Fortunes Lost and Regained Show How Made-in-China Is Changing

  • Two friends seek to escape low-cost labor trap in textiles
  • China is seeking to push manufacturing sector up value chain

Employees work along a production line in Shenzhen.

Photographer: Thomas Lee/Bloomberg

Wang Youjun and Li Chunlong -- two friends who’d made their fortune trading cheap textiles in the years after China joined the World Trade Organization -- each lost a bundle when a buyer went bust five years ago.

Now, they’re back, forging a path that illustrates China’s historic shift away from low-margin export businesses and into higher-end manufacturing. As labor costs and Southeast Asian competitors rise, the two are staking their fortunes on climbing the value chain and feeding demand from an increasingly well-heeled local middle class.

Meeting again over coffee in a hangar-sized hall among the 25,000 exhibitors at Guangzhou’s massive trade fair in November, the two reflected on how the loss of some $3.3 million dollars between them in 2012 forced them to change things up. Li now pitches his agency business toward wealthier domestic consumers. Wang is trying to crack the global market for high-tech sportswear with his runner’s compression leggings.

“If we continue to make basic, low-end stuff, China’s labor-intensive model has ten years left at most,” said Wang, surrounded by rails of neon running outfits, order-books and brochures in his booth. “Innovative, high-value products will always have a place though.”

High Value

Wang’s determination to boost the value-added component of his Runtiger brand of functional sportswear fits the ambition outlined by China’s leadership. A couple of years ago, it unveiled its Made in China 2025 campaign, which aims to move away from the nation’s image as a maker of cheap, low-end goods. The sweeping initiative aims toward high value-added production and envisages global competitiveness across 10 key industries from robots to medical devices.

Such ambition has seen advanced-manufacturing milestones like the first flight of the C919 passenger jet, made by state-owned Commercial Aircraft Corp. of China, this year. China’s share of high value-added exports globally has quadrupled to about 16 percent in 2015 since 2001, according to Morgan Stanley calculations based on WTO data.

Wang, 44, started his trade agency in 2001, the same year China joined the WTO. The "factory of the world" has seen its share of global exports surge by more than 2 1/2 times since then. Hundreds of millions of rural citizens flooded to coastal factories, with their low-cost labor an unbeatable advantage for China’s output.

The former English teacher rode the boom, snapping up a villa and a Mercedes during the peak years around 2008. Things started to slide after 2010. Costs rose, migrant workers were increasingly hard to find, and foreign buyers became pickier and bargained harder.

“We had one pricing war after another, and it became a dead end," Wang said. His biggest customer started to delay payments in 2011, and went bankrupt the following year. His profit since the inception of the firm, some $3 million, was wiped out overnight, he says.

“I’m not religious, but people in their most desperate times pray to gods and Buddha for help. I drove for a few hours to temples.”

Li, a trim, shaven-headed 41-year old whom Wang got to know when selling to the same buyer, was more vigilant. Concerned over the unusually long payment cycles, he cut supply before things turned even worse. He got away with $300,000 in losses, but had a similar case two years later, he says.

"Things got harder and harder," said Li, wearing a rare badge reading "Domestic Buyer" amid throngs of exporters and foreign purchasers at the fair. "All of our competitors used to be in China, and now they are in Vietnam, Cambodia, Bangladesh."

Li has new maxim these days: "Use two legs to walk," meaning sell to both domestic and foreign customers. He still exports $2 shirts to supermarkets in U.S. and Europe, but is also focusing on sourcing for upmarket brands within China, aiming to boost his share of local sales to 50 percent in 2018 from 20 percent this year.

"If the garment producers still look at the domestic market in the old way, they would inevitably lead themselves into a crisis," said Li, between chatting to Wang’s staff at the booth about margins, financing and payment cycles. "They don’t have any advantages left producing and exporting the old, low-end stuff. They have to seize the domestic market."

Old Methods

As China seeks to get a leg-up on higher-technology manufacturing, it isn’t averse to using some old methods. For Wang, a visit to Japan in 2013 kick-started his transition: a shopping mall full of expensive, sleekly designed and technology-intensive sportswear in Osaka was a revelation. He brought back some 40,000 yuan ($6,000) of samples by maxing out his credit card and set about figuring out how they were made and how to make his own versions.

It took five years working “day and night” to design and produce his own compression leggings, which are claimed to improve the performance of runners by increasing oxygen supply to muscles and reducing fatigue. But it wasn’t always easy. At the Xiamen marathon this year, Wang felt so uncomfortable as a prototype chafed that he took six hours to complete it. He ran the Shanghai marathon wearing a newer version last month in 4 hours 39 minutes.

The legging, after more than 500 failed trials, is ready for the market. Wang says he wants Runtiger, which holds a Chinese patent, to compete with specialized makers of compression sportswear like Skins or X-bionics -- but be a quarter of the price.

"We everyday people are the neurons of the Chinese economy," Wang said. "We never wait, never ask for anything, but always are seeking changes, seeking better ways to do things."

— With assistance by Xiaoqing Pi

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