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| Nels Frye |
Shengzhou may be the world’s largest tie-maker, but hardly any of its 750,000 inhabitants ever wear one. Hugo Wu, founder and general manager of one of the 1,100-plus Shengzhou companies making ties, says an entire year often goes by without his donning a necktie. Not many occasions require such formal attire in Shengzhou, which only officially became a city in 1995.
Nestled in attractive hilly countryside on the banks of the Changle River, Shengzhou was, until its first tie factory opened in 1984, best-known for being the birthplace of Yue, the distinctive opera style popular throughout Zhejiang.
Unlike other Chinese cities with economic superstar status, Shengzhou boasts no giant plans for new special zones or grand public works. No airport or train station is planned, though the city is served by the extensive infrastructure of the provincial capital, Hangzhou, an hour-and-a-half away.
There are a few electronics plants and apparel makers, but, by and large, the city’s entire economy rests on the demand for a thin strip of material hung around the necks of millions of businessmen worldwide. And as the global economic downturn begins to bite, it is facing unprecedented challenges.
THE TIES THAT BIND
In 1984, Jiayou Necktie (浙江佳友领带), the first tie-producing joint-venture in the city, was established in partnership with a Hong Kong investor. Shengzhou’s growth since then has been organic and largely dependent on the global tie industry.
The industry’s migration took it first from the UK, US and Italy, to South Korea and other developing countries. When labor and production costs in these countries began to rise, businesses began looking for new, cheaper markets.
In the mid-1990s, South Korean tie producers began transferring their clients to Shengzhou, cashing in on the business through arbitrage. Many Koreans now remain in Shengzhou, operating as middlemen between foreign clients and local factories.
In the last 10 years, Shengzhou’s tie producing sector has taken off. Now, no tie producing country, or indeed city, can compete at the low- and middle-end of the market with Shengzhou.
According to the Zhejiang Daily, more than 50,000 people now work in tie factories in Shengzhou and at least 100,000 are employed by companies directly connected to the industry. Shengzhou is home to the world’s largest tie producer, Babei Group (巴贝集团), which was founded in 1994 by Jin Yao, a former Jiayou employee, and now produces more than 20 million ties a year.
Margins are extremely low due to competition in this unconsolidated industry, where pricing power is in the hands of the buyers. Producers are lucky to make a few cents on every tie.
Prices offered to foreign companies by the major producers in Shengzhou range from USD 1.5 to USD 5 for 100% silk ties, depending on the size of the order, quality of the materials required and complexity of the design. Polyester and microfiber ties are much cheaper. Producers prefer the largest orders with the least amount of complication and these come from global chains like Primark and Walmart.
Nevertheless, the sheer scale of orders flooding in has brought great wealth to the city. In 2007, Shengzhou made revenues of RMB 2.2 billion (USD 322 million) from the necktie business, according to the China Textile Association.
MADE FOR EXPORT
Approximately five out of six of the ties made in Shengzhou are worn around foreign necks. The largest market is the United States, followed by Europe and then Japan, but buyers in nearly every country worldwide now take advantage of the incomparably low prices on offer.
Hugo Wu has little hope that locals will ever take to wearing this Western symbol of professionalism in great numbers, meaning Shengzhou will have to continue to depend on Western markets.
Zhejiang businessmen, he explains, dislike wearing ties and prefer more casual clothing. Wesley Zhang, director of customer relations at Babei, says quality requirements in the domestic market are low, retail prices are higher and styles are out of date. These are not impediments, but very low demand is. Zhang says American men like to wear ties a couple of times and then buy a new one. Chinese men, by contrast, often own a single tie that they bring out only on those occasions when a tie is required.
However, although domestic retail clients are not big business, government agencies and state-owned enterprises (SOE) are. Employees at large SOEs such as China Unicom (中国联通), as well as staff at major airlines all wear identical ties. Some of these orders can be in excess of 1 million units of a single style — last year, China Railway ordered 2.5 million identical ties for its employees — and the quality requirements are much lower than for fashion brands. Some Shengzhou tie-makers players focus entirely on government orders, maintaining a representative office in Beijing just to develop guanxi.
