Overcapacity: The Global Textile Industry and Its Discontents

Saturday, June 27, 2009

Overcapacity—a result of 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 turn into unprecedented amounts of 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? A global recession notwithstanding, the answer lies with technology, but also with government policy.

So why is there so much capacity? Ironically, a government-sponsored program called the Multifiber Arrangement (MFA), designed to protect the textile industries in Europe, the U.S. and Canada, had the unexpected effect of scattering trade all over the globe and helping to build production in countries where that would not otherwise have been the case.

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. At the same time, governments in Third World countries searched for ways of building their economies and providing 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 MFA quotas or had ample unused quota available, but not because they were particularly efficient producers.

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 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 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 has eclipsed the combined industries of Europe and the United States. In fact, China consumes more than one-quarter 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 from 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 their competitiveness in global markets.

Despite claims made by many textile leaders in the developed world, technology has not been 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—on top of a their distinct advantage in labor costs. For developing countries, the combination of low labor costs and technology improvements has been a winning combination that developed countries have simply not been able to 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 are to be abolished at the end of 2004. Although initially the end of the MFA was heralded by exporting nations, both large and small, today a number of smaller suppliers are realizing that they will be squeezed out of the market because their main advantage—quota availability—will soon be 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 one percent), so as imports from the developing world grew, domestic manufacturers, unable to compete, retreated and left significant gaps in the market for low cost imports to fill.

Today, however, this has changed, as 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 for a large 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 a few winners and a whole host of 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 expand. Who will be the likely losers? They will be companies in Europe and the U.S. In turn, fiber consumption in each of these markets will suffer as domestic industries shrink. Also, over time, smaller suppliers in Southeast Asia and the Caribbean will lose out as they become increasingly unable to compete on a global scale.

Needless to say, the future is not a certainty nor will it be static. In time, even China will find that it will have to compete with newly emerging suppliers such as Vietnam and Cambodia. And then there is Africa…

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