In his last column, David Birnbaum argued that in the next 10 years Mexico would grow to become the world's largest garment exporter. Critics of the piece suggested that after 2005, China will be not only the world's largest garment exporter, China will be the only major garment exporter. Here David makes a case against what he calls 'The China Syndrome,' and looks at what is needed to survive in the post-2005 apparel industry.

Several months ago, I wrote an article in which I suggested that in the next 10 years, Mexico would grow to become the world's largest garment exporter. To say that my article received mixed reviews would be an understatement. (While on this subject. Can the person who mailed the doll with the pins stuck through its heart, please let me know their return address? Third Horizon employees are not permitted to accept gratuities.)

The consensus of the critics was that after 2005, China will be not only the world's largest garment exporter, China will be the only major garment exporter. This is the China Syndrome which appears to have attacked many garment and textile industry professionals.

Let me apologise in advance, but I still think I am right. Let me repeat my reasoning: the most important garment costs are the costs of doing business in the country producing your goods - macro costs. Because Mexico is located next-door to the United States and because Mexico is part of NAFTA, for US buyers Mexico must inevitably produce the lowest cost garments in the world.

I realise that at the present time Mexican quality is often a little less than we hoped for, that Mexican factories are not quite 100 per cent reliable about delivery, and that communication occasionally leaves something to be desired. I also realise that I am lying. I am aware of many of the true-life horror stories. Believe me, I can tell you stories that will make you cry.

However, in the long run these are not important factors. Quality can be improved. In time and with considerable effort, you can persuade the supplier that a 31 March shipment actually means 31 March shipment and not some for-

"I know that Chinese suppliers are so willing and so efficient that they appear to be magicians"
off unknown date called manana. And it is possible that with patient effort you can receive timely and accurate information - provided you do not die of a coronary in the interim.

What you cannot change is Mexico's location or NAFTA. I know that Chinese suppliers are so willing and so efficient that they appear to be magicians; but let me tell you, try as they may they are not going move their country closer to the US. At the same time, we cannot change the NAFTA treaty. We can change the new CBI legislation - in fact Mr Bush just did. We probably can and will change the Sub-Saharan legislation. These are laws. In the US Congress can pass, amend, or annul any laws it wants.

However, under the American system, there are two items that Congress cannot play with - the US Constitution and treaties. NAFTA is a treaty. The export advantages given to Mexico will stand. Furthermore, the NAFTA treaty will probably be the last major US free-trade treaty involving garments in my lifetime.

Because of Mexico's location and because of NAFTA, ten years from now Mexico will have mills producing the quality fabrics buyers want with reasonable minimums and at reasonable prices. Mexico will also have garment factories just as efficient as any in China, Taiwan, Korea and Hong Kong. In fact, many of the mills and factories will be owned by these same Chinese, Taiwanese, Korean and Hong Kong companies.

Chinese whispers
As for the Chinese taking over, frankly I am not impressed with arguments of the China Syndrome people. Here are some examples:

  • China has the world's largest labour force:
    This is absolutely true, but so what? I see no relationship between population and garment exports. China has 1.3 billion people and exports about $50 billion worth of garments per year. This works out to $38.50 of garment per capita exports. India with a population of a little over 1 billion people manages to export about $5 billion. This works out to $4.97 per capita or about one eighth of China's. Hong Kong garment exports work out at $1,549 per capita - even after taking out the $14 billion in annual trans-shipments from China - which is about 40 times Chinese exports
  • China is the world's largest raw cotton producer:
    This is true. The US is the second largest cotton producer. I do not see that helping the US industry.
  • China is the world's largest producer of manmade fibres
    This one is a little rocky. However, even if true, it is also irrelevant. The US is a big producer as is Japan. Locally produced raw materials and chemical fibres do not build a garment industry.

In fact, these arguments are all based on a common, but false assumption. People, particularly textile people, assume that to have a viable garment export industry, a local textile industry is required.

There is no backward linkage between textiles and garments. Hong Kong, which for over 20 years was the world's largest garment exporter, never made use of its textile industry. In fact both co-existed, and both exported. Each industry survived and prospered, because each industry fulfilled a need.

The rules of business are the same everywhere. If a local mill is able to supply the garment buyer's fabric needs at a competitive price, then the local garment factory will always buy the local fabric. However, if the local mill cannot provide the right quality, or if the price is too high, the garment factory must buy where the price is best, or the factory's customer will go elsewhere.

The Chinese garment and textile industry prospers not because the garment people rely on local textiles, but because each fulfils its own customer needs. In some few respects, the Red-Peril people are correct. China, at $50 billion

Expert Analysis

China's Major Markets: Forecasts 2002-2005
Report examining market sizes across all consumer sectors up to 2005, while addressing the main issues confronting China's economy and society over the next five years. As China enters 2002, the country is faced with a number of new realities. All of them appear are encouraging from a business perspective. These include China's successful accession to the World Trade Organisation (WTO); The improved relations with the USA & Europe; The prospect of relatively smooth political change at the forthcoming Party congresses; Expected strong economic growth in 2002. 

annually, is the world's largest garment exporter; and China with its $28 billion, is the worlds largest textile exporter. However, and most importantly, China's annual textile imports exceed $25 billion, which makes China by far the largest textile importer in the world. And you better believe, almost all of these imported textiles go into garment exports.

China is the world largest garment exporter because Chinese factories give the customer what the customer wants.

Having said that, the real question remains: will China maintain that position in the post-2005 era? My answer is probably not. The assets that up to now have made China a success will not be the assets needed to succeed in the post-2005 garment industry.

Post-2005 survival
So what assets will be required to survive in the post-2005 world, and who will win the race to develop these assets first?

There are many possible answers to this question. However, all the reasonable answers start from a single point: at the present time there are two factories for every one customer. The minute quotas have been phased out, 50 per cent of the world's garment-export factories will lose their reason for existence. 1 January 2005 will bring the greatest buyers market the garment industry has ever seen. Retail prices will fall 30 per cent or more because the giant retail groups who dominate garment imports can and will make any demands they want.

Think about it. If you are a retail buyer and could demand anything you wanted from your suppliers, what would you ask for? If you answered lower CMTs, 'Go directly to jail. Do not Pass Go. Do not collect $200.'

David Birnbaum.

To find out more on what will be needed to succeed, and who will become the post-2005 leaders, David will be speaking on 'Life after Quota' at the World Apparel Market sourcing event, which takes place at the Brussels Exhibition Centre from 9-11 April 2002.

To read David's earlier article, click here:
For sale: Mexican garment industry (2001 model)