Source: The Stitch Times: March 2009
The Chinese textile industry has indeed hit a bad patch with several factors working against its competitive edge that it has all along enjoyed and helped it to position itself as numero uno in the world of textiles and apparels. But things have changed a lot for sometime; in fact ever since the economic meltdown cast its influence over the apparel demand the world over.
This has forced the Chinese industry to realign and reposition itself. The transformation of China's textile and apparel industry is likely to continue for some time, cutting jobs by the hundreds of thousands- the restructuring of Weiqiao alone, China's largest cotton textile enterprise, rendered 17, 000 workers redundant. But then, many people see this as an opportunity to trim and gear itself to take on the new scenario. It is widely believed that the present crisis will result in a more efficient apparel industry, better adjusted to meeting demand in foreign and domestic markets.
However, the declining international competitiveness of the Chinese apparel industry is in marked contrast to that of the country's economy as a whole. According to the Global Competitiveness Report 2008-2009 from the World Economic Forum, China entered the Top 30 in 2008, up four places from the year before. The country benefits from its large and rapidly growing foreign and domestic markets, allowing for significant economies of scale. Macro-economic stability also remains a source of competitive advantage, while innovation is becoming a new one.
But as far as the apparel industry is concerned, there's unanimity that it's losing its edge.
At last autumn's lntertextile Shanghai Apparel Fabrics trade fair, representatives from the clothing industries in Vietnam, Cambodia and Laos, all said they expect to benefit from China's declining competitiveness. Indeed, a number of factors are undermining China's competitive superiority, which together have been responsible for blunting the competitive edge that the Chinese products enjoyed over their competing economies.
Rising labour costs
First of all, it is the question of rising labour costs. According to Textiles Intelligence, Werner International data shows the average annual increase in Chinese labour costs over 2004-2007 was 11.8% in the coastal region and 14.6% inland. In 2008, Chinese labour costs are expected to have risen by 20-25%. Stringent labour laws introduced in January 2008 stipulate a minimum wage and fixed overtime, severance pay, health and accident care and a pension plan for workers. Credit Suisse estimates that these laws alone add 15-20% to the cost of running a labour-intensive industry, and for small and medium-sized apparel exporters they come at a rough time.
Appreciation of Yuan
The Chinese industry has so far been used to a frozen foreign exchange rate of Yuan, which gave much of leeway to them to compete with other countries which were suffering from the appreciation of their countries. This had given an undue and undeserving edge to Chinese product prices all over, which helped them to emerge the world leaders in export. The situation is no longer the same, as; Chinese had to allow Yuan to float on its own strength; of course with the Government support available at all times by restricting the free rise or appreciation of Yuan. But this could not be managed for all times under the pressure from the US, the EU and other countries. From the beginning of July until the end of October 2008, the Yuan rose almost 24% against the Euro. As most Chinese apparel exporters apply razor-thin profit margins, such changes in foreign exchange have proved highly injurious to their competitive edge.
Rising costs of raw materials
There has been substantial increase in cost of raw materials, particularly cotton, polyester and wool. In 2007 alone the cost of cotton imports rose about US$286 per ton. This apparently had had an adverse effect on the Chinese cost prices of their products in foreign markets; thereby blunting their competitive edge.
Of late, the Government has been enhancing their tax rates. This has adversely impacted the cost of production of textiles and garments. Though the Chinese Government has raised rates of taxation on foreign manufacturers higher than the indigenous companies, yet their impact has been substantial on the pricing of their products. Several regions have been hit by higher taxes. In Shenzhen, a major apparel production centre close to Hong Kong, the tax rate for processing and manufacturing companies was 15%. Now it's 25%.
Shortage of workers
From the beginning of July until the end of October 2008, the Yuan rose almost 24% against the Euro. As most Chinese apparel exporters apply razor-thin profit margins, such changes in foreign exchange have proved highly injurious to their competitive edge.
Improving employment prospects in rural areas and inland cities, coupled with the rising cost of living in the Pearl River Delta, Guangdong and the Yangtze River Delta, mean many of China's estimated 210m migrant workers are choosing to stay closer to home. Many garment factories can't find enough workers, even if they are offering pay rises in excess of 10%. Michel Boogaers, CEO of Hong Kong-based Able Glad, a manufacturer of sports, casual and ski-wear, with factories in Dongguan and Shaoxing, says both factories now have to operate with 800 workers each instead of the usual 1,000. Other apparel producers who are in need of workers are reportedly cutting in their customer base, especially shunning customers who in the past imposed "unrealistic" social compliance requirements.
Tighter pollution regulations
Both the textile and garment companies have been hit by tighter pollution regulations and other environmental requirements. These companies have been pressed into investing in expensive new machinery and improve their waste-management systems. Chinese officials can be ruthless on environmental matters, and in mid-2007 vowed to simply eliminate some 2,150 polluting firms by the end of 2008.
Neither the global financial turmoil nor recent company break-downs in the Chinese textile supply chain (from key suppliers like PTA-producer Sanxin to thousands of apparel makers) were able to convince Chinese banks to relax their credit policy for the apparel industry- an industry they traditionally approach with caution. This has restricted the unhindered flow of funds, resulting in Chinese textile and garment factories the constraints in availability of funds.
This situation calls for innovative strategies. The Chinese Government itself has recognized the need for providing full throated support to the ailing textile and garment industry. Hans De Gusseme, the Commercial Director of weaving machinery buider Picanol (Suzhou), has a positive outlook on developments in the Chinese textile and apparel supply chain and is fully aware of the seriousness of the crisis rocking the industry. Yet he's confident the combined efforts of the Chinese Government- which has already raised export tax rebates for garments and textiles from 11% to 17% and is mulling a new stimulus package for the sector- and individual companies will succeed in re-shaping the industry. He believes that if the industry is able to operate higher in the value chain, it will offer competitive advantages in both domestic and international markets.
