Answer Happy

ZHONGSHAN, China -- Thirty years ago, Levi Strauss & Co.
began producing its iconic jeans in China, eager to tap a seemingly
endless stream of workers willing to sew for a few dimes an hour.
Now that stream is starting to dry up.
Over the coming decades, a labor shortage will force Levi and
scores of other Western brands to remake their China operations or
pack up and leave. The changes will mark a new chapter in the
history of globalization, where automation is king, nearness to
market is crucial and the lives of workers and consumers around the
world are once again scrambled.
The stirrings of change are visible already. In an apparel
factory in Zhongshan, a gritty city of three million stuffed with
industrial parks across the Pearl River from Hong Kong, lasers are
replacing dozens of workers who scrub Levi's blue jeans with
sandpaper to give them the worn look that American consumers find
stylish. Automated sewing machines have cut the number of
seamstresses needed to stitch arc designs into back pockets.
Digital printers make intricate patterns on jeans that workers used
to do with a mesh screen.
"Labor is getting more expensive and technology is getting
cheaper," says Andrew Lo, chief executive of Crystal Group, one of
Levi's major suppliers in China.
While China's economic downturn is providing some respite from
the labor crunch, Crystal's blue-jeans factory here still pays 20%
above the market rate. It organizes cooking classes and singing
contests to keep workers happy.
Last month, China announced it was abolishing its decades-old
policy restricting most couples to one child. But that won't likely
put much of a dent in the country's looming demographic problem,
economists note.
Fearing that China will see an exodus of manufacturers, Chinese
Communist Party Chief Xi Jinping last year called for "an
industrial robot revolution" in China, which has become the world's
largest market for automation.
Looking ahead to 2050, the future appears mixed for consumers
around the globe. Low-cost production in China has helped suppress
inflation in the U.S., Europe and at home. It is an open question
whether automation can hold down costs as effectively as Chinese
peasant labor did. But consumers should look forward to more
choice, faster delivery and, perhaps, less harm to the
environment.
Some technologists even think that inventions such as 3-D
printing -- essentially printers that replicate solid objects like
copiers reproduce printed pages -- will have a big impact by
2050.
"In 2050, you could potentially have a 3-D printer at home that
could produce all the fabrics you want," said Roger Lee, the chief
executive of Hong Kong's TAL Group, which makes 1 of every 6 dress
shirts sold in the U.S. for brands from Banana Republic to Brooks
Brothers. "That would make us obsolete."
The end of very cheap labor in China is giving a push to these
advances in technology, which will make China less central to
global manufacturing. But changing consumer tastes -- enabled by
the same technological change -- are diminishing China's role
too.
Consumer demand is growing for customized goods, whether they
are pharmaceuticals tailored to individual genes or craft beers
tailored to individual palates. That makes distance from market an
increasing disadvantage, especially ordering huge quantities of
goods from China and waiting a month for delivery by ship.
Factories are likely to get smaller and more dispersed.
"Logistics, taxes and marketing may become more expensive
compared to labor costs," said Gary Hufbauer, a trade expert at the
Peterson Institute for International Economics. "All that would
make China less attractive."
Examining the choices faced by Levi, whose history traces the
course of globalization, provides a window into the challenges and
opportunities presented by China's demographic transition. The
162-year-old company manufactured solely in the U.S. until the
1960s, with its jeans becoming a symbol of the American West,
sought by teenagers the world over.
Levi first began production overseas in Hong Kong in 1966. In
the following decades it expanded production in Mexico, Europe and
Asia, as low-cost countries competed for foreign investment. During
the early 1980s, demand for jeans declined, and the San Francisco
company laid off a third of its global workforce, according to a
Harvard Business School study, and moved more aggressively overseas
to cut costs. In 1986, Levi started to shift its production to
China.
In recent years, privately held Levi has overhauled its supply
chain to squeeze out costs and revive a business that analysts say
was late to trends such as colored denim. Levi's revenue has grown
each of the past two years, reaching $4.75 billion in fiscal 2014,
but pales compared with the company's $7.1 billion in revenue at
its peak in 1996.
"We are moving toward agility," says Liz O'Neill, Levi's senior
vice president of product development. "The real money is having
the right product in front of the customer at the right time."
China's rise to the world's No. 2 economy relied on a huge
increase in the country's working-age population, which expanded by
380 million people between 1980 and 2015. In one of history's
greatest migrations, hundreds of millions of rural Chinese headed
for cities for manufacturing jobs that were a step up from peasant
labor, even though the work paid poorly by global standards.
China's foreign shipments rose about 6,700% between 1980 and
2007, when China surpassed the U.S. as the world's largest
exporter. Manufacturers who had been automating U.S. and European
factories to shave labor costs stopped once they set up in China.
"Machines couldn't compete," says David Love, a Levi executive vice
president. As late as 2002, Chinese labor costs were just 60 cents
an hour, according to the Conference Board, a business research
group.
But China's working-age population recently peaked, and its
so-called demographic dividend has started to turn into a
demographic drag. By 2050, the working-age population will decline
by 212 million, estimates the United Nations -- roughly as many
people as live in Brazil, the world's fifth most-populous
nation.
