In 2009 Pacific Brands, parent company to recognisable Australian brands such as Bonds, King Gee, Holeproof, Hard Yakka, and others, closed 10 local factories, made 1850 local jobs redundant, and moved manufacturing offshore to China.
Now, this isn't an out-and-out bashing of Chinese manufacturing, but there are some important lessons that can be learned from the 5 year period that Pacific Brands has utilised offshore manufacturing.
At the time Pacific Brands moved offshore in 2009, their gross profit margin utilising local manufacturing was 38.2%. In the FY 2010/11, after their local redundancies and offshore move, their gross profit margin was 39%. 0.8% hardly seems worthwhile considering the damage to the local economy, however keep in mind that it is 0.8% of a $1 billion business - and that is not an insignificant sum of money!
This is where things get interesting: since 2009, and in fact since earlier than 2009, manufacturing costs in China have risen year on year as the local Chinese economy grows in strength, and as East coast Chinese manufacturing facilities improve and east coast workers receive wage increases. This pushes companies like Pacific Brands west into the cheaper manufacturing districts, but it increases shipping costs.
These wage and manufacturing cost increases are not insignificant either - they have been in excess of 100% growth year on year. For example, Wenzhou 112%, Quanzhou 129%, Putian and Suzhou 129%, Huizhou 103%, and Dongguan 104%
It has been 5 years since Pacific Brands moved offshore. In that time they have continued to report losses. Their most recent loss as of the time of this article, noting that this was a 6 month result, not an annual result was $219 million. $219 million loss in 6 months! Pacific Brands chief executive John Pollaers commented that "the declining Australian dollar, which pushes up the cost of products produced overseas, would be the major headwind for the company over the next couple of years." As a result of that statement, Pacific Brands is looking to implement price rises of between 5 and 15% across their entire range.
Ok, $219 million lost isn't really spectacular when it comes to large corporate losses, and there could be a number of valid financial reasons for writing down that loss.
However - Chinese manufacturing costs continue to increase by up to 129% year on year. Chinese manufacturing is not going to get cheaper. The end result for companies like Pacific Brands is that they will have destroyed local manufacturing facilities, lost local manufacturing skills, and in the end they will be paying just as much, likely MORE, to manufacture their goods in China.
Meanwhile, consumers will be paying year on year price increases for the companies to cover their losses, and will be receiving inferior quality products to those that the company brand and reputation was built on.
Keep in mind that in this particular example, Bonds (the main brand under Pacific Brands) is (was) an iconic Australian brand. Australians were proud to buy Australian owned and Australian made underwear. They got a top quality product, and they supported Australian business. Now, they are paying more money for an inferior foreign product.