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Developing a China strategy is key

China has rapidly become "the world's factory," seizing the smoke-stack operations of more highly developed countries, notably the United States, and sending back low-cost imports, said Ira Kalish, global director, Deloitte Research, at the Financo seminar on a changing quota environment last month.

In just a decade, said Kalish, exports out of China have grown more than four-fold, rocketing up by 333 percent to $325 billion in 2002 from $75 billion in 1993, much of it going into the United States.

More pointedly, he noted, Wal-Mart alone directly imported $15 billion worth of Chinese products in 2002 — roughly 5 percent of everything shipped out of China —and that figure is expected to double over the next four to five years. To further clarify, the $15 billion figure doesn't include products Wal-Mart buys from U.S. suppliers that were produced in China.

With a set of quotas on textiles and apparel products due to expire in January 2005, the consequences to American producers, and the impact on the cost of goods sold to American retailers could be profound, said Kalish. And it won't be just American producers who will feel the squeeze, he said.

When quotas on man-made fiber luggage were lifted in 2001, said Kalish, the Chinese share of the U.S. market went from 13 to 62 percent; and Mexican exports into the United States fell by 50 percent.

The effect on prices was even more profound. The average unit wholesale price fell by almost two-thirds, to $5.23 from $13.71.

The effect on textiles and apparel prices in the wake of disappearing quotas is likely to be substantial, but not as severe, said other panelists in the Financo seminar, with prices of textiles forecast to drop between 15 to 20 percent.

Making Chinese goods attractive, said Kalish, China has deliberately kept its currency undervalued against the dollar and other world currencies, giving it a distinct advantage. But that won't last forever, and Kalish said he expects China to revalue its currency within the next two to three years — eliminating some of its edge.

"If they revalue, they might lose that cost advantage. That could have a big impact on textiles and apparel," added Kalish. The principal beneficiaries, he said, would be "emerging nations, especially Latin America."

In the new global environment of 2005, Kalish cautioned U.S. suppliers.

"Diversify your sourcing," he said. "Don't put all of your eggs in the Chinese basket. Make sourcing decisions not just on the basis of cost. And use China sourcing to gain access to the Chinese consumer market."

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