The Flanarant: China's competitiveness buoyed by Asia challenges
By Mike Flanagan | 13 November 2013
The grass in China is looking greener than anywhere else in Asia
Despite a decision eight years ago by Japanese brands and retailers to cut the amount of clothing sourced from China, garment imports from the country are on the rise. Mike Flanagan believes the reasons should resonate with buyers in the US and EU too.
Claims that China is losing its competitiveness in garment making are not borne out by the buying decisions of the world's major brands and retailers, or the prices they're paying.
Indeed, in August this year, China's share of EU, US and Japanese imports was higher than the same month a year earlier.
But China's recent growth in Japan - which imports far more clothes than any other country in the world apart from the US - seems especially odd.
Japan's garment industry and government made a collective decision in 2005 to move garment production from China to other Asian countries. In 2009 Japan's Ministry of Economy, Trade and Industry announced a target to move China's share of Japanese garment imports from its then 92% to 50%-60% "within a decade".
By 2012, though, Chinese-made garments still accounted for 84% of Japanese imports. And even though neurosis in the Western business press about China's allegedly weakening competitiveness still persists, China's garment exports to Japan, both in volume and share, have actually grown between the third quarter of 2012 and the same period this year.
This is not unique to Japan. In the first eight months of 2013, the volume (in quantity of fabric) of garments the EU imported from China grew 3.3%, while the US imported 5.9% more.
But there were three factors playing in Japan that don't matter to buyers in the EU and US:
- The scale of Japan's dependence on China for its clothing. With the immense range of competent garment making elsewhere in Asia, it can't be prudent for Japan's garment industry to get four-fifths of its garments from just one foreign country.
- Relations between China and Japan. In autumn 2012, anti-Japanese riots broke out in China for the second time in a decade, with rioters smashing up some Japanese businesses. Japanese and Chinese politicians were united in condemning them and working to stop them spreading - but you'd have thought many Japanese brands and retailers would have been worried Japanese customers might boycott Chinese-made clothes in semi-revenge.
- Over the past five years, Japan has made duty-free access for garments from Laos, Cambodia and Bangladesh even easier, given duty-free access to all the other members of ASEAN (including Malaysia, Vietnam and Indonesia), and signed a free trade agreement with India. Unsurprisingly, they're the countries who've swept up the business coming from China.
So why the reversal? I think the reasons have an importance outside Japan.
The major beneficiaries of the move so far have been Bangladesh, Burma, Indonesia, Cambodia and Vietnam, and Indian garment makers think they'll do well too.
But the past nine months can't been have easy for Japanese buyers in any of these countries:
- Bangladesh's problems are well known. But of the nearly 130 brands and retailers who've publicly signed up with the Accord or Alliance to support Bangladesh reconstruction, just one is Japanese. In Europe or North America, most publicity about Bangladeshi horrors is accompanied by something about what Gap or Inditex or C&A or M&S is doing. In Japan - just pictures. Meanwhile, it's now almost impossible for foreign-owned manufacturers to set up or expand there. Problems with rules and power supply mean Korea's Youngone (whose 53,000 Bangladeshi workers make up three-quarters of its global workforce) has spent the past 15 years getting practically nowhere building shoe factories on the 2,500 acres leased to it by the Bangladeshi government for development.
- In Indonesia - a year ago seen by many buyers as the real alternative to China - businesses are now worried about the damage being done by increasingly militant union supporters. They're worried about the scale of wage rises (44% this year in Jakarta), the practice of "sweeping" (where union demonstrators break away from processions and intimidate workers in nearby factories into joining the demonstration), and they're critical about the lack of government help in finding alternative sites outside Jakarta.
- Cambodia's garment strikes are far less prevalent than many reports imply. The last data from trade association GMAC (up to July) shows that days lost to strikes this year are just 17% up on 2012, which isn't much more than the growth in the garment industry workforce. But they're messy and highly publicised. Wages are also on the rise too: 23% up in March, and hints from the government that wages will go up 25-50% early in 2014.
