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Mike Hundert
Chief Executive Officer
Chief Creative Officer
REM Eyewear
Base Curve Eyewear
XIAMEN, China—I am just wrapping up my semiannual sojourn to eyewear manufacturers in China. In the past two weeks, I visited five cities with the REM product team, met with 19 factories and two customers, each with plenty of tales to tell and perspectives to offer.

To fully appreciate what is happening in the eyewear supply chain that is centered in China today, it requires some imagination mixed with stark realities. This morning’s headline in the China Daily reads, “Companies Warned of Increasing Labor Costs.” Worker disputes, according to the newspaper “send a clear signal of tighter labor supply…Foreign and domestic enterprises should brace themselves for hefty wage rises in the coming years after labor discontent at Foxconn
and Honda…”

Reports stated that work pressure and discontent at electronics giant Foxconn (which counts Apple, Sony, and HP among its clients) have led 10 workers to jump from factory buildings to their deaths at their Shenzhen factory in recent weeks. Tens of thousands of Chinese workers are on strike at Honda China. At optical factories in the Pearl River Delta, workers are in short supply forcing up the cost of wages and benefits.

Add to that, continued pressure on the Chinese currency to float higher, already up more than 20 percent from just a couple of years ago, and it’s clear that consumer prices for goods made in China are on the rise. One manufacturer told me that raw material costs, including metals and plastics, are up 28 percent in the past six months.

What is going on in China, and what are the implications to us in the eyewear business? To better understand the fast changing landscape in the country that makes more than 90 percent of today’s eyewear, it is important to appreciate how life for the Chinese has changed in recent years.

Imagine access to limited information controlled by the government, of a social environment restricted to your local community. Then, imagine getting a satellite dish and a plug into the worldwide web. Just think of the ensuing changes in attitude and aptitude and the exposure to goods and services that drives demand.

Now imagine hundreds of millions of people experiencing these changes at the same time. They want some of the products they see. Heck, they want some of the products they make (hopefully including our Converse Eyewear).

Let’s go back to the beginning. Imagine living on a family farm. As a teen, your parents send you thousands of miles from home, not for boarding school, but to economic zones to work and live at factories for $150 a month
 
REM’s Mike Hundert, right, and Nicolas Rosseillier atop Victoria
Peak overlooking Hong Kong.
 
Among the factories and retailers we visited was Jean Scott, an
American optical industry veteran who now has two stores in
Macau, including this high end boutique in the Venetian Hotel.
Pictured (left to right) are: Daniel Lai, Managing Director of
REM’s Asian business based in Hong Kong; Mike Hundert, REM
CEO; Jean Scott; and Nicolas Roseillier, REM and Base Curve
Creative Director.
(plus room and board). These teenagers are told to save their wages and bring them back to the family each February during the country’s New Year holiday. Now, no longer is that necessary, and no longer is it happening as it had in the past. How is it that a country of 1.3 billion people has a labor shortage? This too is China.

Hong Kong was an eyewear-manufacturing center for decades when in the 1980s the Chinese government seduced those companies (and those in other industries as well) to set up shop across the border in the special economic zone of Shenzhen. Incentives included access to virtually unlimited cheap labor. Countless industries and foreign investors accepted the offer. Some 30 years later, there are no special zones for development. The entire country is a thriving economic zone growing at approximately 10 percent annually. Jobs are now plentiful, eliminating the need to travel far from home for work.

Today, the southern region of China, closest to Hong Kong is said to be short more than one million workers. Competition for workers is driving up labor costs even beyond the fast rising minimum wage.

Optical factories are filled with new orders as the world emerges from recession during which customers lived off their inventory and now need replenishment. Among other repercussions, the labor shortage has drawn out delivery of goods to typically be five or six months, versus the 90-day norm of the recent past. Overtime is a controversial issue. Workers desire the extra pay and pressure for delivery demands it. However, laws place limits on maximum hours allowed and demand overtime pay premiums. But this is China. Not all factories comply. And oh yes, there is plenty of corruption that allows maneuvering. This remains
China too.

While all these changes create forces that will increase the cost of frames and sunglasses, opportunities are created. Factories that held back cost increases during the recession have started imposing higher prices. Like so many other industries, companies have cut the fat (i.e. some no longer provide room and board for all workers) and now face the inevitability of higher consumer prices. At the same time, China’s mushrooming middle class creates new consumer markets.

Is this sustainable, or will it lead to an opportunity for some other country to compete with China? I am often asked, “What about Vietnam? What about India?” Can’t we simply engage those countries to make eyewear at cheaper prices to bring stability to the cost-price ratio? The answers are complex. Requirements seem to be (a) a predictable government, (b) infrastructure of subcontractors for the eyewear industry, (c) work ethic, and (d) their interpretation of quality.

Vietnam, a country of less than 100 million people, is often mentioned as the next manufacturing country for eyewear. Some foreigners fear investing in a country with such strict government controls bring uncertainty about the future. Despite recent political unrest, the need for government stability holds out possibilities for countries like Indonesia and Malaysia, or even Thailand.

Any country making eyewear requires the infrastructure of subcontractors and this will take many years to evolve.

Taiwan was a major maker of sunglasses in decades past. High costs drove many to invest in manufacturing in China. Like Hong Kong optical factories, those Taiwanese were attracted to the special economic zone just across the Taiwan Strait in the city of Xiamen. Some believe that as costs rise in China, manufacturing may return to their homeland. That may be wishful thinking given the continuing investment they are making on the mainland.

India certainly has the population to become the world’s factory. The fact that they speak English is an advantage. At the same time, manufacturers I talked with in China say Indians are not as hard working as the Chinese, and have a low standard for quality, among other unflattering perspectives of Indian ethics they mention.
 
Entrepreneurial Chinese put their future in automation. Hundreds of millions of dollars are being invested in technology that will lead to producing eyewear with less labor and more consistent quality.

Any change in where eyewear is produced will take many years, and will more likely migrate to other regions within China. During that period, technological advances will allow eyewear to be made with less labor, thus solidifying China as a production center where the government, while perhaps controlling and certainly

The best business in China right now might be the crane
business. Construction is booming throughout China.
Here cranes are building a new train station in Hong Kong
that will be an ultra high speed link to Shanghai.

filled with corruption, is indeed stable, where the infrastructure is well in place, where people are enterprising and hard working, where experienced craftsman reside, and where workers understand the quality demanded by global consumers.

It is no longer about the country of origin, even forgetting about all the trans-shipping that is rampant. It is now far more about “factory of origin,” due to the great disparity of sophisticated manufacturing and quality throughout China’s eyewear manufacturing industry.

The good news is that while cost of goods will be increasing, the quality will be improving as well. It is the Chinese culture to reinvest in their business. Skilled and experienced workers have learned how to make and certify high quality eyewear. Manufacturing techniques are impressive and their quality control has become industry leading. The ability to move, work, understand and collaborate in a global marketplace is well established. China will continue to be the homeland for manufacturing eyewear as far as the eye can see.

As I depart Xiamen to begin the journey home, I just received my daily email blast from WWD (Women’s Wear Daily), the headline of which reads, “China Labor Prices Seen Rising.” A photo shows a protester holding a sign saying, “Workers are not machines, they have self esteem.” The article cited the suicides at Foxconn “raising new questions about whether low-cost production is worth the potential consequences.”

—Mike Hundert, Chief Executive Officer and Chief Creative Officer, REM Eyewear