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Changing Value in Chinese Yuan One More Headache for Apparel Manufacturers

July 2, 2010

California Apparel News

By Deborah Belgum, Senior Editor

In the last year, cotton prices have skyrocketed as much as 55 percent. Chinese workers are pushing for bigger paychecks. And now the Chinese government is appreciating the value of its national currency, making it more expensive to manufacture in the country that is the apparel factory to the world.

“The yuan was the next thing to hit,” said Michael Weisberg, chief executive of Second Generation Inc., a Los Angeles company that makes teen clothing under the BeBop and Fishbowl brands.

For the last few years, U.S. apparel manufacturers have been able to contain costs as soft economic conditions worldwide kept labor costs low and raw materials in ample supply. Since the beginning of the recession in 2008, the Chinese yuan has been pegged to the U.S. dollar, giving it a steady and predictable value.

Now that is changing. Political pressure from Western countries that believe the yuan is undervalued by 20 percent to 40 percent is pushing the Chinese government to float the yuan.

Recently, China bowed to U.S. pressure and let the yuan inch up, moving from 6.82 yuan to the dollar to 6.78. Many believe more adjustments are on the way, but getting the kinks out of China’s currency is expected to be a gradual long-term process.

Pietra Rivioli, a finance and international-business professor at Georgetown University who wrote the book “The Travels of the T-Shirt in the Global Economy,” believes China is bowing to political pressure by letting the yuan fluctuate, but she said it won’t deviate too much from its current level. “The appreciation of the yuan has always been so small and gradual in China because the currency is so tightly controlled. Even if they do let it appreciate, it won’t be at market rate,” she observed.

One advantage of a rising yuan is that U.S. cotton and other U.S. raw materials will be cheaper to the Chinese manufacturer. “China is the largest buyer of U.S. cotton,” she said. “A stronger currency means cotton will be at a much more competitive price for those manufacturers in China.”

Rick Helfenbein, president of Luen Thai USA, part of a large Hong Kong sourcing company with factories in China and the Philippines, said the slight uptick in the yuan was anticipated and caught no one off guard. “But the spike in raw-material costs hasn’t leveled out, and that is more of an issue,” he said. He has been recommending that clients buy their raw materials early, looking as far out as six to nine months to save money. Cotton prices are expected to decline later this year after farmers plant more acreage.

Stay the course

Despite the yuan’s fluctuation and rising raw-material costs, not many companies are shifting their sourcing away from China. But if costs keep going up, they should be looking for other venues. “Manufacturers have to be conscious that the price of the product coming out of China is going up,” said Andrew Tananbaum, president and chief executive of Capital Business Credit in New York, which specializes in factoring accounts receivables. “They have to decide at what point they have to consider other sourcing locations to mitigate that increased cost.”

The hardest hit will be low-margin manufacturers who sell to discount chains. One of those is Topson Downs in Los Angeles, which does private-label apparel for Wal-Mart Stores Inc. and Target Corp. The largest chunk of its production is done in China, with manufacturing also booked in Cambodia, Vietnam, Bangladesh, the Philippines, Central America and Mexico.

“China will continue to be our mainstay,” said Myrna Grief, Topson Downs’ director of imports and global compliance, noting that 30 percent to 40 percent of production is done there. “Fabric is made there. There is speed to market, which is really important. China offers what other countries don’t.”

Even though costs are rising in China, Topson Downs can’t raise prices to its retailers. “Retailers are being awfully, awfully tough,” Grief said. “Other issues have come up this year, with the price of cotton and the price of heathery yarns and slub yarns. We have been hard-pressed to adjust our price as much as we would like to.”

T-shirt and underwear maker Hanesbrands is playing down the impact of China’s decision to float its currency because the North Carolina–based company sources in a number of countries. It said a 5 percent change in the yuan will have just a $1.1 million to $1.5 million pre-tax effect on company costs in 2011 and an even smaller effect in 2010.

“The competitiveness of our balanced global supply chain is a key pillar to our growth strategy,” said Gerald Evans, Hanesbrands’ president of international business and global supply chain.

Los Angeles designer Sue Wong, who does all her manufacturing in China, said she will stay there because China’s skilled workers can inexpensively fashion her intricate designs into chic dresses that sell for as little as $368. However, she will be raising wholesale price points by as much as 20 percent to recuperate climbing silk and labor costs.

Second Generation’s Weisberg will keep much of his production in China even though he has seen costs rise since the beginning of the year. He is trying to pass some of those costs on to retailers, such as JCPenney Co. Inc., Macy’s Inc., Nordstrom Inc. and Belk Inc. “There hasn’t been any price inflation on this level for a long time,” he said, noting he has been lobbying for wholesale-price increases. “Sometimes we get the [price] increases, and sometimes we don’t.”