Wages and benefits have already been rising in double-digit
percentages for the past decade as workers can command higher
rates. Although wage growth may ease this year because of the
economic slowdown, the pressure is bound to increase in coming
decades as the number of workers plunges.
Outside the Zhongshan factory that makes Levi's jeans, a white
banner tells potential workers that "no experience is necessary"
and promises bonuses for new recruits.
In Nansha, a manufacturing hub 30 miles north of Zhongshan,
rising salaries over the past decade have made it possible for Li
Yu, 28, to buy a modest house.
"There are many different opportunities today," says Mr. Li, who
repairs machinery that assembles circuit boards. "I'd like to do
something I'm good at. Of course, if there's a better opportunity,
I will take it."
Adding to the shortage, many factory workers will be drawn back
to their hometowns to take care of the growing ranks of Chinese
older than 60, whose share of the population is forecast to double
by 2050 from 2015, to 36.5%.
"I really want to go home," said Fu Yingjiang, 32, a laborer
from Hubei province who has been working in factories in Zhongshan
and elsewhere for 10 years. Awaiting him are a wife and two
children, along with his blind mother and terminally ill
father.
Already, China's rising labor costs -- now $14.60 an hour on
China's coast, adjusted for productivity, compared with $22.68 an
hour in the U.S., according to the Boston Consulting Group -- have
diminished China's competitiveness. Adding energy costs, China is
now a more expensive place to manufacture than Indonesia, Thailand,
Mexico and India, says BCG.
None of this means Levi is going to abruptly pull up stakes.
Levi lists about 200 Chinese factories where it does business, five
times as many as any other country.
Levi is adapting its laser technology so it can etch different
patterns to make one type of denim look like another, reducing
costs by buying less fabric. For a new line of women's wear, Levi
said it needed only 12 fabrics, rather than 18. In the past three
years, Levi said, it cut the number of its suppliers by 40% and the
number of fabrics by 50%.
The changes also give Levi greater flexibility, said Ms.
O'Neill, the 44-year-old executive who helps oversee the company's
supply chain. If a pair of jeans using a particular fabric is
selling well, she says, Levi can use lasers to produce more of the
desired look, and pare back designs that are losers. "The idea is
to delay decision-making for as long as possible," said Ms.
O'Neill.
Levi executives say they have largely abandoned a strategy of
relocating production to one impoverished country after another,
known as "chasing the needle," in favor of other forms of
cost-cutting.
Even so, to stay competitive, says Mr. Love, the executive vice
president, Levi turns to lower-wage countries like Cambodia to
produce some plain jeans that are cardboard stiff and require
little processing. Levi is also checking out African countries
where wages are low and the population, unlike China's, is youthful
and growing. The company isn't convinced yet that Africa's
infrastructure is up to snuff.
Levi faces other challenges producing in China. It takes about
30 days to ship jeans by sea and land from China to Hebron, Ky., a
big Levi distribution center for the U.S., long enough for Levi to
miss changes in fashion and get stuck with unwanted inventory.
McKinsey & Co. says the next big change in manufacturing is
"mass customization," or responding to individual consumer
preference. Shoppers already can pick from thousands of designs and
fits of clothing on e-commerce sites, a practice that is likely to
increase over the coming years as consumers use scanners to upload
their body measurements.
For China and the companies that do business there, these
changes threaten to remake the traditional manufacturing model
where goods are produced in huge runs in China's coastal cities and
shipped thousands of miles by sea. Instead, technologists expect a
profusion of smaller factories over the coming years, designed to
meet local preferences. Moody's Analytics, in an analysis for The
Wall Street Journal, forecasts that the U.S. trade deficit with
China will diminish and turn positive by 2042, in good measure
because of these changes.
Levi is already experimenting with more localized production.
When a line of so-called skinny jeans, which it made in China,
became a big hit in Europe, it turned to factories in Poland and
Turkey to fill the unanticipated demand and cut shipping time, said
Ms. O'Neill.
In the U.S., Levi produces its "vintage" jeans. The company uses
lasers and other techniques to reproduce the wear patterns of jeans
that cowboys and miners once wore.
Levi used Mexican plants to produce some of its most
high-fashion women's jeans -- ones with patched-up holes and
complex stitching -- when it noticed that U.S. women were patching
jeans on their own because they liked the look. Mexico is only four
days by truck from Levi's Kentucky distribution center.
These days in hilly, arid Torreon, Mexico, Apparel International
Inc. is counting on China's shrinking working-age population and
rising wages to gain an edge. Fifteen years ago, the big jeans
maker halved its workforce of 6,000 because it couldn't compete
with China. Now it is modernizing aggressively.
The company's 58-year-old research director, David Reyes, hangs
jeans on a conveyor belt in a big ultraviolet ray chamber to
replicate the look of sun bleaching. "My grandmother used to toss
my jeans on the top of the roof," he recalls. "The sun bleached
them yellow." He wants to produce a similar tint -- and interest
Levi in producing such jeans in Mexico.
Levi said it expects China production to rise only "modestly"
next year; new orders are up for grabs. Apparel International's
president, Oscar Gonzalez, says the company now boasts an advantage
over China -- a large pool of apparel workers who were laid off in
past downsizings. Excess labor has helped him keep wage increases
to 2% or 3% a year he says.
1) Executive Summary of the article.
2) Analysis of Problem for Levi Strauss & Co.