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Forces of Change: The Global Textile Industry in Transition

Enormous forces of change have buffeted the global textile industry over the past quarter century. Traditional textile manufacturing industries in the United States and Europe have wilted in the face of increased competition from Asia. Further, the emergence of China as a key exporter of textiles and apparel has overshadowed almost every aspect of the global trade situation. However, the rise of Asia as the major supplier of textiles and apparel in the world has coincided with a number of unforeseen developments that has helped to dramatically alter the textile landscape. Understanding these developments is the key to understanding the textile industry today and tomorrow.

An Industry Plagued by Global Overcapacity

Overcapacity–a constant reminder that the boom years of the 1990s–has a strangle hold on growth early in the New Millennium. Textile producers throughout the world had enjoyed unprecedented profits, only to see that now turn into unprecedented red ink. What happened? Where did all the business go? And why are entire industries shutting down in countries that just a few years ago seemed destined to become major textile centers for years to come? The answer lies with technology–but it also lies with convoluted government policies.

So why is there so much capacity? Ironically, a government-sponsored program, called the Multifiber Arrangement (MFA), which was designed to protect the textile industries in Europe, the U.S. and Canada has had the surprising effect of scattering trade all over the globe. It has helped to build production in countries that may not have otherwise benefited were it not for quota. Under the MFA, buyers in the U.S. and Europe searched the globe for quota-free suppliers. In effect, a global hunt was underway to find new sources of supply. Governments in Third World countries, on the other hand, searched for ways of building their economies and providing jobs for their people. Apparel production proved to be a relatively easy way of employing large numbers of people.

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Ultimately, many countries were in the global textile business only because they were either not subject to quotas or had ample unused quotas available–not because they were particularly efficient producers. Now with the end of the MFA, smaller, less efficient suppliers are being slowly squeezed out by the behemoths of China and India. In turn, as the supply base bulked up over the past couple of decades, culminating with huge capacity in the 1990s, a classic oversupply problem has developed as global demand for textiles has slumped badly since about 2000. The global recession in 2008 only complicated matters. Too many sellers are chasing too few buyers. How this oversupply problem gets sorted out will be key to understanding how the industry will evolve.

The global textile industry today is vastly different from the global industry of just a quarter century ago. Whereas 25 years ago, Europe and the U.S. dominated the global production and trade in textiles and apparel, today most of the world’s production and trade is in Asia–or more specifically, China.

This shift in production from the developed world to the developing world is truly striking. For example, 20 years ago, the polyester industries in Europe and the U.S. were locked in a competition to see which industry was the largest in the world. Today, however, China’s polyester industry is larger than the industries in Europe and the U.S. combined. In fact, China consumes nearly one-third of the world’s cotton and manmade fiber–a claim that neither Europe nor the U.S. could ever make.

At the same time, the productivity of all manufacturers in the textile supply chain has improved exponentially. In part, this improved productivity came about in the developed world as companies struggled with new competition in the developing world. Cash-poor, but labor-rich, developing countries in Asia found they could produce quality textiles and apparel for a fraction of the cost to produce the same goods in the developed world. Producers in the developed world, straddled with higher labor and production costs, turned to technology to help lower costs and improve competitiveness in global markets.

Despite claims made by many textile leaders in the developed world, technology has not proven to be the “silver bullet” solution for firms in the U.S. or Europe to compete against their Asian counterparts. Simply put, technology alone has not been enough, as low-cost Asian producers have also invested more and more in new plants and equipment further causing more competition in the marketplace–this on top of a distinct advantage in terms of labor costs. For developing countries, the combination of low labor costs and technology improvements has been a winning combination that developed countries cannot compete against.

