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Last Updated: Monday, 5 September 2005, 05:29 GMT 06:29 UK
Stores fashion new Chinese supplies
By Charlotte Windle
in Hong Kong

The TAL factory in Hong Kong
Hong Kong is providing retailers with a way round the textile quotas
The millions of Chinese textiles stuck in EU ports will be high on Prime Minister Tony Blair's agenda during his visit to China this week.

More than 75 million garments - including jumpers, t-shirts, blouses and bras - are being held up in European seaports because they exceed quotas on Chinese textile imports set by the EU in June.

Meanwhile, Chinese officials failed to reach agreement with US negotiators in Beijing in talks over quotas for 20 categories of Chinese textiles.

Retailers from both continents are warning of shortages and inflated prices in shops this autumn if quotas remain in place.

As things stand, quotas will remain in place until 2008, when they must end according to the rules of the World Trade Organisation.

The alternative route

In the meantime, retailers are finding clever ways to get garments out of China.

The most popular is through Hong Kong, which remains quota free.

"Made in Hong Kong" is big business and it's growing
William Connor, Connor Associates chief executive
A growing number of retailers from the US and Europe are placing orders with Hong Kong manufacturers who are then outsourcing production to the mainland via an agreement known as the Outward Processing Arrangement (OPA).

The agreement states that Hong Kong manufacturers can subcontract subsidiary and finishing processes to mainland factories as long as the "major transformation" of the garment takes place in Hong Kong.

What this means in practice is that 90% of the work can be done on the mainland.

Finishing touches

The TAL Group is one of Hong Kong's largest clothing manufacturers.

The company has a small production facility employing 400 staff in Hong Kong. Their main facility is over the border in the mainland city of Dongguan, the heartland of China's textile industry.

The TAL factory in Dongguan, China
Despite the label, much of the work is still being done in China
There, the company employs 4,500 mainlanders. The Dongguan factory cuts, hems and sews buttons or zips into the material before sending it to Hong Kong.

In the case of a shirt, all the Hong Kong factory then needs to do is sew four seams connecting the pieces together before sending it back to Dongguan for finishing, washing, ironing and packing.

"Producing this way costs roughly 35% to 40% more than if we make everything directly in China," says the managing director of the TAL Group and vice chairman of the Hong Kong Textile Council, Dr Harry Lee.

"But cost-wise it is comparable to places like Thailand or Indonesia and production in Hong Kong has the added perception of quality for consumers in the US and Europe."

Growing market

The quality is good. But consumers are paying more for the fact that these are some of the best travelled shirts you are likely to find.

A single garment might travel up to six times across the border before it is finally shipped to the US or Europe.

An estimated 2,000 Hong Kong companies are shipping goods back and forth in this way.

A business that, according to textile traders, is now worth as much as business conducted direct with mainland China.

"About half of our $400m textile sourcing business through the Hong Kong office is garments with "Made in Hong Kong" labels that are produced under the cross-border arrangement with the mainland," says William Connor, chief executive of Connor Associates, one of Hong Kong's leading textile traders.

"The other half are 'Made in China' garments sourced directly from the mainland at a lower cost. So as you can see 'Made in Hong Kong' is big business and it's growing.

"If you want to source from China in the latter part of this year you are going to have to resort to this cross-border arrangement or go elsewhere because quotas for the year are already full."

The system adds costs for retailers and, by keeping jobs in China, appears to do nothing to safeguard jobs in Europe or US.

The process is complicated, time consuming and costly, but as long as quotas remain in place its popularity as a tool for sourcing from China is likely to grow.

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