HOT TOPIC A new look at old problems

ASIAN INFLUENCE CHINA RULES THE PIE

The increasing cost of imports from Chinese manufacturers has many suppliers cutting back in other areas and considering new centers for frame manufacturing

BY ERINN MORGAN

As a mighty manufacturing center for the eyewear industry, China can affect worldwide supply, demand, and cost of goods on a whim. This behemoth country is, in fact, the leading source of origin for U.S. frame imports. According to The Vision Council, China sent over 52 million pairs of frames to the U.S. in the first nine months of 2008, a 9.4 percent increase over the previous year's figures.

By quantity, China supplies a full 77 percent of the United States' frames (with Italy coming in a very distant second at just over 8 percent). By dollar volume, China shrinks to a still-impressive 52.6 percent (while Italy bumps up to over 26 percent).

Today, there is change afoot as this Asian power raises its eyewear prices, an act that has squeezed U.S. suppliers. A playing hand filled with the rising cost of raw materials, new Chinese labor laws that have amped up regulations and required employers to offer specific employee benefits, and spiking shipping costs has caused Chinese manufacturers to pass along the cost of doing business to its customers. Couple this with a turbulent economy and a weakened U.S. dollar, and a real gamble is put on the table for all parties involved.

"Everything kind of hit all at one time, kind of like our current economic crisis," says David Friedfeld, president of ClearVision Optical. "We are paying almost twice as much as we paid for the same frame four years ago, but I certainly have not doubled my prices to retailers."

Crunched to remain competitive, particularly in today's marketplace, suppliers are trying to maintain their profitability and deliver competitive pricing to the market. "There is an inherent rise in the costs of imports, which makes it more challenging from our side to maintain the quality of our product without sacrificing integrity," says Michael Jackson, president of Zeal Optics, a sports sunglass supplier in Boulder, Colo.

This scenario isn't specific to the eyewear industry. "This is affecting every industry in the world that has totally depended on China for manufacturing," says Ed Greene, CEO of The Vision Council.

The changes in China's manufacturing policies and costs may well open the door for manufacturing in other developing countries; some point to places such as Vietnam and India as being of growing interest.

Some product manufacturing is already taking place in these countries, even with prescription lenses. Perhaps taking the eggs out of one big basket and spreading them around may equate to better options for the frame industry. "The lens people have pretty diversified manufacturing sites around the world, but the frame guys have been locked into China," says Greene.

For now, the bottom line is that frame suppliers have to take a hard look at trimming the cost of running their business before rising product costs take their toll. "I wouldn't be surprised if all of this puts some companies on the edge or out of business," says Mike Hundert, president/CEO of REM Eyewear. "When you combine the cost of goods escalation over the past year along with the slowdown of the economy, the math is ugly."

A look at China's share of the frame imports market paints a very revealing picture. Will it look different in 10 years?

THE CHINESE MELTDOWN

How did it all come to be? The process is fairly clear to those who are intimately familiar with China as a frame manufacturing center.

"Within the last two to three years, their government increased regulations for factories, including taxes, where they can be located, and what labor will cost," says Friedfeld. "It has all been regulated in a very positive way for the worker and their government, but it raises our costs."

Specifically, Hundert says, the minimum wage in provinces like Shenzhen has risen by over 40 percent in the past two years. A pension system is also now in place.

Friedfeld also notes that shipping costs ballooned due to the rising cost of oil. Even with the recent ease in price pressure at the pump, Chinese shipping costs remain static because the country had purchased a significant amount of oil at high prices.

Lastly, China's raw materials costs have skyrocketed. "Most of these materials come from Japan and Europe, where the currency valuations are still high," says Friedfeld. "But, China has locked its pricing to the dollar, which is low in the world market."

China's rise as a frame manufacturing center also put the onus on the ability to produce more exotic frame styles that still maintain price value. "With this, there is a lot more wastage and investment in machinery, so the manufacturing prices will go up as a result," says Friedfeld.

As all this was happening and Chinese manufacturers were faced with new costs, the downturn in the world economy created a storm swell that forced factories out of business.

"First, it was at a point where factories were forced to raise prices," says Hundert. "But, as a result of the global economic calamity, the whole thing changed and the focus of attention was on getting orders and staying in business. Still, tens of thousands of factories in Southern China have closed and others have had layoffs."

CLAMPING DOWN

U.S. frame suppliers are working to keep their businesses afloat. Many are employing new strategies for success.

"As our costs are increased, the natural progression would be to increase wholesale prices; but then, retailers would increase retail prices, which could eventually price us out of the market," says Jamie Shyer, Zyloware's chief operating officer. Instead, suppliers are getting creative.

At Modo, a New York City-based eyewear supplier, smarter inventory management is one tactic to maintain margins. "We have realized that by selling the right portion with the right frequency, the ultimate result will be profitability," says Alessandro Lanaro, president and CEO of Modo.

Managing more compact collections with specific targets—as opposed to throwing out large amounts of styles and seeing what sticks—is another strategy suppliers are employing. "We are also trying to work with customers on selling points," says Lanaro. "We try to encourage them to use the web more to utilize our business-to-business solutions and intelligence by checking bestsellers, latest releases, and the ship dates of those on backorder to ensure the right products for their immediate needs. We believe this will also help reduce costs by having customers buy the right products at the right time."

At ClearVision, costs are being trimmed by the reduction of waste and elimination of unnecessary costs. They are bringing more standout colors and designs to the market to entice buyers while reducing the more costly complexities of frames.

Says Shyer: "These times are not all that bad; it makes you a smarter business person and you clean off the excess fat, which you may not have needed anyway." FB