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Last Updated: Monday, 14 May 2007, 06:23 GMT 07:23 UK
The changing face of outsourcing
By Steve Schifferes
Globalisation reporter, BBC News, Zhangjiagang, Jiangsu Province, China

HuaXia baseball cap factory
Modern factories have been built across the Yangtze River Delta

Mr Qin, manager of the HuaXia baseball cap factory, is a proud man.

His factory, located in the booming Yangtze river delta region of China, has expanded dramatically in the last few years.

It is now producing 30 million baseball caps each year, supplying retailers across the US and Europe at an average price of $1 (50p) per cap.

Every day the factory fills a standard 40-foot container with 60,000 caps, which is sent down the motorway to the port of Shanghai.

A sister factory, Hua Yuan, has an exclusive contract with Nike to manufacture their branded caps.

Mr Qin, factory manager, HuaXia baseball cap factory
Pride and price pressure: running the factory is getting more difficult

Mr Qin is particularly proud of the embroidery department, where dozens of new Japanese-made machines automatically reproduce the complicated logos on the front of the caps, with only a few workers in sight.

But textile and clothing manufacturing is nevertheless a labour-intensive business. The factory employs more than 1,000 workers - mainly young women - in the large sewing rooms where the caps are put together.

Workers' lives

They work a six-day week, 7:30am to 5pm, and many live in dormitories adjoining the factory.

Textile worker in HuaXia factory
A good job in Zhangjiagang

But with average factory wages of around 1,300 RMB per month ($165, 81), most want the extra work.

A worker told the BBC she had worked for the company for four-and-a-half years, while her husband worked at another factory and his parents looked after their child.

The booming export trade has made the factory owner, Mr Bao, a rich man.

Having started from humble beginnings, he now has two homes and two cars - including an Audi A6, and can afford to educate his children privately, according to the factory manager.

Export boom

Mr Bao's success story is not unique.

The private sector has led China's huge export boom, which has continues to accelerate.

Map locating Shanghai
In the first three months of 2007, China exported $252bn worth of goods, an increase of 27.8% on 2006, and had a trade surplus with the rest of the world of $46bn - nearly double the amount in the same period last year.

Textiles and clothing exports are expected to reach $161bn this year, and in 2006, textiles and clothing accounted for 72% of China's trade surplus in manufacturing.

Textile and clothing exports from China have surged since the ending of restrictions on exports to Western countries in 2005, when the Multi-Fibre Agreement was finally abolished as part of a world trade deal.

The rise in Chinese exports sparked protectionist pressures in both the US and the EU, and China negotiated export restraint agreements that expire in 2008.

The US government has also been urging China to revalue its currency, the yuan, at a faster rate in order to reduce its trade surplus.

Pricing pressures

But seen from the ground, Chinese firms feel under increasing competitive pressures, with profit margins continually squeezed by the appreciation of the yuan and government increases in interest rates.

textile workers, Shanghais
Conditions have improved in many clothing factories

Mr Qin says that his firm has borrowed heavily to invest in the new equipment to lower their costs and improve quality and productivity.

According to government figures, the overall profit margins in the textile industry are only 3.9% - the lowest of any major industry.

The shift of textile factories away from Shanghai to cheaper cities in the interior is one way that owners can control costs.

Vivian Zhu, operations manager for ET2C International, is a close observer of those pressures.

Her firm helps oversee outsourcing contracts between Western and Chinese companies, often supplying bespoke services to major retailers.

She explains that rival firms often cluster in the same towns - so several baseball cap manufacturers, or several handkerchief makers, are found together.

skilled textile worker, Shanghai
Designers work closely with pattern cutters to produce designs
She says that there is continuous pressure for high quality and low cost from Western purchasers.

Price pressures have increased since the spread of internet sites such as Alibaba.com, which seeks to match buyers and suppliers in China.

Ms Zhu says that many of her clients also want to ensure the factories they use meet social standards and are free of child labour.

She regularly sends inspectors to the factories she uses to check quality and carry out social audits - although she admits that, faced with the issue of free trade unions, the best she can do is ask the workers whether they are happy.

But the combination of labour shortages, pressure from abroad and rapid expansion have been raising standards nevertheless.

Large air-conditioning units now hang over the HuaXia factory building.

Going upmarket

China's export advantage no longer lies mainly in its low cost of labour.

Urban Shock store in shopping mall, Shanghai
Moving into retail: Urban Shock store

And firms are recognising this by moving up-market or by specialising in a single product.

ET2C International itself decided to move up the value chain by launching a fashion brand, Urban Shock, for young women.

It has now launched a series of shops in Shanghai marketing the brand, and has recently opened its own factory to produce its clothes.

The firm's factory has to pay higher wages to attract workers, but its location means that the designers can work closely with it to ensure the dresses are made to their specifications.

But ET2C is not alone.

It is the domestic market, rather than cheap exports, that is now attracting a huge wave of foreign investment into China by Western multinationals.

This is one of a series of articles on how globalisation is reshaping Shanghai and the Yangtze River Delta. Subsequent features will look at the car industry, banking and computer hardware.

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