The Legacy of the MFA

The MFA leaves a legacy of government policy that has left its indelible mark on global trade. Under the rules established by the World Trade Organization (WTO), all bilateral textile and apparel quotas implemented under the MFA were abolished in 2005. Although initially, the end of the MFA was heralded by exporting nations both large and small, today a number of smaller suppliers have realized they are being squeezed out of the market because their main advantage–quota availability–is now gone. At the same time, an ever-expanding quota system not only fueled export growth but provided key exporters with access to overseas markets. Yet overall market growth in the U.S. and Europe is not much greater than population growth (about 1 percent), so as imports from the developing world grew domestic manufactures unable to compete retreated, leaving gaps in the market for low-cost imports to fill.

Today, however, this has changed. Now the top exporting countries are sustaining their growth at the expense of other less competitive suppliers. Domestic producers in the U.S. and Europe have been driven into niches leaving the broad commodity business to imports. Nevertheless, there is not enough net growth in the world to provide growth for a wide number of suppliers. With the quota system eliminated, the supply situation has collapsed around a relatively few suppliers like China, Bangladesh, Vietnam and Indonesia as less competitive producers dropped out of the market.

The Future: Winners and Losers

What will be the probable landscape for the global textile industry in the future? It will boil down to winners and losers. And who will be the likely winners over the next few years? China will continue to be the dominant supplier of textiles and apparel over the next five years or so, with countries like India and Bangladesh also commanding a significant portion of the world textile trade. Fiber consumption in these countries will continue to rise as the export-oriented textile industries continue to expand. Regional free trade agreements will also play a role.

Who will be the likely losers? The likely losers will be companies in Europe and the U.S. In turn, fiber consumption will suffer in each of these markets as domestic industries continue to shrink. As far as Made in the USA, I hope to see American manufacturing grow, but I remain concerned that there will not be enough capacity available to meet potential demand.

Needless to say, the future is not a certainty. As we know, even China is struggling to compete with newly emerging suppliers like Vietnam, Cambodia and Bangladesh.

The current status of China’s textile industry may be summed up in one word: stagnation. In turn, the future prospects for China’s textile industry may be summed up in another word: decline. However, even with current and projected growth in China’s textile industry, structural issues, new emerging competitors and slowing growth in the rate of global consumption of textiles in the coming years will temper industry expansion. At the same time, China’s textile industry has been plagued by a series of problems ranging from (at times) chronic overcapacity, inefficiencies brought about by central government planning, difficulties in securing consistent supplies of raw materials, and rising labor costs. In fact, a transient workforce of more than 150 million people available for the highest bidder only helps to raise wages. These problems will only become more acute as time goes on.

Measuring China

In many ways, the emergence of China as a dominant global player in textiles and apparel up until now has mostly been the direct result of its success in the cut-and-sew trade, and not really as a result of its textile industry. In fact, it is the growth in China’s cut-and-sew business that has in large part pulled China’s textile industry along. But with rising production costs, this sector is under increasing competitive pressure from producers in other countries. In turn, the rising cut-and-sew trade in Vietnam, Bangladesh and elsewhere has given rise to a new Chinese export of sorts: relocation. As garment manufacturing expanded outside of China, many Chinese mills relocated their production, or at least made significant investments in local textile companies. This development is significant, as China’s export business in textiles has suffered as a result.

Nevertheless, for the time being, China’s apparel industry imports whatever it needs that it cannot find domestically. Thus, China remains a major importer of yarns and fabrics; in particular, China imports much of its basic textiles from other Asian suppliers. Yet this import phenomenon will not last for much longer as the country will increasingly rely on domestic sources for its textile supply–a supply that is increasingly supported by overseas investment. Textile imports may actually wane because of the relocation of textile investment outside of China. India may export a lot of yarn to China today, but tomorrow that will likely be to other countries.

Of course, there will undoubtedly be unforeseen factors that will affect the Chinese industry. For example, SARS, another Asian currency crisis and political instability at home are all unknown “wild cards” that can affect China’s textile industry.

