China s Textile and Clothing Industry

Transcription

1 China s Textile and Clothing Industry 2005 Larry D. Qiu HKUST Executive Summary This study presents an analysis of China s textile and clothing industry. Textile and clothing has been one of China s traditional industries since 1949 and has remained one of the key industries in modern China. This industry has experienced dramatic reforms and reached high growth for a long period of time. China is the world s largest exporter and producer of many products in this industry. However, there are a lot of problems within the domestic industry. Chinese firms concentrate on the low-end product markets. They are still very poor in management and marketing skills. Technologies in this industry are not advanced. Profit margins are low. This report presents a comprehensive analysis of this industry. It aims to help companies in this industry to understand the history of their industry, to anticipate the possible changes in the future, and to formulate good strategies for their development. Correspondence to: Professor Larry D Qiu, Department of Economics, School of Business and Management, Hong Kong University of Science and Technology, Kowloon, Hong Kong. larryqiu@ust.hk Acknowledgement: I am extremely grateful for the help from Kelvin Wong and Huayang Yu, who are graduate students in the Department of Economics, HKUST.

2 Table of Contents 1. Introduction 2. A Brief History before Performance of Major Textile and Clothing Product Categories 4. Analysis of the Structure of China s Textile and Clothing Industry 5. Concluding Remarks References 1

3 1. Introduction The textile and clothing industry has been a pillar industry in China for a long time. Since the open door policy and economic reforms began in 1979, this industry has been a driving force in China s exports. It is a major source of foreign exchange for the country and thus plays an important role in China s foreign trade and economic development. Over the past twenty years, the domestic textile and clothing industry itself has also undergone tremendous changes. Most factories were located in several large coastal cities during the 1980s and early 1990s, but now the interior regions have become homes for many textile and clothing companies. A lot of factories are equipped with modern technologies and produce a wide range of products. Some of them are even able to produce high quality products for exports. China is already the largest exporter of textile and clothing products in the world and accounts for one-tenth of the world s exports in this industry. Textile and clothing exports account for more than 20% of China s total exports. The textile and clothing industry is the largest manufacturing industry in China. It has about 24,000 enterprises and employs about 8 million workers. The value of its total output was 1,064 billion yuan in China is the largest clothing producer in the world and has the largest production capacity for textile mill products consisting of cotton, manmade fibers and silk. With the improving living standard of the Chinese people, local demand for highquality textile and apparel goods continues to rise. This is another force for changes in this industry. As the WTO has phased out the MFA (Multi Fiber Arrangement), which had imposed quotas on developing countries textile and clothing exports to developed countries markets, Chinese firms in this industry are facing very good opportunities to expand their businesses. However, some protections still exist in international markets and Chinese textiles and clothing exporters have to face competition from other developing countries. It will be interesting to see how this industry will evolve in the future. This report uses the well-known Five-Force framework developed by Michael Porter to analyze China s textile and clothing industry. In Section 2, we describe the brief history of this industry. In Section 3, we discuss the past and current developments of three major parts of the textile and garment industry. 1 In Section 4, we analyze the key structural characteristics and competitive capabilities of domestic firms within this industry. In Section 5, we offer some concluding remarks. 2. Brief History of China s Textile and Apparel Industry since Pre 1979 Conditions 1 In this report, we use the three words, clothing, garment and apparel, interchangeably. 2

4 China s modern textile and clothing industry began in the 1870s. Chen Qi Yuan built up the first textile factory called Ji Chang Long Reeling Mill in China. During the following years until 1949, the textile industry developed slowly as the society was very unstable and China had witnessed many wars over many years. In 1949, the total output of the textile and clothing industry was 4 billion yuan, which accounted for 38% of the China s industrial output value. There were 179,000 firms and almost all of them were private companies. About 745,000 workers were employed in this industry and among them, 8,000 were technicians. This industry did not use advanced technologies and management, resulting in very low productivity. Raw materials and machinery were mainly imported. Most enterprises were concentrated along the coastal trading region. In order to increase domestic supply to satisfy internal demand, the new Chinese government devoted a lot of resources and attention to the development of the domestic textile and clothing industry in its first Five Year Plan ( ). With government support, many cotton and printing and dyeing plants were established and there were 9.8 million cotton spindles and 310,000 looms. Production increased significantly with about 1.3 million tons of cotton yarn and 6.3 billion meters of cotton fabric produced. In the 1960s, China began to develop its synthetic fiber industry especially out of polyvinyl alcohol and acrylic fibers. Four large plants including Shanghai Petrochemical Plant, Liaoyang Petrochemical Fibers Plant, Tianjin Chemical Fibers Plant and Sichuan Vinylon Plant were set up and their joint annual production capacity of chemical fabrics was 650,000 tons. In addition, other textile products such as cotton, wool, and silk had significantly increased in production. By 1978, China had 15.6 million cotton spindles and 480,000 wool spindles. Production of cotton yarn reached 2.4 million tons, cotton fabric 11 billion meters, wool fabric 89 million meters and wool knitting yarn 378,000 tons. These products were respectively 7.3 times, 6 times, 16 times and 21 times more than their 1949 levels. From 1949 to 1978, China s textile and clothing industry had transformed from an old style into a modern industry. However, under the social planning economic system, like all other industries in China, this industry could not develop into a competitive one, especially on the world market Developments since 1979 China began its economic reforms and adopted its open door policy in The government chose the textile and clothing industry as one of its domestic industries for promotion. There were two reasons for this choice. First, China had basic infrastructure and experience in this industry. Second, this industry is a labor-intensive one and it did not require very advanced technologies. It exploited China s comparative advantage since the country had a large population and labor force. Accordingly, the government launched a policy called Six Priorities to promote the textile and clothing industry. Under this policy, the industry enjoyed favorable treatments in six areas: supply of raw 3

