Understanding China’s Success

Understanding China’s Success:

China’s ranks #1 as the world’s the world’s largest garment exporter with 38% global market share.  Bangladesh ranks #2 with a 5% market share.  We all acknowledge that China dominates the global garment export market.

However, few of us understand the underlying conditions that resulted in China’s premier position.

We are told that government subsidies, notably an undervalued currency provides China’s garment exporters with a unique advantage over its competitors. There is no question that the Chinese government ensures that its currency is undervalued. However, the data clearly shows that there is no relationship between changes in the RMB and market share.

We re told that China’s advantage lies in its modern and extensive infrastructure, education, banking system, and supporting industries that is far superior to any of its competitors. Once again, there is no question; China today is far better equipped than any of its competitors.  However, once again the data shows a very different picture

These advantages did not precede China’s dominance of the garment industry.  In a real sense they were the result of industrial development.

China’s garment industry developed in the in the late 1970s and 1980s — immediately after the end of the Cultural Revolution.  This was a time when the Chinese economy was in a state of collapse.  Infrastructure was primitive.  The great road networks, port facilities, and electric power plants that we now take for granted were then non-existent. The industry was dominated by vast and inefficient Maoist era state owned enterprises (SOE) that cared little about delivery dates ad less about customer requirements.

Education in China was second to all. Tertiary education no longer existed.  For 10 years, from 1967 to 1976, universities were transmogrified from places of learning to centers of rioting.  Anyone with academic or professional qualifications were defined as reactionaries. At worst tortured or murdered, at best exiled to the rural areas to learn from the peasants.

In 1980, no one even considered the possibility that one day China would become a serious industrial competitor.  The idea that within 30 years, the Chinese would become a major economic power was risible.  Anyone even suggesting that the Chinese economy would grow to the point where its GDP was second only to the U.S. would have been written off as insane.

The move from economic basket-case to economic power house, while extraordinary, was no miracle.  It was the result of government policy that placed economic development above politics and ideology and can be replicated in any country with population and a government committed to economic development.

China’s early success was based on three important factors:

1. The Government of China made a committed to industrialization

a. The Chinese government built homes for the foreigners called Special Economic Zones. Working on the SEZ’s foreign factory owners were guaranteed special benefits, special laws and complete freedom of action.  To this day those benefits, laws, and freedoms remain unchanged.

i.     Shenzhen for the Hongkongers

ii.     Zhuhai for the Taiwanese

iii.     Dalian for the Koreans

b.  Government invited foreign corporations to invest in road networks and electric generation and other infrastructure projects. As early investors found government promises to be reliable and the project profitable, others rushed in.  As a result, China did not have to resort to the international bond market nor raise taxes. To a large degree, foreigners paid the cost of China’s economic development.

2.  The garment industry was built by foreigner

a.  With the exception of Hong Kong, Taiwan, and Korea the countries that in the early 1960s first built the Asian garment industry, no country has developed a successful industry without outside support

b.  The foreigners have the customers; they have the product; they have the capital; they have the technical knowledge

c.  The original local Chinese garment industry was dominated by huge totally inefficient state owned enterprises (SOE) that were incapable in uninterested in meeting customers’ needs

i.  Every customer wanted to work in China but no one wanted to work with Chinese factories.

ii. The Hongkongers, Taiwanese, and Koreans came in and literally built the industry, bricks and mortar.

3. Industry leaders and government ensured that China became known as a customer friendly country — an easy place to work and a reliable factory base.  Consider this, everyone knows that China is home to the world’s largest textile industry.  Everyone knows that China is the world’s largest textile exporter.  However, few people realize that China’s annual textile imports $18.9 billion.  If you add in imports to Hong Kong which are in turn re-exported to China, Greater China becomes the world’s largest textile importer, second only to the EU (27 countries)

Working in China is easy.  The factories exist to service their customers.  If the fabric you need is available locally (and the price is competitive) the local factory will source in China.  If the fabric you need is not available (or the price is too high), China becomes the world’s easiest place to import your goods.

China’s industrial and even macro-economic success is primarily the result of two policies:

  1. Reliability: The Chinese government keeps its word. It has made China a good place for foreign investment
  2. Reliability: China’s garment industry keeps its word.  It has made China the world’s best supplier.

China’s future challenges:

For the past decade, each year professionals have predicted the decline of China’s global garment industry decline.  Each year these same professionals conclude the same prediction:

“China may have pulled through this year, but next year. . .”

China does in fact face serious challenges.  It is also true that these challenges provide opportunities for competitors to move ahead.

Paradoxically these challenges are not rising costs. With the exception of Bangladesh, labor rising everywhere. Furthermore, China’s high labor costs are offset by greater productivity.

China’s faced three challenges:

1.  China’s one-child per family policy has created the worlds greatest demographic time bomb. Population growth rate is now 0.5% per annum ranking china 152nd. China’s median age stands at 35.9.  China is running out of worker

2.  Young women are now less willing to move thousands of mile from home to work in garment factories.  Economic development has lead to better opportunities at home

a.  The garment industry is no longer a preferred industry.  Work in sewing plants is difficult requiring log hours.

b. Garment making has become low status.  The same problem that brought Hong Kong, Taiwan and Korea in the first place — the inability to find workers — is now affecting China

3. The local market is becoming increasingly more important than the export market, with the result that the production capacity for garment exports is declining.  This has not yet become apparent because in the current poor economic environment, aggregate demand from the U.S. and EU demand for garment imports is also declining.  However, when economic conditions improve and demand rises, customers will find that supply capacity has fallen.

China’s current challenges produce an opportunity for its competitors to move ahead.

The strategy for success is very simple.

All that is required is for the governments and industries in these countries to be reliable.

Aye, there’s the rub.

 

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