INDUSTRY SERIES. Apparel Production and Cluster Development in China IN THIS ISSUE : LI & FUNG RESEARCH CENTRE. I. Apparel production and exports

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1 LI & FUNG RESEARCH CENTRE INDUSTRY SERIES December 2007 Issue 10 IN THIS ISSUE : I. Apparel production 1 and exports II. Textile and apparel 7 clusters in China Apparel Production and Cluster Development in China China is the world s largest producer and exporter of textile and apparel. With its abundant supply of low-cost and skilled labour, the country has attracted textile and apparel manufacturers from around the world to set up production bases. The textile and apparel clusters are primarily located in the coastal regions. Since raw materials and other processed apparel products are much cheaper in China and their qualities are increasingly up to the global standards; the textile and apparel clusters in China have become principal sourcing bases for textile and apparel products. However, the current development status of the apparel industry, like many other industries, is characterized by surging operational costs, increasing competition and reducing profit margin. As a result, more apparel manufacturers are moving out from the relatively high-cost coastal areas to the inland regions. Relocation of the apparel industry/clusters is being observed. This issue looks into the production and exports of the apparel industry, including some major industry indicators and the current trends. It also gives a brief overview on the characteristics and latest development of China s textile and apparel clusters. I. Apparel production and exports 1. Apparel output China is the largest textile and apparel producer in the world. In 2006, the production of the apparel industry demonstrated steady growth. According to the National Bureau of Statistics (NBS), the total output of apparel products by textile and apparel enterprises above designated size amounted to 17.0 billion pieces, up by 11.9% year-on-year (yoy). Of which, woven products and knitted products increased by 12.5% and 11.2% to reach 8.1 billion and 8.9 billion pieces, respectively (see Exhibit 1). 13/F, LiFung Centre, 2 On Ping Street, Shatin, Hong Kong. Tel: (852) Fax: (852) lfdc@lf1937.com Contact person: Ms Francesca Lim and Ms Teresa Lam 1

2 INDUSTRY SERIES December 2007 Issue 10 Exhibit 1 Total output of apparel products by enterprises above designated size, 2006 Quantity (billion pieces) Year-on-year increase (%) Apparel Of which: Woven Products Suits Shirts Children s wear Down products Knitted products Source: National Bureau of Statistics 2. Production bases China s apparel industry has long concentrated in the coastal regions. According to the NBS, in 2006, the provinces with the highest production capacity were Guangdong, Zhejiang, Jiangsu, Shangdong and Fujian. The total output of these five provinces represented 83% of China s total apparel output, up by 3 percentage points yoy (see Exhibit 2). This geographic distribution of the apparel industry has been largely driven by the following factors: (1) The coastal areas are China s traditional locations for its apparel industry as well as for upstream industries such as the textile industry and synthetic fiber industry. In addition, there are more qualified workers in the coastal areas than the rest. (2) Most of China s earliest established Economic Development Zones are located in the coastal areas such as Shenzhen, Zhuhai, Haikou, Ningbo, Shanghai, Dalian, Qingdao and Xiamen. These Economic Development Zones have attracted huge foreign investment for over 20 years. (3) The coastal areas are of high population density; in general, residents in these areas have higher disposable income, are better-educated and more fashion-conscious than in other areas, thereby leading to huge market potential. (4) Logistics infrastructures are generally better developed in the coastal regions, making the areas attractive to foreign investors. 2

3 December 2007 Issue 10 INDUSTRY SERIES Exhibit 2 Proportion of apparel output by province, 2006 Source: National Bureau of Statistics 3. Apparel Exports Textile and apparel have been important Chinese exports since the introduction of economic reforms in the late 1970s. Today, China is the world s largest exporter of textile and apparel products. Its total export of textile and apparel products accounts for around one-fifth of the world total. (1) Export value According to General Administration of Custom s statistics, China s textile and apparel exports grew by 25.1% to reach USD147.1 billion in 2006; of which apparel and apparel products accounted for 64.7% of the total exports of textile and apparel (or USD 95.2 billion, up by 28.8% yoy) and 9.8% of China s total commodities exports. A total of 26.6 billion pieces of garments and clothing were being exported in 2006, up by 21.2%. Exhibit 3 shows the breakdown of the apparel exports by total export value and quantity in The total export values of knitted products and woven products amounted to USD 44.9 billion and USD 43.7 billion, increased by 45.4% and 24.8% respectively. For the first time ever, the export value of knitted products was higher than that of woven apparel. The growth of the former was 20 percentage points higher than that of the latter. Exhibit 3 Breakdown of the apparel exports, 2006 Export value Quantity (billion yuan) Year-on-year (billion pieces) Year-on-year increase increase (%) (%) Apparel Exports Of which: Knitted products Woven products Source: General Administration of Customs 3