5 materials, fuel and power; innovation and its transformation and infrastructure construction; bank loans; foreign exchange, imported foreign advanced technology and transportation. As a result, the industry s output rose rapidly. From 1979 to 1982, the average annual growth rate of the total value of textile and clothing output was 13.2%. In 1983, China abandoned its coupon allocation system, which resulted in a discrete expansion of both demand and supply of domestic textile and clothing products. The sustainable growth of the textile industry results from the continuous economic reforms, improving living standards, foreign trade expansion, and increases in demand in both domestic and oversea markets. Today, China is the largest producer of total textile and clothing products including cotton yarn, wool fiber, cotton fabric, silk fabric, garments, chemical fibers and knitted goods. As shown in Table 2.1, except 1998 (the year after the Asian financial crisis), all indicators, except total employment, of the textile industry follow a strong growth trend. Total industrial value increased by about 7% per annum on average between 1997 and The industry profits rose rapidly from 3.65 billion yuan in 1997, to billion yuan in 1999 and then to billion yuan in On the contrary, the total number of people working in this industry decreased from about 10.6 million in 1997 to 7.89 million in However, this reduced employment is not a bad sign. It represents efficiency and productivity improvement due to deeper economic reforms. Table 2.1: Major Economic Indicators of China's Textile and Clothing Industry Items Unit Total Industrial Value 工 业 总 产 值 Billion Yuan Industrial Added Value 工 业 增 加 值 Billion Yuan Sales Revenue from Textile Products 纺 织 品 销 售 收 入 Billion Yuan Gross Profits 利 润 总 额 Billion Yuan Net Income 净 收 入 Billion Yuan Million Total Employment 从 业 人 员 Persons Remark: 1997 statistics consider data in towns and above only. Statistics from 1998 to 2002 include SOEs and Non SOEs with revenue above 5 million yuan only Source: Zhongguo Fang Zhi Gong Ye Nian Jian (China Textile Industry Yearbook), 2002/03 Major textile and clothing products grew even faster in In particular, Table 2.2 shows that the growth rate of synthetic and chemical fibers increased over 20% while other products like various kinds of clothes, and silk products increased by more than 10%. Garments also had about an 8% growth in This boom is partly due to China s entry to the WTO in that year. Table 2.2. Output and Growth of Major Textile and Apparel Products in 2002 Product Name Unit Output Growth from 2001 Chemical Fiber 10,000 tons Viscose Rayon 10,000 tons Synthetic Fiber 10,000 tons

6 Polyester 10,000 tons Yarn 10,000 tons Cloth Billion metres Pure Cotton Fabric Billion metres Chemical Fabric Billion metres Printed and Dyed Fabric Billion metres Silk 10,000 tons Silk Fabrics Billion metres Print and Dye Silk Textile Billion metres Garment Billion pieces Weaving Garment Billion pieces Knitting Garment Billion pieces Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/ Export Pattern Export Performance and Product Mix The open door policy and domestic economic reforms in China brought large changes to its textile and clothing industry. Moreover, various export promotion policies also helped to expand this industry s exports. As a result, the Chinese firms have been able to gain a substantial market share in the world s textile trade. In 1980, this industry exported US$ 4.41 billion, accounting for only 4.6% of the world exports and ranking at the ninth position in the world. In 1995, China s export of textiles and garments ranked number 1 in the world and China has maintained its first position ever since. In 2002, its textile and garments exports accounted for about 15.6 % of the world s exports (Table 2.3). Table 2.3. China's Textile and Garment Exports in the World Year World Exports China s Exports China's China's Rank (Billion USD) (Billion USD) Shares (%) Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03 While the textile and clothing industry rapidly expanded domestically and internationally, the export composition of the industry s products changed over the past twenty years. In 1980, textile products dominated the industry s exports, accounting for 63% of the total exports, but declined continuously and dropped to 32% in 2001, as shown in Table 2.4 and Fig 2.1. On the contrary, garments accounted for only one-third 5

