China rapidly turning into the factory of the world

In the first of a four-part series, retail reporter Karen Chan explores where New Zealand really goes shopping. We find China is rapidly crowding out low-cost production in places such as the Philippines, Indonesia and Malaysia. Meanwhile, parts of the retail sector such as clothing vendors are moving towards selling Chinese goods almost exclusively.

Pick up a new coat from a Queen St chain store in a few years and it will almost inevitably have come from China.

Buy it today and there is a high chance it was still stitched together in one of the newly created industrial towns springing up all over what has been dubbed the factory of the world.

It is a sign of the steady shift in sentiment from the fears of the 1980s, when campaigns such as "Buy New Zealand Made" sprang up to urge people to shun imports and protect local jobs, to the reality of 2005: consumers buy cheap goods.

Retailers are supplying goods from overseas factories in ever-increasing quantities and more and more that means from China.

"The price differential has become so huge as to make it impractical to go anywhere else," said Daniel Silva, secretary of the Importers Institute, which represents 300 New Zealand importers.

Although much attention has been paid to the country's exports, imports - where consumer goods come from and how much of New Zealand's retail shelves imports occupy - have received far less scrutiny. Yet consumers have bought well over $68 billion worth of imported consumer goods since 1990.

In the year to this May, more than 30 per cent of the $6.3 billion of consumer goods imported were from China.

China's ascendance has come at a cost to others.

"For quite some time, there has been a whole raft of Asian countries that New Zealand firms dealt with - the Philippines, Indonesia, Malaysia. In almost every industry that is now focused tightly on China," said Greg Muir, chief executive of children'swear retail chain Pumpkin Patch.

The Retailers Association said goods of Chinese origin alone now accounted for more than half the total of consumer sales in the major chain stores. Among individual businesses the level of overall imports could be even higher.

Major retailers said 20 to 95 per cent of the goods on their shelves were sourced internationally.

The rising tide of imports on shelves has its roots in the 1980s, with the easing of restrictions on import licensing in 1985.

John Albertson, association chief executive, can recall times before that when almost everything sold in the shops bore a Made in New Zealand label.

"In the 1960s or 1970s, if you wanted to buy a new car you had to have your own source of overseas funds or you went on a waiting list. It was a wonderful period of time, when demand absolutely outstripped supply," he said.

Fifteen years ago, imports of consumer goods were dominated by Australia, followed by Japan, Britain and the United States, in that order.

China passed Australia as a source of imports in the year to May 2001 and has increased its lead over our near neighbour (now in second place) each year since.

Japan has dropped from second to fifth place as a source of consumer goods, and the US and Britain swapped ranks and are now in third and fourth place respectively.

Consumer goods worth at least $1 million were imported from 65 countries in the year to this May - these include Honduras, Iran and Cuba.

But it is China's name on the lips of every major retailer.

"There is daylight between China and everyone else," said John Rathbun, general manager of co-operative hardware retailer Mitre 10. "China is the biggest - and growing."

He estimates that well over half Mitre 10's goods are imported, either directly or through importers.

Although economic experts suggest low-cost countries such as Mozambique and Romania could benefit as Chinese wages rise, local retailers maintain China's population, modern factories and infrastructure, as well as its proximity to New Zealand, will allow it to keep its crown for some time.

Evidence is emerging that huge US retailers such as Wal-Mart and Gap have begun to turn their attention to India for cheap clothing and jewellery because they fear China will become more costly.

Before the unexpectedly small revaluation of the Chinese currency, the yuan, announced last week, US consultants were predicting revaluation could swell retailers' costs by 10 per cent over the next two years.

A spokesperson for The Warehouse said the revaluation of the yuan would be a factor in considering where to source products in the long term.

But in the short term, with orders already in the pipeline, the impact would be minimal.

The dominance of Chinese goods is at its clearest in the clothing industry.

Statistics New Zealand data shows China's presence in that industry has grown remarkably.

Imports of semi-durable clothing such as coats sourced from mainland China jumped 20-fold from $22 million in the year to May 1990, to $463 million in the year to this May - to make up just under 74 per cent of the total imports in that category.

The figures indicate New Zealand is already well on its way down the path predicted in a survey by US strategic consultants Booz Allen Hamilton that found apparel companies planned to spend up to 95 per cent of their procurement budget in low-cost countries by 2008.

They also support the conventional wisdom a number of retailers referred to: that China will dress almost everyone in the West within a few short years.

In New Zealand, there is still a 19 per cent tariff on apparel imports: that is to reduce to 10 per cent in 2009.

Reserve Bank economic analyst Hannah Kite estimates in her overview of the entire retail sector that 20 per cent of retail sales are directly imported consumer goods, but admits the figure is likely to be an understatement.

On the one hand, retail sales figures are swelled by items such as accommodation and fresh food. On the other, data for imported consumer goods excludes tariffs and is based on the value of the imports when they enter the country, not the marked-up price they are sold for.

One industry expert said imports typically sold for a price double the sum the imported item was worth when it arrived in New Zealand, plus GST.

That would imply that imports could have at least twice the slice of the retail sales pie implied by the Reserve Bank estimate.

Why have imports of consumer goods reached such levels? Put simply: price.

Kite said the strong dollar and falling world prices of manufactured goods have been a spur. Prices of imported consumer goods were 12 per cent lower last year than five years earlier.

A strong improvement in the quality of Chinese-made goods, without a corresponding price rise, has also smoothed the path of imports.

"China was always cheap but couldn't necessarily provide the variety or the quality seen from other countries.

"China has changed. The early part of this decade saw massive change in its ability to get quality right," said Muir.

What does the level of imports from China mean?

Economic historian Professor Gary Hawke, of Victoria University, said New Zealand's overall level of imports was lower than most realised. Most Asian countries were more import-dependent than this country.

Although import prices could be influenced by freight and oil costs, retailers said intense competition here insulated consumers from some of those effects.

Of more concern was whether New Zealand retailers could keep factory space in Asia if far larger markets such as Europe or the US allowed higher volumes into their market, particularly of such items as clothing and footwear.

"New Zealand is small so our production runs are small. They [retailers] may not get that top end factory any more, so they could find the quality is not so good," said Liz Francis, chief executive of industry development group Textiles New Zealand.

She said retailers might not find any attempt to switch back to domestic production as easy as they found the shift to foreign factories.

Albertson agreed. "What we're importing out of China is a mere detail versus some. The great risk is walking away from having any productive capacity of our own."

Tomorrow: The Home Front. Bronwyn Sell checks the pulse of manufacturing in New Zealand and talks to some of the hardy companies that continue to make goods here.

Friday: Global Realities. Some of the world's biggest brands have been burned by global sourcing and rethought the way they do business as a result. We also look at conditions closer to home, in the Pacific.

Saturday: Ethical Dilemmas. Do New Zealand retailers know the conditions under which their merchandise is produced? From the views of international experts to the growing market for Fair Trade goods, we canvass the ethical considerations and the business risk.