By  on September 18, 2007

NEW YORK — China's rise as the world's leader of low-cost manufacturing has been largely a result of its size, style of government and immense population.

While sourcing executives and economists have taken comfort in the belief that other developing countries have historically sprouted up to fill the world's manufacturing needs, there are few, if any, contenders approaching China's weight class. Now, only a little more than two years after World Trade Organization countries dropped quotas on textiles and apparel, prices may have nowhere to go but up.

"A lot of the easy price decline has already happened," said Mark Messura, executive vice president of global product supply chain at Cotton Inc. "I think what's going to happen now is there will be a search for the good companies in these low-cost countries and not everybody can do that. The low-hanging fruit has been picked."

China has played an increasing role in the apparel, footwear and accessories industries for decades. But it was anticipated that the removal of quota would change the landscape of global manufacturing and China's position in the world almost overnight.

In 2004, the final year of the quota system, speculation on the impact of the removal of quota was rampant. Some in the industry predicted apparel prices would plummet as much as 50 percent as a wave of Chinese-made goods flooded the shelves of domestic retailers. Ocean carriers and importers had visions of container ships bobbing outside Chinese ports on New Year's Eve waiting to pick up the first quota-free deliveries. This would be followed weeks later by equally large waiting lines for ships to get into West Coast port facilities. Like the fears surrounding the transition from 1999 to 2000, the reality was less dramatic.

Prices certainly have fallen, but the end of quotas failed to spur a widespread plunge. Instead, it helped continue a long-term trend. According to the U.S. Bureau of Labor Statistics, women's apparel prices have been falling since 1993. The consumer price index for women's apparel was 130.1 for 1993. By 2005, the CPI for women's apparel had fallen 17.1 percent to 111.1.

Over the last year, however, prices have been inching up. The CPI for women's apparel rose 0.9 percent to 112.1 in 2006. So far this year, the CPI for women's apparel has risen five out of the seven months through July.Messura said retail prices for apparel fell by as much as 2.5 percent a year between 2000 and 2004. During that same time, the cost of imported apparel fell as much as 3 percent a year. Today, Messura said, data indicates that the retail price declines are starting to flatten out along with the average price of imported clothing.

"If there's a bottom to the market, we may have hit it or we're pretty close," said Messura.

He believes many manufacturers, particularly mass merchant retailers, have extracted all the margin they can from the supply chain. Mass merchants have been the driving force behind offering factories larger volumes in exchange for lower costs.

"You can only do that so long, it has a practical limit," said Messura.

Reaching that limit will involve making decisions between quality and quantity. Nate Herman, director of international trade at the American Apparel & Footwear Association, is hearing similar sentiments from manufacturers.

"There's general agreement that there's nowhere else to go, we've gone as low cost as we could," said Herman.

The focus now will shift to achieving smaller efficiencies, such as utilizing radio frequency identification technology. Herman said the industry is expecting, or hoping, that prices will stabilize or slightly increase. The amount of competition in the industry leaves little room for price increases. Keeping prices low will be even more crucial should there be a significant downturn in the economy.

"It's going to get harder to operate at the same margins that you have with sourcing in China," said Herman. "There's a lot of cost pressure coming from China right now that's going to make it harder to maintain the same price levels."

The rising cost of energy and raw materials may also force increases. Messura noted that global demand for cotton has begun to outpace the supply.

"The world wants cotton and it wants it at a level that cotton farmers haven't supplied in the last three years," said Messura.

According to data from the U.S. Department of Agriculture, world cotton production in 2005 was estimated at 25.2 million metric tons, while cotton consumption was estimated at 25.3 million metric tons. For 2006, world cotton production came in at 26 million metric tons and consumption rose to 26.7 million metric tons. Demand is expected to exceed supply this year as well, with global production expected to be approximately 25.2 million metric tons and consumption to come in at 27.8 million metric tons.Higher-end materials are also seeing increases. Wool, for example, has seen prices jump. According to The Woolmark Co., one pound of wool cost $3 at the end of 2006. By June 1, the price had increased 27.7 percent to reach a high for the year of $3.83 a pound. Prices in August retreated to $3.41 a pound, but this still represents a more than 30 percent jump compared with the $2.57 a pound reported in August 2006.

Donald Rosenfield, a senior lecturer at MIT Sloan School of Management and an expert in global manufacturing, logistics and the Chinese economy, is less pessimistic about the threat of rising costs. Rosenfield contends that there are significant amounts of untapped potential left in China, particularly in the country's inland territories.

"I think the dynamic will take a while to play out in China because it has a huge population and there's a huge population in the interior," said Rosenfield.

He is also a believer in the idea that other countries will develop the necessary manufacturing capabilities to maintain stability.

"If you look at the history of economic development, there's always a new place," he said. "First it was Japan, then [South] Korea, Singapore and now China."

Those in the apparel industry are less confident that a country with the size and scale advantages of China exists on the horizon. Countries like Pakistan, India, Bangladesh and Vietnam regularly come up as likely to experience apparel-related growth. That said, each one has significant impediments to becoming a serious challenge to China. The political situation in Pakistan is increasingly tenuous and the monitoring program of Vietnam has already convinced several apparel manufacturers to take their business elsewhere. India has the size and population to compete, but is plagued with infrastructure problems and a heavily bureaucratic government.

"China has become the most important source, but still one of many sources," said Herman. "If anything, people are pursuing that kind of strategy even more than they used to, making sure they have a multicountry strategy."

Gary Ross, vice president of global manufacturing and sourcing at Liz Claiborne Inc., agrees the pressures that led to lower prices have been reduced. The apparel industry must now enter a transition period."We're now going to enter a cycle of efficiency," said Ross.

Becoming more efficient will require examining each step of product development to eliminate waste and redundancies. The industry will need to do things such as optimizing fabric utilization, reducing the number of garments being reworked, improving packaging techniques and ordering only the required number of goods needed. For example, Ross noted it's an accepted practice of the industry to order around 5 percent more trim than is needed.

"We can't pay for it and the consumer can't pay for it," said Ross. "Our industry, in general, has not necessarily subscribed to sophisticated management techniques because it was relatively cheap. It's not relatively cheap anymore."

Ross also believes there is room for growth in China. The country's manufacturing industry is currently shifting within the country. It's similar to the movement that occurred in the U.S., with manufacturing moving from the Northeast to the South and eventually overseas. In China, manufacturing has begun to shift from southern China to northern China. Ross said the Chinese government has invested heavily in infrastructure to open up western China, as well. This should keep prices stable. However, China moves quickly in its development.

"It will happen faster than most will realize," said Ross.

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