Forces of Change: The Global Textile Industry in Transition

Thursday, September 03, 2009

Enormous forces of change have buffeted the global textile industry over the past few years. Traditional textile manufacturing industries in the U.S. and Europe have wilted in the face of increase competition from Asia. Further, the emergence of China as a key exporter of textiles and apparel has overshadowed almost every aspect of the global trade situation.

However, the rise of Asia as the major supplier of textiles and apparel in the world has coincided with a number of unforeseen developments that has helped to dramatically alter the textile landscape. Understanding these developments is the key to understanding China’s role in the textile industry today as well as tomorrow.

The Effects of Overcapacity on the Global Textile Industry

Overcapacity -- a constant reminder that the boom years of the 1990’s -- now has a strangle hold on growth in the first decade of the New Millennium. Textile producers throughout the world had enjoyed unprecedented profits, only to see that now turn into unprecedented red ink. What happened? Where did all the business go? And why are entire industries shutting down in countries that just a few years ago seemed destined to become major textile centers for years to come? The answer lies with technology -- but it also lies with convoluted government policy.

So why is there so much capacity? Ironically, a government-sponsored program -- called the Multifiber Arrangement (MFA) -- which was designed to protect the textile industries in Europe, the U.S. and Canada has had the surprising effect of scattering trade all over the globe and helped to build production in countries that otherwise would not be the case were it not for quota.

Under the MFA, buyers in the U.S. and Europe searched the globe for quota-free suppliers. In effect, a global hunt was underway to find new sources of supply. Governments in Third World countries on the other hand searched for ways of building their economies and provide jobs for their people. Apparel production proved to be a relatively easy way of employing large numbers of people.




Ultimately, many countries were in the global textile business only because they were either not subject to quotas or had amble unused quota available – not because they were particularly efficient producers. Now with the end of the MFA, smaller, less efficient suppliers are being slowly squeezed out by the behemoths of China and India.

In turn, as the supply base bulked up over the past couple of decades culminating with huge capacity in the 1990’s, a classic oversupply problem has developed as global demand for textiles has slumped badly since 2000. Too many sellers are chasing too few buyers. How this oversupply problem is sorted out will be key to understanding how the industry will evolve.

The global textile industry today is vastly different from the global industry of just twenty years ago. Whereas twenty years ago, Europe and the United States dominated the global production and trade in textiles and apparel, today most of the world’s production and trade is in Asia – or more specifically in China. This shift in production from the developed world to the developing world is truly striking. For example, twenty years ago, the polyester industries in Europe and the United States were locked in a competition to see which industry was the largest in the world. Today, however, China’s polyester industry is larger than the industries in Europe and the United States combined. In fact, China consumes nearly one-third of the world’s cotton and man-made fiber -- a claim that neither Europe nor the U.S. could ever make.

At the same time, the productivity of all manufacturers in the textile supply chain has improved exponentially. In part, this improved productivity came about in the developed world as companies struggled with new competition in the developing world. Cash-poor, but labor-rich, developing countries in Asia found they could produce quality textiles and apparel for a fraction of the cost to produce the same goods in the developed world. Producers in the developed world, straddled with higher labor and production costs, turned to technology to help lower costs and improve competitiveness in global markets.

Despite claims made by many textile leaders in the developed world, technology has not proven to be the “silver bullet” solution for firms in the U.S. or Europe to compete against their Asian counterparts. Simply put, technology alone has not been enough, as low cost Asian producers have also invested more and more in new plants and equipment further causing more competition in the marketplace -- this on top of a distinct advantage in terms of labor costs. For developing countries, the combination of low labor costs and technology improvements has been a winning combination that developed countries cannot compete against.

The MFA leaves a legacy of government policy that has left its indelible mark on the global trade. Under the rules established as part of the World Trade Organization (WTO), all bilateral textile and apparel quotas implemented under the MFA were abolished in 2005. Although initially, the end of the MFA was heralded by exporting nations, both large and small, today a number of smaller suppliers have realized that they are being squeezed out of the market because their main advantage -- quota availability – is now gone.

