The Pakistani Spectator

It is a well known fact that China has been suffering for quite sometime from a number of problems which are threatening her position as a global leader in the textile business.  This brief report is intended to highlight those problems and explain why China is no more feasible to source quality textile products at cheap prices. On the other hand current never ending upward trend Yarn price is alarming for all exporting countries and that includes us as well

Following are the major problems being faced by Chinese exporters:

· Increase in the Cost of Production

· Huge Domestic Market

· Increase in the Cost of Raw Materials

· Shortage of Cotton

· Credit Squeeze

· Appreciation of Yuan against US Dollar

· Large Number of Vulnerable Small Sized Companies

· Switching to Hi-tech High Value Manufacturing

· Ability to Deliver Goods on Time Compromised

Increase in the Cost of Production

A

ny country having the resource of cheap labor will have a competitive edge in manufacturing.  Unfortunately, the hype about Chinese Labor being very cheap is over as labor cost in China has gone up by 300% to 500% in the last decade.  The increase in labor costs are pushing up the overall manufacturing costs and squeezing profit margins.  Therefore, manufacturers are resorting to different cost cutting measures ultimately compromising the quality of products being delivered.

Skyrocketing labor costs in China’s largest cities are pushing manufacturing out to the less-developed areas where labor costs are lower and so is the efficiency and productivity.   Since such locations are farthest away from the sea ports, such moves are adding to the transportation cost not to mention the lead times.  The relocation of manufacturing is threatening the economies of tier-one cities and creating massive shifts inside of China’s economy.  However, the solution is not a lasting one as the labor cost in remote areas are also bound to increase with time making the survival of manufacturers even more difficult.

Moreover, the general cost of production gone up drastically as China was forced to make certain reforms in compliance for holding Olympic Games in 2008.

Huge Domestic Market

D

omestic demand is the main reason for the growth of textile industry in China rather than the country’s exports.  With a population of more than 1.3 billion people in China, domestic demand has a steady and gradual growth.  Sales volumes of China show an average increase of 26.78% during the past years, which are comparatively higher than the export volumes. This data implies that domestic demand is more in China. Since China has a burgeoning middle class with growing buying power that makes domestic market much more lucrative compared with export market.  In this situation many textile manufacturers are opting for domestic market against export market where competition is much more severe as there are more players to compete with.

Increase in the Cost of Raw Materials

A

lthough China harvests a sizeable cotton crop every year but still a huge quantity of different origin cotton is imported into the country.  The simple reason for importation of cotton is that Chinese Cotton is not suitable for manufacturing different types of textile products therefore; China imports coarse count yarns mainly from Pakistan, while to keep costs low ELS (Extra Long Staple) cotton like Giza and PIMA are mixed with Chinese cotton.  This practice improves the cost structure but the quality is compromised while the customer is on the loosing end.  This was just one example while there are hundreds of other raw materials involved in the manufacturing of textiles which add to the production cost.

Shortage of Cotton

C

hina is the biggest cotton consumer and importer in the world. The global financial crisis and economic slowdown hit China’s textile and garment industry hard in 2008, resulting in reduced demand for cotton and decreased cotton cultivation acreage.

According to the Ministry of Agriculture (MoA), China’s cotton production acreage in 2009 is 5.1 million hectares down by 671,000 hectare, which is more than a ten percent decrease, from 2008. Hence, China’s cotton production this year is expected to fall by ten percent to be about seven million metric tons, 500 thousand metric tons less than in 2008.  Another source, the China Cotton Association (CCA), recently predicted that the shortage of cotton supply in China is expected to be about two million metric tons in 2009, a figure bigger than what MoA had predicted.

In addition to decreases in domestic cotton production and steady increases in textile production which fuels cotton demand, China’s trade and reserve policies for cotton have also contributed to the widening shortage of cotton supply this year.  On the one hand, from October 2008 to April 2009, while the global financial crisis was in full force, China’s national cotton reserve entity increased procurement and storage efforts in an attempt to prevent domestic cotton prices from falling and to give cotton farmers incentives for continued cultivation. This policy resulted in increased cotton storage of 2.72 million metric tons and more than 3.8 million metric tons in total cotton reserves, marking the highest level in history of cotton reserves in China.  Although, as of September 25, 2009, 1.8 million metric tons of cotton has been sold through auction from the Chinese national cotton reserves, China still holds about 2 million metric tons in cotton reserves. On the other hand, the Chinese government has adopted strict trade policies to limit cotton imports, resulting in a sharp decrease of cotton imports in 2009. As of September 2009, the total issuance of cotton TRQ certificates in China was 1.29 million metric tons, a decrease of 2.2 million metric tons since last year, and the total quantity of cotton imports from January to August 2009 was 976,000 metric tons, down 664,000 metric tons from the same period in 2008.