7 of exports in the early 1980s but then rose rapidly and exceeded 50% in the 1990s. Garments accounted for almost 70% of total exports in 2000 and Table 2.4. Product Mix of China's Textile and Garment Exports (Billion USD) Year Textile Products Garments Proportion (%) Export Amount World Rank Export Amount World Rank Textile Garment Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/ % Year Fig Product Mix of China's Textile and Garment Exports Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03 Textile Garment Export Characteristics Based on the export statistics of the textile and clothing industry from 1998 to 2002, we notice the following four patterns. First, as indicated by Table 2.5, the export growth rate of textile products is 12.6%, which is higher than that for garment exports (8.2%). But the proportion of garments still accounts for a larger proportion of the industry s exports. Table 2.5. The Export of China s Textiles and Garments between 1998 and 2002 (Billion USD) 6

8 Average Annual Growth (%) Textile Products Garment Total Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03 Second, as shown in Table 2.6 and Figure 2.2, cotton-made products and chemical fabric goods dominate the exports of textiles and clothing. These two groups of products together contribute about 70% of total export of the industry. Table 2.6: Composition of China's Textile and Garment Exports (%) Silk-Made Products Wool-Made Products Cotton-Made Products Linen-Made Products Chemical Fabric Products Other Products Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/ Percent (%) Silk-Made Product Hair-Made Product Cotton-Made Product Linen-Made Product Chemical Fabric Product Other Product Year Fig Composition of China's Textile and Apparel Exports Third, the processing trade still plays a very important role in China s textile and clothing industry. Processing refers to using imported materials and exporting final products. This type of export accounts for a large proportion of the textile and clothing 7

9 industry exports, but its share has declined continuously in recent years, from 47.2% in 1999 to 35.7% in 2002 (see Table 2.7). Table 2.7. China's Textile and Apparel Processing Trade (Billion USD) Total Textile and Apparel Export Textile and Apparel Processing Export Share of Processing Trade Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03 Finally, the major import and export markets concentrate on a few countries/regions, which are Japan, Hong Kong, the United States, the European Union (EU) countries and Korea, as shown in Table 2.8 and Fig These five markets account for about 70% of the total textile and clothing exports in Table 2.8. Major Importing Countries/regions of China's Textile and Apparel Products (Billions USD) Countries/Regions Japan Hong Kong The U.S EU Korea Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03 21% 31% Japan Hong Kong 6% 21% The U.S. EU Korea Other 10% 11% Fig China Textile and Apparel Exports in

10 Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/ Trade Agreements While data indicates a rapid increase in China s production and export of textile and clothing products in the past 10 years, the development of exports in this industry has been limited by a number of bilateral and multilateral agreements made between China and some of its trading partners. Protectionism in clothing and textiles is almost as old as the industry itself. But since 1974 it has been formalized and greatly expanded by a web of curbs imposed by the US, Europe and other rich countries on imports from developing country producers. The system, known as the Multifibre Arrangement (MFA), has not succeeded in its aim of stemming a steady fall in employment in the industry in the west. However, it has severely distorted trade and cost western consumers, as well as developing economies, dearly. A bilateral agreement was signed with the US in 1980 following strong requests from the US to protect its textile industry from Chinese imports. The agreement set quotas on imports of specific Chinese-made textile and clothing products. Later, this agreement was renegotiated and augmented by four times. The latest modification was in The China-US Textile Agreement of 1997 set quotas on a wide range of Chinesemade textile and cloth products including cotton, wool, man-made fibers, and other vegetable fibers such as linen, for four years until the end of Nearly 100 product categories were covered by this agreement. 2 China and the European Union signed a textile agreement based on the MFA framework in 1998, which imposed quota restrictions on imports of Chinese products. China and the EU also signed an agreement in 1995 to extend the quota restrictions to silk products that the MFA does not cover. These two agreements were amended in 2000 to cover 70 Chinese-made product categories. They have been phased out together with the MFA in January Structural Changes and Reform of the Textile and Clothing Industry The economic reform changed the incentive system in the Chinese economy in general and the textile and clothing industry in particular. This industry, like the whole economy, had short supplies (demand was greater than supply) in the 1980s. As a result, the industry output soared in the 1980s due to productivity improvements in the stateowned enterprises (SOEs) and entry of many new privately owned enterprises. The industry entered a different stage in the 1990s: saturated demand, redundant workers, outdated machinery, and poor management. In particular, the textile segment lost money from 1993 until 1998 (see Table 2.9). Most SOEs recorded heavy losses during this period and they had to rely on financial support from the government to exist. 2 HKTDC (2001a). 9

