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WWD Denim In Depth issue 11/06/2008

As the outlook for China’s textile and apparel producers — until now, perhaps the strongest in the world — grows ever more bleak with the global economic decline, Chinese denim producers are searching for ways to streamline production and add value to their traditional low-end offerings.

This story first appeared in the November 6, 2008 issue of WWD. Subscribe Today.

For many, that means investing in new equipment and production techniques to make premium denim and higher-quality fabrics, once the domain of Japan and other, more advanced economies. China, which makes roughly 50 percent of the world’s denim, for years has been the globe’s largest producer of low-to midrange denim fabrics and apparel, while Japan held a corner on the premium market. To stay competitive and increase potential for profits, Chinese denim manufacturers over the past three years have begun angling for a piece of the premium denim pie, with mixed results.

“We are trying to develop high-end denim and, as far as I know, many of the factories in this area are doing the same,” said Dong Yong, marketing manager of a denim factory in Foshan, in the Guangdong province. “There’s a greater demand from both China and abroad, so we’re importing equipment and improving technologies to develop our capacity for premium denim production.”

Dong’s factory, a medium-size textile producer, has spent more than $2 million in the past year to buy 30 new machines and upgrade other technologies in order to produce premium denim. Dong said that, while some domestic buyers want high-end denim, the output is still primarily driven by export customers. That’s not great news this year.

“Because the economic situation is not very good this year, we’ve had difficulty in exporting to the United States and Europe,” said Dong. “But we are still moving in this direction.”

The logic behind China’s move toward high-end denim is clear. Premium denim can fetch prices of two to five times as much as traditional, lower-quality denim fabrics, and the demand for high-end denim has grown significantly in recent years. Still, industry analysts say, quality issues remain in China’s ability to produce high-end fabrics and it’s impossible for every denim manufacturer here to make the switch to premium production.

“We don’t plan to switch to high-end fabric production,” said Zhao Jun, manager at Shandong Weiqiao Textiles, one of the country’s leading denim producers. “It’s a difficult time right now and we have difficulty guaranteeing current production. We don’t want to spend even more on something we don’t really want to do.”

And, while some producers are moving into higher-end denim fabrics and apparel, the vast majority of Chinese producers are still making lower-end denim goods. According to a report from Hong Kong-based Global Sources, 80 percent of the estimated 9,000 denim textile and apparel makers in China are focused on the lower and middle ranges of the market.

With a steady focus on the lower ranges, and most factories manufacturing made-to-order products on contract with apparel companies, Global Sources said China has managed to maintain about 15 percent annual growth in the sector for several years, totaling $3 billion in shipments last year. The main denim industry association said China made 2.8 billion meters of denim last year, most of it in the lower and middle ranges.

But that kind of growth is unlikely this year or in the near future, according to analysts. With China’s textile and apparel sector already squeezed by rising labor costs, pricier raw materials and a quickly appreciating currency, factories have been closing at a rapid pace this year. The global economic crisis will only add to that pressure, with consumer demand easing and factories ill-equipped to stay in business without incoming orders.

China’s economy undoubtedly will suffer fallout from the financial crisis in the U.S., economists predict, and much of that will land hardest on the manufacturing sector. The textile and apparel sectors will be among the first hit, they said, as consumers worldwide scale back on spending.

“It can’t be avoided that some denim factories will close,” said Wang Qianjin, a senior textile industry researcher for the Ministry of Commerce.

Wang said the most vulnerable manufacturers are those at the lowest end of the spectrum, with the smallest factories. Larger factories will shrink, he said, and they must begin combining different types of production and being more innovative about product lines and production techniques. China’s denim industry has reached a saturation point, he said, and will have to adapt to survive in tough economic times.

“The denim industry in China is very vulnerable to the global economic slowdown,” said Wang. “The industry doesn’t really have any competitive advantage right now, but is really one of the most vulnerable.”

Wang Keli, head of the China Denim Association, said the industry is calling for a move toward better and newer production technologies. “Factories need to lower their own costs by saving energy and reducing emissions, developing more value-added products and adjusting overall production structure to increase their profits,” said Wang.

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