Shoemaking has long been a mainstay of Guangdong province's manufacturing sector. Unless shoemakers adapt to a changing business climate, they may become a rarity, writes Li Suwang in China Business Net

Latest figures show that southern China’s Guangdong province exported nearly 30% less shoes year-on-year in the first two months of this year, indicating shoe making – an economic pillar of the export-driven Pearl River Delta – faces a tough task ahead as the foreign trade climate deteriorates.

Guangzhou customs figures show the province exported 490 million pairs of shoes in the first two months, down 27.5% year-on-year. Earnings were US$1.59 billion, down just 0.6% year-on-year. Of the 490 million pairs, 190 million were made by the province’s private sector, down 41.1% year-on-year, while 190 million were made by foreign-funded shoe joint ventures, down 8.9% year-on-year. Private and joint venture shoemakers exported 77.6% of the shoes they produced.

An analyst with Guangzhou customs said the export decline was due largely to reduced export tax rebates on shoes, fallout from the US sub-prime mortgage fiasco, anti-dumping barriers and a fall in the number of shoemakers in the province.

The US is the largest export destination for Guangdong shoemakers. The analyst said that the province’s shoemaking industry has come under increasing pressure as the fall-out from the sub-prime mortgage crisis, which broke last March, has continued to escalate. Guangdong exported 1.08 billion pairs of shoes to the US in 2007, down just 3.4% year-on-year, but the export volume in the first two months of this year was just 190 million, down 12% year-on-year.

Meanwhile, leather shoe exports to the EU were hit with anti-dumping duties. Guangdong exported 77.77 million pairs of shoes to the EU last year, down 6.5% year-on-year. Exports in the first two months of this year amounted to just 13.3 million pairs, down 17.5% year-on-year. Similar anti-dumping duties were imposed in Pakistan, Peru, Venezuela and Canada.

The rising yuan also had an impact, as did the increased tax burden on foreign-funded firms, while the new labor law further squeezed the already tight profit margins of the labor-intensive manufacturers in the province.

Guangzhou customs figures show the number of shoemakers in the Pearl River Delta stood at 1,512 as at the end of February, 1,855 less than a year earlier. The number of private firms decreased by 1,484, foreign-funded firms decreased by 92, and state-owned firms decreased by 23. According to the Asia Footwear Association, over 1,000 shoe plants have either been shut down or shifted in Dongguan and Huizhou over the last year.

Li Peng, the secretary of the association, said that some countries had started placing orders with other Asian countries such as Vietnam, Cambodia, Indonesia and India. Some shoemakers from Guangdong province have already begun building plants in these countries, but there had not yet been any large-scale shifts. It is expected it will take these countries two to three years to further their shoemaking infrastructure.

“Guangdong’s shoe export decline was because many factories were reluctant to take orders fearing they would lose money while foreign buyers did not want to increase prices so they could not find cheap sellers in China,” Li said. “But it could be a good opportunity to introduce value-added elements to Guangdong’s shoemaking industry.”

Wu Zhenchang, chairman of Guangzhou Panyu Chuangxin Footware Co Ltd, said that the profit margins from processing name brands like Nike was still acceptable, but that the company had visited India and Vietnam to study the feasibility of shifting its assembly lines there.

The average price for shoes exported from Guangdong province was US$3.20 per pair in the first two months, up 37% year-on-year. Li Peng said the price increment was slower than the pace costs had grown. “Only large manufacturers were able to bargain the price up while small firms did not have any power to haggle,” Li pointed out. “The government needs to introduce some policies to protect or help upgrade the industry; otherwise the situation in Taiwan and South Korea, where the local shoemaking sector shrank rapidly as a result of rising labor costs, will be repeated here.”

This article originally appeared in Chinese in China Business Net on March 21, 2008. The China Perspective takes no responsibility for the accuracy of the original article.