11 Table 2.9. After-Tax Profits of China's Textile Industry between 1993 and 1998 (100 Million Yuan) Year Total Textile Garments and Other Fiber Products Chemical Fibers Textile Machinery Source: Zhongguo Fang Zhi Gong Ye Nian Jian, ; China Textile Industry Development Report 2000/2001, 2002/ To overcome this difficulty and strengthen this important pillar industry, the government instituted new reforms in this industry. It laid off excess workers to lower excess production capacity and eliminated outdated equipment. It shut down hundreds of money-losing companies and allowed profitable firms to acquire unprofitable ones. By the end of 1999, 1.16 million workers had been laid off and 9.6 million old-fashioned cotton spindles were removed, resulting in a drop in production costs. For instance, about 300,000 outdated wool spindles were removed over the period between the end of 1998 and The number of spindles for wool spinning is about 3.6 million now. The reform of China s textile industry made a significant progress and returns the industry returned to profitability in In particular, the government expended a lot of effort on state-owned enterprises in the textile industry. The number of SOEs and statecontrolled firms in textile industry was reduced from 2839 in 1997 to 2236 in In the 21 st new century, the government has shifted its reform focus from downsizing to industry restructuring, technological enhancement, and R&D (research and development) spending Performance of SOEs and non-soes Before the reforms, SOEs dominated the textile industry, accounting for more than 80% of the whole textile and clothing industry. Since the reforms, many non-soes have entered the industry and become the main force for the development of the domestic

12 textile and clothing industry. The output value of the SOEs accounted for 62% of the textile industry total output in However, this share fell to 50% in 1990 and further down to 23% in 1997 and eventually only 19% in Table 2.10 shows the total after-tax profits of the SOEs in various categories of the textile and clothing industry from 1996 to We can see that the performance of the SOEs in this industry was very poor over this period. The total loss was about 10 billion yuans in 1996 and 7 to 8 billion yuan in each of 1997 and Although the SOEs still earned positive profits in chemical fabric and machinery, they had serious loss in both textile products and garments, especially the textile products. Table After-Tax Profits of China's SOE in Textile and Clothing Industry between 1996 and 1998 (100 Million Yuan) Year Total Textile Sector Garments and Other Fiber Products Chemical Fibers Textile Machinery Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 1997/1999 The profit situation has changed in recent years. However, according to Table 2.11, in 2001 and 2002, 30% of the SOEs in this industry still recorded losses, resulting in a loss of 3 billion yuan in 2002 and a loss of 4 billion yuan in Similar amounts were lost by the non-soes in this industry; however, only 20% of the non-soes in the textile industry recorded losses. Table Profits and Losses of SOEs and Non-SOEs from 2000 to 2002 State Owned Enterprises No of Enterprises No of Deficit Enterprises Share (%) Loss Amount (100 Million Yuan) Non State Owned Enterprises No of Enterprises No of Deficit Enterprises Share (%) Loss Amount (100 Million Yuan) Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03 Although there were still a large number of non-soes in the textile and clothing industry experiencing losses in recent years, the overall performance of the non-soes in this industry was much more satisfactory than that of the SOEs in the 1990s. While the SOEs experienced losses in most of the years during that period, profits of non-soes 11

13 reached on average 23.5% annual growth between 1990 and The successful result and rapid expansion of non-soes is largely attributed to foreign direct investment (FDI). In 1995, the number of foreign-funded enterprises in the textile and clothing industry was 10,690, accounting for 14% of the total number of firms in this industry. In 1997, the output value of foreign funded enterprises was 185 billion yuan, accounting for 23% of the total output value of the industry. These firms profits reached 2.5 billion yuan, about 68.4% of the total industry s profits. In 2002, non-soes earned 31 billion yuan, contributing 92% of total profits of the whole industry. 3. Performance of Major Textile and Clothing Categories According to Figure 3.1, we can see that cotton fabrics, garments and chemical fabrics jointly accounted for 80% of total after-tax profits of the textile and clothing industry in These product categories accounted for 29%, 28% and 23%, respectively of these profits. Other products such as wool, silk and knitted products accounted for about 5% each. Garments Cotton Fabrics 6% 5% 5% 3%1% 28% Chemical Fabrics Wool Fabrics Silk Fabrics Knitted Fabrics 23% Textile Machinery 29% Bast Fiber Fig Distribution of Total After-Tax Profits in the Textile and Clothing Industry (2000) Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2000/01 In terms of textile exports in 2002, cotton and chemical fiber products jointly accounted for 70% of the textile industry s exports. Accordingly, in this section, we analyze the performance of garments, cotton and chemical fabrics. 12

14 3% 1% 6% 21% Cotton 34% 35% Fig Distribution of the Textile Industry's Exports in 2002 Chemical Fiber Wool Silk Bast Fiber Other Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/ Clothing Since the start of the economic reforms, China has experienced rapid economic growth with about a 10% annul growth rate on average. Rising income and improving living standards contribute to an increase in the demand for garments. Both the internal and external markets have created good opportunities for the local clothing industry to grow. China has been the largest garment producer across the world since From 1985 to 2000, the industry grew by 15% per year on average (see annual production in Fig 3.3.). Men s wear, women s wear, shirts, jackets, down-filled garments and children s wear are the major products in this category. Due to rising living standards and rapid urbanization, demand for new types of clothing have emerged, including denim wear, casual wear and sports wear. 3 3 Wholesale and Retail Distribution of Garments in China (1996). 13

