12 More Brands to Alter China’s Exports

Sunday, May 10, 2009 22:06
Posted in category Uncategorized

While doing a bit of research for some of last weeks posts, I came across the article Twelve Major Brands That Will Disappear.  An article that caught my interest for many reasons, but kept my attention when I considered the fact that many of the firms were sourcing from China, and that their closures could spell even more trouble for China’s already weakened exports:

1. Avis/Budget
2. Borders – Product Made in China
3. Crocs – Made in China
4. Saturn – Parts made in China
5. Esquire Magazine
6. Gap – Clothing made in China
7. Architectural Digest Magazine
8. The Chrysler – Parts Made in China
9. Eddie Bauer – Clothing and product made in China
10. Palm – Components and gear made in China

Taking a minute to let the imagination run wild, and consider for a minute that many firms in the US were forced to walk on their own financial feet (i.e. were unable to secure lines of credit). A condition many firms were unused to – operating a cash business – what is occurring is that the cash positions for many firms (retail / auto in particular) are deteriorating fast. Which will increase the risk of further closures.

Were this to happen, this would filter back another wave of manufacturing instability in China as orders for these firms are lost. Orders that were supposedly rebounding (if you believe the statistics), in areas that were less than decoupled from the export economy.

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8 Responses to “12 More Brands to Alter China’s Exports”

  1. Craig says:

    May 11th, 2009 at 12:38 am

    Hooray! Crocs can’t die fast enough.

  2. Dan says:

    May 11th, 2009 at 12:03 pm

    Only if you assume (wrongly) that the products these companies were having made in China are not going to be replaced by other companies making similar products, also in China. In fact, I could make the argument that the demise of some of these companies will actually lead to increased production in China because (Eddie Bauer is a great example) the companies that are likely to replace the sales of these companies probably do even more manufacturing in China than the companies being replaced.

    Just by way of example, I represent a US company that is on the verge of going under. This company used to have around 3000 employees and it is now down to around 1000. A couple years ago, we were working with them on sourcing more product from China. But the short term costs of starting the sourcing turned out to be too high so it had to quit the project, even though it made complete sense for the company long term. Now, it probably does less sourcing from China than any of its competitors. Yet, it sources about 30% of its components from China. So by your logic, the demise of this company will hurt China manufacturing, but instead, what is going to happen is that the competitors of this company will end up getting the sales that my client used to get and since these competitors outsource around 60 to 90% of their components to China, Chinese manufacturing is going to benefit.

    It is my impression that the better run and healthier companies tend to do more outsourcing to China than the ones on the verge of going under and so, overall, I would think that the demise of weak companies (with stronger companies eating up their prior sales) will have either no impact on Chinese manufacturing or will be net positive.

  3. Rich says:

    May 11th, 2009 at 8:55 pm

    Craig – you are evil!

    R

  4. Rich says:

    May 11th, 2009 at 9:08 pm

    Dan

    So, your logic is that if Crocs fails, Nike (or some alternative) will pick up the remaining business from the closure, and (specific to China) that the economy here is going to take up the slack anyway.

    1) Under normal economies (and let’s not kid ourselves about the severity of the problems, or how far we are from the bottom), I might be inclined to agree. should Nike fail, Adidas would see a bump.

    However, even under the best conditions, there is no 1-for-1 gain here, and the market will typically not see a net positive.

    Under the current case, people are closing from a lack of demand and a lack of liquidity, and while the lack of demand can arise from a crappy product (Craig I believe would argue Crocs is one of them), the primary reason for the fall off in demand has nothing to do with product. It is all economic.

    Consumers are cutting back, not expanding, so any losses will remain losses in the US economy. Especially should the consumer credit groups start falling over (as this report suggests is on the way: Next challenge for banks: Credit card losses.

    2) the myth that is the Chinese domestic market is quickly evaporating, and I really cannot stress the fact that any gain we saw in China over the last quarter were largely driven by incentives, coupons, and sales.

