By  on March 22, 2005

NEW YORK — U. S. textile firms have concluded they can’t beat their Chinese competitors, so they’re joining them.

Fabric and fiber makers such as Invista, International Textile Group and Malden Mills Industries have established manufacturing presences in China over the past few years, and the list of firms looking to follow their lead is growing.

The deals so far have primarily come in the form of joint ventures, which have required domestic textile firms to come to terms with rivals they’ve been struggling against — and loudly complaining about — for years.

Two major shifts in the industry have smoothed the way for this change. One is an influx of new investors who don’t necessarily share the isolationist attitudes of the old guard of the textile sector. A second and closely related change is the realization that China’s dominance in the world textile market has been all but assured now that the nations of the World Trade Organization have dropped their quotas.

“China already is about the largest apparel-producing country and I see no reason to think that it won’t gain market share,” said Wilbur Ross, the investor who bought Burlington Industries and Cone Mills to create the $800 million ITG, and who is an example of the industry’s new blood.

He said China, with the huge workforce that comes with a population of 1.3 billion people, is “destined” to remain the world’s largest producer of apparel and textiles, “the only question is how big.”

China’s leading position as a supplier of imported textiles and apparel to the U.S. is unquestioned. Last year, Chinese suppliers shipped $14.55 billion worth of those goods across the Pacific, a 25.4 percent increase that pushed China far ahead of its nearest competitor, Mexico, which saw its shipments slip 2.1 percent to $7.78 billion. China has more than doubled its U.S. apparel sales since 2001, the year it joined the WTO, and its pace of growth has accelerated since the lifting of quotas. According to recently released U.S. government figures, in January imports of Chinese textiles and apparel were up 29.4 percent.

In December, Greensboro, N.C.-based ITG inked a deal with China Ting Group, a major Chinese textile producer, to invest a combined $20 million to build a dyeing and finishing plant in the city of Linping, about 100 miles southwest of Shanghai.Ross emphasized that the move was just a first step in ITG’s expansion in the world’s most populous country.

Invista, Koch Industries Inc.’s Wilmington, Del.-based fiber business, last month broke ground on a $128 million spandex plant in the city of Foshan, located in Guangdong Province, north of Hong Kong. Foshan Plastics Group Co. owns a 10 percent stake in the facility, which will produce 12,000 tons of spandex annually when it comes on line in the third quarter of 2006.

The facility will be Invista’s third spandex plant in China. Invista also operates a factory outside Shanghai — its first Chinese fiber facility that began operating in 1997 while the business was still under the DuPont corporate umbrella — and another joint venture in the city of Lianyungang, in Jiangsu Province.

Bill Ghitis, president of apparel for Invista, said the Foshan plant will give Invista the capacity to produce more than 50,000 tons of spandex a year in China, representing about half the Chinese market for that fiber. He added that Invista plans further expansion in China.

“We will be looking at opportunities across the board, beyond spandex,” he said.

Invista also produces polyester and nylon. The world’s largest fiber company, with an estimated $9 billion in revenues, Invista has 32 factories across North and South America, Europe and Asia, and has been operating globally for decades.

While not on the scale of Invista, many other U.S. textile companies had tested foreign manufacturing platforms over the past two decades. Malden Mills has long operated a satellite manufacturing plant in Germany to serve the European market, and in the mid-Nineties, a slew of major U.S. mills — including Burlington, Cone, Guilford Mills and Galey & Lord — opened factories in Mexico to take advantage of the North American Free Trade Agreement.

But the surge to China has taken on a new urgency in light of that country’s growing dominance of the garment industry. Textile production is highly automated, and modern mills with the right equipment can turn out hundreds of thousands of yards of fabric with just a handful of staffers, whose main function is keeping the looms and dye vats running.But garment manufacturing remains labor-intensive. A modern apparel factory, with rows of workers seated at sewing machines, would look familiar to a garment worker from the early 20th century. That has made China’s enormous workforce and low wages a huge competitive advantage, and with apparel production concentrating in China, it behooves textile makers to have a presence there.

