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HONG KONG — The numbers are staggering: Last year, Chinese textile manufacturers produced 5.3 million tons of textiles, nearly one-quarter of the world’s output. China, the world’s largest cotton producer, accounted for 24 percent of the world’s total output of $121 billion. There are currently 70,000 textile and clothing enterprises in China.
With Chinese textile exports equaling $7.07 billion in 2002, there’s little wonder that American manufacturers are worried about what will happen when quotas on textiles and apparel are lifted among World Trade Organization members in 2005.
This story first appeared in the September 23, 2003 issue of WWD. Subscribe Today.
The prospect of cheap goods flooding the U.S. market and causing massive job losses at factories has Washington worried. Ironically, similar concerns affect China, which struggles with high unemployment, particularly in rural provinces, and the idea that in 2005, foreign-made goods will eradicate domestically produced ones.
The crux is that Beijing sees its textile industry as one of the few sectors that will not be adversely affected by the removal of quotas. The People’s Daily, a government paper that is widely seen as a barometer of official Chinese positions, reported, “Chinese textile firms will be best positioned to capitalize on the agreement.”
This contrasts with China’s telecommunications, banking and automotive industries, which are expected to take a backseat to foreign competitors in 2005. Indeed, one of Beijing’s aims is to get foreign investors to help out enterprises that are now state run. Lin Zongtang, president of the China Industrial Economic Federation, said foreign investors are “encouraged to join in the restructuring of China’s state-owned companies.” High on China’s wish list is help for its agriculture, high tech and manufacturing industries.
Unlike other sectors, the textile industry is more concerned with meeting demand than future competition. It is also following actions in the U.S. Congress carefully.
Last November, the National Association for Textile and Clothing Enterprises was formally established. The nongovernmental business association is designed to boost the development of China’s textile and clothing industry and also serve as an industry watchdog. It and the China Textile Industry Association are seen as likely to ask Beijing to execute counter-measures if the U.S. imposes new tariffs or other restrictions on Chinese-made clothing or textiles.
In the meantime, textile and apparel manufacturers are gearing up for increased demand, both domestic and foreign.
“I see a lot of companies upgrading their equipment and their existing facilities,” said Katy Lam, general manager of trade fairs for Messe Frankfurt Hong Kong, which organizes the largest textile trade shows in the region, including Interstoff Asia and Intertextile Shanghai. “People are preparing themselves by getting new machines, improving efficiency and by doing more promotion and marketing.”
A case in point is Shandong-based Weiqiao Textile, China’s biggest cotton textile maker. Chairman Zhang Bo said his company will spend about $60 million a year over the next three years to improve technology and output capacity and to increase its mix of value added-products. (All dollar figures are converted from the Chinese yuan.)
Similarly, Fuzhou-based Art Textile Technology International Co. has set its sights on the European market. It hopes its export sales will reach $3 million, representing more than 5 percent of its total volume, by the middle of next year.
“Our medium-term target is for overseas sales to contribute about 30 percent of total sales by 2005,” said Chen Dong, Art Textile’s vice chairman and executive director. “But our strategy is to expand one step at a time.”
Like Weiqiao, Art Textile made its initial public offering on Hong Kong’s Hang Seng exchange in September, issuing 218.75 million shares at the equivalent of about 6 cents a share. (Share price is converted from Hong Kong dollars.) The company says it will invest as much as $8.5 million to double its production facilities of knitted fabrics in Fuzhou.
Companies are hoping not just for an increase in exports, but also for a larger chunk of the lucrative domestic China market. Weiqiao’s Zhang said the company aims to increase its domestic market share to 15 percent by 2007 from 3 percent now. To reach these goals, the company last week held an IPO, hoping to raise upward of $274 million from the sale of 25 million shares.
Said Zhang, “China’s textile industry has expanded faster than global growth. We want to focus on what we do best; that’s the quickest way to expand. It is also the quickest way to push back our competitors.”
Art Textile is also hoping to answer domestic demand for more cotton fabrics, expanding its current annual production to 52 million square meters from 26 million square meters.
“The additional facilities will be in operation in the first quarter of next year,” said Chen. “We are planning to supply cotton textile to the domestic casualwear makers.”
Last year, the company spent more than $120,000 on developing new products.
Most of China’s large textile companies are vertically integrated and very diverse, producing everything from fiber to finished products, handling distribution and operating retail outlets.
“Some of these companies are not just in textiles,” Interstoff’s Lam said. “They are also in chemicals and other businesses. If you look at the big textile companies in [South] Korea and Japan, it’s the same.”
An example is Yue Yuen, the world’s largest manufacturer of branded footwear, which went public in June. It is spending between $150 million and $160 million to increase its production lines and to boost its materials business. Currently, the firm has 279 production lines in factories in China, Vietnam and Indonesia. Executive director Edward Ku said, “We will use $120 million to increase our production lines in Vietnam and upgrade equipment and machinery in China.”
Yue Yuen is already a major force in the footwear retail arena in China, with more than 170 stores including freestanding boutiques for such brands as Timberland, Hush Puppies and Rockport. It now has plans to enter the sportswear market with the opening of some 40 stores over the next few months that are designed to capitalize on China’s Olympics fever. Beijing will host the Games in 2008.
