A new policy in China’s Guangdong province, which builds 75% of footwear consumed in the US, makes clear the government’s intent to shift capacity to a higher value mix of goods.
China’s Guangdong province announced it will invest more than 50 billion yuan ($7.32 billion) in the next five years to implement a new labor and industry strategy, known as "Double Transfer," which aims to transfer labor-intensive industries from the Pearl River Delta (PRD) to less developed regions of the province. The end goal is to accelerate the PRD from a traditional manufacturing industry base to a center of service-oriented, advanced manufacturing systems. In other words….not footwear or apparel. As a sidenote, I estimate that close to 75% of US footwear consumption originates in the PRD.
So far, many small and medium-sized enterprises in the PRD have closed or suspended operation, with a third of footwear capacity closing over the past year alone. So many on Wall Street hit me with the ‘it’s cyclical argument’ in that once capacity becomes tighter in China, then pricing goes up and more plant space will be built. My view is that it is all about duration. If you’re talking 5+ years, then I agree. Anything less then the argument holds no water.
The Chinese government simply does not want the developed cities to be manufacturing low value goods. Semi chips? Yes. Cotton Ts? No. Proof positive of this is when the government instituted mandatory vacation back pay to apparel/footwear factories earlier this year. If you were a small factory on the brink of making money, you had to dole out cash too all employees at your factory for unused vacation over multi-years. Yes, the easier route in the decision tree is to close the factory doors.
The benefits of this ‘Double Transfer’ initiative to less developed parts of the PRD will help, but we’re talking about building up highways and infrastructure. This is more of a ‘next decade thing’ than a ‘next year thing’. Before costs start to come down due to more capacity, I think they’ll double at a minimum. The worst is yet to come, and those costs will flow through to marginal US brands and retailers.