The following are eight re-positioning strategies currently applied by Chinese apparel companies.
The Chinese industry itself has taken up measures, evolved new strategies to curb their rising costs. One way of this was to relocate their industries at places, where the costs of land and labour are lower. For this they have moved in to the interiors, where the cost of land is much less, which they can buy after disposing of their own present locations. These areas, it is observed, are also getting labour at cheaper rates, because of lower cost of maintaining themselves their families. For example, early in 2008 Hong Kong sweater maker Milo's Knitwear opened a factory in Jiangxi province, some 650 km from Hong Kong, where operational costs are about 20% lower than in nearby Dongguan. Another famous setup in Dongguan, Dongyue Garment Factory, has relocated one of its workshops to Heyuan City in the north east of Guangdong province and another one to Hubei province. Other companies are relocating production to cheaper Asian countries like Vietnam, Cambodia and Indonesia, and even to commercial hub Dubai, where Chinese workers are reportedly flown.
Shifting focus on domestic market
Earlier, the focus of Chinese manufacturers, whether of textiles or garments, was on the export markets rather than domestic markets. Now that the thin veneer of lower Chinese products has worn off which has rendered Chinese products less competitive abroad, the focus has now shifted to the domestic market, which is by no means small. According to the China National Textile and Apparel Council, China's domestic clothing demand in 2007 rose by 32%, 14.5 percentage points higher than the general growth in consumables.
It's also noteworthy that Western retailers are betting on soaring clothing consumption and growing quality and brand awareness in China. Early October 2008, Marks & Spencer opened a 3, 800 square metre flagship store in Shanghai. Brands such as Zara, H&M, Muji, C&A and American Apparel also have a presence in China, while luxury brands like Gucci and Prada cater to the wealthy.
Shift in export destinations
So far, the US and EU markets have been the most important export destinations, but these markets, being lucrative, have been a bit too crowded with many countries indulging in cut-throat competition in getting a pie in American and European markets, with the result that some of the other less important but still potential markets had been left out. Now, these markets have started receiving attention from the Chinese exporters who have shifted their focus on export destinations to neighboring Asian countries and even to South American markets.
Shift from 'Make' to 'Create'
Though the Chinese Government has raised rates of taxation on foreign manufacturers higher than the indigenous companies, yet their impact has been substantial on the pricing of their products. Several regions have been hit by higher taxes. In Shenzhen, a major apparel production centre close to Hong Kong, the tax rate for processing and manufacturing companies was 15%. Now it's 25%.
Many firms in Southern China's apparel producing centres, like Shenzhen, Dongguan and Guangzhou, are planning to shift their production model from 'make' to 'create'. In an effort to encourage local manufacturers to develop brand names, the Dongguan treasury department has allocated RMB67m (EUR7.8m) to reward those designated "famous brand enterprises". The shining role model for Chinese manufacturers who dream of their own brand is 'Aimer', China's top high-end lingerie company in terms of employment (3, 000 staff), sales (US$90m in 2007) and consumer awareness.
Shift from quantitative to qualitative production
Having been a world leader in mass production and having enjoyed the massive exports, the Chinese have now realized that there is more money into production and export of quality products rather than quantity, which has so far been their one-point programme. The high technology products have, as a rule, commanded higher prices and better margins over the massive casual products, in which Chinese producers have been so good so far. This is the strategy of Hong Kong based TAL Apparel, one of the world's largest contract clothing producers whose customers include JC Penney, Calvin Klein, Debenhams, Giordano, and Liz Claiborne. Last year TAL started up a new US$70m factory in Dongguan, and it plans to double the size of the factory in 2009.
Guarantee-backed product quality
With the growing and mandatory requirements of the Western consumers in particular, the Chinese textile and garment producers have become deeply conscious of maintaining quality along side the social compliance, which has been a casualty all along. It is here that The Sri Lankan products have started earning a few brownie points over their competitors by committing and swearing themselves on the ecology. Better quality of products, supported by ecological parameters find ready acceptability anywhere in the world, particularly in the more lucrative markets of the US and the EU and in any case, get far better prices than the mass produced apparels.
The China National Textile and Apparel Council is co-operating with the Foreign Trade Association in Brussels, the European Commission, the US-based Worldwide Responsible Accredited Production (WRAP) and many retailers to build a responsible international supply chain.
Joint Initiatives among Chinese companies
As a recent development, the Chinese companies have been driven to consider joint initiatives in improving their processing. What some of the smaller companies could not achieve better processing facilities, because of higher costs involved, they have now chosen to collectively own a common processing unit to process their products at world class standards. Last year, eight textile dyeing and printing plants in Dongguan invested around US$4.5m in a water processing plant.
Avoiding price competition
There has been an intense, often bordering cut throat competition among the Chinese manufacturers themselves who have been undercutting each other in offering the same level of technology or machinery or even other products. This gave distinct and perhaps undue advantage to their buyers. There is biw a common realization that unless they themselves start avoiding under-quoting their prices to win over the buyers, each of them would be net loser. In Haining (l00 km from Shanghai), a city that claims to represent 25% of China's warp knitting industry, a price index system has been established to allow companies to adjust the pricing of their products to avoid "vicious price competition".
As someone rightly said, necessity is the mother of invention. New strategies are being invented and evolved by Chinese textiles and garment exporters to meet the new challenges that a dynamic world of international trade keeps on posing.
Originally published in The Stitch Times: March 2009