Li & Fung: China Consumption Growth to Bring Major Change

In What's New, Industry News by Just Style

china-thumbs-upParis–Not content with dominating the global exporting landscape, China is now switching its focus to growth in domestic consumption. And according to Li & Fung chairman William Fung, this is likely to lead to “a rather bumpy ride” for the apparel industry.

Speaking at the 2014 World Retail Congress in Paris today, Li & Fung chairman William Fung shared his thoughts on China, a “funny” country that operates in cycles of 30 years.

China Cycles
“From the beginning of the People’s Republic, the world lost China. We conducted our business without China. All of our global supply chains linked everywhere else, primarily in the U.S. and Europe. Then China burst on the world scene and they conquered the world. They became the world’s factory.”

Fung told attendees that, after 30 years, China had now reached a point where this was no longer sustainable. It is now setting in place its second engine for growth behind exports, he said: domestic consumption.

“China is talking about slowing down GDP growth, to 7.5%. However, their retail business is projecting almost double that, and we think at Li & Fung that from the next 30 years, China will become the largest consumption country in the world.”

Considering overall consumption, however, China still has a long way to go, Fung believes, if it wants to catch up with the U.S. China’s GDP is currently half of America’s, he noted, and the proportion of consumption in the U.S. is currently around 70%. China’s consumption, he pointed out, is half of this.

“It will take another 30 years for China to catch up, but the impact on the world will be tremendous. They will have the same impact on the world as they have in the last 30 years.”

A Question of Consumption
One of the things Fung says China is doing to promote this idea of consumption is by putting money in the pockets of the people, and the workers.

“They are mandating a 13.5% increase in wages every year for five years. Most people have missed this point. No country has ever tried to increase [wages] at that capacity. This is just typical of the sort of action that China can take. It has a government that doesn’t have same checks and balances as the rest of the world, so when they change they can do it immediately, and I think that is what will be disruptive about China.”

Fung pointed to rapidly rising wages in China and the emergence of a migration in manufacturing out of the country to South East Asia, primarily, to countries like Vietnam, and also maybe India.

“Frankly, the big markets like Cambodia…and the Bangladesh’s, they don’t have the same size of China.”

So what does that mean on the supply side? The chances are, Fung said, that consumer goods prices are going up.

“Basically, my view is that up to 2009, China exported deflation. Today, China has pushed consumer prices down. Because of China and their labor, they have put a cap on the rest of the supply world. What that means is, for 30 years people like us have enjoyed good margins because production costs were so low.”

Material Issues
Going forward, with costs rising in China, Fung suggests the global apparel industry should prepare itself for a rather bumpy ride.

“It’s not going to be so easy any more. Raw materials have been stable and going down but that won’t be the case at the next stage when [China] starts consuming. The middle class is developing so fast, and India is coming up behind. When they start [consuming], I’m predicting a run of price increases and a squeeze on margins unless we can pass it on. It means China will disrupt the world. That is what I’m projecting.”

In the 30 years to 2009, the country added 1bn workers to its market. But Fung told attendees he sees around 100m tourists set to come out of China every year.

“China will add more than 1bn of middle-class shoppers to the world, both as an opportunity and a threat,” he said.

Bangladesh, he added, has created a “sea-change” in the way the world sources product.

Consumers were previously concerned about product cost and quality, but “in the future, they’re asking how is this made? Not just asking what it is. Is it made in a sweatshop? Is it made by an underage worker? Is it made through a process that pollutes the water, or air? Is it causing cancer through the dyes being used? And also is the health and safety of the workers being jeaopardized?

“They will no longer accept workplaces not being compliant. That is going to change, how we look at sourcing around the world.

“There are going to be problems, he added, citing labor safety, but stressed: “The world is no longer willing to accept that. I predict that will be a huge impact on the world.”

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