China has developed rapidly since 2000

China has developed rapidly since 2000

Despite the size of its supply base, its range of skills and quality levels, China's apparel industry is repositioning for the future – including a focus on building its own brands, investing overseas, and moving up the value chain.

"Chinese apparel companies realise that if they keep relying on cheap manual labour, if they don't have a direct connection to the consumer, they're going to go out of business," explains Ben Cavender, principal at China Market Research Group (CMR). "So they're looking at a tremendous number of issues right now that are affecting the way they think about the world and the way they think about their business planning," he told delegates at this year's Sri Lanka Design Festival.

According to CMR, apparel industry wages are increasing around 8-10% each year, which Cavender says are not sustainable for low cost manufacturers. 

He adds: "At the same time, we've hit an inflection point. Starting in 2012, China's working age population actually started to drop. We are now at the point where we're losing 3m unskilled workers from the labour force every year. If you're a manufacturer in the value chain, you just can't survive, so companies are realising they have to make a change. On the factory side of the equation they have big problems, and on the consumer side of the equation they have big problems too."

Chinese consumer expectations for fashion have also grown in the last decade as they become more connected, travel more, earn higher wages, and are more aware of global fashion trends. 

"If you're a brand and trying to sell to these consumers now, you have to be connecting the dialogue, you have to know what they're thinking, you have to be talking to them, and know their expectations in terms of design, have faster new products. And I'm not sure anyone can keep up with them. But you have to try or you're going to get left behind because what's happening in the China market right now, that's what companies are talking about," Cavender says. 

He points to five strategic moves China's apparel industry is making in order to position itself for future success. 

1: A move away from labour intensive, simple manufacturing 
China is investing in other market such as Vietnam, following the conclusion of negotiations on the Trans-Pacific Partnership (TPP) trade deal with the US. However, while the TPP is now all but over following the election of Donald Trump who says he will take steps to withdraw from the pact on his first day in the White House, Vietnam does, however, still stand to gain from the EU-Vietnam free trade agreement due to come into force in 2018. 

"They know Vietnam is going to be a big factor in the apparel market because of low tariffs," Cavender says.

Indeed, cotton yarn and fabric supplier Texhong Textile Group currently has four, soon to be five, factories in Vietnam, and is now investing in Turkey. The company is also looking to invest in the US.

"They are looking at how they can control their own global supply chain, and they are working directly with the consumer to build a stronger brand. If you're going to stay with someone who is focusing on manufacturing contracts, you're going to get killed by the Chinese because they're doing this everywhere. China last year became the number one outbound M&A investor for the first time, so they're putting a tonne of money into foreign businesses, they're putting a tonne of money into industrial projects, and this is going to continue. They're shopping around the world for factories, and they're shopping for brands as well."

2: Investment in destination markets
China is investing in western markets where a lot of higher margin, higher priced items are being sold. "If you look at what Adidas, Reebok and other large brands are doing, they're starting to control a lot more of their production. That's going to be the trend going forward. Multinationals are responding to a direct need to have more, different specialised products within the course of the season, and having more ability to customise. And the OEM partners working with these brands realise that if they don't make these investments, five years from now they're going to go out of business because they're no longer going to be a partner to Nike. It's not just investment in cheap manufacturing, it's investment in cutting edge manufacturing in destination markets as well."

3: Building brands
Last year, Chinese sportswear brand Anta Sports Products sold more product in China than Nike, taking the number one spot in the market. The company grew rapidly, moving from one that had poor product management and no data and analytics on consumer behaviour, to a company with a heavy emphasis on lean manufacturing. 

This, Cavender says, is due to investment in automated cutting machines, and customised software in-store helping it understand the consumer. "The use of technology is going to be very important for anyone who wants to survive in the manufacturing business over the next five to ten years."

4: Chinese shopping sprees
As well as investing heavily in trying to develop their businesses, Chinese companies are trying to move up the value chain by buying brands – they want to be completely in control and they want to be a trusted brand. This, inevitably, involves investing in technology brands. "The Chinese are super technology driven, they've always got a phone glued to one hand, they're always online. This is how they shop. They don't want to go to the mall, they don't need a physical store, they need a brand that is responsive to their needs, that offers a good service. If you're not preparing for this somehow, if you're not looking at how to bridge the gap between the factory and the customer directly, it's going to create a problem for you," Cavender explains. 

"A lot of people think China is not a truly innovative market and all they do is just rip of what other markets have, but it has some of the best design teams and some of the best coders in the world. They are working very quickly on programming algorithms to make things work, and part of China's master plan going forward is being a manufacturing powerhouse, at the high end of the value chain. And they are going to get this right, so you need to be worrying about it now."

5. Making plans for the future
Last year, China's government launched its 'Made in China 2025' programme, aimed at advancing restructuring of the manufacturing sector, upgrading China from a manufacturer of quantity to one of quality, and investing in high-tech sectors and projects like advanced robotics.

"One thing China is good at doing is making plans for the future," Cavender says. "The whole point of the 2025 programme is 'how do we become the Industry 4.0 leader?' What we're seeing now is massive investment in Chinese start-up companies that are trying to build more efficient robots, building smart factories, looking at big data and analytics, and using it in ways that are effective in the workplace. A Chinese company is right now trying to buy the largest robotics manufacturer in Germany."

Beating the competition

But for all this investment and development, Cavender points out that "tens of thousands" of Chinese manufacturers will go out of business due to the inefficiency of their factories. They are also only just starting to fully realise the value of protecting their intellectual property (IP). 

He adds: "Chinese companies know they need to spend on research and development, and they are spending but still at a relatively low level. The apparel sector [spend] is still less than 1% of revenue. They are also not terribly efficient with how they use their findings. They don't know how to work their supply chain or processes very well. 

"They know there is this need for responsive, faster design, but the reality is nobody knows how to collect data and use it properly. So there is still an opportunity here that if you can do that well and take the time to find the partners that know how to do that, you've already got a leg up on the competition."

The key to companies capitalising on these weaknesses over the next 15 years, Cavender says, is to be flexible, and invest now. 

"If you're not trying things with automation and robotics now then it's going to be too late. You have to be willing to change and try new things. The biggest reason why the Chinese apparel industry stays healthy is that they're willing to try new things, they're always experimenting."

He also points to the importance of analysing data from customers, and subsequently building an identity of the customer and knowing what they want.

"It's not really truly about technology at the end of the day, it's about teamwork, working together and finding ways to avoid brain drain. You need to find a way to keep those people and get the best out of them.