Yesterday, Today and Tomorrow: Prospects for China’s Textile Industry

Wednesday, March 04, 2009

With China’s ascension to the World Trade Organization (WTO) long completed, global investment in China’s textile industry has accelerated and has positioned the country to be the world’s preeminent producer of yarns and fabrics for the remainder of this decade, if not beyond.

There has been a lot made in industry circles in recent years over China’s huge gains in exports since ascension to the WTO. The growth has been truly staggering. In the case of the U.S. market, China surpassed Mexico late in 2002 as the largest supplier of textiles and apparel and has remained in the top position ever since. Further, Chinese exports have continued to grow in the U.S. market despite the presence of safeguard quotas on various products.

Although bilateral safeguard quotas do exist between China and the U.S. today, next year these quotas are do to be lifted. In turn, the current network of quotas maintained by the U.S. and E.U. are not nearly as extensive a web of import controls as was seen during the days of the Multifiber Arrangement (MFA) when Chinese exporters were faced with tight aggregate and group limits. As a result, once the U.S. and E.U. lift the last vestiges of protectionism China will be poised to even further solidify its position as the dominant supplier of textiles and apparel in the world.

To illustrate the success of China in the global export markets, U.S. imports of textiles and apparel from China since 2002 have grown by more than 275 percent to reach 18.613 billion square meters in 2007.

For years, China was a major supplier of apparel and other cut-and-sew products to the U.S. market, in large part due to low production costs, coupled with above average quality. But in 2002, China began to ship greater quantities of textiles – a trend that has only accelerated to-date. This is an important point, as China has not always been the best producer of textiles in the world. Government regulation, oversupply, poor infrastructure, raw material bottlenecks and the relatively poor quality of locally grown cotton all conspired to harm Chinese efforts to enhance their textile industry.

Today, it appears that all of that is changing. Investments have been made in new plants and equipment. China is now the largest importer of textile machinery in the world. Low productivity – long a drag on the domestic industry – is improving. Investment has flooded in from Hong Kong, Taiwan, Japan and elsewhere. Although problems still exist in the spinning sector, measurable strides have been made by China’s weaving sector.

In order to provide a context for the enormous growth in China’s textile industry – as well as its enormous potential – it is useful to look at the history of the industry.

As an organized endeavor, China’s textile industry emerged in the 1870’s. From the outset, textiles have been central to the Chinese economy as a key employer and earner of foreign exchange. Growth in the industry was made in fits and starts over the years -- typified by periods of rapid growth followed by years of rapid decline. In the years leading up to the establishment of the current Chinese state in 1949, textile expansion was often interrupted by war, shortages of capital and a lack of raw materials – in particular, a reliable supply of quality cotton. As many mills leading up to 1949 lacked adequate resources to purchase new machinery and equipment, local makers were forced for many years to make do with old, inefficient equipment.

By 1949, the Chinese industry was comprised of some 179,000 firms, nearly all of which were small, privately owned operations. The industry employed 745,000 workers, but most of these workers were basic laborers. Reflecting a weakness, the industry employed just 8,000 technicians, thus technical innovation was hard to come by in China in the early years leading up to the Chinese Revolution. Nevertheless, the industry was quite large in comparison to other employing industries of the time. To place it in some perspective, employment in the pre-revolution textile industry was about the same size as employment in today’s U.S. textile industry.

In terms of production, by 1949 the industry maintained five million cotton spindles and 64,000 cotton looms -- producing 326,000 metric tons of cotton yarn and 1.8 billion meters of cotton cloth annually. Such capacity compares with present-day capacity levels of more than 55 million spindles and more than 750,000 looms installed.

After the revolution in 1949, the new Chinese government embarked on the first of a series of five year plans that mandated a strict rationalization of the domestic industry, as well as provided production benchmarks for local manufacturers. In addition to consolidating smaller manufacturers into larger cooperatives, the five-year plan provided much-needed capital for an expansion of the industry.

Although Chinese central planning -- as epitomized by the five-year plans -- had their drawbacks, the initial five-year plan did help to set the stage for a virtual explosion of the Chinese textile industry.

By the 1960’s, China had nearly doubled its installed base of cotton spindles to 9.8 million. Further, the industry expanded its weaving base to 310,000 looms – a nearly five-fold increase since 1949. As a result, production grew rapidly so that by 1965, China was producing more than 1.3 million metric tons of cotton yarn and more than 6.3 billion meters of cotton fabrics annually.

Although China initially began its broad expansion in cotton yarns and fabrics, the country was quick to expand its use of man-made fibers beginning in the 1960’s. With the worldwide boom in polyester usage in the late 1960’s and 1970’s, Chinese mills scrambled to use more synthetics in their production. Initially, China imported most of it man-made fibers, but as the 1970’s unfolded, the government stepped in to provide the financing for the construction of local man-made fiber capacity. Acrylic capacity was initially built and then expanded to include polyester and nylon.

Concurrently, the cotton, wool and silk sectors were also expanded. By 1978, there were 15.6 million cotton spindles – more than three times the number of spindles installed in 1949. In terms of output, cotton yarn production soared to 2.4 million metric tons – more than seven times the level of 1949 – while production of cotton fabrics reached 11 billion meters – a six-fold increase.

In part due to an explosion in domestic consumption, the government embarked on an even greater expansion program for the textile industry after 1978 when – building on improved relations with the West – the government announced a series of initiatives coming out of the Third Plenary Session of the Eleventh Central Committee that provided for greater openness in dealing with foreigners and a greater receptiveness to foreign investments.

