The Economist, January 2015
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This is an excerpt:
But labour costs will always be an issue in Shenzhen.
Textiles were once a cornerstone of Hong Kong's vibrant manufacturing sector, but in line with other industries production has largely shifted to cheaper markets, particularly the mainland. Many textile firms however remain headquartered in the SAR and base finance and administrative functions there—as is the case with Lever Style, a garment maker with an over-50-year history in Hong Kong that produces clothes for top brands like Armani, Calvin Klein and Ralph Lauren.
While low costs and well-established infrastructure and cultural links once made mainland China a natural production base for Hong Kong companies, trends are changing - and FTAs are playing a role in that process. Lever Style chairman and CEO Stanley Szeto says rising wages and other factors are making China increasingly uncompetitive, and for the last four years the firm has been shifting manufacturing to supplier factories in Southeast Asia, particularly Vietnam.
The nature of its business means Lever Style finds little use for the trade agreements to which Hong Kong itself is a direct party, such as the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), since it rarely ships products from Hong Kong. However it has successfully used the China-ASEAN free trade agreement to lower production costs for goods sold in China, which is increasingly a market for the company as well as a manufacturing centre.
With most goods now enjoying duty-free access between China and Vietnam, it is now cost effective for Lever Style to ship fabric from China to lower-cost factories in Vietnam, then re-export the finished products back to China to sell there.
However, the strategy has had its hiccups. "It took a while just to get the hang of it, how to fill in all the forms at customs," Mr Szeto says. "Clearance may take days - sometimes they want to inspect the cargo and it takes another week, so you have to allow for that bureaucracy."
Internationally, duties in the textile sector remain relatively high, especially for synthetic product categories, where they can top 30%. Mr Szeto says Lever Style is therefore watching progress on the US-led Trans-Pacific Partnership (TPP) with a mix of excitement and trepidation. China has yet to join talks on the agreement, and if it suddenly results in sweeping tariff cuts in other markets, some companies could face short-term difficulty as a result.
"For companies which are still quite heavily reliant on China, the sooner it [TPP] happens, the worse it is for them, because they become less cost competitive, while their competitors become cheaper," says Mr Szeto.
As the firm's ongoing efforts to move more production out of China to South-east Asia progress, however, the TPP becomes a more compelling proposition. Multiple ASEAN countries, including Brunei, Singapore, Malaysia and Vietnam, have signed on to the initiative, opening the possibility of Lever Style's Vietnam-produced goods enjoying lower-tariff access to what is still the company's biggest market—the US. "If we can [shift more production] before TPP comes into effect, then we would be in a better position."