Yue Yuen’s apparel ambitions are not limited to tracksuits for trendy Chinese. It recently acquired a 73 percent stake in King Protex, a manufacturer of casual wear for brands like The North Face, Lands’ End and Columbia. The idea, notes Ku, is to diversify gradually ahead of the end of quotas.
As China’s manufacturers expand their production capacity, they are straining the country’s infrastructure in many areas. Last month alone, there were power outages in 19 of China’s 29 provinces, events that are very disruptive to factory operations. New roads, bridges, airport and seaports are being added every month.
Last week, new shipping lanes to ports in the Black Sea and Europe from China and Southeast Asia were announced. The foundations for the Pearl River Bridge, which would link Hong Kong to Zhuhai and Macau, are also being laid. In the ports of Shanghai and Tianjin, new berths have been added and export records were set this year.
China’s building boom and its increasing openness have led to a huge influx of foreign investment. So far this year, overseas funds have invested more than $33 billion in the mainland. Recent reports of bad loans have not stemmed the tide. The American Chamber of Commerce in Hong Kong, which publishes an annual Business Outlook Survey, found that 78 percent of its member companies are already doing business in China and 89 percent have plans for further investment during the next three years.
Recently, Izod took a big step in this direction by signing a deal with Hempel International Group, China’s largest fashion brand licensing and marketing company. Under the licensing agreement, Hempel will open and operate up to 155 Izod stores in China, Hong Kong and Taiwan.
Luxury brands are also getting their feet wet in the market. Prada opened its largest store to date in China in Guangzhou last week. The 4,000-square-foot shop in the La Perle shopping center is the company’s fourth in China. Three more are in the works.
Men’s wear brand Ermengildo Zegna, which was one of the first luxury brands to enter China more than 10 years ago, has decided to expand its presence by opening in such far-flung cities as Urumqi in northwestern China. The brand, which is also one of the largest buyers of cashmere in China’s Inner Mongolia, is increasing its number of stores to 60 from 48. It also has a 50 percent stake in a garment factory in Wenzhou, which helped the company to localize production and reduce costs.
Although many of the West’s best-known brands have been in China for a few years, notably in Shanghai and Beijing, the lure of relaxed distribution rules is enticing renewed interest in retail. This is because foreign firms will be allowed a controlling stake of up to 65 percent in the businesses after 2005. Also important, foreigners will be allowed to establish independent distribution for the first time.
But it isn’t all smooth sailing. As reported by the American Chamber of Commerce, more than 90 percent of the survey’s respondents cited corruption, bureaucracy, lack of intellectual property rights protection and lack of transparency of laws and regulations as difficulties encountered in China. Finding the right local partner is essential, the survey said.
Some joint-venture hopefuls are hiring detective agencies and accounting firms to check out their prospective mainland partners. Many of the detectives are former Hong Kong policemen who are hired to hunt counterfeiters, get background information on would-be partners or investigate fraud. PricewaterhouseCoopers reported that it is expanding its detective services in Hong Kong to meet demand.
Hong Kong-based fashion conglomerate Toppy Ltd., which owns such brands as Episode, Jessica, Colour 18 and Oxygen, is getting around such problems by creating its own partner and its own distributor. Sixty China is a joint venture between Toppy and Sixty Italy that will launch five new labels that have been created just for the China market. They will be distributed by Novo Concept, a lifestyle store that is the brainchild of Alan Fang, the son of Toppy’s chief executive officer, Vincent Fang.
Toppy reported that three of the labels will debut in Shanghai in October; it hopes to have 65 retail outlets in five cities by the end of 2004. The company, which is investing $12 million on the venture, will spend much of its effort on Novo Concept. The 25,000-square-foot space will open in Shanghai this November and will be home to such China first-timers as JLo, Energie and Killa.
“Novo offers a very different approach to retail that has never before been attempted in China,” said Alan Fang, Novo Concept’s director. “But the market in Shanghai is very receptive to new and exciting ideas, and the response from tenants has been stronger than expected.”
Not all Hong Kong companies are as enthusiastic, however. The textile industry in particular is preparing to be hit hard by the new regulations of 2005. Hong Kong is currently the number-two export market in the world, but much of that trade is goods that are re-exported from the territory, a practice that is not expected to continue in 2005.
Two months ago, the territory and China signed the signed Closer Economic Partnership Agreement to help ease the pain. CEPA allows Hong Kong-made goods to be sold in China tax free. The problem is that apart from watches and jewelry, not many goods are actually made in Hong Kong, which has one of the costliest workforces in the world.
Many in the Chinese industry claim they expect any surge in exports to the U.S. to take market share from other foreign countries more than compete with domestic manufacturers, a stance that to some degree reflects a growing awareness of political concerns in Washington.
Cao Xin Yu, deputy director of the China Chamber of Commerce for the Import and Export of Textiles, said China’s increase in its textile exports to the U.S. was mostly achieved by “displacing other countries’ exports, not dramatically increasing U.S. imports.”