In order to “balance” domestic cotton supply and demand, the Chinese government may release more cotton reserves to fill the gap between cotton supply and demand in the short-term, while reopening the door for more cotton imports through TRQ certificates, although these trade policy changes are expected to take time before they effectively increase the cotton supply in China.

The cotton import slip-tax is the most debated among textile and cotton companies in China.  China has an annual cotton shortage of 4.5 million tons, but import quotas are only 900,000 tons.  So any above-quota imports will incur cotton import slip-tax, which increases the cost of cotton by US$260 per ton.  As 70% of operating cost for a typical Chinese textile company goes to raw materials such as cotton, cotton costs are vital to a company’s profitability.  This means that post-tax imported cotton has now become even more expensive than domestic cotton making it harder for Chinese textile companies to survive.

This strategy is going to have far reaching effect on the textile industry in China and will compromise her position to offer cheaper prices as it is going to take considerable time to bridge the shortfall while imported cotton will only make things more expensive.

Credit Squeeze

C

hinese government squeezed credit for many small sized textile companies based on their financial health but in fact those are the companies in need of real help.  However, without having credit lines at their disposal small scale manufacturers are striving for their survival.  Some are scaling down while other are facing closure or considering changing to other lines of business apart from textiles.

Appreciation of Yuan against US Dollar

A

lthough Chinese government has been successful to keep Yuan stable against US Dollar at around 6.83 Yuan per US$ however, there is tremendous pressure on China to let it roll in the free market trade.  As soon as China caves in to the pressure which continues to build as applied by USA, EU and IMF, the Yuan is going to appreciate further.  It is interesting to note that in the last decade Yuan has appreciated by about 17.50% against US$ and any further appreciation will make China’s exports uncompetitive against regional rivals like Pakistan, India, Bangladesh etc.

Large Number of Vulnerable Small Sized Companies

N

o one knows exactly the number of textile companies in China. The official statistics show that there are currently more than 40,000 companies with annual sales above 5 million Yuan (US$660,000), based on export statistics.

According to Mr. Sun Huaibin, Director of China Textile Economic Research Centre, 80% of profit in the Chinese textile industry was contributed by 1/3 of the companies in 2007.  These companies have a profit margin of 6%-10%, against the industry average of 3.9%.  But even this profitable one-third is having a hard time now. “Due to various factors, long term sales contracts are no longer easy to get now,” said Mr. Sun, not to mention other issues discussed in this report.

Switching to Hi-Tech High Value Manufacturing

L

ike many countries in the West, China is also getting ready to move towards Hi-Tech manufacturing like automobiles, electronics and heavy mechanical engineering and reducing focus on labor and energy intensive textile industry.

Ability to Deliver Goods on Time Compromised

I

n the wake of factors listed above we won’t be exaggerating in stating that ability of China to deliver goods on time is very much compromised and this statement holds true even for deliveries as early as December 2009.

Just to quote an example, Springs Global the largest home textile company with a turn over of US$ 3 billion, placed an order worth US$ 500 million in China three months ago and the Chinese Vendors have recently backed out on confirmed orders.

Conclusion

T

he question is what will massive, even colossal, manufacturing infrastructure that China had created to meet the hypothetical astronomical world demand, do? The production has to be tampered down, which would in any case, increase the overhead costs, both in absolute and relative terms.  What would happen to the repayment of large amounts of loans taken by Chinese manufacturers to set up their production facilities? The fact of the matter is that the odds are heavily loaded against China.

On the other hand, the smaller, upcoming and developing countries with the clear advantage of lower labor costs and the availability of benign special concessions in terms of import duties available to them from the Western countries, would certainly steal a march on Chinese exports of textiles.

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