China’s apparel and textile industry

Fifth of a series

Editor’s Note: The following is a Deloitte Research study that looks at the changing landscape of the worldwide garment industry in the face of the lifting of trade restrictions in January this year and the potential reverberation of such action on global trade. The report was written by Ira Kalish, the Global Director of Consumer Business at Deloitte Research. The Saipan Tribune is re-printing the study in a series of articles, with permission from Deloitte Touche Tohmatsu.

The Chinese government is interested in taking advantage of the end of quotas to solidify China’s position as the world’s leading apparel and textile supplier. The government wants apparel and textile exports to rise from roughly $60 billion in 2003 to over $100 billion in 2010. Consider the fact that China’s apparel and textile exports to the US rose 25 percent in 2004 alone.

Although a disproportionate share of China’s export growth recently has been driven by high technology products, the labor intensive nature of apparel and textiles is attractive to China’s leadership. After all, they are concerned about absorbing many new workers into the market economy. With privatization of state-owned enterprises accelerating, and with a huge migration of rural workers to the big cities, the apparel and textile industry offers a social safety valve.

On the other hand, the government is clearly mindful of the political impact its success is having in other countries. Consequently, just prior to the end of quotas the government announced the imposition of export duties of 2 percent to 4 percent on some textile and apparel products. Unfortunately for China, this move was viewed cynically by importing governments. The duty was seen as insignificant and purely symbolic. With new protectionist measures threatened by the US and EU, China is now considering setting minimum prices on six categories of apparel products.

One of the salutary aspects of China’s apparel and textile industry is that it is relatively privatized and efficient. For example, in 2001 state-owned enterprises (SOEs) accounted for only 10.6 percent of apparel employment, 8.1 percent of apparel enterprises, and 6.7 percent of apparel output. The remainder was mostly accounted for by foreign invested factories. On the other hand, the textile industry had more state involvement with SOEs accounting for 49.4 percent of textile employment, 21.3 percent of textile enterprises, and 35.7 percent of textile output. (See Figure 6)

In the cases of both apparel and textiles, SOEs were much less efficient than the private sector. In 2004, foreign and overseas Chinese invested textile and apparel factories produced 31,250 renminbi of output per worker while SOEs produced 14,800 renminbi of output per worker. Moreover, the private firms had, on average, a 5.9 percent return on assets while SOEs had a loss. (See Figure 7)

Going forward, the Chinese apparel and textile industry is likely to change in some important ways. First, the end of quotas will drive consolidation and vertical integration in the industry. Nowhere will this be more important than in China. Consequently, the industry will experience greater economies of scale and further investment in technology. In addition, the government will encourage the industry to move up the value chain by producing higher technology and higher value added products. It will also encourage locally owned companies to take greater control over distribution and, ultimately, develop brand names that can be exported.