At the same time, over the past twenty years, an ever-expanding quota system not only fueled export growth, but also provided key exporters with access to overseas markets. Yet, overall market growth in the U.S. and Europe is not much greater than population growth (about 1 percent), so as imports from the developing world grew, domestic manufactures, unable to compete, retreated leaving gaps in the market for low cost imports to fill.

Today, however, this has changed as now the top exporting countries are sustaining their growth at the expense of other less competitive suppliers. Domestic producers in the U.S. and Europe have been driven into niches leaving the broad commodity business to imports. Nevertheless, there is not enough net growth in the world to provide growth for a wide number of suppliers. With the quota system eliminated, the supply situation will collapse around a relatively few suppliers such as China and India as the least competitive producers drop out of the market.

What will be the probable landscape for the global textile industry in the future? It will boil down to winners and losers. Who will be the likely winners over the next few years? China will be the dominant supplier of textiles and apparel over the next 10 to 15 years, with countries such as India and Pakistan also commanding a significant portion of the world textile trade. Fiber consumption in these countries will continue to rise as the export-oriented textile industries continue to expand. Who will be the likely losers? The likely losers will be companies in Europe and the U.S. In turn, fiber consumption will suffer in each of these markets as domestic industries continue to shrink. Also, smaller suppliers in Southeast Asia and the Caribbean will lose out over time, as they will be increasingly unable to compete on a global scale.

Needless to say, the future is not a certainty. In time, even China will have to compete with newly emerging suppliers such as Vietnam, Cambodia and Bangladesh.

The Outlook for China’s Textile Industry

The current status of China’s textile industry may be summed up in one word: growth. In turn, the future prospects for China’s textile industry may be summed up in two words: more growth.

However, even with current and projected growth in China’s textile industry, structural issues, new emerging competitors and slowing growth in the rate of global consumption of textiles in the coming years will temper industry expansion. At the same time, China’s textile industry, though exhibiting strong growth in recent years has been plagued by a series of problems ranging from (at times) chronic overcapacity, inefficiencies brought about by central government planning and difficulties in securing consistent supplies of raw materials. These problems still affect the industry today.

In many ways, the emergence of China as a dominant global player in textiles and apparel up until now has mostly been the direct result of China’s success in the cut and sew trade, and not really as a result of its textile industry. In fact, it is the growth in China’s cut and sew business that has in large part pulled China’s textile industry along.

In order to fuel China’s rapidly expanding global reach in apparel, the country’s apparel industry imports whatever it needs that it cannot find produced domestically. Thus, China remains a major importer of yarns and fabrics; in particular, China imports much of its basic textiles from other Asian suppliers. Yet this import phenomenon will not last for much longer as the country will increasingly rely on domestic sources for its textile supply – a supply that is increasingly supported by overseas investment.

Prospects For Future Growth

Much of China’s future growth in textiles will be predicated on several key factors:

1. China’s textile industry will continue to receive outside investment.
2. China’s textile industry will continue to expand as long as there are expanding markets for Chinese apparel globally.
3. China’s textile industry will continue to expand as long as there are few trade barriers erected by importing countries.
4. China’s textile industry will continue to expand as long as there is a rising standard of living at home.
5. China’s textile industry will continue to expand as long as there is political stability at home.

Of course, there will undoubtedly be unforeseen factors that will affect the Chinese industry. For example, SARS, another Asian currency crisis, political instability at home are all unknown “wild cards” that can affect China’s textile industry.

Outside Investment

Hampered by a variety of factors, China’s textile industry will need to continue its active courting of foreign investors in order to help provide not only much-needed capital, but technical expertise in order to improve the management and production efficiency of its textile infrastructure.

China has been very successful in attracting outside investment to fuel growth in its textile industry. Investment has taken the form of investment for new the construction of new mills (capital construction), as well as for efforts to modernize older facilities (innovation). With regard to modernization, China remains the world’s leading importer of new textile equipment.

An expanding global market will be critical for China’s textile industry over the next ten years. Although long-term projections prepared by Globecot Associates suggest that the rate growth of the global market will likely slow over the next 15 years, China’s textile industry will continue to expand due to a greater export market share and rising domestic consumption for textiles.

