China – Textiles

Import tariffs imposed by the US affect sector

China’s textile and clothing manufacturers are currently discussing how the trade dispute between the USA and China is affecting its business – especially companies dealing in the high-end sector. Of the approximately 119 US$ billion worth of goods the clothing sector sold abroad in 2018, around two-thirds went to the United States. According to the American Apparel & Footwear Association (AAFA), 41% of clothing, 72% of shoes and 84% of accessories sold in the USA come from China. Producers of intermediate products and textiles, on the other hand, are less or not at all affected by the punitive tariffs, as their business depends less on the USA. Apparel manufacturers in Vietnam and Bangladesh, for example, usually buy intermediate products from China.

In September 2018 the USA imposed a 10% tariff on a broad range of Chinese imports, including textiles and clothing. Customs duties were originally to be raised to 25% on January 1, 2019, but at the beginning of December 2018, US President Trump and China’s President Xi agreed not to increase duties until March 1, 2019.

Companies are reluctant to invest

It is difficult to make predictions about the outcome of the conflict. In view of the uncertainty, many companies are reluctant to invest. Thus, many foreign manufacturers of textile machinery suffer from lower demand.

But apart from the current upheavals, the modernization of the Chinese textile and clothing industry is far from over. Gone are the days when China’s numerous street markets were flooded with cheap clothing; nowadays they are rarely seen. Manufacturers of low-quality goods either have had to modernize or have simply disappeared from the market.

Number of Chinese textile and clothing companies down sharply

China’s textile and clothing industry went through several difficult years of consolidation and modernization. In fact, between 2013 and 2017 the number of predominantly privately-held companies in the sector fell by almost 11% to 33,300.

Chinese customers no longer want to buy junk – and nowadays they can generally afford higher quality. According to the Chinese National Bureau of Statistics (NBS), the population spent around 1,371 billion yuan (RMB; equivalent to US$ 207 billion; 1 US$ = 6.6114 RMB annual average rate in 2018) on clothing and shoes in 2018. This represents an increase of 8% from the previous year.

Rising labor costs force automation or relocation

On one hand, consumer standards have grown, forcing companies to invest in better machinery. On the other hand, constant pressure on personnel costs has also forced them to automate their processes. Between 2010 and 2017, the number of employees in the industry fell from 10.9 million to 7.8 million.

Several companies have tried (and still are trying) to avoid the pressure by relocating to the interior of the country – where wages are lower – or to even cheaper foreign countries. However, there has been no major migration, as most companies are too closely connected to their suppliers. Some producers are also skeptical about moving to the west, arguing that it would only be a temporary solution, and that sooner or later wages would follow suit.

Traditionally, the industry is concentrated in the provinces of Guangdong, Fujian, Zhejiang and Shandong. There, the average gross monthly wages of urban workers rose by 38.9% (Fujian) to 48.5% (Guangdong) between 2013 and 2017 (latest available figures) – with significantly lower inflation rates.

China: Development of the textile and clothing industries

Note: only includes companies with annual sales of over RMB 20 million

Source: National Bureau of Statistics (NBS)

Environmental legislation and energy efficiency as additional investment drivers

The industry also has to deal with increasingly strict environmental legislation. In addition, energy efficiency is becoming more and more important.

But this is positive news for foreign suppliers of textile machinery; the market for high-tech machines is expanding, and the resulting demand is still far from being met by local production. China imported textile machinery worth US$ 4.2 billion in 2018, an increase of 6.7% over the previous year. And more market potential is arising from the growing importance of technical textiles.

According to Chinese customs statistics, imports of textile machinery amounted to US$ 3.4 billion in 2017 (latest available data) – a staggering 34.1% more than in the previous year. The biggest suppliers are Japan, Germany and Italy, which together account for roughly 70% of imports. However, these statistics show only one side of the coin, as almost all well-known manufacturers are now represented in China with their own production, and no figures are currently available for their activities.

China: Imports of textile machinery to China from selected countries (SITC code 724; in US$ million)

Source: UN Comtrade

Environmental model companies are paving the way

There are already manufacturers with ambitious plans in environmental protection. Among them is the Dongrong Group, based in Chifeng, Inner Mongolia. This cashmere wool producer has been selected by the government of the Autonomous Region, along with a dairy company, as a model company for environmental protection. In one measure, CEO and owner Cheng Xudong had the company buildings sealed against energy leakage.

The next big step will be the treatment of the company’s own waste water. “Fish suitable for consumption in our canteen should be able to swim in them,” as Cheng describes his goal. The company is already growing vegetables itself for its canteen. Cheng is being financially supported by the state in his efforts. But not all entrepreneurs are this ambitious.

An old Chinese proverb is still valid for many companies: “The sky is high – and the emperor is far away”. In other words, what the central government decides in Beijing does not necessarily have to be implemented in the vast hinterland. But the efforts at least show the general direction in which the sector is heading.