BEIJING -- China is getting used to what its top government official called a "new normal." At the latest annual National People's Congress, the official cut the nation's growth target by 0.5 percentage point compared with a year earlier to 7%. Double-digit growth, he said, is over. From now on, China's economy will be more stable and based on quality.
Business leaders operating in China face a number of problems that they are now expected to take seriously. Overproduction, environmental pollution and higher labor costs must be tackled.
Qiu Yafu, chairman of Shandong Ruyi Science & Technology Group, a major textile maker in China, said his company aims for further growth through automation and computerization.
Q: Labor and raw materials costs are rising, threatening the position of China as the "world's factory." Why?
A: Manufacturers in China feel the business environment is getting tougher and tougher. In the case of the textile industry, the worst news is soaring prices for raw materials such as cotton fiber and wool. Such materials represent 50-70% of our entire costs. They are expensive because prices of homegrown materials are set high, probably 30% higher than those from abroad, due to Beijing's protectionist policies. These policies are undermining the competitiveness of Chinese textile makers.
The second problem is higher utility costs. In some Chinese coastal areas, electricity costs are double those of the U.S. This is dragging down manufacturers operating in such areas.
What is worse, labor costs in China have become 500-600% higher than those in Pakistan, India and Bangladesh, and 200-300% higher than Vietnam's. Textile producers are increasingly relocating their factories to those countries.
Consumer prices in China are also stringently controlled. So it is difficult for textile makers to pass on higher costs to consumers. Therefore, 30-50% of textile companies seem to be unable to make profits.
Q: Do you think Chinese companies can continue to follow a labor-intensive model of production at home?
A: We have hope. First, China's consumer market is growing. Consumption in China is so powerful that it influences the world's fashions and trends. We still have a great advantage by making products in a place with enormous demand.
Furthermore, manufacturers can perform all the processes in a value chain from design, development, production and sales here. Unlike peers in other countries, makers here can conduct all business processes, upstream and downstream, in one place.
Chinese textile and apparel makers, for example, boast some of the most advanced production technology in the world. The quality of made-in-China products has also significantly improved. Our next task is to make our business more sophisticated by establishing brands specific to China and other approaches.
Q: How will you do that?
A: The key is automation and computerization. Shandong Ruyi has invested $1 billion on a large spinning mill that annually turns out 1 million spindles in Yinchuan, Ningxia Hui Autonomous Region. The new factory features the state-of-the-art robots and a control system that significantly improves production efficiency. Previously, we needed 80-100 workers to produce 10,000 spindles; we need less than 15 now.
The geographic advantage is not negligible, either. In western Chinese cities such as Yinchuan, utility costs are about a third of those in coastal areas.
We also plan to expand a large factory in the Xinjiang Uihgur Autonomous Region by the end of the year. Xinjiang is strategically a key point in the Silk Road Economic Belt scheme. Establishing production bases in this area would give us a leg up in marketing our products to central Asian countries such as India and Pakistan, which have a combined population of about 2 billion. It will be a good opportunity to pitch Chinese brands.
Q: Authorities are tightening regulations on the environment. What actions have you taken?
A: Last year, we closed three factories that were discharging polluting waste water. The environmental standards in the areas along the canals that are part of South-North Water Transfer Project are stricter than those in many developed countries. The project was launched to channel water from the Yangtze River in southern China to the north of the country through canal systems.
The same goes for the air pollution problem. Makers in a variety of sectors are now required to install cutting-edge equipment to control pollution. Manufacturers that cannot install such facilities will not survive. Some companies will inevitably have to pay more for environment protection measures eventually.
Q: Shandong Ruyi is partnering with Japanese companies. Trading house Itochu invested in Shandong, while your company owns equity in Japanese apparel company Renown. What is the purpose of these deals?
A: Japanese firms have advanced management methods in investment and credit areas. Moreover, they have outstanding brand power in emerging markets such as those in Southeast Asia. Combined with our scale and logistics capabilities, our partnerships create innumerable possibilities. Besides, our corporate culture is quite similar to that of our Japanese counterparts. We hope to cooperate and expand abroad with them.
Interviewed by Nikkei staff writer Tetsuya Abe