The Secret to Success? Hard Work and Sticking to the Basics

As the world’s largest producer, consumer and importer of cotton, China is a country of extreme interest for merchants around the world. While it still remains a mysterious market, in many ways it functions like those in other countries around the world. That means merchants who want to succeed there have to stick to the fundamentals and be ready for heavy investments of both time and expense.
As with any market, cotton merchants need to have strong sales and distribution channels in China to succeed. And, when that market is as large and diverse as China’s is, that is obviously easier said than done. Nonetheless, it isn’t a process that can be skipped or overlooked because good channels are critical for liquidity and information flow.
“A merchant needs to have a very deep understanding of the local market in order to adequately manage the risks of trading in China,” says Alex Hsu, managing director of Formosa Trading Co., based in Taipei, Taiwan. “I personally believe that a merchant needs to be flexible and willing to think outside the box in order to take advantage of the ever-changing landscape and be able to continuously find different ways to make money. I realize that some of those things sound basic, but there’s nothing magical about doing business in China. You just need to execute the basics, and execute them very well.”

Close to Home
Unlike import markets such as Taiwan and Indonesia, China is driven mainly by its domestic cotton market. “I think one of the important things I learned quickly was to treat China as a ‘home market,’” Hsu says. “Therefore, imported cotton must be considered and traded as part of a larger cotton market. More importantly, China is such a large and dynamic market that it requires the same amount of resources as a merchant would invest in their U.S. headquarters – and maybe even more. That is a very important mindset to have for a merchant, because no one can afford to underestimate the effort required to find success in China.”
While the Chinese government is taking steps to reduce the country’s reliance on imported cotton, its mills need to be fed – and buyers are getting more and more sophisticated. They have to: According to the People’s Daily Online, almost 97% of the cotton-spinning industry’s profits come from one third of the mills, meaning the other two-thirds are largely unprofitable. The industry is plagued by overcapacity and badly needs a technology upgrade. Mills also face high taxes and have little access to credit.
They are able to take advantage of certain aspects of the system, however. The consignment business in bonded areas in China allows domestic mills to better manage cash-flow and quality by having a menu of actual cotton to choose from, according to the International Trade Center’s Cotton Exporter’s Guide. This service is a savvy innovation that supply-chain minded cotton merchants are sure to use to their advantage.
Nonetheless, it remains a challenging market for mills, which is making them increasingly tough and savvy purchasers. According to the marketing team from Hong-Kong-based Wallon Cotton Ltd., competition and shrinking margins are forcing buyers in China to become more sophisticated in terms of their understanding of on-call, hedging and futures. They are also very concerned about the risk of defaults.
“I believe risk control and contract sanctity are among the most important success factors in the Chinese cotton business,” says Du Feng, CEO of Qingdao Cotton Logistics, which is located in the Qingdao Free Trade Zone and has decades of experience and credibility in the cotton industry, having established an efficient supply and marketing network from cotton-producing regions around the world to the domestic cotton textile enterprises inside China. “There’s little doubt that history does, in fact, repeat itself. It looks as though it will be another very volatile year in the cotton business, perhaps even crazier than the previous situation that occurred in 2008.
“As to what the future holds for the Chinese market, it is impossible to forecast into the long term,” Du Feng says. “But in the shorter term, I believe that consignment will become more popular for China’s mill buyers due to the tight cash flow and market risk.”
When Formosa’s Hsu is asked to predict the future for China, he laughs and says, “It’s hard to tell what will happen six months from now, much less 5 years, but I’ll give it a shot.
“It looks like the Chinese garment industry is gradually shifting from an export industry into a balance of export and domestic demand. This is likely to make the decision on whether or not to purchase imported cotton even more dependent on price than usual.”