4 INDUSTRY SERIES December 2007 Issue 10 (2) Export markets Exhibit 4 shows the ten major apparel exports markets of China in Topping the list was the US, followed by Japan and Hong Kong. One major change that took place was that the US overtook Japan for the first time to become China s number one export market. In fact, the US, Japan and Hong Kong have long been the three major export markets of China. However, the share of the top three export markets has been reducing significantly in the past decade, from 72% in 1997 to 43% in China s efforts to diversify its markets paid off. Romania, for the first time ever, entered the Top-10 list and even surpassed Russia to become China s fourth largest export market. Exhibit 4 Ten major apparel exports markets of China, 2006 Rank Country or region Export value Year-on-year change (USD billion) (%) 1 US Japan Hong Kong Romania Russia Germany Korea UK Canada Italy Source: General Administration of Customs (3) Export prices Statistics from the China National Textile Industry Council (CNTIC) showed that export prices of apparel increased steadily over the past five years (see Exhibit 5). In 2006, the average export price of apparel grew by 10.9% to reach USD Among the various apparel products, cotton-knitted garments recorded the largest export price growth of 20.3%; knitted garments registered a growth of 19.8%; while woven garments witnessed the least growth of 7.5%. 4

5 December 2007 Issue 10 INDUSTRY SERIES Exhibit 5 Average export prices of apparel products, Source: China National Textile Industry Council. 4. Recent developments and trends to note (1) Apparel exports under pressure In recent years, China s textile and apparel exports have been suffering from a multitude of pressures such as RMB appreciation against the US dollar, trade friction, restriction and imperfectness of the export quota mechanism. All these have affected the growth of China s export to the US and EU markets. China launched bilateral negotiations on textile and apparel exports with the US and EU in 2005 to limit the growth of its textile and apparel exports. According to the China-US agreement, the US would establish safeguard quotas on 34 categories (21 groups) of textiles and clothing imports from China from 2006 to The agreement included a clause that allows the US to exercise restraint in the application of any safeguard quotas on products outside the scope of the agreement for the duration of the deal. The China-EU agreement, on the other hand, provided for the establishment of safeguard quotas on 10 categories of textiles and apparel imports from China from 2005 to the end of Starting from January 2008, a joint surveillance system monitoring the trade flow will replace the textile quota and operate for one year. It will monitor the issuing of export licenses in China and the importation of the textile and clothing products into the EU. The joint surveillance system should cover 95% of textile trade, extending to 8 out of 10 categories currently subject to the current quotas. 5

6 INDUSTRY SERIES December 2007 Issue 10 These two agreements have had a considerable impact on textiles and apparel trade patterns in both the US and the EU, diverting production that might have otherwise been performed by China to other Asian countries. According to a report by CNTIC, the growth rate of China s textile and apparel exports to the US and EU dropped 70 and 45 percentage points yoy respectively in the first half of (N.B. The report did not provide details on the dollar value of the exports to the two markets) These quantitative arrangements are expected to continue to have substantial distortional effects on the market for some time. (2) Export rebate adjustment The Chinese government s recent policies on export rebate adjustment have quite a significant impact on the industry. In a new Circular No.97 issued jointly by the Ministry of Finance, National Development and Reform Commission, Ministry of Commerce, General Administration of Customs, and State Administration of Taxation in June 2007, China further lowered the export tax rebate rates on 2,268 products that easily trigger trade friction, including apparel products. The export tax rebate rate of apparel and clothing accessories was reduced from 13% to 11%. Some analysts held that the two percentage points on export of textile products will reduce the profits of the whole industry by as much as 2.1 billion yuan. (3) Apparel manufacturers: a shift from OEM to ODM/OBM As said earlier, China s textile and apparel enterprises are suffering from rising costs of production, intensifying competition, RMB appreciation and so on. Many enterprises are indeed operating on narrow profit margins on OEM (Original Equipment Manufacturing). On the other hand, there are very few strong Chinese brands because most textile and apparel manufacturers are working on OEM basis. Therefore, an increasing number of textile and apparel manufacturers are striving to move to ODM (Original Design Manufacturing) as well as OBM (Original Brand Manufacturing), so as to enhance their competitiveness and seek higher profit margins. Meanwhile, they are starting to speed up technology and product innovation, use environmentally friendly methods to reform the industry, focus more on brand building and product design, as well as explore the international market of high-end products. (4) Industrial relocation As shown previously, the production of apparel products has long been concentrated in the coastal areas of Guangdong, Zhejiang, Jiangsu, Fujian and Shangdong. However, the sharp increase in land and labor cost in these coastal regions in recent years has put coastal apparel factories under pressure to cut down their production or relocate their plants to other areas. 6

