Made in America, By Chinese Companies: China's Textile, Apparel Industry Adapts to New Normal

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Made in America, By Chinese Companies: China's Textile, Apparel Industry Adapts to New Normal

10/25/2015
Given the vicissitudes of the world's textile and apparel supply chain, China is changing its strategy to counter what Chinese experts describe as the "new normal."

"The 'new normal' situation implies the reality of slower growth rates … in China's economy, coupled with spiraling costs that are going out of control," explained Zhang Tao, the secretary general of the Sub-Council of Textile Industry (CCPIT), The Textile Industry Chamber of Commerce (CCOIC).

Tao cited the rising production and labor costs in the textile and apparel industry — wages have risen over the years from a double-digit monthly salary to today's nearly $700 per month ? as the cause of China's "losing the competitive edge in mass production." China's costs have risen dramatically and exceed those in many other Southeast Asian countries, including Malaysia, the Philippines, Indonesia and Vietnam.

Still, even as China imports textile and apparel products from Bangladesh, Pakistan and other countries, textile and apparel exports continue to be the number one contributor to China's foreign trade, with China's biggest markets the United States, the European Union and Japan. Also, many Southeast Asian exporters import China-made fabrics and re-export them after further processing.

Last year, China processed approximately 10 million tons of cotton, 60 percent of which was grown locally. The remainder was imported from countries including the United States, India, and Pakistan.

Declining demand
According to the CCPIT data, China's total export value of textiles and apparel from January 2015 to May 2015 reached just $30 billion, with the United States accounting for some $16.4 billion in that period. By contrast, in 2014, the total export value of textiles and apparel amounted to roughly $300 billion.

Tao said that U.S. demand for textiles and apparel seemed to be picking up, but at a slower pace. "It is difficult for suppliers of low-end products [to find demand in the United States] because of the fierce competition and the cost-conscious U.S. consumer's self-restraint in buying. However, the U.S. market is much more resilient and stronger than the European Union's and Japan's. Recovery is, however, not that strong, according to the feedback we get; buyers are not ordering as much as they used to," Tao said.

As the traditional markets seem to be saturated, Chinese exporters are also looking for greener pastures elsewhere, particularly in the emerging markets of South America, including Brazil, with its 300-million-strong population, and Russia, though the latter has problems vis a vis the sanctions it currently faces. Tao noted that Africa was also opening up to Chinese exports.

Seeking alternate production locales
To counter the sharp rise in production and labor costs, China is also looking around for production sites beyond its shores ? migration that typically focused more on apparel than textile production. "Fabric production is not labor intensive but apparel production is. Chinese companies are worried by rising labor costs and one way to remain competitive in the world markets is by shifting production to low-cost sites," he explained.

But in a shift in thinking, says Tao, Chinese companies are looking to set up full manufacturing bases in the markets they wish to serve. Toward that end, Chinese textile companies have been buying up manufacturing assets such as mills in the United States, the most recent one in South Carolina.

This is a reversal of the mass sourcing of textile and apparel production from what was then a low-cost production site more than two decades ago. Textile production in China is no longer profitable for many manufacturers, both international and Chinese, who are turning their backs on China. In addition to rising wages and energy costs, production in China also involves higher logistics costs and requires dealing with government quotas on imported cotton, which creates a lot of uncertainty for manufacturers.

Made in the USA — by Chinese companies
The scene and the actors are changing too, according to Tao. If there was a huge interest on the part of many U.S. manufacturers-turned-importers in sourcing cheap products from China, it is the Chinese who are now flocking to the United States to manufacture.

The calculation of Chinese companies is that while U.S. labor costs are much higher, the productivity levels in the United States are also much higher, thus levelling off or even driving down the end costs in the final analysis. Other "perks" for Chinese manufacturers setting up shop in the United States come in the form of much lower energy prices, competitive prices of cotton, tax incentives from local governments and of course a reduction in shipping costs. Also, there is an opportunity to capitalize on the "Made in America" cachet, which is becoming increasingly desirable.

Additionally, the "keeping-a-foothold-in-the-market" strategy ? producing goods in the market where they are sold — is appealing to many Chinese companies that are driven by the prospect of a trans-Pacific free trade market, which would result from the successful passage of the Trans-Pacific Partnership (TPP). The U.S.-led TPP agreement will include all of the major economies of the trans-Pacific region except China. And the fear of being shut out of the TPP has caused Chinese yarn companies to set up a base in the United States.

China's yarn production costs have sharply risen, surging by as much as 30 percent compared to those of the United States, according to the International Textile Manufacturers' Federation. Of course, the Chinese are not moving just into the United States. They also have been shifting manufacturing to other lower-cost countries in Asia, particularly Bangladesh, India and Vietnam.

Chinese companies see multiple benefits accruing to them from their presence in the United States. Some Chinese exhibitors at the recent TexWorld show in New York said recently that many Chinese companies found the U.S. an attractive manufacturing site because it offered unhindered and direct access to the huge U.S. market and noted that Chinese companies had so far made more than $45 billion worth of investments in new projects and acquisitions in the United States, with most of that occurring in the past five years.

The Carolinas are proving to be a hot spot, with more than 20 Chinese companies having set up operations, including a polyester fiber plant opened by Keer and Sun Fiber in South Carolina in 2014.

Some Chinese companies also want to use their U.S. operations to ship yarn to apparel manufacturers in Mexico, Central America and the Caribbean ? countries that have duty-free access to the American market under NAFTA and CAFTA, provided the yarn is produced in a member country.

The Chinese are taking lessons from companies in neighboring countries such as India, which recently has been making acquisitions or setting up shop in the United States. Indian textile manufacturer Shri Vallabh Pittie Group, for example, garnered a lot of attention when it opened a factory in Sylvania, Ga.

The impact of new plants being opened or old ones being revived can be seen on local job markets. South Carolina, for instance, welcomed the arrival of Keer, as it employed weavers and spinners who had been laid off after Springs Industries shuttered its cotton mills — at one time some of the world's largest.

Recently, Chinese specialty textile company Legend Athletic Wear LLC opened its first U.S. production unit in Cincinnati, Ohio. (Ohio had been competing with Oregon and California to bag the Legend project.) The company, which uses sublimation technology to color fabrics, is the North American subsidiary of a Shanghai-based Australian textile-specialty company. Legend was founded by husband and wife co-owners Dr. Tan Kek Looi and Min Qi in 2005. From 2005 to 2012, the company's sales grew from $84,000 to $1.8 million.

Ohio's Tax Credit Authority granted tax breaks to Legend, which expects to create 80 full-time jobs by the end of 2018 and to generate more than $2 million in new payroll; besides creating the new jobs, Legend plans to invest more than $1.4 million in its new manufacturing facility. Indications are that the owners want to establish the Legend brand in the United States and later launch it in China.

With a strategy of geographic diversification, Legend and other Chinese manufacturers look to beat the pricing pressures of China's spiraling inflation.


Manik Mehta is a New York-based Apparel contributing writer.