SHENZHEN, China—In a corner of a sprawling factory in this coastal southern city, sewing machines that stitched blouses and shirts for Lever Style Inc.'s clients now gather dust. As the din on the factory floor has dropped, so, too, has the payroll. Over the past two years, Lever Style's employee count in China has declined by one-third to 5,000 workers.
The company in April began moving apparel production for Japanese retail chain Uniqlo to Vietnam, where wages can be half those in China. Lever Style also is testing a shift to India for U.S. department-store chain Nordstrom Inc. and moving production for other customers.
It's a matter of survival. After a decade of nearly 20% annual wage increases in China, Lever Style says it can no longer make money here.
Thomas Lee for The Wall Street Journal A board shows workers' statuses at each production line at Lever Style's factory in Shenzhen, China.
"Operating in Southern China is a break-even proposition at best," says Stanley Szeto, a former investment banker who took over the family business from his father in 2000.
Companies from leather-goods chain Coach Inc. to clogs maker Crocs Inc. also are shifting some manufacturing to other countries as the onetime factory to the world becomes less competitive because of sharply rising wages and a persistent labor shortage. The moves allow the companies to keep consumer prices in check, although competition for labor in places such as Vietnam and Cambodia is pushing up wages in those countries as well.
At Crocs, 65% of its colorful shoes are expected to be made in China this year through third-party manufacturers, down from 80% last year. Coach will reduce its overall production in China to about 50% by 2015 from more than 80% in 2011 so the handbag maker isn't too reliant on one country, a spokeswoman says.
Some migration of apparel manufacturing from China is expected, and even encouraged by the government, as the country's economy matures. As other Asian nations become efficient at mass manufacturing, China must embrace research and high-technology production to transform its economy as South Korea and Japan once did. But healthy economic growth requires that China expand its service sector and create higher-skilled manufacturing jobs at a rapid clip to compensate.
"If costs continue to rise, but China is unable to become more innovative or develop home-grown technologies, then the jobs that move offshore won't be replaced by anything," says Andrew Polk, a Beijing-based economist for the Conference Board, a research group for big American and European companies.
Thomas Lee for The Wall Street Journal Idle equipment at Lever Style's factory in Shenzhen, China. The firm, whose clients include Uniqlo, has cut its employees in China by a third.
China continues to be the developing world's largest recipient of foreign direct investment, attracting $112 billion last year. But that was down 3.7% from a year earlier. And exports still are rising in the double-digit percentages. Growth is slowing.
Here in the manufacturing hub of Guangdong province, Lever Style's factories provide a glimpse into the future of China's apparel industry.
The company, which is based in Hong Kong, used to manufacture its clients' clothing at three factories in China. But rising labor costs have forced the apparel maker for Armani Collezioni, John Varvatos and Hugo Boss to focus on what it does best: helping clients develop clothing while the company outsources a growing part of production.
In five years, Lever Style expects about 80% of its production to be outsourced to factories it manages throughout Asia.
As it shifts production to Vietnam, Lever Style says it is able to offer clients a discount of up to 10% per garment. That is attractive to U.S. retailers, whose profit margins average 1% to 2%, according to the U.S.-based National Retail Federation.
This shift is already well under way. Lever Style expects that a few years from now, 40% of the clothes it makes for Uniqlo, one of Lever Style's biggest customers, will come from Vietnam and 60% from China.
As China production slows for Uniqlo and other clients, Lever Style plans to return one factory here to the landlord and consolidate its shrinking workforce at the other two.
Uniqlo, the biggest apparel chain in Asia, says it makes 70% of its clothing in China but would like to cut its production in the country to two-thirds, mainly to reduce costs. A spokesman for parent company Fast Retailing Co. says the retailer has an "ongoing dialogue" with contract manufacturers of its 70 factories world-wide about where to produce its clothing.
Nordstrom, which works with 450 factories in nearly 40 countries, says cost is important but so are product quality and factory working conditions. The company hasn't seen a "material change" in how much of its apparel is being made in China in recent years, a spokesman says.
Many retailers are less concerned about where a product is made than about price, delivery and quality, says Lever Style's Mr. Szeto.
Still, he says, while China's transformation of its economy is "the right move for the country, I see this as a huge challenge for us as a company."
Next in the Series: Factories face a labor shortage, and new ways to keep workers happy.
Write to Kathy Chu at kathy.chu@wsj.com
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