7 December 2007 Issue 10 INDUSTRY SERIES At present, most of the relocations take place within a province. For instance, enterprises in southern Guangdong gradually shift their productions to the mountainous areas as well as the eastern and western regions of Guangdong; and enterprises in southern Jiangsu relocate their plants to the northern part of the province. Nonetheless, we also see an increasing number inter-provincial relocation lately. More and more apparel manufacturers (mostly those engaging in export processing trade) start moving out of Guangdong to nearby provinces such as Jiangxi, Anhui and Hunan. A major advantage of industrial relocation is that it helps boost the development of apparel industry in the central and western part of China. II. Textile and apparel clusters in China 1. Characteristics (1) Geographically concentrated along coastal regions The majority of textile and apparel clusters are located in the cities along the coastal provinces of Zhejiang, Guangdong, Jiangsu, Fujian, Shangdong and Hebei. Exhibit 6 shows the major textile and apparel clusters in China. As shown in the diagram, most of the apparel clusters are located in Zhejiang and Guangdong; as for the textile clusters, most of them are concentrated in Zhejiang and Jiangsu. The coastal regions have well-established intra-regional logistic infrastructures and strong linkage with the outside world. These facilitate the movement of apparel products within China as well as to other countries. 7

8 Source: China National Textile & Apparel Council; Exhibit 6 Major textile and apparel clusters in China INDUSTRY SERIES December 2007 Issue 10 8

9 December 2007 Issue 10 INDUSTRY SERIES (2) High degree of specialization Most of these textile and apparel clusters demonstrate high degree of specialization and has emerged as leading centre for certain products. Some prominent examples include the leisurewear cluster in Shaxi town in Zhongshan, Guangdong, the children s wear cluster in Zhili town in Huzhou, Zhejiang, the light textile cluster in Shaoxing, Zhejiang, etc. (3) Commodity markets located in or near the clusters Today, wholesale markets or commodity exchange markets mostly located in major apparel clusters. They act as major distribution channels for mass apparel products produced in the cluster. The majority of the products sold in these markets are low-and-mid-range unbranded garment and clothing. Prices of these products usually range from a few yuan to hundreds of yuan. According to the Statistical Yearbook of China Commodity Exchange Market, in 2005, there were 2,525 textile, apparel, shoes and headgear commodity exchange markets with an annual turnover exceeding 100 million yuan in China. Within these markets, there were over 1.4 million stores selling various types of apparel, shoes and headgear products; the total turnover of these commodity exchange markets amounted to 2,628 billion yuan. Exhibit 7 shows the Top 20 textile, apparel, shoes and headgear commodity markets in China. Exhibit 7 Top 20 textile, apparel, shoes and headgear commodity markets in China, 2005 Rank Textile, apparel, shoes and Province Turnover headgear commodity market (billion yuan) 1 China Eastern Silk Market in Wujiang Jiangsu China Light Textile City in Xiaoxing Zhejiang Wuai Small Commodity Wholesale Market Liaoning Xiliu Apparel Market in Haicheng Town Liaoning Qianqing Light Textile Raw Material Market in China Light Zhejiang Textile City in Xiaoxing 6 Dieshiqiao Embroidery Market Zhejiang Zhongda Fabric Market in Haizhu District, Guangzhou Guangdong Xiqiao Light Textile City Guangdong

10 INDUSTRY SERIES December 2007 Issue 10 Rank Textile, apparel, shoes and Province Turnover headgear commodity market (billion yuan) 9 Changshu Commercial Town Jiangsu Hongcheng Market in Nanchang City Jiangxi Zhili Children s Wear Market Zhejiang Chaotianmen Apparel Wholesale market Chongqing Zhejiang Textile Expo Zhejiang Datang Light Textile and Socks City Co. Ltd. Zhejiang Liqiao Daily Commodity Exchange Market Zhejiang Textile Commodity Exchange Market in Changshu Jiangsu 8.92 Commercial Town 17 Chuangang Bed Lining Products Market Jiangsu Luyuan Cotton Wear Market Tongxiang City Zhejiang Xuanmu Market in Xuzhou Jiangsu China Shoe City in Shenyang Liaoning 8.00 Source: Statistical Yearbook of China Commodity Exchange Market, Latest development of textile and apparel clusters in China (1) Cross regional cooperation With growing sophistication of information system and supply chain management, cross regional cooperation among enterprises in different textile and apparel clusters is being observed. This takes place mostly in the lessestablished clusters. Many experts believe that specialization of the enterprises in the clusters gives rise to cross regional cooperation. Indeed, specialization and cooperation coexist and help spur the growth of the clusters. 10

11 December 2007 Issue 10 INDUSTRY SERIES (2) Relocation of textile and apparel clusters As mentioned earlier, industrial relocation is gradually taking place in China. The continual surging land and labour costs, rising costs of raw materials and energy in the coastal regions have prompted many enterprises to relocate to the relatively less expensive inland areas. Some enterprises even move their production to other lower cost countries in Asia. Thus, it is expected to see the formation of some new textile and apparel clusters (with the presence of many Chinese enterprises) in other Asian countries. This may pose some new challenges for the existing apparel enterprises/clusters in China. 11

12 INDUSTRY SERIES December 2007 Issue 10 Copyright All rights reserved. Though endeavours to ensure the information discussed in this material is accurate and updated, no legal liability can be attached as to the contents hereof. Reproduction or redistribution of this material without s prior written consent is prohibited. 12