2010 had but one country winner: China. With its share of the US market surging towards 40%, and FOB prices beginning to rise, David Birnbaum asks why, and how, the country continues to maintain its dominance. The answer, it seems, is that everyone else competes to make the easy stuff, leaving China to mop up the profits elsewhere.

There seems little doubt that in 2010 China’s share of the US market will breach the 40% barrier. Good times or bad times, China continues to move inexorably upwards, while the market shares of its main competitors are either stagnating or declining.

Top 10 U.S. Garment Suppliers: Market Share
  2006 2007 2008 2009 YTD 10-10
China 25.9% 30.8% 32% 37.2% 39.5%
Vietnam 4.5% 5.9% 7.3% 8% 8.2%
Indonesia 5.1% 5.4% 5.6% 6.1% 6.2%
Bangladesh 4.1% 4.2% 4.8% 5.4% 5.5%
Mexico 7.4% 6.1% 5.6% 5.4% 4.9%
India 4.4% 4.3% 4.3% 4.5% 4.4%
Honduras 3.4% 3.4% 3.6% 3.2% 3.3%
Cambodia 3% 3.3% 3.3% 3% 3%
El Salvador 2% 2% 2.1% 2.1% 2.3%
Pakistan 2% 2% 2.1% 2.1% 2%

If this trend continues China will take over the entire industry, leaving the rest of us the bits her factories cannot or do not want to produce.

The questions are why and what can we do to stop China?

The answer does not make sense. We are told it is all about price: China maintains its dominant position because illegal government subsidies allow Chinese factories to export garments at FOB prices below real costs.

Critics argue that if the Chinese government was forced to remove its subsidies, China’s FOB prices would rise – which would allow other garment exporting countries to compete more effectively against their Chinese counterparts.

Like most half-truths, the unfair-price-advantage theory is 50% accurate and 50% nonsense. It is certainly true that the Chinese Government does subsidise Chinese factories. It is also true that until very recently, prices for made-in-China garments had been falling.

Made in China FOB Prices
  2006 2007 2008 2009 YTD 10-10
All Garments $2.85 $2.83 $2.94 $2.73 $2.69
Cotton T-shirts $4.36 $4.74 $5.07 $4.04 $3.88
Cotton Trousers $6.22 $6.66 $6.73 $5.39 $4.98
M&B Woven Shirts $5.29 $5.91 $6.49 $6.11 $6.05
Underwear $1.2 $1.26 $1.35 $1.08 $0.99
India 4.4% 4.3% 4.3% 4.5% 4.4%
Honduras 3.4% 3.4% 3.6% 3.2% 3.3%
Cambodia 3% 3.3% 3.3% 3% 3%
El Salvador 2% 2% 2.1% 2.1% 2.3%
Pakistan 2% 2% 2.1% 2.1% 2%

However, the fact is China’s FOB prices have begun to rise, eroding any price advantage they may have had. Yet China’s market share continues to rise.

Made in China FOB Prices Premium/Discount to Average from All U.S Suppliers
  2006 2007 2008 2009 YTD 10-10
All Garments -10.4% -10.6% -6.7% -7.9% -6.8%
Cotton T-shirts 54.3% 64.3% 79.6% 48.8% 44.7%
Cotton Trousers 5.5% 16.7% 19.7% 2.8% -1.8%
M&B Woven Shirts -7.6% -0.8% 2.8% 1.6% 3.1%
Underwear 18.5% 25.7% 34.1% 5.9% 0.8%
India 4.4% 4.3% 4.3% 4.5% 4.4%
Honduras 3.4% 3.4% 3.6% 3.2% 3.3%
Cambodia 3% 3.3% 3.3% 3% 3%
El Salvador 2% 2% 2.1% 2.1% 2.3%
Pakistan 2% 2% 2.1% 2.1% 2%

More revealing is the fact that China’s market share continues to rise even in such “commodity” products such as T-shirts, where their FOB prices are at a substantial premium to world average.

The answer to the question why, lies not in price but rather in product and product mix. Ironically, China’s competitors compete with one another. They do not compete with China.

US garment imports are dominated by four big basic commodity products which account for 45% of all US garment imports. Of the big four, two – cotton T-shirts and cotton trousers – account for 36% of all garment imports, while the second two —woven shirts and underwear – account for 9%.

These four products dominate the exports of nine of the ten largest US garment suppliers, and this is the area where they compete. 