15 Year Fig China's Garment Output (Billion Pieces) Source: Zhongguo Fang Zhi Gong Ye Nian Jian, (2000/01), Wholesale and Retail Distribution of Garments in China (1996). The development of clothing products has also led to a greater proportion of their exports across the whole textile and clothing industry, for example, from 40% in 1980 to about 70% in In 2002, the value of garments exported was US$41.3 billion, which accounted for 70.8% of the industry s total exports. The export of garments can be divided into two main categories: weaved garments and knitted garments. The growth rate of exports of knitted garments is 10% higher than that of weaved garments. The top markets for these Chinese exports are Japan, Hong Kong, 4 the United States, Korea, Germany and Australia (Table 3.1). Their joint demand accounts for 70% of the exports of Chinese-made weaved garments and 65% of the exports of knitted garments. Table 3.1 Top Five Garment Importing Countries from China in 2002 Weaved Garments Knitted Garments Ranking Country/Region Ranking Country/Region 1 Japan 1 Japan 2 Hong Kong 2 Hong Kong 3 The U.S. 3 The U.S. 4 Korea 4 Korea 5 Germany 5 Australia Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03 4 A very large proportion of China s exports to Hong Kong are eventually re-exported to other countries. 14

16 The major export enterprises are mainly located in coastal regions, including Guangdong, Jiansu, Shanghai, Zhejiang and Shangdong. Table 3.2 presents a picture of their contributions to the country s total exports. Table Garment Exports from Five Provinces in 2002 Weaved Garments ($ billion) Share of the country (%) Knitted Garments ($ billion) Guangdong Jiangsu Shanghai Zhejiang Shandong source: China Textile Industry Development Report 2002/ Cotton Textiles Share of the country (%) Cotton textiles was the largest part of China s textile and clothing industry before the 1980s. In the 1970s, China s cotton yarn and fabrics even took the first position in the world. Table 3.3 indicates that China contributed over 20% of the world s cotton production in the past two decades. In particular, China s production of yarn and cotton fabrics increased from 330,000 tons and 1.9 billion meters in 1985 to 8,500,000 tons and 32.2 billion meters in 2002, with a 23-fold increase and a 15-fold increase, respectively. China s yarn and cotton fabric production is the largest in the world. Figure 3.4 presents the cotton yarn production growth trend. Table 3.3. Cotton Production by China and China s Share in the World Market (10,000 tons) Year Global China Share (%) Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03 15

17 Year Fig China's Cotton Yarn Production (10000 tons) Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03 In the mid-1980s, world textile production shifted to developing countries to exploit their cheap labor. China took this opportunity to develop this industry and expand its exports. As a result, China s domestic production and exports of cotton products increased sharply. In 1990, cotton textiles and cotton garments generated a US$6.2 billion trade surplus, accounting for 42% of the total textile and garment export surplus, 3.5 times more than in the pre-reform level. In 2002, domestic cotton textile and cotton garment production was 1.8 times more than that in As discussed before, this industry encountered many problems in the 1990s such as overcapacity, redundant laborers and inefficient management, leading to losses in several years since Since 1997, the government has deepened its reforms of this industry, for example, by removing 10 million outdated spindles and laying off 1.2 million workers during In 1999, the cotton textile category of the industry returned to making profits. In 2002, this category s industrial value reached 208 billion yuan, accounting for 19.5% of the whole textile and clothing industrial value, and it generated 5.34 billion yuan in after-tax profits. It employs about 2 million workers. Major cotton textile products consist of yarn and cotton fabric products. Export of yarn products brought US$1.07 billion and export of cotton fabric products US$3.715 billion to the country in 2002, which accounted for 12% and 44.4% of total cotton textile industry, respectively. Similar to clothing exports, Guangdong is the largest exporter of cotton textile products, followed by Zhejiang, Shandong Shanghai and Jiangsu. However, China s competitive advantages in cotton textile production have been diminishing in recent years. Cotton is the major raw material required for production and China needs to import cotton from overseas markets since the domestic supply is not sufficient. Hence, the profitability of cotton textiles is largely affected by the world s 16

