The Flanarant: China's textile and clothing challenge in new era
By Mike Flanagan | 19 November 2012
Xi Jinping, the new general secretary of the Communist Party of China
As Xi Jinping assumes the leadership of China's ruling Communist Party and prepares to get down to business, Mike Flanagan pens him an open letter offering up a few home truths about China's textile and garment industry.
Dear Mr Xi,
Congratulations on your appointment as secretary general of the Chinese Communist Party. Congratulations, too, to your colleague Li Keqiang who will be joining you next year as prime minister. The jobs created in China's export oriented textile and clothing companies over the past 20 years have played a huge part in the extraordinary growth in prosperity of the people you now govern. But during your time in office, a lot of that is likely to change.
1: Being number one
Some time in your first few years, your country's economy will overtake America's. This will still mean that average Chinese earnings are less than a quarter of those in America or Europe - and Wikileaks tells us Mr Li is pretty sceptical about these numbers anyway. But looking as though you've overtaken America will create some serious challenges:
- Chinese expectations. Your fellow citizens will hear that China has become the world's richest country - but will see on the Internet that almost everyone in even the poorest Western countries is a lot richer than most of them. This will provoke even greater frustration among Chinese workers at their relative poverty. As America (like Britain before it) knows only too well, being number one increases worker dissent.
- American resentment. The publicity surrounding China "overtaking" America will increase domestic pressure on politicians throughout the West (but especially in America) to "do something" about "unfair" Chinese competition.
- Commercial insignificance. China is the world's biggest exporter - but its nowhere near the largest market for most goods made by factories in the rest of the world. So even when it's number one, it'll still need its exports to the West.
2: Role of China's clothing industry
Over the past 20 years, the garment manufacturing industry of the US, UK, France, Germany and Japan has moved to poorer countries. This has increased jobs worldwide - typically one job lost in Western clothing factories has created 1.5 jobs in poorer countries such as yours -and brought down garment prices. But the growth in demand for energy and food in countries like China has pushed up fuel and grocery prices. And with clothing in the world's biggest market (the US) accounting for just 3.5% of consumer spending, the rise of China is increasingly seen in the West as not just job destroying, but inflationary.
Your clothing exports to the west are currently static. This is not because of the "protectionism" your government-owned media talk about: the US, EU and Japan have little garment making to protect. It's not because Western markets are collapsing: there's no growth in Western garment exports because clothing is a mature market and all China's growth until 2010 came from Western production being moved. The reason China is now losing share of Western imports is because of China's policies.
Remember, by the way, that China is the world's biggest clothing maker. But there are dozens of other low-wage countries with garment making capacity. The UK, for example, now sources as many clothes (27.2% in Q2 of this year) from developing countries on Europe's periphery as it does (29.9%) from China - including Hong Kong, Macao and Taiwan. Finding other low-cost garment making centres isn't difficult.
3: Hitting your friends
The largest single buyer of Chinese garments is Wal-Mart. But last year, mislabelling ordinary pork as organic in 15 Chongqing Wal-Mart stores led to a $575,000 fine and the detention of two employees. In October, Nike was fined $780,000 in Beijing for adverts claiming a shoe had two air cushions when it had only one.
No-one is claiming businesses should be unaccountable. But punishments so grossly disproportionate to the offence seem like a local official's device for explaining the consequences of failing to offer a bribe - or a deliberate government programme for "helping" Chinese-owned superstores and sportswear brands. Remember, businesses like Wal-Mart and Nike argue the case for China while Western politicians argue we should make life tougher for Chinese exporters
4: Public policy, protectionism and cheating
Japan is moving apparel production out of China to elsewhere in Asia because of a policy decision taken in 2005. Shocked by a wave of anti-Japanese riots in China, its government and garment importers agreed to train other Asian businesses in their uniquely demanding standards. This summer, further anti-Japanese riots in China confirmed their judgement. In September, Ministries of Commerce all over Asia were being besieged by Japanese importers looking for advice on speeding up their relocation.
Naturally, many of China's competitors in the garment industry think you cheat. Americans have long been obsessed with the way you manipulate your currency - but now Mitt Romney has failed to win the presidency, that argument is unlikely to be taken much further. A far more important "cheating" complaint comes from the subsidies you pay textile and garment exporters - and a major reason the West gives many developing countries duty-free concessions is because it is the only way those countries can compete with your subsidised businesses.
Most of these subsidies flagrantly breach the agreements China made to phase them out when you joined the World Trade Organization (WTO) in 2000. Rich countries have generally ducked complaining because they've assumed the subsidies would bring prices down overall, and they'd be selling you lots of Boeings or Airbuses.