- In Vietnam wages are going up (17% in 2013; probably 15%-17% in 2014), and the government is publicly admitting it wants them to go higher still. But businesses are more worried about the country's Labour Code. It's got some unfortunate provisions (like limiting voluntary overtime to 200 hours a year - less than half the levels allowed in relatively affluent Taiwan). Worse, though, it was imposed on the country by the government without any consultation with businesses - unthinkable in Japan, and not at all how things work in modern China. Just the kind of thing Communist governments used to do before they discovered the joys of getting rich.
Meanwhile, though the Vietnamese government is forever promoting the importance of developing spinning and weaving plants - almost indispensable if the country is to profit from the proposed Trans-Pacific Partnership (TPP) trade treaty with countries including Canada and the US - it's struggling. Among the obstacles are local authorities not wanting textile plants. And America's ITG closed its $80m weaving plant joint venture in Danang after just three years "to prevent further losses."
- In Burma, there's been a lot of interest from businesses wanting to set up garment factories. But this hasn't translated into more power plants, an increase in trained staff, more roads or progress on building a proper deep-sea port. Just more upward pressure on wages for businesses long-established in the country (ie, suppliers to Japan), and more nosey activists poking round factories.
- India has had little labour-related disruption in its garment industry. But not a month passes without at least one new discovery of children found working in its garment factories.
India's preferred vehicle for attracting foreign manufacturers is its Special Economic Zone (SEZ) project. But of 576 SEZs approved since 2000, just 173 are operating today. Among the 60-or-so developers who've handed their licence back are Reliance Industries, India's largest private business (which started life as a spinner) and Orient Craft, one of India's three largest garment exporters. In February, an Ipsos survey of 400 companies operating in SEZs found 62% of respondents had suspended plans to invest further in the zones.
Change at China's competitors
Many Japanese buyers started looking outside China due to worries about cost inflation, labour disorder and the ease of expanding production plants. Few realised how fast China would improve its productivity as wages grew - though we all share a worry about how resilient that improvement might turn out to be.
But even fewer realised how quickly China's emerging competitors would change. Almost everywhere outside China it is hard to find decent factory locations, with adequate road connections and power supply.
Labour relations are a great deal tougher too. Imperfect though its sources are, Hong Kong-based activist group the China Labour Bureau reported about 10,000 worker days lost to strikes in China's entire garment, shoe and textile industry during October - almost all in factories that had already announced closure.
But Cambodia - with less than one-twentieth of China's garment output, and no spinning or weaving - announced three times as many days lost to strikes in July (latest data released), and ten times more in June.
Gazipur, near Dhaka in Bangladesh, loses more worker days in one average day of garment factory unrest (ie, just about any day a buyer cares to choose) than the whole of China manages in a month.
Throughout the garment-making world, the "race to the bottom", as activists love to call the process of sourcing, is turning into a quest for Scandinavian-style efficiency and harmonious labour relations. It's a messy transformation, and there's little harmony in its labour relations yet.
Anyone thinking they could avoid getting caught up in the mess by leaving China was wrong.
Agitation and unrest
It's a simple law of nature: impoverished peasants moving to an urban factory work all the hours they can when they first realise how much better the factory pays.
Even when they realise how little they can buy with their wages, they'll still stay in the city to ensure cash flows back to their villages: the ILO reckons 20-40% of garment wages get sent back to relatives in the countryside, even if the garment worker almost starves herself to do it.
But they'll agitate - and I believe in most of Asia they'll go on agitating for many decades to come.
I also reckon many Japanese buyers are switching back to China because transformation from Wild West to Sweden over the past five years has been much smoother in China than anywhere else in Asia.
Could they onshore? It's a costly alternative for Europeans or American buyers - and likely to be trickier still for the Japanese.
Over the past few weeks, we've seen a series of intriguing new factory announcements by garment makers around the world.
But those in the US average $283,000 per job created. That compares with $27,000 a job in Macedonia, $7,000 a job in Mexico, $4,400 in Bangladesh - and no announcements at all in India or Japan.
Land - and the cost rich-country legislation adds to developments - is even pricier in Japan. Unlike the US or Europe, there's just one low-wage country, apart from China, within 1,000 miles of its borders: North Korea. And that's really not going to be as attractive a manufacturing location as Mexico or Romania in the foreseeable future.
Suddenly, for the world's largest group of garment importers in a single country outside the US, the grass in China, where they've been buying all along, is looking a great deal greener than anywhere else in Asia.
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