By welcoming foreign investment and business relationships, improved technology and additional financial capital were made available to contend with a situation where demand was outstripping the capabilities of a strictly planned economy. It has been the opening of the domestic market to foreign investment that has done the most to benefit China’s textile industry and in turn has propelled China to the forefront of the global market for textiles.

China’s textile industry is centered along China’s eastern and southern coastal regions, but is particularly heavily concentrated in the provinces of Jiangsu, Shandong, Zhejiang, and Guandong. Much of the traditional industry has moved out of areas such as Shanghai, Tianjin, Sichuan, Shaanxi, Shanxi and Heilongjiang in an effort to be better located near ample supplies of cotton and man-made fibers, as well as the transportation infrastructure to access foreign markets. One benefit of this shift has been a reduction in old, inefficient and generally money-losing state-owned textile capacity, while the new capacity in the textile centers along the coast is largely joint-venture or privately (or collectively) owned with modern equipment and management style.

China has made cotton quality a top priority, but work still needs to be done. Some mills continue to report problems with domestic cotton lots not meeting contract specifications, as well as rather frequent cases of cotton being adulterated. Mills also struggle with insuring a steady supply of domestic cotton from the newly liberalized cotton marketing system. Once completely monopolized by state-run entities, the new mixed system of state-run and private cotton merchants is relatively immature, leading to some fragmentation in the domestic cotton market. These problems, however, will likely abate rather rapidly over the next few years under pressure from the growing demand of the textile sector for timely supplies of high-quality cotton, as well as by at least some competition from foreign cotton imports.

Yet despite all of the gains made by China’s textile industry in the world export markets, problems do remain. First, textile consumption in the U.S. and E.U. – the two major markets for Chinese textiles and made-up products – is flat and only increases at the rate of population growth (about 1 percent a year in the case of the U.S.). As has been widely reported, much of the U.S. textile industry collapsed in 2001, creating a void in the market that imports have readily filled. But it is important to realize that the import growth has not been the result of strong market growth. Because of this, China, in turn, is building its export market at the expense of other suppliers. The biggest losers: Mexico, the Caribbean and various ASEAN region suppliers such as the Philippines and Indonesia. Certainly, if current trends continue, China will steadily carve out a greater and greater share of the world market for textiles.

Although for now a significant share of domestic textile production is destined for export markets, as Chinese consumer incomes continue to rise, it will boost domestic spending on apparel and apparel products. Consumption of apparel by the population in major urban centers is already rather significant. Growth in domestic apparel demand, however, will only explode when the two-thirds of China’s population in rural areas and smaller towns begin to demand increased amounts of apparel.

Yet these changes are not without problems. In fact, these problems may be summed up in ten factors impacting textile mills today. These factors – the direct result of broader industry and macro-economic forces – are driving mills to rethink their business models in order to better compete:

1. Textile industry consolidation. It’s hard to find textiles made in the U.S. or Europe anymore. Production has shifted to other countries such as China and India. At the same time, the textile industries in Japan, Korea, Taiwan and Hong Kong have been forced to reorient their production in more of a supporting role to the industries in China and India.

2. Continuing overcapacity. The rush to build new investment in China and India has resulted in nagging overcapacity in some sub-sectors of the textile industry.

3. Export competition. Until overcapacity problems are rationalized throughout Asia, buyers of goods produced there will have a significant upper hand in sourcing product for discounted prices, as it’s too easy for sourcing companies to play suppliers against each other.

4. Consolidation in raw materials. There are a limited number of growing regions in the world for cotton, while synthetic fiber production tends to move near the centers of textile production. This provides synthetic producers with a competitive advantage opposite cotton.

5. Shifting investment flows. The sheer force of the movement of capital around the globe has resulted in a huge influx of resources into Asia, but has also contributed to overexpansion in some parts of the textile industry resulting in depressed prices.

6. Slowing global market growth. Whereas global consumption of textiles spiked during the 20th Century, the rate of growth in global consumption of textiles appears to have moderated at the beginning of the 21st Century. As the societies in the developed world age, their rate of growth in the consumption of textiles has declined to more closely match population growth, while at the same time textile consumption has soared in the developing world. The question for mills everywhere is “will the gains posted in the developing world offset the declines recorded in the developed world?”

7. Consolidation of the retail sector. Today, just 20 retail firms make up 55 percent of the global market for apparel. “Big box” stores have driven small retailers and many traditional department stores out of business. The result: both the top and bottom of the retail business has heavily consolidated into the hands of a relatively few powerful buying organizations.

8. Government policy. The WTO, free trade agreements and farm legislation all affect the global textile industry by increasing (or decreasing) competition at all levels of the textile supply chain. Government actions often result in unforeseen and unintended consequences.

9. The impact of China. As mentioned previously, China’s industry has quickly grown to dominate the global textile business, not only as the largest exporter of finished textile products (such as apparel) in the world but also as the world’s largest importer of basic yarns and fabrics.

10. The impact of China’s competitors. The textile industry is likely an evolutionary industry for China. In time, China’s economy will expand into other more profitable, value-added industries, hence providing an opportunity for other suppliers to fill a possible void. Increasingly, suppliers such as Vietnam and Cambodia will play a growing role in the global market for textiles and apparel.

All of these factors add up to one conclusion: China’s textile industry will be forced to rethink its business today in order to better compete tomorrow. In many ways, the successes of the past virtually ensure that changes will be necessary in the future if China’s textile industry is to continue to dominate global markets. Change has been a hallmark of the history of China’s textile industry as producers have historically been able to adapt to rapidly changing business conditions and challenges at home as well as abroad. Because of this, today’s textile industry in China will need to adapt to change as never before in order to meet the challenge posed by the ever-increasing globalization of textiles.

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