18 cotton production and prices. Besides, other developing countries such as Vietnam, Indonesia and Pakistan are able to produce even cheaper but high-quality cotton yarn. They are strong competitors of the Chinese producers Chemical Fibers Table 3.4 shows that the average annual growth rate of China s domestic chemical fiber output was more than 10% between 1981 and China s chemical fiber production has been ranked first in the world since 1998, when it exceeded the U.S. In 2001 and 2002, production increased by 20% each year. Furthermore, the after-tax profits in these two years were 1.8 billion yuan and 2.9 billion yuan, respectively, accounting for 13% and 16% of the whole textile and clothing industry s after-tax profits. Table 3.4. China's Chemical Fabric Production (10000 Tons) Year Output Average Growth Rate (%) Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 1999/00, 2002/03 Chemical fabrics consist of viscose rayon and polyester, which includes four minor categories: nylon, polyvinyl alcohol fiber, acrylic and vinylon. Table 3.5 presents production statistics on the different kinds of chemical fibers from 1999 to Table 3.5. Production of Different Kinds of Chemical Fibers (10000 Tons) Viscose Rayon Synthetic Fiber Polyester Nylon Polyvinyl Alcohol Fiber Acrylic Vinylon Total Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2000/01, 2002/03 17

19 From 1996 to 2000, the world s chemical fiber production rose from million tons to 28 million tons, with an increase of 1.2 million tons per year. In the same period, China s chemical fiber output grew from 3.34 million tons to 6.94 tons, with an increase of 0.7 million tons per year. China contributed to the growth by a considerable amount (over 60%). While European countries and the U.S. either restructured their own industries or retreated from this market, Asian countries, especially China, have become the major production base for chemical fibers. Rapid expansion of domestic chemical fiber production is largely stimulated by domestic demand, as indicated by the rapid increase in the share of chemical fiber in total fiber consumption, from 35% to 56%. FDI, encouraged by China s open door policy, also helped in the development of this industry. FDI brought in new and advanced technologies to China. For instance, by the end of the 1990s, China s technology level in polyester filament fiber had reached the international level. Huge foreign investment inflows into the domestic chemical fiber industry not only upgraded the existing production and capital structure, but also brought in new technologies and management experience. This resulted in continuous high growth rates of about 19%, in China s chemical fiber production over the period. 4. Analysis of the Structure of China s Textile and Clothing Industry In Sections 2 and 3, we discussed the developments and current performance of the local textile and clothing industry. In this section, we present a detailed analysis of the main structural features of China s domestic textile and clothing industry following the Five Competitive Forces approach. The five competitive forces are (1) entry, (2) threat of substitution, (3) bargaining power of buyers, (4) bargaining power of suppliers and (5) rivalry among current competitors. These five forces jointly determine the intensity of competition within an industry and in turn help individual firms to construct their competition strategies. Since China joined WTO in 2001, domestic textile and clothing enterprises have faced increasing competition from overseas and good opportunities in the foreign markets. This section will also cover the impact of WTO on the business environment of the Chinese firms in this industry Entry New companies entering an industry will bring new supply, new ideas, and seize market share as well as profits from existing companies. New competition from the entrants usually reduces existing companies profits. If able, incumbents will try to deter any potential entry. The threat of entry affects industry profitability. There are various factors that affect entry to the textile and clothing industry: capital, technology, policies and the business environment. Basically, the whole textile and clothing industry is labor intensive in the sense that the required capital investment is not so large compared with many other industries and its production does not require very advanced technology. In this regard, the financial and technological barriers to entry are 18

20 not high. For example, it is not difficult for a new company to set up a textile mill. It is even easier to build a factory to make clothes. At the minimum, you only need some sewing machines and workers with certain skills. However, textile production and garment production have become more advanced these days. Garment production remains very labor intensive. Some textile production has become more technology and capital intensive, e.g., chemical fiber, while some others remain quite resources intensive, e.g., cotton yarn. Thus, it has become increasingly more difficult to enter this industry than in the past. Moreover, competition from developed countries is not diminishing. Firms in developed countries such as Japan continue to innovate technologies for textile production, which more than offsets the low labor cost advantage enjoyed by Chinese firms. Furthermore, there exists excess capacity for textile production in China due to local governments policies to encourage local production and keen competition among existing manufacturers to expand their production scales. Therefore, although entering the textile market is not hard, the question is whether it is profitable to enter. The above discussion and the discussion in Section 3 seem to indicate that there are already excessive incumbents in this industry. Policy is another barrier to entry to this industry. Export quota systems were established in the past due to bilateral and multilateral agreements. Although all of them have come to an end in theory, some are still in effect in practice for at least a few more years. When export quotas are used, they are used according to an allocation system. In China, export quotas are distributed by the Ministry of Commerce (called MOFTEC in the past). Those who have export rights will have priority in receiving quotas. Companies that receive basic quotas in a year would obtain the same quotas in the following year unless their export performance is not satisfactory. This is the old allocation method, which gives strong protection to existing export enterprises and limits the export ability of new companies. The allocation system has been amended several times since For example, auctions have been used for 27 textile products. Although the export quota system does not serve as a barrier to entry for firms that want to sell their products only to the domestic market, without exports these firms competitiveness and profitability will be lower. Also, even though most of the quota agreements have been terminated, their effects on Chinese firms export abilities still exist and are lasting. It is likely that some restrictions for exporting textile and clothing products to the US may be still imposed even after 2005 due to the pressure from the US and the China-US agreement, which allows a certain degree of protection until Even without any restriction, new entrants do not have experience with and business networks in the overseas markets and therefore are inferior to the incumbents in market competition. Experience can thus serve as an entry barrier. In summary, the barriers to entering the textile and clothing industry are not high. However, potential investors should consider seriously whether their entry is profitable given the fact that the industry is very mature and incumbent companies enjoy certain degrees of advantages. Table 4.1 shows the expansion of the industry in terms of total number of firms, including both exits and entry. Tabel 4.1. Total Number of Firms in the Industry over Time 19