In terms of exports, China is forecast to drive other suppliers out of major markets such as the U.S., thus further solidifying the position of China’s textile industry as the largest in the world. For example, in the case of the U.S. market, China is forecast to more than double its share in the U.S. apparel market by 2007 and further expand its position by 2010.

However, as is illustrated in the U.S. example, the rate of China’s expansion in the U.S. market will slow as the end of the decade approaches as other new suppliers (such as Vietnam, Cambodia and others) step up their production of finished apparel products.

Trade Barriers To Chinese Exports

The Chinese government will need to carefully manage its relations with the governments of importing countries, as there will likely continue to be efforts by importing nations to find ways of disrupting Chinese exports in an effort to answer calls by industry constituencies to control rising imports. There will also be calls for investigations of China’s trading patterns as import-impacted producers in the U.S. and E.U. will alleged that China transships much of its merchandise through third countries.

At a minimum, transshipments are a serious perception problem for Chinese makers. Transshipments, real or otherwise, will also fuel government use of the WTO safeguard.


The Importance of a Rising Standard Of Living At Home

While exports will continue to be the main engine of growth for Chinese textiles over the next ten years, it will be increasingly important for China to build a rising standard of living at home in order to boost domestic consumption of textiles. This is critical for the long-term prospects for the Chinese textile industry, as the growth in global consumption of textiles will likely slow in the coming decades.

Concurrently, much of China’s export growth will be fueled by the displacement of other suppliers in the world market. Although China will gain market share, this will not alter the fact that growth in the major importing markets will only match population growth – a level not adequate to maintain China’s rapid growth in recent years.

Thus, when the export engine slows for Chinese manufacturers, it is possible that the domestic market would have already developed adequate buying power to help offset declines in overseas sales. Globecot forecasts suggest that future apparel purchases domestically will rise sharply, though it is uncertain if that increase will be enough to offset what may prove to be a more difficult export environment during the next decade.

Implications for Cotton Consumption

The implications for cotton consumption are that for the next few years, cotton consumption will rise rapidly, but will level off as the rate of export growth in textiles and finished apparel subsides towards the end of the decade. To some degree, increased domestic demand for textiles will help to partially offset that decline, but to what degree it will be offset is hard to predict as the buying power of large segments of the Chinese populace are hard to anticipate going forward.

Continued cotton consumption growth in the future to feed the expanding textile sector will boost domestic production and imports. The need for increasing amounts of cotton imports will be driven both by China’s limited ability to expand domestic output without having to resort to more marginal and less productive lands and by demands for cotton qualities that are not produced in sufficient supply by domestic growers.

At the same time, imports of cotton yarn will likely continue to rise rapidly as China’s raw cotton import quota fills year in and year out. There are no quantitative limits maintained by China on the importation of cotton yarn. As a result, it is likely that China will continue to import significant quantities of cotton yarn from other Asian countries, India and Pakistan, in an effort by domestic mills to counteract shortages of raw cotton in the local market and corresponding higher prices for locally-grown cotton.


The Likely Scenario


I can project a future scenario for Chinese textiles which in general is typified by strong aggregate growth for the industry, but at the expense of other suppliers. In turn, this rapid growth will begin to slow before the end of the decade as increased competition from other suppliers and slowing global consumption of textiles begin to take their toll.

At the same time, I can forecast an improving standard of living for many Chinese, which will translate into improving demand for textiles via rising apparel sales. In large part, increased domestic consumption of textiles will translate into the eventual demise of the industry, as the government and outside investors will increasingly look for higher valued-added products (such as cars and planes). The textile sector has historically been a stepping-stone industry for developing economies and China will not be an exception to the historical rule.

It will be increasingly important for cotton growers throughout the world to find better ways to penetrate the Chinese market. To do this, growers will need to find ways of becoming choice suppliers to China’s burgeoning textile industry.

Needless to say, there are problems in selling foreign cotton in China, not the least of which are the problems of staple length and overall quality. Education of Chinese mills will be important. Equally important will be good relations with the current government in order to keep the annual cotton import quota from being capped at too low a level.

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