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EU debt crisis hurting labor-intensive industries

China's exports to the EU continue to grow despite the area's financial malaise. But manufacturers of bags, apparel and consumer electronics claim sales have fallen and orders reduced.

The EU's debt crisis has not affected China's exports yet, but there are signs that it may do so in the months ahead. Some labor-intensive companies have experienced a reduction in overseas sales for H1 2010, a few by as much as 40 percent.

EU debt crisis hurting labor-intensive industries
Manufacturers in labor-intensive industries, including garments, are worried the EU debt crisis is affecting exports negatively. January to July 2010 customs statistics, however, show the area is still a major market for apparel.

China customs statistics show the country's exports to the EU in the six months to June 2010 increased 36 percent to $140.7 billion. Manufacturers such as Danbio Sports & Entertainments Products Co. Ltd, however, have not felt that growth. The company exports different types of bags mostly to Germany, Italy, Spain and other countries in the EU. During H1 2010, its total export sales remained flat year on year at $1.5 million, but down 20 to 40 percent compared with the same period in 2008. This is attributed mainly to slow shipments to the EU. Exports to the US, on the other hand, have improved slightly.

Danbio said for the bags industry, second half sales are normally lower than H1 2010 exports, sometimes by 30 to 50 percent.

Overseas sales at Shenzhen Huacun Textile Co. Ltd were hit badly by the EU's debt crisis as well. The company boosted shipments of casual wear to France and Italy in late 2008, when one of its major US clients went bankrupt. Business recovered gradually, but started slowing in late 2009, when the value of the euro started falling against the US dollar. Since then, the volume of orders from various EU buyers has dropped 10 to 50 percent. The company now expects overseas sales in H2 2010 to be 50 percent lower than first half exports.

Dongguan Elcoteq Electronics Co. Ltd is projecting weaker sales for H2 2010 as well. A midsize manufacturer of consumer electronics such as mobile phones and accessories, the company believes the situation in the EU is worsening, affecting the purchasing power of its buyers. One of its EU clients requested to have 70 percent of ordered goods shipped first, paying for this batch of products. But when Dongguan Elcoteq was preparing to send out the balance, the buyer wanted only 20 percent of the remaining items, citing poor retail sales. Such cases have been happening more frequently the longer the debt crisis in the EU remains unresolved.

Further, orders placed at the start of the second half are 20 to 30 percent lower than in H1 2010.

Analysts have a more optimistic view than suppliers. While manufacturers fear the situation in the EU will spread to the rest of Europe, Avic Securities Co. Ltd senior macroeconomic researcher Dai Lei does not think this will happen. He believes that as long as the euro stops depreciating so steeply against the dollar and Europe's Central Bank controls its expansionary monetary policy, circumstances will not worsen. But Dai does not expect conditions to improve soon, projecting recovery to take place in the next three to five years, or even longer.

Supplier woes

Danbio feels the current export environment is bad. Besides weak demand from the EU, manufacturers have to face other challenges such as higher raw material and labor costs, worker shortage and the yuan's appreciation. There is also speculation the export tax rebate for bags may be removed in the next half-year.

The company's factory is supposed to house 100 to 200 workers, but there are only 50 handling operations. With the limited capacity, Danbio has now chosen to accept orders from bigger enterprises or traders instead of transacting directly with buyers.

Almost all production facilities across the country are experiencing a shortage in labor. This has led many of the larger plants to subcontract some manufacturing processes to smaller factories. For such makers, handling these orders is preferable as work is continuous and there is a greater chance of being profitable. They do not think this will be possible if they had gone the traditional route, as many of the buyers now can only place small orders with no assurance of repeat transactions.

Shenzhen Huacun is in a bigger bind. It used to run a textile factory in Changzhou, Jiangsu province, but had to shut it down early this year due to insufficient production. The garment plant in Foshan, Guangdong province, remains in operation but it hardly turns in any profit. In the past, the cost to make a pair of pants was roughly 20 yuan ($2.95). Now, it is at 25 yuan ($3.69) per pair. Despite being 25 percent more expensive to produce, the company could not raise export quotes because of intense price competition. All these have made it difficult for the company even just to break even.

Danbio is now planning to focus R&D on high-end models, which have more value and can bring in bigger margins. For this half, the company intends to participate in a greater number of trade shows to find clients from markets other than Europe.

Suppliers that offer a range of products and cater to a diverse set of buyers from different markets are much more flexible in shifting their focus to other export destinations. Shenzhen Getian Opto-Electronics Co. Ltd is one such company. It ships finished LED products such as bulbs and spotlights to the US and the EU, and manufactures components such as LED chips for the domestic market.


Note: This article "EU debt crisis hurting labor-intensive industries" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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