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Rising Chinese Apparel Production Costs Slow Industry Growth

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Apparel and textile production costs are rising in China, according to recently-released data from the country’s National Bureau of Statistics, resulting in sluggish production growth that is under-performing that of the overall manufacturing sector.

China’s Purchasing Manager Index (PMI) rose to 51.4% in November, even with October’s level, and  capping five months of steady improvements. However, production growth in the apparel and textile industries has slowed by comparison.

Capital investment in the soft goods industries has not kept pace with that of other sectors, such as food and beverages and motor vehicles, as the labor intensiveness of apparel makes it a difficult one to automate.

Textile and apparel production costs in China increased at an accelerated rate in October compared to recent months. The producer price index (PPI) for apparel increased by 1.2% in October compared to the same month last year, its biggest monthly gain since May, though well below the very high monthly increases seen in late 2011 and early 2012, many of which were in the 3-4% range.

The PPI for textiles edged up by.6%, the index’s biggest monthly jump since November 2011.

Textile and apparel production costs are rising faster than those for all goods in China. The PPI for all goods fell by 1.5%, a slightly steeper drop than September’s 1.3% decline. The PPI for consumer goods was flat in the month, up from its .1% drop in September.

The increases in producer prices have been closely tracking steadily rising wage rates for all key regions of China, which have more than offset declines in crude oil, energy and textile raw materials costs.

According to the International Labor Organization (ILO), wage rates in the prime coastal area of China are currently between 20% and 40% higher than those of remote inland areas, and are four to five times higher than wage rates in South and Southeast Asian countries.

Many U.S. and European brands are shifting sourcing of lower-cost apparel and textiles to other countries within Asia, like Cambodia and Vietnam, but keeping the production of higher quality goods in China. The increase in demand in the Southeast Asian countries could spike wages there over the next few years.

Furthermore, increased appetite for fast fashion brands has resulted in a surge in demand for production from ultra-low-cost Bangladesh and Sri Lanka, where increased focus on improving factory safety and wage rates will no doubt change the future cost structure.

Exports of apparel are relatively strong, however. For the first three quarters of 2013, Chinese apparel exports to the U.S. rose by 2.6% compared to the same period last year, after a 1.6% decline for that same period between 2011 and 2012, according to the U.S. Office of Textiles and Apparel (OTEXA), while textile exports to the U.S. fell 1.6% on a dollar basis, compared to an only 2.6% increase for the prior year period.

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