Wandering in the aisles of Expo Riva Schuh, the mass-market trade show held on June 15-18 in northern Italy, before the announcement at the end of the month that the U.S. and China are resuming trade negotiations, was a great way to gather facts and anecdotes not only about the impact of the trade war between the two countries, but also about the fierce competition that the Asian powerhouse is facing from other emerging economies.
The demand from U.S. clients was declining prior to the announcement, according to Alex Goi, sales director at New Look GZ, a Guangzhou-based footwear firm that sells 1.5 million pairs a year entirely made in China. The bulk of its production is outsourced to third parties and the company relies wholly on exports.
He said the sentiment in China is that the trade war will be protracted. “It's not a question of trade but hegemony. We are all just collateral,” he said. He pointed out that profit margins for Chinese shoe producers are “razor-thin” and that it would not be possible for them to absorb new U.S. tariff hikes. They were raised already once last September.
Goi claimed that China remains the most competitive industry for polyurethane shoes destined to the fast-fashion segment, thanks to its comprehensive supply chain, but a country like Vietnam has the advantage of not having tariffs with the U.S. for shoes, offsetting its disadvantage over China.
New Look's business model is not adapted to selling in China, where a retail presence is necessary, prompting the company to search for new foreign markets. Goi pointed out that seeking to increase sales to Europe “won't work out” because the market is already saturated for his company and not growing. Europe is New Look's main market, followed by the U.S. The Middle East and Asia largely account for the rest.
He ruled out attacking the Indian market because of local import tariffs but mentioned opportunities in southeastern Asian countries like Indonesia, Vietnam and the Philippines. ”We can't fight the Indians on their own turf,” Goi said. On the other hand, catering for southeast Asian clients will require rethinking the firm's product line, which is more geared toward European tastes. Goi noted that Asian consumers want simpler shoes and have a lower purchasing power than Europeans.
Like many other Chinese and Taiwanese shoe manufacturers, New Look is also mulling over a possible shift of production outside of China, which would require setting up a new logistics team. Goi said that he is in a fact-finding stage but in his opinion there is no valid alternative to China. “It is too late to go to Vietnam” where wages are already high and “too early for Bangladesh” where there is a lack of skills, he added.
Terry Huang, general manager of Wahyi Group, also situated in Guanzhou, was optimistic that the U.S. and China would go back to the negotiating table, arguing that it is impossible to separate the two economies. Wahyi has annual revenues of about $50 million and ships five million pairs per year. It manufactures 1.5 million pairs and relies on third parties for the remainder. It is adding three lines to its existing five, which will lift its own annual production capacity to 3 million pairs.
The company relies fully on exports and is not interested in its domestic market, which Huang rates “as the most competitive in the world.” Europe is its main market, absorbing three million pairs, with Italy, Germany and Spain its leading local markets. The group sells one million pairs in the U.S, Skechers being its only client in the country. Huang noted that Skechers wants manufacturing to be moved outside China, and he revealed that Wahyi is currently in talks with a large potential European sports brand that is also shunning China and wants manufacturing to be done in Vietnam. Huang said that his company is looking for suppliers in Vietnam and Bangladesh and is considering building a factory in Cambodia.
“Everybody is starting to move,” he concluded. He noted that the capacity in China will be used to serve other markets. Wahyi already has a presence in South America, where it sells 200,000 pairs a year and has offices in Chile, Colombia, Paraguay and Argentina. The company is seeking to lure more European brands with an international presence and next year it will try to enter new Asian markets such as Japan and South Korea. Wahyi already works with European brands like 4F, Michelin, Hi-Tec and Lotto. The company is also studying the development of its own brand, called No Way. For the time being this is only a concept, but the ambition is to create an international brand.