Malden Mills, based in Lawrence, Mass., during its stint in bankruptcy in 2002, set up a joint-venture fabric plant in Shanghai, operated with Shanghai Challenge Textiles, where it makes its Polartec polyester fleece.

Atlanta-based Galey & Lord, which in November was acquired by investment firm Patriarch Partners, has joint-venture operations in Tunisia, the Philippines and Mexico. It’s now exploring options for expanding into China, which president and chief executive officer John Heldrich called “a major consideration for us, both in denim and twill.”

The growth of China’s textile and apparel industry has come at a time when the domestic U.S. industry has been in sharp decline. According to the Labor Department, U.S. textile mill employment at the end of 2004 stood at 230,400, down 4.4 percent from 2003, while there were 272,500 apparel manufacturing jobs, down 8.5 percent. Those figures are less than half the level reported in 2001, though the government in 2003 changed the way it counted manufacturing jobs, which is a major reason for the sharpness of the decline.

That makes the advantage to U.S. firms of joining with the Chinese clear. Experts and executives said even with their explosive growth, Chinese firms also gain by combining their efforts with U.S. partners.

Peter Liu, chairman of the textile and apparel committee of the American Chamber of Commerce in Hong Kong, said in addition to gaining access to U.S. firm’s fabric technologies and production expertise, Chinese firms who join forces with U.S. companies also gain access to U.S. brands, which can make it easier to break into the market.

“It’s one thing to make the product, you also have to design, you have to have the technology, the marketing — you need a brand,” said ITG’s Ross. “Just making the goods is not the whole answer. So what a relationship with a big U.S. company does is, it gives them instant marketplace access and gives the most up-to-date technology and marketing.”He added that working with well-funded U.S. firms can give Chinese mills easy access to capital, which is critical to funding expansion plans. Over the past year, the Chinese banking system has been tightening credit terms in a bid to curb speculative investments and prevent the fast-growing economy from overheating.

China’s rapid economic growth — last year its gross domestic product rose 9.1 percent to $6.449 trillion, adjusted to reflect purchasing power — has also attracted the interest of Western firms that see its potential as a consumer market. The country is estimated to have a middle class of 100 million people.

Ghitis said by boosting Invista’s presence in China now, the company will be well positioned to market its branded products — particularly Lycra spandex — to the Chinese shoppers.

“We are absolutely interested in the Chinese consumer,” he said. “We believe that the Chinese consumer will progress quicker than any other consumer in the world’s history. From that perspective, China will become very important, indeed.”

To market their brands in China, U.S. companies are taking some novel approaches. Ghitis noted that in China it’s still common for brands not only to sponsor but to produce their own TV shows — a step beyond the cigarette packs dancing in the background of “Your Lucky Strike Hit Parade” on U.S. TV in the Fifties.

To get its Lycra brand name — locally known as Laika — in front of Chinese viewers, Invista produces a program called “Lycra My Show,” which the company described as similar to “American Idol” in the U.S., and a regular style awards snow.

“We’re doing stuff in China that we’ve never done before,” Ghitis said. “China has got its own soul and it’s got its own style, and if you want to grow in China, you will have to grow by Chinese values.”

He noted that the firm has also named a local executive, William Yeoh, to the new post of vice president of apparel for China and Hong Kong. A former Gillette regional manager, Yeoh is the first Invista executive charged with promoting the company and its brands in China.ITG is also taking an unconventional route to reach out to Chinese consumers. In addition to the joint-venture dyeing plant, its deal with China Ting calls for a rollout of 25 Burlington House stores across China. The stores will sell home textiles, such as sheets and bedspreads.

Ross acknowledged that it could seem “strange” for a company that has never operated stores anywhere else in the world to take its first stab at retailing in China, but said the move fits into his plan to build the Burlington name worldwide.