Top 10 U.S. Garment Suppliers: Four Major Products: Market Share
  338/339 347/348 340/640 352/652 Big 2 Total 4
World 19% 17% 4% 5% 36% 45%
China 12% 13% 3% 2% 26% 31%
Vietnam 26% 16% 4% 3% 42% 49%
Indonesia 27% 13% 6% 2% 40% 47%
Bangladesh 10% 39% 12% 5% 49% 66%
Mexico 14% 41% 3% 2% 56% 61%
India 26% 11% 7% 9% 37% 53%
Honduras 33% 3% 5% 17% 37% 58%
Cambodia 29% 28% 1% 3% 57% 61%
El Salvador 31% 5% 3% 21% 37% 61%
Pakistan 41% 23% 1% 5% 64% 70%

Unlike the other countries, China’s garment industry is diversified. Exports of the big four products, while important, do not dominate China’s garment exports. While the other garment exporting countries are busy fighting one another for market share in the big four commodity products, they are leaving China alone to dominate the other products.

China’s product mix
In the year to October 2010, US imports from China totalled $23.7bn. Of that amount $3.8bn (16%) was divided among 40 products in which China’s US market share was between 67%-98% - giving China a virtual monopoly.

A further $7.3 billion (31%) was divided among 24 products in which China’s US market share was between 50%-65%, giving China market dominance. Altogether 54% of Chinese garment exports are in products where US imports are now controlled by China.

Imagine you are in the sweater business and wish to import women’s wool sweaters. You can go to China (87% market share). You can go to Italy (6% market share) which is a great alternative, if you are Giorgio Armani or Ralph Lauren.

After that you have the UK (1% market share) followed by Peru (0.6% market share) which produces great alpaca but little sheep wool. Let’s face it, for all practical purposes your choice is China, China or China.

What is true for women’s wool sweaters is equally true for cotton sweaters, wool knit blouses, women’s wool suits, men’s synthetic jackets, and 36 other products. For these 40 products it does not matter if prices rise substantially. You have to stay with China because no other country supplies your product.

Some may argue that much of this advantage is due to China’s access to indigenous raw material, particularly silk (77% US market share) and linen/ramie (82% US market share).

However, this is not the case. India produces silk but holds only a 4% US market share. Thailand is world famous for silk, but accounts for less than 1% US market share.

The same holds true for other-vegetable-fibres (OVF) which includes linen, ramie and related fibres. China monopolises this market using ramie. However, other, far better fibres are grown throughout the world: hemp (Canada and France), jute (India and Bangladesh), sisal (Mexico, the Caribbean, Kenya and Tanzania), and henequen (Mexico).

These OVF fibers exist, but none of these countries are making the effort necessary to compete in the billion dollar OVF garment market.
 
Wool is the most important example. Wool garments is a $3+ billion export business. Most importantly, it is a fibre that China, like everyone else, must import. Nevertheless, if you want to import wool garments you have very few choices.

You can go to China (55% market share). After that you have Italy (12% market share), Mexico (5% market share), Canada (3% market share), and Vietnam (3% market share).

For men’s suits and jackets, both Mexico and Canada offer good quality products at very competitive prices. For everything else, once again you are left with China, China, and China.

China either controls or virtually monopolises US imports of 64 products which, in the year to October 2010, had a total FOB in excess of $21bn. This is one basis of China’s dominance of the global garment industry.

The second basis is product quality. Why would a customer pay China $3.88 for a cotton T-shirt when the same cotton T-shirt is available from Pakistan for $2.46, from El Salvador for $1.69 and from Honduras at $1.57?

The answer is that they are not the same T-shirts. The made-in-Pakistan, made-in-El Salvador and made-in-Honduras T-shirts are basic commodities competing with Bangladesh, Sub Saharan Africa and other garment export industries based in least-developed countries.

But the made-in-China T-shirt is a quality fashion item. The nomenclature for tariff purposes is the same, but the actual products are very different.

Stopping China
China maintains its dominance, not through unfair or illegal currency manipulation or other underhanded subsidies, but rather because the rest of us – China’s potential competitors – have walked away from China’s main export products.

It is far easier to make cheap T-shirts and 5-pocket jeans than wool sweaters and down jackets. The orders are larger, workers require fewer skills and the capital investment much smaller; which is precisely why every country in the world is competing to produce these products.

Everyone competes to make the easy stuff, with the result that the price keeps on falling. However, the profit is in the difficult stuff which we have all left to China.

It is for us to develop our industry to compete effectively on a product by product basis with China. We have no alternative.

If indeed China does succeed in hijacking the global garment industry, do not look to blame others. We have only ourselves to blame. We are all China’s accomplices.

David Birnbaum is the author of The Birnbaum Report, a monthly newsletter for garment industry professionals. Each issue analyses in-depth US garment imports of four major products from 21 countries, as well as ancillary data such as currency fluctuations, China quota premiums and clearance rates.