labor Contract Law is driving up labor costs (ref A).  In our 
discussions with factory owners, they acknowledged that the new law 
is intended to balance economic growth with increased standards of 
living.  However, one owner argued that even though the law might 
benefit people in the future, it was hurting enterprises today. He 
stressed that the changes forced by the law were too rapid. 
 
-------------------- 
Factories Relocating 
-------------------- 
 
¶7. (U) Guangdong's "double transfer" policy aimed at moving 
labor-intensive factories out of the PRD (ref B) also poses a 
challenge to Guangdong's apparel industry.  The municipal government 
of Foshan, one of Guangdong's top apparel producers, is forcing four 
types of enterprises to relocate, all of which could include apparel 
 
GUANGZHOU 00000498  002 OF 002 
 
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proactively relocating to the government's target destinations such 
as Qingyuan and Heyuan; others are simply relocating to suburban 
areas of Foshan.  One manager argued that relocating apparel 
factories did not make sense, and doubted that the "double-transfer" 
policy would be effectively implemented anytime soon.  He said 
garment manufacturers relied on a sophisticated supply chain that 
would have to be relocated as well.  He believes this is not 
feasible. 
 
------------------------------------------ 
Increasing Competition: At Home and Abroad 
------------------------------------------ 
 
¶9. (SBU) Zhu Zejiang, General Manager of Foshan Sanden Industries 
Company, told us that stiff competition both home and abroad is 
hurting sales for companies in Guangdong. Domestically, Guangdong is 
competing with factories relocating to and springing up elsewhere in 
China.  In the first half of 2008, Zhejiang, Jiangsu, Shandong 
provinces and Shanghai experienced a 20% increase in apparel 
exports, according to local newspaper, Nanfang Daily.  These 
factories have cheaper operating costs due to, among other reasons, 
less governmental pressure and oversight.  Zhu claims the apparel 
industry supply chain is weaker in those areas, but fears they will 
develop rapidly and soon gain a comparative advantage over 
Guangdong.  Factory owners commented that they are seeing more 
competition from South and Southeast Asian countries, including 
Cambodia, Vietnam, and Bangladesh, because of cheaper labor costs 
there.  Some of the foreign competition may be coming from factories 
previously based in Guangdong. 
 
¶10. (U) In the long-run, some factory owners believe that increasing 
costs and factory relocations won't diminish Guangdong's role in the 
global textile and apparel industry.  However, one manager suggested 
that Guangdong may have to develop new niches such as supply chain 
management, rather than manufacturing. 
 
GOLDBERG