21 Year # Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2000/01, 2002/03 A final point about entry is about economies of scale and location of entry. There are two types of economies of scale: internal and external economies of scale. Internal economies of scale refer to the case of decreases in average cost of production when a firm s own production level increases. Since the fixed investment is not too large for a plant in the textile and clothing industry, internal economies of scale are not very significant. External economies of scale refer to the case of decreases in the average cost when the whole industry s production level increases. One of the important features of this industry, especially clothing products, is that firms need to adapt their production to the market demand quickly. Therefore it is very important for a firm to be located in an area where information can be obtained easily and quickly. This is similar to external economies of scale. Companies in the textile and clothing industry have advantages by locating themselves near each other and forming production clusters. In return, the clusters lead to formation of efficient information networks and a complete business environment, which attracts many potential buyers and suppliers to the area. External economies of scale are strong in China s textile and apparel industry. Firms are concentrated in Guangdong, Shanghai, Jiangsu, Zhejiang, Shandong, Shandong and Fuijian. The joint industrial value produced by these regions made up to 67% of total industrial value of China in 2001 in this industry. For clothing, 95 out of the top 118 apparel enterprises are located within these regions. Tables 4.2a and 4.2b present data on the top textile and clothing regions in China. Table 4.2a. The Top Five Textile and Clothing Export Regions in China, 1998 and 2001, (Billion US$) Guangdong Zhejiang Jiangsu Shanghai Shandong Export Rank Export Rank Export Rank Export Rank Export Rank Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03 Table 4.2b: Distribution of the Top Five Regions of China's Textile and Clothing Exports (%) Guangdong Zhejiang Jiangsu Shanghai Shandong Total

22 Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03 Textile and clothing production and development in the western region of China including Sichuan, Shanxi, Yunnan, Guizhou, the Guangxi, Tibet and Xinjiang is lagging far behind production in the eastern coastal region. The western region contributed only 10% of the country s total textile and clothing output in Nevertheless, it is important to realize that the central government has carried out many go west projects, including projects in the textile and clothing industry. The western region suffers from the problem of no external economies of scale, but they have rich source of raw materials, such as high-quality cotton, and cheap labor. The government push is both necessary and justifiable for development of the textile and clothing industry in the western region Rivalry among Existing Competitors China is a large exporter of textile and apparel products. It means that supply is far greater than domestic demand. This situation leads to fierce competition among the domestic textile and apparel firms. Due to low entry barriers, excessive entry has added more competition to the market. Price competition and price wars are often observed. Companies in this industry are fighting for materials and customers. As shown in Table 2.11, there were more than 24,000 firms, both SOEs and non-soes, in the textile and clothing industry in Competition leads to more than 20% of the firms losing money. However, due to changes in the demand structure and various degrees of technological advancements, different categories of this industry s products exhibit different degrees of competition. Chemical fibers. In 2001, China produced million tons of chemical fibers, with 18.4% growth in production over the previous year. China was the biggest manmade fiber producer in 2001 and its output contributed 25% of the world production, two times more than the output of the second largest producer, the U.S. In 2002, China s output reached 9.91 million tons with 20.11% growth. The average annual growth rate of chemical fabric output has been over 10% since But demand is not able to catch up with the supply, leading to an overcapacity problem. Other products such as yarns are also in overproduction. In particular, polyester fiber is the driving force in the increase in chemical fiber output. Private enterprises and rural enterprises have joined a reckless race to increase production capacity in the past few years, which inevitably unbalances the supply and demand balance. One problem associated with this product category is the existence of too many small-scale factories. In the whole country, there are only 10 polyester producers whose output each exceeds 100,000 tons per year. Several hundred firms with a capacity of around 10,000 tons are competing severely with each other. The output of polyester fiber in 2005 was expected to be about 7,500,000 tons. The total number of 21

