Flat Fitty’s Director of Production and Commercialization Noel Rix has more than 20 years experience in the Asian market helping build Coach, Timberland, and Nike’s Chinese operations and launching Nike Golf. He now works out of Flat Fitty headwear’s China offices, overseeing production. TransWorld Business caught up with Rix via Skype to discuss the rapidly evolving changes in the Chinese market, which hinge on rising material costs, labor shortages, and the Chinese government’s ever-changing policies.
Is the recent panic that we’re hearing from brands based in China more of a knee jerk reaction to what’s going on or how does what you’re seeing on the ground compare to other situations you’ve been through in your twenty plus years in China?
It’s an interesting dynamic right now. When you look at what was happening with Japan when they started with footwear they split up and went to Taiwan and Korea, and then not long after we got to Korea. Footwear was getting spring-boarded into other areas that were less labor intensive. Then, as we were looking at other places, the technology began to match what our needs were in Korea. As you start to branch out [to new locations] you realize that you have two choices. To get going right away you could just move what you currently have, which means old habits and bad habits just get moved but you take advantage of cheap labor. Or you can take advantage of what you learned and start from scratch and mitigate your cost right from the beginning. It was a mix of both at that point. Within China now it’s such a mix of all the things that all the countries we started with had specialties in. They’ve got it all-the raw materials, the minerals, the oil – all those natural resources that go along with the labor.
With all these opportunities became this high turnover rate. If they were in this factory, workers moved to this one and that one, and the factories were so glad to have someone show up that they didn’t do any background checks. You combine all that with the media and the exposure to internet-regardless of what anyone says about censorship in China, they are still exposed to Mercedes and BMW’s and LCD screen TV’s. So they see, they desire, they want, now they are turning into a consumer society. So you’ve got the labor issue coming in, the RMB is getting stronger so this adds the cost of everything coming out of China – all these forces that are starting to work together. Now what’s happening is heavy hitters are all moving inland because they are finding two things; they don’t have the big populace to draw from, but the good news is the labor force is more stable inland because they aren’t leaving the coast to go work the factories. They can stay home and work at the factories.
But if you’ve established your factory on the coast, it’s basically like entering a new market, right? Other than the cultural barriers and those lessons you’ve learned?
Even though they are moving inland it’s not really starting from scratch. If all these guys were to move to Bangladash or Vietnam or somewhere in India, then that is a re-education process. But all of these [inland workers] have already worked in a factory before and they went back home. So what you’ve got are smaller labor pools, which will lead to smaller factories, and more of them, who will be much more stable because they won’t be leaving and coming back on Chinese New Year, so they won’t be experiencing the turnover.
Do you see moving inland as just prolonging the inevitable of having to look to new countries for production?
The clock is ticking and if you go back and look at the U.S., a lot of people went overseas right at the beginning to do manufacturing. The guys who were the last out of the chutes, a lot of them were too late to take advantage of the opportunity over here. We are sitting here looking at this thing going ‘OK it’s less labor intensive to make headwaer than to make footwear. We need to be looking at ways to move a portion of what we do into the United States or somewhere into the Northern Hemisphere on the western side.’
So a diversification strategy? Last time we spoke you had mentioned Brazil as far as regional production facilities around the globe.
First you have to establish a beachhead and that’s what we’ve done in Brazil. We have signed an exclusive distributor down there. So we are going to work that and see what it looks like and if it’s big enough to move something down there to produce the hats. We think it will, but timing is everything.
We’ve got CB Ellis in the U.S. looking for bits of real estate in areas where we could take advantage of certain tax benefits. We’re really still in the exploratory stage, seeing what we can pull together and what the labor pool looks like, and what local support municipalities would offer us.
From your standpoint, do you think the Chinese production era as we know it is drawing to a close? Is it on to the next thing? Where does the Chinese market play into production at this point?
Long-term it will begin to take on some of the things that happened with Japan, and we are beginning to see that already. Footwear was the springboard in Korea, they branched off and went into automobiles. They are specialized and look at how they got into LCDs and LEDs and are essentially the biggest player in big screen technology now
But in China, there are these regional strengths. We’re looking at that and seeing if we can find the right location in the U.S. we can start by bringing in the right components that we can finish and customize over 50% to make it officially made in U.S. and not leave the China market completely.
Is it a paradigm shift now from them being a producer to a consumer market?
They are gradually becoming more and more of consumers. As you drive down the streets, you see more Mercedes and BMW’s in the same distance than I see driving in New York and Boston. There is a lot of money around here.
It seems like a lot of the production difficulties with the growing middle class, labor shortages, rising costs of materials, and government focus on more domestic end use really came out of the blue, especially for people in the action sports industry. Being on the ground there, is that your perspective or has it been something that’s built slowly?
I’m not an expert, but it doesn’t take a brain surgeon to realize if you just take a quick glance back into history and look at the trends this was happening. With new technologies and awareness,s with media and all that around you, you realize you’ve created that desire in people faster. The next thing you know Maslow’s hierarchy of needs comes in and then they decide that’s what they are looking for and striving for.
What’s the next China in your opinion?
I don’t know if there is a next China. There will be a diversification of the things that are in China and that’s kind of what I alluded to earlier. Because China is so massive and they have all of what these other countries did, I think China will end up investing in South America more so than in their own country. But I think you’ll see more regional specialties.