An Adidas shoe display in Beijing's shopping district of Wangfujing. (File photo/CNS)
International sports brand Adidas has said it will follow in Nike's footsteps to close its only production line in China due to rising costs. As labor and land costs rise in China, many multinationals are relocating their factories to countries in Southeast Asia.
Adidas has a factory in Suzhou in eastern China's Jiangsu province and has its headquarters in Shanghai with branches in Beijing and Guangzhou. While factory staff say hiring has stopped, they have not been told when operations will stop. Reports have suggested that workers may get compensation much higher than the national standard. Adidas has declined to comment on the possible closure, according to the Shanghai-based First Financial Daily.
In the first quarter of this year, Adidas' global revenue increased 14%, to US$47 billion; of these, sales from the Greater China region surged 26% to US$4.7 billion. Adidas predicts that its revenue will be boosted by major sporting events, including the London Olympics, and may achieve 10% growth this year.
Although the brand's sales have been increasing, the firm has not able to totally offset the impact of rising costs in China. Its profit margins decreased 0.7%, to 47.7%, in the first quarter of this year. Industrial insiders consider rising costs the main factor causing Adidas to close its Suzhou factory. The company opened 1,175 stores and 6,700 outlets last year in China, and plans to increase the number of its stores in Greater China to 2,500 by 2015, according to the daily.
The rising costs led Yue Yuen Industrial Holdings, the largest manufacturer of Adidas products, to expand its productions lines in Vietnam and Indonesia by 54% and 124%, respectively, in fiscal year 2010. The company's production lines in China, however, only grew by 41%. Herbert Hainer, Adidas' global CEO, told German media that the company hopes to move parts of its production out of China to countries such as Laos, Cambodia and Vietnam.
Many Chinese manufacturers have also been forced to relocate from coastal China to the country's hinterland, or even to Southeast Asian counties, due to rising costs. Vietnam and Bangladesh have become increasingly popular among European and American business, since the wages of workers in these countries are lower than in China.
The relocations have also taken place amid the backdrop of an appreciating renminbi, which has contributed to falling profit margins. This trend is most common in textiles and hi-tech industries, said Liu Gang, an associate professor of the School of Management at Shanghai's Fudan University, according to the First Financial Daily.