    Right now, I know of a global 25 that is laying off an entire division in downtown Shanghai (200 people), and last month it was a major retailer shutting down a sourcing office in downtown Shanghai (250 people), and a number of firms have their 2nd round cuts already planned.

    …. and everyday I hear my local staff speaking to groups/ friends who are wondering if they are next.

    In short, this is not a time that consumes are going to go out and spend.

    Of course, in 3 months this could all change, and I hope it does. I hope you are right, but as the ATK chart from the following post shows… experts do not have high confidence that China’s market will save capitalism.

    3) I agree that as US firms feel the squeeze, they will look to outsource (assuming they have not already), but this will take time (6-9 months depending on the product). So, short term this is not a benefit, but long term it certainly is.

    R

  5. Dan says:

    May 11th, 2009 at 9:37 pm

    I don’t disagree that the economy is bad out there (everywhere) and though I just about an hour ago wrote a post touting the impact of China’s stimulus, I am very skeptical we are experiencing anything other than a dead-cat bounce. BUT, I still think you are mixing micro with macro. On the macro level, the death of Crocs is not going to have any real impact on anything. Anyone who would have bought Crocs is most likely going to buy something else instead (maybe not shoes, but jeans) so the death of Crocs is not likely to cause much of a negative economic impact on the macro level.

  6. Rich says:

    May 11th, 2009 at 11:02 pm

    Dan.

    Again – under normal conditions I would agree that there would be the substitute, however at the MACRO level consumers are not spending right now, and all boats are down (at this point).

    In 3-6 months (assuming a real bounce occurs), and consumers come out from hiding, then your thoughts will naturally come true as consumers no longer have a Crocs to chose from.

    for me, the macro question is who will be left. Given the fact that many retailers have seen a huge cash erosion in the last 9 months from an inability to access short term financing, we are seeing closures (the economic point I was making earlier). Should this condition last another 3 months/ 6 months/ 1 year… it is sure to result in more store/ firm closures

    Anyway, China just reported a 33% reduction in exports from the year before, and regardless of whether you are a couplist or a decouplist, it is clear that consumers markets are not buying yet.

    R

    R

  7. Ruud says:

    May 13th, 2009 at 10:04 pm

    Its plain logic that export driven tier-1 cities + export driven manufacturing areas are hit by the economy. 2+3 tier and other areas serving domestic consumption are still doing ok (of course it can always be better).

    Although the big international names make it sound dramatic, these are just a few drops.

    In addition, the list above is not the representation of a very solid and stable business:

    Avis/Budget – did not have a solid business, build up phase, and with a business model that might just not work in China yet (everyone wants to own a car / otherwise take low cost taxi / hire a driver)

    Borders – Online business is not the easiest in China, probably very much in startup phase

    Crocs – fashion product, already was in trouble, they will be back unless they think plastic shoes can be made exclusive and justify production in US

    Saturn – they will be back if they still manage to stay alive

    Esquire Magazine – totally saturated market in China, trying to build up a position, failed and probably need to cut cost and concentrate on home market

    Gap – fashion, definetely hit by resession, probably will be back, or concentrate in India

    Architectural Digest Magazine – see Esquire

    Chrysler – already in shambles long time ago, weak position in China and overall they just need to focus / cut losses before it is too late

    In 6-12 months (or whenever) markets recover and consumers feel more confidence, you will see the wave coming back, companies will set-up shop again and likely more land inward / to the west as migrants have moved back from former production areas and skilled labor is now available where it was not. The investment by government in the west will further support and strengthen this.

  8. Rich says:

    May 13th, 2009 at 10:20 pm

    Ruud.

    On your 6-12 months, I would agree that IF consumers come back, then this picture is likely to change. however, the premise ofthe original article is that the demand will not be there. That the firms will fail.

    As to the limited impact on China, again I would agree that these companies are a fraction of a fraction, but if the Gap is moving several thousand containers of goods a year, that is still several thousand containers of products who are produced in a factory, but whose process has a much wider impact (trucking, tanneries, cattle ranches, etc.).

    R