The downside of taking the China option

Kerrie Richards says quality and specifications aren’t up to scratch

FACING a strong dollar and the prospect of increased input costs from the federal government’s proposed carbon tax, the big concern for many local manufacturers is the threat of low-cost competition from China.

But as Queensland manufacturer Merino Country has found, China has as many disadvantages as advantages for many Australian manufacturers of clothing.

Kerrie Richards, managing director and owner of the merino clothing manufacturer, says the company is pinning its reputation on quality and has decided to manufacture its clothing in Australia.

“We have looked at manufacturing offshore but we’ve decided it’s never been worth it. It would probably end up costing us more to produce offshore if things went wrong.”

Merino Country, which is located at Loganholme, between Brisbane and the Gold Coast, is expanding to 13 employees making clothing on 25 machines.

The spinning and dyeing of its fabric is split between Melbourne and Brisbane, although the yarn is spun in South Korea.

Richards says she’s used yarn made in China and hasn’t been happy with the quality, although China’s latest five-year plan is addressing this problem (see sidebar).

She says the problem with manufacturing in China, which is mainly conducted by small and medium enterprises, is that Australian companies are finding quality and specifications aren’t up to scratch, with returns resulting in increased prices and delays.

Merino Country has two types of customers — contract clients, including the Department of Defence and the Victoria Police, and the mainstream consumer.

It is pitching its consumer products mid-market with, for instance, men’s Wundies (merino boxer shorts) priced at $44.

The products are aimed at people seeking quality and value for money, with customers cutting across age groups and demographics, from late 20s outdoor adventurers to grey nomads for travelling and pensioners for everyday wear.

Merino has the advantage of keeping a person warm while not overheating, as man-made fibre does. For the army, the products can be worn for a long time without starting to smell.

“The people who are buying our product are looking for value for money,” Richards says. “And the thing with merino products is that they last a lot longer than synthetic and cotton.”

There are big differences in manufacturing costs between China and Australia. For example, a basic T-shirt in China would cost about 45c to 50c each, including the packing. In Australia, the cost would be $4 to $5.

But the fabric is about five to six times the input cost of manufacturing.

The equation is that it takes about $20 of merino to make a T-shirt, with local manufacturing adding about $5 to the price.

Meanwhile, the costs of quality control in China can be high, requiring on-site attention, and returns taking, often quite literally, a slow boat to China.

“Yes, it would be cheaper to manufacture in China but you have to weigh that up [against] the costs of any mistakes and the quality,” Richards says.

On the contract manufacturing side, Richards says that while quantities of about 10,000 items seem large in Australia, the volumes are dwarfed by orders of 100,000-plus from the US and Europe.

This can mean local orders are put on the back burner while bigger orders are fulfilled according to the deadline by SME manufacturers.

Merino Country helps keep its costs down by processing its own 19.5 micron fabrics from the raw merino fleece, which also helps maintain quality; and this year the company is starting to source back to the farm gate.

“Basically, we will have full traceability of product,” Richards says.

“We were doing it and we knew where product was coming from, but we hadn’t gone back to the farm gate. That will give us a better quality product as well.”

The record highs hit by the Australian dollar have this year helped offset the increased price of merino.

After decades of the wool price slumping, it has increased by 30 per cent, partially on account of the destruction of Pakistan’s cotton crop in last year’s floods.

Also, a series of droughts in the past decade, combined with weak prices, meant many farmers in Queensland swapped sheep for lucrative cattle feedlots.

“This has been coming for years,” Richards says.


China has the world’s largest textile industry, with output of more than $US44 billion last year, up 23 per cent on 2009, and expected to hit $US65bn in value by 2015.

In China’s 12th five-year economic development plan, covering 2011-15, a major upgrade of the wool textile industry is planned.

Focus will be on sustainability through increased efficiency, saving energy, pollution control and advanced dyeing and spinning processes.

The development of domestic retail brands is planned to create added value and will result in further exports and retail competition in Australia.

Demand for luxury fibres such as wool is linked to economic growth.

According to global management consulting firm Bain & Company, there is a 95 per cent correlation between growth in luxury product sales and gross domestic product growth.

Australian Wool Innovation says that given the level of interdependence between the wool industries in Australia and China, the latter’s 12th five-year plan bodes well for Australia.

Source: AWI Market Intelligence Update

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