23 firms in chemical fiber industry is 896 in 2001 and 921 in This part of the industry is expected to undergo selection and restructuring. Increasing competition has led to a fall in prices. Between October 2000 and the end of 2001, prices for most of chemical fiber products fell by an amount ranging from 20% to 38%. In 2002, the prices of most chemical fabrics rose a bit, but this was the result of increasing raw material costs. Large companies in this industry try to avoid head-to-head price competition. Yizheng Chimerical Fiber Co (YCF) ( 仪 征 化 纤 ), which is the largest polyester producer in China, has developed 18 new products, improved the quality of its products to build up its brand name, and differentiated its products from those of its competitors. In 2001 YCF has developed spun-dyed yarn for seats of Passat jointly with Shanghai Volkswagen. YCF is not marketing fabrics, but owns the textile development center equipped with looms and dyeing & finishing facilities and places special emphasis on the development of yarn suitable for composite woven fabrics. Cotton fabrics. In the cotton fabric category, firms performance in terms of output and sales is more satisfactory than in chemical fabrics in recent years. This part of industrial profits was increased by 60.58% from 2001 to The profit in cotton fabrics industry was 1, million yuan in 2001 and 1, million yuan in This is mainly due to increases in both internal as well as external demand for cotton fabric products. The export revenue of cotton fabrics in 2002 is billion dollars and accounts for 44.41% of all the cotton textile exports. Garments. Fierce competition also occurs in the garment market. There were 7797 firms producing clothing in Many unpredictable factors, such as the weather, can affect the demand seriously. Demand is very sensitive. For example, in 2003, competition in winter wear was especially keen among department stores in Shanghai as the demand was weak due to mild winter weather that year. The sales discounts, although increasing purchasing incentives, reduced profits. Winter clothes are expensive and hence their sales revenue is important to apparel enterprises. Poor sales of winter wear greatly reduced the profit of department stores and apparel producers. In order to outperform other competitors, Ningbo Youngor Co Ltd. ( 宁 波 雅 戈 尔 ) the top apparel firm in sales ranking in many years, reorganized its department stores, a network of 370 direct management stores and 500 franchised retail stores, to increase its efficiency. By connecting the head office on-line with these direct-management stores and branches in the countryside, the company plans to establish a POS (point-of-sales) information management system. In addition, it has developed its own brand and has tried to expand its overseas markets after the removal of quotas. Shanshan Group Co Ltd. ( 杉 杉 ), ranked third in clothing sales in China (No.2 in sales revenue in 2002: Matsuoka 茉 织 华 ) has formed a joint venture with an Italian company called Forall to produce and promote a new brand men s suits. The aim of Shanshan is to open new markets. As the average price of men s suits made of Italian fibers are 3000 to 6500 yuan while the price of a usual Shanshan product is about 1000 to 1500 yuan, the suits produced by the joint 22

24 venture are used to open the medium and high grade market and attract new customer groups. The company has also extended its product line from men s suits, women s wear and casual wear to ties, shoes and cuff links. 5 Silk. Competition among the Chinese firms is not confined to the domestic market. They also compete in the international market fiercely. We can find this problem in silk products, for example. Eighty percent of China s silk production is exported, which accounts for 60% to 80% of the world s silk exports. Competition leads to price decreases. For example, the price of Chinese-made silk ties is only worth 1% of the price of similar products made in Italy. Hence, although export-quantity silk products increased in 2002, the export value declined due to a 20% decrease in prices. Severe price competition among local producers is due to over production capacity. The price of silk was very high in the past, which attracted many new companies to enter the industry. However, most of these firms are small to medium in size without the ability to develop new products and create new designs. They expand their production without enhancing quality and updating their technologies. As a result, price competition is inevitable. By 2005, the export quota on silk products will be removed. But without changing the vicious competition situation, liberalizing the silk export market will make the competition even worse, causing even lower silk prices in the world market and hurting the profits of domestic silk producers. This is a serious problem faced by the Chinese textile and clothing industry in general, and the silk producers in particular. In summary, domestic competition is expected to intensify. Firms can no longer rely on price competition to survive. Product quality improvement, business diversification, product differentiation, and improvement in marketing and management will become more and more important. Only those who have competitive advantages will survive while a majority of inefficient and small-scale companies will close under fierce competition. Chinese firms will meet competition from other developing as well as developed countries not only in the international markets, but also in the domestic market. China could also lose its comparative advantage in cheap labor. Tables 4.3 and 4.4 list the top textile and apparel firms and their performance. Table 4.3. Top Textile Firms Top 5 Textile Firms Rank by Sales Revenue Rank by Exports 1 CWGC 华 源 Guangdong Silk 广 东 省 丝 绸 2 Weiqiao 魏 桥 CWGC 华 源 3 YCF 仪 征 化 纤 Younger 雅 戈 尔 4 Younger 雅 戈 尔 Fuan 福 安 5 Wanjie 万 杰 Weiqiao 魏 桥 Source: China Textile Industry Association Statistics Center Table 4.4. Top Apparel Firms 5 One can look at the example of Li Ning sports wear series ( 23