Jeremy Wallace

Background
http://www.thestandard.com.hk/stdn/std/Business/GF16Ae05.html
http://www.globalmanufacture.net/home/communities/production/capacity.cfm

Our meeting with Weiqiao has been pushed back to 4pm local time. I hope that this does not mean another freakin’ banquet and alcohol.

The following Forbes article has a couple of interesting political points related to Weiqiao. The article is a profile of Hongdou, a private textile manufacturer outside of Shanghai.

http://www.forbes.com/global/2005/0207/020_print.html

Hongdou focused on its home market initially because it had little choice: China’s central government doled out valuable export rights to state-owned firms at the expense of private firms. “A lot of foreign companies have called over the years and asked if I have quota available, and I’ve had to say no, I don’t,” says Zhou. “So you know who opposes the end of the quota system the most in China? The state-owned trading companies.” To get what was left of quota allocations after the state firms got their cut, private manufacturers like Zhou had to travel to Beijing and grovel to government officials.

Whenever there is more demand than supply, there are allocative decisions to be made and politics to be had….

Sweeping trade liberalization and the fitful end of the quota system in China will end much of that. In principle, companies will export freely. As they move more orders into low-cost China, though, foreign importers will help consolidate the number of suppliers they work with and push prices downward.

It is unclear to me the mechanism that moves the logic forward in the above paragraph. Let’s break it up into two pieces. First, it could be that foreign orders imply reliable orders which allow for more investment which will lead to fewer suppliers. This seems to be the logic implied. But are textiles as dominated by economies of scale as much as other industries? Shirts aren’t cars. It is not clear to me that an increase in foreign imports will reduce the number of firms. Second, an increase in foreign buyers of Chinese textiles could only lead to a reduction in prices if one thought that there was underinvestment in the industry generally and oligopolistic profits and that the removal of trade barriers will lead to an increase in competition and a reduction of margins. This is also likely given the massive margins that the companies are reporting (18-20%). Yet Weiqiao sells half of its production in the domestic market, and it would seem difficult to believe that there is no competition in the domestic market (unless exports subsidize domestic production).

That could squeeze Hongdou because its wages–about $150 per month–and other costs run higher than in the country’s southern export regions, and it is too big to flout pollution rules. To compete, Hongdou will shift toward higher-value manufacturing and above all expand sales of Hongdou-brand suits and shirts. Zhou’s ambitious dream is to duplicate Italy’s quality image. “If I have a suit that says ‘Made in China,’ I can sell it for 1,000 yuan. If it says, ‘Made in Milan,’ I can sell it for ten times that much.”

Why are wages higher at Hongdou than other places? Do they receive any benefits from the higher wages akin to Ford’s decision to pay $5 a day? (http://www.detnews.com/2003/specialreport/0306/09/f10-186947.htm)

The point on environmental regulations is interesting. Sure, the amount of pollution which it produces will be vastly larger than other smaller producers, but Hongdou should have methods to fight this. First, whereas small firms do not employ everyone around, it is quite likely that Hongdou workers surround the factory and thus would not have an incentive to report any environmental violations. Second, Hongdou has more money to make sure that environmental regulators look the other way, as it were.

Finally, if Zhou’s suits really are as good as those made in Milan, then there should be some excellent arbitrage opportunities….