China and Its Place in a Changing U.S. Garment Import Market

2011 brought wrenching change to the U.S. market.  From June through December unit imports declined every single month, as retailers drastically reduced inventories.

U.S. Imports All Garments Monthly Data 2011 vs 2010
Units Value
January 17.0% 22.4%
February 12.3% 16.9%
Mar 7.1% 13.3%
Apr 6.6% 13.6%
May 6.3% 14.8%
June -7.1% 7.9%
July -3.6% 11.5%
Aug -4.0% 10.0%
Sep -7.7% 8.6%
Oct -14.6% 0.01%
Nov -14.5% -0.96%
Dec -13.5% -1.11%

Increasing labor, material and overhead costs in the major garment producing countries inevitably led to rising prices. Eventually FOB prices rose to levels unseen since the bad old days of quota restrictions. The era of continual  FOB price reductions had come to an end.

Both retailers and their suppliers were caught in a bind.  The economies of major garment importing countries were in a fragile state. Costs were rising, beyond the control of the suppliers, but retailers were unable to pass these costs on to the consumer.

Old customer/supplier relationships broke down as retailers and brand importers began to search for new low cost suppliers.  Supplying countries which previously had been of secondary importance, such as Nicaragua and Sri Lanka, suddenly became suppliers of choice.  Others which had previously been written off as failed suppliers, such as Mexico and the Philippines, were reborn.

The big loser was China; although the term “loser” may not be an apt description for a country with a 39% market share.  Customers saw China’s rising costs and more importantly rising value of its currency and chose to move elsewhere.

We can see the pattern in the chart below.  China’s market share increases peaked in the 1st quarter of 2010.  Thereafter increases moderated until 1st quarter 2011, when market share change turned negative, until reaching a trough in May/June 2011.  At that point the trend reversed once again, moderating the declines.

U.S. Garment Imports:  China – Year on Year Change

Unit Market Share

Value Market Share

2010

2011

2010

2011

Jan

20.4%

-5.6%

12.2%

-1.3%

Feb

19.5%

-3.5%

15.3%

-1.1%

Mar

16.0%

-7.3%

12.4%

-4.9%

Apr

11.1%

-6.4%

8.7%

-4.2%

May

10.1%

-6.8%

8.2%

-4.7%

Jun

9.5%

-6.3%

7.7%

-4.0%

Jul

8.5%

-5.1%

8.0%

-3.8%

Aug

7.4%

-4.4%

7.7%

-4.0%

Sep

6.1%

-3.8%

6.6%

-3.1%

Oct

5.0%

-3.5%

6.2%

-3.3%

Nov

4.2%

-3.1%

5.6%

-3.0%

Dec

4.0%

-2.4%

5.4%

-2.8%

January 2012 continued the improving trend, as unit market share once again rose, while value market share declines moderated to -1.0%

U.S. Garment Imports:  China – Year on Year Change

Unit Market Share

Value Market Share

2011

2012

2011

2012

Jan

-5.6%

3.6%

-1.3%

-1.0%

Here comes the big question:  Does this new twist mark the return to China’s ever increasing market share?

On the yes side, it is now quite clear that China’s rising costs notwithstanding, the FOB prices of made-in-China garments remained quite competitive throughout this period.  As we can see from the next chart, China’s FOB prices rose consistently in 2011, compared with 2010 and these continued in January 2012.

 

However, FOB prices from almost all suppliers showed greater increases, with the result that throughout this period China’s FOB prices were at a discount to the average from all suppliers.  By January 2012 that discount had had reached -8.1% a substantial improvement from the same period in 2011 which stood at a discount of -3.8%.

On the no side, we have two factors.  First of all, as costs rise, there is a limit to any supplier’s ability to keep prices unchanged.  With China’s factories already operating at margins below 2%, they may not be able to absorb any further cost increases.  This is particularly true of labor costs, where China’s garment factories must compete with high tech factories which are able to convince customers to pay more to cover these wage increases.

The second factor is structural.  The value of the Chinese currency (RMB) relative to the U.S. dollar (and the Yen and Euro) single most important factor affecting FOB prices.

In the short term the Chinese Government has able to control the value of their currency.  Between June 2010 and end January 2012, the RMB increased by about 8% against the dollar.  Thereafter the value of the RMB was allowed to move only within a very narrow band — 7.7%-8.3%.

In the long term, despite their greatest efforts and most stringent controls, the Chinese the price their government must pay to control the value of their currency may be unacceptably high.

In early 2012, the Chinese government stopped revaluation because the rising value of the RMB resulted in rising costs and therefore reduced demand for exports. This proved to be unacceptable for two reasons:   Falling product exports would lead to both reduced economic growth and higher unemployment, At the same time would bring complaint from the exporters themselves who are a large and powerful interest group.  The real possibility of falling growth rates, rising unemployment together with the anger of serious and powerful commercial interests was too much for China’s leaders to accept.

At the same time limiting the rising value of the RMB result in equally serious and equally unacceptable difficulties.  In the Chinese system an undervalued currency leads directly to rising inflation.  These rising prices have an immediate negative effect  on the living standard of the majority of Chinese people.  The real possibility of a falling standard of living which may lead to popular unrest is too much for  China’s leaders to accept.

In the final analysis, the Chinese government must choose between increased exports which lead to rising inflation or decreased exports which lead to reduced economic growth and rising unemployment.  Despite their most earnest efforts, the Chinese government  cannot have both without fundamentally changing their economic system.

This is the real problem facing the Chinese government and the real uncertainty facing garment importers. Until this problem is resolved, garment importers must accept that dealing with China has real and serious risks.

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