China Economy, Apparel Evolve

Although China seems to be losing ground as the world's top apparel manufacturer, many experts say this is a natural part of its economic development.

BEIJING — Although China seems to be losing ground as the world’s top apparel manufacturer, many experts say this is a natural part of its economic development.

This story first appeared in the February 25, 2008 issue of WWD.  Subscribe Today.

“This trend has just started and various contradictions and problems will gradually arise,” said Cao Honghui, a market economist with the Chinese Academy of Social Sciences, Beijing’s top economic think tank.

Yet, he said, mature economies the world over — from the U.S. to Hong Kong — have been through similar circumstances, providing China with good examples of how to move its economy from one based on simple manufacturing to one structured on innovation and technology.

“It’s a historical process and there is a need to implement coordinated policies,” said Cao.

Luo Jun, secretary of the Asia Manufacturing Association, said China’s economy is evolving from being one in a developing country, and, as a result, competition and prices are bound to increase. He said the new climate will contribute to a rise in the success of domestic companies, environmentally friendly production and better working conditions.

“It’s a very normal thing to have this kind of trend of shift in manufacturing,” Luo said.

In recent months, American and European apparel and textile manufacturers have become increasingly vocal about their dissatisfaction with certain growing trouble spots of producing in China. Costs are rising because of higher wages, a steadily appreciating yuan, stricter labor laws and rising domestic inflation. As the country loses its cost advantage, other problems, such as logistics and simple cultural gaps, have become increasingly apparent to Western companies. As a result, countries and areas such as Vietnam, India and Eastern Europe are emerging as strong competitors to the Chinese production powerhouse.

China had a 40.2 percent share of the U.S. apparel and textile import market last year. The country increased the volume of apparel and textile imports to the U.S. by 14.8 percent to 21.37 billion square meter equivalents.

But U.S. apparel importers did diversify their sourcing strategies. Imports from Vietnam increased 31.3 percent to 1.5 billion SME, shipments from India rose 2.5 percent to 2.7 billion SME, imports from Indonesia gained 1.6 percent to 1.62 billion SME and goods shipped from Bangladesh rose 4 percent to 1.55 billion SME.


Though there has been no mass exodus from China and the trend is more focused on potential new factory sites, reports have begun to surface that some companies have left. The Asia Footwear Association reported in December that roughly one-sixth of 5,000 to 6,000 shoe factories in the Pearl River Delta — the country’s main production hub — have shut down in recent months. While half of those that moved went to interior provinces in China where costs are cheaper, a quarter went to other countries, the association said.

Yet, with China leading the world in foreign direct investment, no one expects the world’s factory to stop mass producing anytime soon. Multinational companies have made huge investments in infrastructure, research and employee training, analysts noted. Instead, it is more appropriate to say that apparel companies “have China on a watch list,” said Doug Hart, partner with BDO Seidman LLP’s retail practice.

“I don’t think you’re going to see any wholesale movement away from China,” Hart said.

Luo, whose association represents manufacturing across sectors, said China is in a transitional period between low-level manufacturing and widespread high-tech innovation. Companies are beginning to learn, for example, that pollution is expensive rather than cost effective, and the government is bolstering such notions with new policies to encourage cleaner development.

Researchers like Cao said the trend is real and the Chinese government needs to establish some clear policies to deal with changing industries.

Government officials did not respond to requests for comment.

Cao said the central government is working to address the issues, but needs more clearly defined plans and policies for the economic shift that is beginning to emerge. In the first stages of change, he said, Western and interior provinces, the poorest parts of China, have improved incentives plans to draw new factories. Wages there remain lower and worker shortages have not yet arisen as they have in Guangdong.

Du Yang, a labor economist with the Chinese Academy of Social Sciences, said China’s coastal regions have had labor-shortage problems for several years. Though higher labor costs are not popular with producers, they are good for the country, he said.

“The goal of development is to increase the welfare of human beings,” said Du.



In addition, Cao said, the government is planning tax incentives and other financial policies to encourage development of an innovation-based economy to provide jobs that could eventually replace simple factory work.

Meanwhile, the government has more imminent, economic issues to deal with. Statistics showed inflation last month hit an 11-year high of 7.1 percent, largely on skyrocketing food prices. Economic planners have warned that inflation should be kept to 3 percent or less to maintain social stability.