|
|
Good for Consumers – Bad for Producers: The Impact of China
on the World’s Textile Industry
On January 1, 2005, there was a significant shift of power
in the world’s textile markets. The global quota system that
managed textile exports was abolished, no longer limiting
the amount of textiles shipped from developing countries
like China leading to a flood of inexpensive textile imports
into the US and Europe and forever-changed the industry’s
landscape. The Multi-Fiber Agreement, which has been in
existence since 1975, was designed to protect apparel
markets from a surge of imports from developing countries
with low labor rates. But starting in 1994, the agreement
was dissolved to encourage trade growth between all
countries. Then in 2001, China joined the World Trade
Organization (WTO) which gave the manufacturing juggernaut
significant access to US and European markets.
According to the Wall Street Journal, China now supplies
upwards of 20% of the world’s textiles and the WTO estimates
that by 2007, the country will supply apparel for half of
the world. Just in the first two months of 2005, China’s
textile imports to the US have increased by a third. The
same story is true in Europe, where Chinese imports are now
73% higher than the same period last year. This meteoric
growth has surfaced concerns from US and European
manufacturers who stand to lose revenues, market share and
jobs as a result of the shift in production.
How is China Changing the Industry?
China has a number of advantages that makes other textile
producing countries feel threatened. The first advantage:
Inexpensive labor. Unlike the US and Europe which must
invest heavily in payroll and benefits for their workers,
their Chinese counterparts can provide the same labor for a
fraction of the cost. In addition, many of China’s
manufacturers benefit from government subsidies that lower
overall manufacturing costs. Since many of these subsidies
go unpaid, the practice gives Chinese producers a clear
competitive advantage.
The third advantage relates to China’s currency valuation
proactices and the weak position of the US dollar. China has
pegged the currency at 8.82 yuan to the US dollars, an
artificially low rate according to many of the country’s
critics. The devalued currency allows manufacturers to
charge lower prices since production costs appear lower,
thereby shifting overall market prices lower. With this
level of control over the market, China can lure retailers
away from US and European produced goods thereby boosting
their share of textile and apparel markets worldwide.
So what does this wave of Chinese imports mean to worldwide
textile production? It means that the US and EU
manufacturers will struggle to compete on price and many
will be squeezed out of the market place. They must find
ways to adjust their business strategies to create new
competitive advantages.
The Market Responds to Shifting Competition
There are a number of the industry’s constituencies that are
concerned about the changing trade landscape. First, the US
and European Union have launched massive probes to review
the impact of Chinese textile imports and whether limits
should be imposed to curb the market disruption. Their goal
is to protect the interest of their domestic textile and
apparel producers. Many categories will be investigated,
including T-shirts, denim, socks and underwear, since they
have had explosive growth since January.
Next, China recognizes the impact of their new trade status
and the country has imposed export tariffs on textile and
apparel exports to slow the rate of Chinese goods entering
foreign markets. The country must also meet the terms of the
current provision imposed as a condition of their entry to
the WTO. The provision states that the country cannot exceed
a growth rate of 7.5% over previous year’s sales in a number
of textile and apparel categories. While this safeguard
provides some protection, it must be renewed annually and is
only available until 2008. Meaning that in three years,
China will have full access to all foreign markets forcing
producers in western markets to identify ways to remain
competitive in the long-term.
Third, the cries of US and European manufacturers are not
the only geographies calling for more protection from
China’s growth. Other developing nations in Southeast Asia,
Central America and other regions stand to lose substantial
ground in the textile markets because they cannot compete
with China’s ability to produce high volumes of products at
rock-bottom prices. China’s expansive manufacturing reach
allows them to produce higher volumes of textiles,
ultimately robbing other developing nations of their
competitive advantage.
But not all groups, however, agree with the idea of limiting
China’s textile imports. The final group, retailers,
welcomes the expiration of the quota system so they can
source products at the lowest possible prices to both
bolster profit margins and pass savings along to their
customers. According to the US Association of Importers of
Textile and Apparel, its expected that prices for textile
and apparel products will decrease anywhere between 5% and
20% with the expiration of the quota.
How Can Manufacturers Compete?
While government intervention can be of some assistance to
these haggard manufacturers, these companies must also focus
internally on making changes to become more competitive.
There is little that an individual company can do to change
prevailing rates for labor or adjust market prices for
textile products. However, these companies can make
significant gains through better management of resources and
information to identify cost savings within their business
processes.
The US and European manufacturers who survive China’s rise
as a textile powerhouse will require a proactive, integrated
approach to managing production costs. From finding cheaper
raw materials suppliers to adding smarter cost management
technology, those companies who find a way to compete on a
cost basis with China will be the ones left standing when
the industry shake-up dust settles. Operations, accounting
and finance leaders at these companies are under fire to
identify new ways to enhance profitability by eliminating
unnecessary spending at each point in the manufacturing
process.
Impact:ECS is the solution for textile producers because its
integrated approach exposes where costs reside in the
process. This level of awareness allows textile producers to
make informed decisions about their business strategy,
product mix, customers and suppliers. By delivering accurate
and detailed cost data, built-in reporting and centralized
access, Impact:ECS brings costs to the fingertips of the
business leaders who need it. By understanding costs,
textile companies can better face the tectonic shifts of the
textile markets.
|
|
|
