The Chinese Puzzle

2011 was the worst garment-export year for China  in a decade.  As of the 10 months ending 31 November 2011, China’s U.S. market share as measured both in units and by value was down over 4% compared with the same period in 2010..

The question is why?

There are three schools of thought each with its own answer

The Living-in-Denial La-La Landers:  2011 has not been a bad year for China.  Exports in units may be down -3% but total value is still 8% above 2010.

This is not  a particularly sensible conclusion.  I certainly do not think those with factories in China find comfort in  an 8% increase when at the same time  their customers are leaving China, taking their orders elsewhere.  And, while its true that so long as U.S. garment imports  were rising, made-in-China garment exports continued to grow, the data shows that this situation is changing for the worse.  Garment imports to the EU are falling sharply while the U.S. appears to be following the same downward path — not good news for made-in-China suppliers.

The It-Serves-You-Right Critics : If Chinese garments are not doing well, the fault lies with the Chinese industry.  In this case higher costs, resulting in higher FOB prices have rendered the industry uncompetitive.

This is my personal favorite. It is short, to the point; and has the added benefit of  following natural justice.  Too bad  the data says otherwise.  It is certainly true that  2011 has brought higher FOB prices for made-in-China garments.  In October 2011 prices for Chinese garments averaged $3.27 compared with $2.85 for the same month in 2010 — an increase of  15%.  However, at the same time the average FOB price from all suppliers rose by 17.4%.  As a result, China’s is becoming more, not less, competitive. October 2011 fob prices compared with its competitors dropped from discount of -4.1%  in 2010 to a discount of -6.1% recorded in October 2011.   When you consider that the Chinese industry is concentrated in better quality fashion­ goods and tends to avoid basic commodities, being at  any discount to world average is remarkable feat.

If you want to see prices increases look at India where between October 2010 and October 2011 average FOB prices rose 22%, Pakistan where in the same period prices were up 23% or Indonesia up 35%, Bangladesh up 37%, or Thailand up 41%.  Compared with these, China is looking pretty good.

All of which leads us to the third and final group

The Silent Minority:  I understand the question.  I have no idea of the answer

Perhaps the most sensible response.

Two years ago, I looked at the same problem and came to yet a fourth conclusion

Herein lies a tale.

“Prolepsis”

In 2009 I was hired jointly by the textile and garment industries in  eight ASEAN countries — Cambodia, Indonesia, Lao, Malaysia, Philippines, Singapore Thailand and Vietnam — to create a strategy to increase exports for the region.   This was the depth of the global recession — when even the major ASEAN garment exporters such as Vietnam, Cambodia and Indonesia were in bad shape, to say nothing of the second level exporting countries. It seemed that China was finally taking over the entire global garment exporting industry, leaving everybody else with the little remaining business that Chinese factories were unable or unwilling to take.

However, it seemed to me that China’s very success might provide a solution to my ASEAN clients’ problems

As China’s global market share approached 40%, the larger retailers and brand-importers were growing increasingly concerned with the size of their made-in-China orders.

Labor costs were rising, and while FOB prices for made-in-China garments remained stable, garment retailers and brand importers were concerned that rising costs would inevitably result in rising prices

To add to the uncertainty, both the U.S. and the EU Governments were growing increasingly critical of China’s trade policies — notably the devaluation of the Chinese RMB as well as other more direct export subsidies.  There was a growing possibility that one or both importing regions would impose anti-dumping and/or countervailing tariffs.

China’s  major customers could not afford to wait for the oncoming disaster.

Imagine you are head of garment sourcing for a major importer.  When disaster strikes the little guys — the  customers who placed 2,000 dozen woven shirts or any orders totaling a few million dollars would have little difficulties finding new suppliers outside China on short notice.  However, you as a large buyer ordering 100,000 dozen shirts per month and/or having outstanding orders totaling a half billion dollars, would be dead. You would require months if not years to build a new supplier base capable of capable of handling your quantities. For you and your fellow big importers, there are no quick fixes.

To avoid the potential catastrophe you would have to move in advance of the disaster, and develop alternative suppliers outside of China.

The ASEAN strategic goal was to prepare the ASEAN textile and garment industries to provide a viable alternative to China:  textile-mill/garment-factory relationships to provide the customer with one-stop shopping, and most importantly a range of services which would allow China’s former customers work more easily and efficiently with their new suppliers.

As expected, in 2011 customers started moving their orders from China to alternate supplying regions.  To some degree, CAFTA and Mexico benefited, but the big winner has been ASEAN.

Surprisingly our predictions were wrong.  The risks of working in China have not materialized.  Wages, overheads and the value of the RMB have all gone up, but none of these have seriously effected prices for made-in-China garments.  At the same time none of the U.S. and EU anti-China rhetoric resulted in Change.

Good news for the ASEAN suppliers:  Reality proved to be of negligible importance.

China’s loss of market share is real even though , the causes of that loss are are perceptions of a reality that remains unfulfilled and may never become realized

The bad new for China:   The perception of  China’s problems remain.  Those concerns are real.  Until the perception changes, China will find a return to dominance very difficult to achieve.