Hampered by a variety of factors, China’s textile industry will need to continue its active courting of foreign investors in order to help provide not only much-needed capital, but technical expertise in order to improve the management and production efficiency of its textile infrastructure. However, such investment can only be considered reasonable for the next five to 10 years. China has been very successful in attracting outside investment to fuel growth in its textile industry. It has invested in construction of new mills (capital construction) and made efforts to modernize older facilities (innovation). With regard to modernization, China remains the world’s leading importer of new textile equipment. An expanding global market will be critical for China’s textile industry over the next 10 years. Although long-term industry projections suggest the growth rate of the global market will likely slow over the next 10 years, China’s textile industry will continue to expand due to a greater export market share and rising domestic consumption for textiles.

In terms of exports, the rate of China’s expansion in the global markets will slow as the end of the decade approaches and as other new suppliers (like Vietnam, Cambodia and others) step up their production of finished apparel products. The Chinese government will need to carefully manage its relations with the governments of importing countries, as importing nations will likely continue to find ways of disrupting Chinese exports in an effort to answer calls by industry constituencies to control rising imports. There will also be calls for investigations of China’s trading patterns as import-impacted producers in the U.S. and E.U. will allege that China transships much of its merchandise through third countries and sells its products at below cost of production.

While exports will continue to be the main engine of growth for Chinese textiles until the end of this decade, it will be increasingly important for China to build a rising standard of living at home in order to boost domestic consumption of textiles. This is critical for the long-term prospects of the Chinese textile industry, as the growth in global consumption of textiles will likely slow in the coming decades. Concurrently, much of China’s export growth will be fueled by the displacement of other suppliers in the world market.

Although China will gain market share, this will not alter the fact that growth in the major importing markets will only match population growth–a level not adequate to maintain China’s rapid growth in recent years. Thus, when the export engine slows for Chinese manufacturers, it is possible that the domestic market would have already developed adequate buying power to help offset declines in overseas sales. Future domestic apparel purchases will rise sharply, though it is uncertain if that increase will be enough to offset what may prove to be a more difficult export environment during the next decade.

Future Implications

Over the next few years, fiber consumption will moderate, leveling off as the rate of export growth in textiles and finished apparel subsides toward the end of this decade. To some degree, increased domestic demand for textiles will help to partially offset that decline, but to what degree it will be offset is hard to predict as the buying power of large segments of the Chinese populace are hard to anticipate going forward.

In terms of fibers, continued cotton consumption growth in the future to feed the textile sector may boost imports of raw cotton. The need for increasing amounts of cotton imports will be driven both by China’s limited ability to expand domestic output without having to resort to more marginal and less productive lands, and by demands for cotton qualities that are not produced in sufficient supply by domestic growers.

China’s pressing concerns of food production from agricultural lands will overshadow any efforts to expand domestic cotton production. At the same time, imports of cotton yarn will likely continue to rise rapidly as China’s raw cotton import quota fills year in and year out. There are no quantitative limits maintained by China on the importation of cotton yarn. As a result, it is likely that China will continue to import significant quantities of cotton yarn from other Asian countries, India and Pakistan, in an effort by domestic mills to counteract shortages of raw cotton in the local market and corresponding higher prices for locally-grown cotton.

I foresee China’s previous rapid growth in textiles beginning to slow before the end of the decade as increased competition from other suppliers and slowing global consumption of textiles begin to take a toll. Concurrently, it is likely that the standard of living for many Chinese citizens will increase in the coming years, which will translate into improving demand for textiles via rising apparel sales. In large part, increased domestic consumption of textiles will translate into the eventual demise of the industry, as the government and outside investors will increasingly look for higher value-added products (like cars and planes).

Bottom-line: China will become not only a net importer of fibers and textiles, but made-up apparel as well!

The textile sector has historically been a stepping-stone industry for developing economies; China will not be an exception to the historical rule. In fact, as China’s textile industry evolves, moves to other countries, becomes a smaller factor in the global exportation of textiles and becomes a smaller portion of the Chinese economy, a signal of sorts will be sent to the global market: China has transitioned into a consumer society. And with that an entirely new chapter in the history of global textiles will unfold.

By Robert P. Antoshak
Managing Director
Olah Inc.