But over the past couple of weeks, Mexico, Brazil, the US and the EU have all said those subsidies really are unjustified - and are seeking a remedy at the WTO. Worse, the US, EU, Japan, Turkey and Australia have said they believe China lied to the WTO earlier this autumn when you submitted a list of your subsidies, justified or not.
Western countries have become more aware of how little benefit they're getting from a China that sells a lot, buys next to nothing and discriminates against Western companies - and how much damage China's doing to their economies as a result.
At the same time, more and more developing countries are learning that your growth is at their expense. Brazil and Mexico are attacking the subsidies on your garment and textile exports because their jobs are being lost a result - and they don't have access to the social security comfort blankets provided by the US and Europe.
Turkey's not just joining the attacks on you at the WTO: it's slapped a whopping import surcharge on the garments and textiles you sell it. When WTO spokespeople worry about growing protectionism, they're usually referring to acts taken by other developing countries to protect themselves against illegitimately subsidised Chinese imports. Practically all the countries who import your garments or textiles are now ranged against you at the WTO.
5: Who to believe?
In your new position, you'll hear views from lots of people. I'd suggest there's one group with views you should be especially sceptical about: factory owners. Good entrepreneurs - especially in China - are a lot better at adapting to new circumstances than they admit when first facing a problem
One of the pioneers in the automation of China's garment industry is Milo's Knitwear, which has just spent $1.8m on 28 robots to take over production in its Guangdong plant. CEO Willy Lin has been predicting the imminent collapse of China's garment industry since wages began to rise in 2006 - but it hasn't collapsed, and Lin has been smart enough both to pilot Milo's way through a world of rising wages, and to draw up an investment programme to help it survive the next phase.
6: Keeping your workers happy
I'm puzzled about this, and I suspect many Western garment retailers and brands are as well.
Western garment buyers are probably kept awake at night by the same terror as you: the risk of violent disorder if the Chinese government ever fails to deliver the continuous improvement in living conditions you and your predecessors have sought since Deng Xiaoping launched the Four Modernisations in the early 1980s.
We've always assumed that keeping a contented population meant rising wages. You'd increase investment in industries like garment making, and by improving productivity you'd hike wages without damaging China's overall competitiveness. That's why Chinese apparel prices in the US are currently falling faster than any other supplier.
So why delay the reform to the Labour Contract Law your government originally announced, banning easily terminated, limited-hours, temporary contracts for factory workers recruited through agencies? In June your government presented a draft reform to the National People's Congress - but now reports say you've been swamped by comments and are postponing it. Employers, apparently don't like it - but they need a stable supply of contented workers a lot more than they need to maximise this year's profits
Such contracts are a necessary evil in some countries, where there are more young people entering the workforce each year than there are jobs being created. They offer work when demand is unpredictable, meaning employers have the confidence to pitch for new business, without being stuck with a workforce bigger than they need when demand slackens. That's why Mexico's finally approved legislation to allow such contracts.
But your problem is not having enough workers - and all the buyers I know want to keep the stable working environment they value in Chinese factories, rather than rock-bottom prices.
7: The Harbin street-sweepers
We all know China's workforce is about to start falling. Cai Fang, director of your Institute of Population and Labor Economics, recently said the number of working-age Chinese has already started to fall. In a country whose economy is growing so fast, there's already a shortage of bright young people: textile and garment factories struggle to recruit good technical managers.
But in the City of Harbin this October, 2,954 people with undergraduate degrees (and 26 with Master's degrees) applied for 500 vacancies in the city's sanitation department - mostly as drivers and sweepers. A total of 7,100 people with some kind of higher education diploma applied for those 500 street -sweeping jobs.
Is this a commentary on the quality of Chinese higher education? On a younger generation unhappy with the idea of working for a real business, with all its risks and demands for hard work? On the difficulty for young, qualified Chinese of getting a residence permit in a big city - because all those street sweeping jobs come with residence permits? Or - because young people seek low-level jobs in local government to help get more senior ones - evidence of the bribe-collection opportunities open to senior local government officials?
A bit of all the above, I suspect. But the way China will compete in the world garment industry needs the kind of highly trained, middle-level management we thought China's higher education system was so good at producing. The Great 2012 Harbin Streetsweeping Boom seems to be saying you can't rely on it.
In your new job, you're not going to keep the friends you can find if you keep on alienating countries and companies who have helped China in the past. At home, your young people seem to need to learn to love business; your businesspeople can probably be trusted to find ways of keeping growth going, even if you make the concessions needed to keep your customers and your workforce happy.
But the golden formula China found to dominate the world garment and clothing industry between 1990 and 2010 is getting tarnished. Bringing it back to life means listening to your customers.
And no Emperor, however powerful he thinks he is, will prosper if he thinks that's unnecessary.
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