Executives assert that joining forces with a Chinese partner can smooth the way to moving into China by serving as a guide through the nation’s labyrinthine bureaucracy, for instance. But choosing a company to go into business with is never easy and the challenge can be steeped in China by language and cultural barriers.

Greensboro-based Unifi Inc., a $746.5 million fiber maker, has been trying to open its first manufacturing plant in China for about two years. In July 2003, Unifi executives started negotiations with Guangdong Kaiping Polyester Enterprise Group about building a joint-venture polyester factory in the city of Kaiping, the government of which owned Unifi’s perspective partner.

In April 2004, the firm revealed to investors that it had decided to pull out of the talks due to the slow pace of their progress. It was a setback to Unifi’s planned entry to China, but Bill Lowe, the company’s chief operating and financial officer, said it turned out to be “very fortuitous.”

“We were contacted shortly thereafter by different firms,” Lowe said.

One of those firms was Sinopec, one of China’s largest petrochemical companies. Sinopec and Unifi officials are now finalizing plans for a polyester plant in the city of Yizagng, near Nanjing.

“We are working toward having a joint venture signed and submitted for government approval by the end of March and hope to be on the ground working by the first part of July,” Lowe said.

Ira Kalish, global director of consumer business at Deloitte Research, said it’s not uncommon for U.S. firms to have trouble finding partners in China.

“The biggest challenge when doing that is to find the right people,” he said. “The right partner is one that you can trust and one where your intellectual property is going to be protected.”For major manufacturing joint ventures, executives said one of their biggest challenges in working with Chinese firms is doing financial due diligence. Accounting practices and financial controls in China are not always up to the standard U.S. firms expect, which can make it a challenge to assess the stability of a potential partner. Likewise, China lacks the major credit ratings services that many U.S. and European companies rely on.

Unifi’s Lowe said negotiations with Sinopec have seemed to go smoothly because that firm has “done other transactions with other Western companies. The parent company is familiar with Western contracts.” In addition, he noted that Sinopec uses an internationally known auditor, KPMG, to do its books, a fact that increased Unifi’s comfort level.

Sinopec, a public company with its stock listed on the New York and Hong Kong Stock Exchanges, reported 2003 profits of $2.29 billion on revenues of $53.48 billion. Its fiber business alone was a $1.51 billion entity that year. It also has chemical joint ventures with BP and BASF.

The proposed Unifi-Sinopec deal calls for Unifi to invest a so-far undisclosed amount of money into an existing Sinopec polyester plant that currently produces about $120 million worth of fiber a year. Unifi plans to begin making some of its branded specialty yarns at the facility to sell to local yarn and fabric mills.

Deloitte’s Kalish said in general, U.S. firms seem to have greater success in setting up ventures with Chinese companies that are owned by private investors — or by private stockholders on a major exchange — than with those that are still owned by the state or regional governments.

“The efficiencies of the private Chinese companies are far greater than the state-owned companies,” he said.

In a recent research report, he noted that China’s state-owned textile and apparel factories last year produced average output of $1,786 per worker, while those owned by private investors had output of $3,771, more than double their state-owned counterparts. Private firms produced an average return on assets of 5.9 percent last year, while state-owned ventures on average reported losses.

Until three months ago, foreign companies looking to do business in China were required by Beijing to form joint ventures and have local investors. In recent years, China has been relaxing its rules on what foreign investors may do in the country to bring China in line with its WTO obligations. On Dec. 11, Chinese law changed to allow foreign companies to set up wholly owned subsidiaries on Chinese soil.Whatever challenges they encounter along the way, U.S. textile executives said they’ll remain focused on building their presence in China because they have to. China already produces more than 90 percent of the shoes and toys sold in the U.S., and following the lifting of textile and apparel quotas its U.S. market share in those categories is expected to soar.

“We do believe there is a textile industry that will remain in the U.S. We’re working to stabilize that operation,” said Unifi’s Lowe. “But you have to recognize, and we do, that the growth for polyester is in China. That’s our growth platform.”

load comments
blog comments powered by Disqus