Chinese factories are in trouble - at least when it comes to their clothing exports to the United States. But is this a symptom of new quotas hampering the market, or simply that US importers and retailers are not even looking for China quota any more? David Birnbaum discusses the message being sent out.

• US garment imports from China have collapsed

China's garment producers may well revive in the second half of 2006 or more probably in 2007. However, studying data to the end of March 2006, when China's US unit market share was down from 27% to 21% compared with the same period last year, it is fair to conclude that Chinese factories are in trouble.

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You will note, however, that market share measured by value in the same period fell only from 22% to 20%, which leads to the second conclusion:

• The collapse is limited to quota restricted categories

This is certainly borne out by the data. Every one of the product categories where quotas were reimposed - and imports later embargoed - shows catastrophic declines.

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At first glance it appears that nothing unusual has occurred. There is a reasonable explanation for the seeming collapse. We just have to follow the logic:
- China's quotas for these categories are very small compared to demand, which is why last year's quotas were exhausted two months after they were imposed; and
-  The 2006 quota is almost the same as the 2005 quota.

The problem is simply too many orders chasing too little quota.

So, based on this logic, can we conclude that the problem will solve itself? The 2007 quota will be 12.5% higher than 2006, and 2008 will be 15-16% higher than 2007. Increased quotas will bring more orders which in turn will increase China's US market share.

The logic may be unassailable, but regrettably it is out of whack with the facts, which leads to the third conclusion:

• It's not that US importers are unable to find the quota, it's more a case they are not even looking for China quota

By the end of April, we would expect that about 33% of quota to be utilised. After all, T-shirts and jeans are not seasonal products.

Compare Vietnam with China. Vietnam's quota is approximately at the 33% level, with some categories dangerously higher than that. In fact, Vietnam's factories may soon be crying "where has all the quota gone and hello to embargoes."

However, China quota utilisation shows a different story. No worries about embargoes here. China factories should be singing "where have all the customers gone, long time passing."

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We know where all the customers have gone. The big Hong Kong factories have moved a lot of production one way or another from China to Hong Kong and Macao.

A lot is going to the old second echelon exporters — Philippines, Indonesia, Thailand, and Malaysia — where the Hong Kong, Taiwan, and Koreans already have branch factories. Much has gone to the relative newcomers — Vietnam, India, Cambodia, and Bangladesh.

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The real question is: Why have all the customers gone?
The answer: Price.

As you can see from the chart below, 15 years ago, way back in 1992, China was still a low price exporter. However, even then FOB prices for 'made-in-China' garments were rising. At its peak in 2000, the average FOB price for a 'made-in-China' garment was 36% higher than the average of US garment imports from all sources.

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The cheap commodity importers were driven out. They had to go to the outer limits, places like Bangladesh, Cambodia and Vietnam.

These were the days when quota premiums reached previously unimaginable heights: Cotton T-shirts @ $2.50 per piece. Cotton trousers @ $3.50 per piece. However, despite this premium, enough customers still stood in line to place orders with China factories to use the entire existing quota.

In 2002, when the first strategic quotas were phased out, the old cheap commodity importers started to return. In 2005, everybody and his uncle dove into the China garment pool.

However, quotas were reimposed, and in 2006 so too were quota premiums. Of course Chinese factories dared charge the excessive amounts of 2000. This time the premium was only $1.00 per piece for both cotton T-shirts and cotton trousers.

The problem is that China garment makers believe they are still living in the good old days when everybody needed China.

China garment makers, here comes the news: You are wrong. As far as the cheap commodity importers are concerned, $1.00 is excessive. This is not 2000. In 2006, there are plenty of countries with reliable factories, who will deliver a decent product at a decent price.

The China garment industry is in a state of collapse because China garment makers think they own the industry.

The message is: China garment makers wake up. You too can be replaced.

David Birnbaum is the author of 'The Birnbaum Report/Strategic Sourcing for Garment Importers,' a monthly electronic newsletter to help manufacturers and importers work at the best price and source in the best countries.

Appendix: FOB price differentials

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