COMO DOWN, SHENGZHOU UP
The rise of Shengzhou has paralleled the decline of the Italian city of Como, home of the necktie industry and silk production for centuries. Como has been losing jobs and companies over the last 20 years in this classic case of an old-world craft ceasing to exist in its original home due to rising costs.
The businesses remaining in Como are exclusively high-end, producing small and specialized orders. Zhang says that what is left of Como’s tie industry is no longer under threat, because Shengzhou targets high-volumes, and a certain market segment always looks for specialty brands that are “Made in Italy.”
The best finishing on the highest-end ties has not yet been mastered by Shengzhou producers, and design is still in the hands of the Italians. Zhang and others caution that many Shengzhou-made ties read “Made in Italy” at the request of the buyers.
BRACED FOR A DOWNTURN
Shengzhou’s growth was truly explosive in the first years of this decade, but since 2006 has slowed considerably. Revenue from export growth peaked in 2001, jumping 73% from 2000. By 2006, the growth rate had slowed to 22.75%, and by the first few months of 2008 to 12%.
These rates of growth must seem enviable to tie makers in Como, or indeed anywhere else, but Shengzhou’s mayor, Sheng Qiuping, said recently that “the tie industry is facing unprecedented difficulties,” and a member of the Shengzhou Tie Industrial Association bemoaned the fact that the industry’s best years may already be behind it.
Local producers cite a number of reasons for this, including RMB appreciation over the past few years, new labor laws and fluctuations in the price of silk yarn, all of which have eaten into razor-thin margins.
A slowing was inevitable as Shengzhou secured its hold over the global market, but the economic downturn is hitting the industry. Many companies report delayed payment on orders, and others expect major difficulties this year. Some firms, which operate as workshops for orders that larger producers cannot complete, are already bankrupt. There is also concern that US and UK retailers will collapse this year.
To respond to these challenges, many in the industry have attempted to agree on price controls. Other measures include efforts by bigger producers to gain control of the production of silk yarn.
The true solution, however, will always be branding and original design. Babei is at the forefront of this, and provides a model that other producers in the city would do well to follow. It has an exclusive license to produce and sell Pierre Cardin-brand neckties in China, as well as its own Babei brand. Another effort by Babei is toward diversification, spreading into other finish products such as clothing, upholstery fabric and silk-woven paintings.
Babei also recently gained possession of a design studio in Como — its Italian owners, which had outstanding orders with Babei, went bust and gave the studio to the Chinese firm — which it hopes will give it an edge in competing internationally and against other Shengzhou producers.
THE ZHEJIANG STORY
Shengzhou’s story is a classic example of the rise of China’s — and specifically Zhejiang’s — export-driven economy and its commercial relationship with the West.
Over the past 25 years it has enjoyed explosive growth, but has also suffered from the downside of being dependent on foreign markets – slim profit-margins, vulnerability to foreign economic slowdowns and a lack of internationally-recognized local brand-names.
Shengzhou is the perfect model of a Zhejiang city leading the world in a single industry. Cities across Zhejiang have achieved enormous success by focusing on one industry. Yiwu is the world’s largest button producer; Haining makes leather bags; Wenzhou has built much of its wealth on its shoe industry.
Preferential provincial-level policies encouraging private enterprise, favorable economies of scale and excellent infrastructure, along with municipal governments that have prioritized excelling in a single industry, have built these world centers.
The coming months may well prove the toughest yet for Shengzhou’s tie producers. But its inhabitants have shown in the past that adaptability and entrepreneurialism runs in their blood. Not all of the city’s 1,100-plus tie-makers are likely to see the year through. But in spite of the grim industry outlook, expect Shengzhou to be the center of the global tie industry for many years to come.