"The next China is not a country but rather a region"

"The next China is not a country but rather a region"

Garment sourcing involves much more than finding the place with the lowest labour rates - but the industry continues to obsess about finding the next successors to China's crown as the ultimate manufacturing destination. As David Birnbaum explains, it's a complex problem, and fast answers almost always tend to be silly ones.

Once again, garment sourcing professionals are gathering for their annual contest: 'Name the New China.'

This year we have more entries than ever before; although I regret to say that absent from the 2013 list of potential new-Chinas are both Svalsbard and Spizbergen. 

I am also disappointed that yet again Atlantis has been omitted from the list. I have complained to the committee and been rebuffed, with the excuse that only WTO members can be nominated.

And I am concerned that the failure to include Atlantis may prejudice development of its nascent garment export industry. I am reliably informed that Li & Fung has already delayed opening an Atlantis office and is now concentrating its efforts on the new frontier - the planet Neptune - where an unusually high cost of logistics can be offset by low labour rates.

Having made my complaints public, it is time for me to cast my vote for the 2013 'Name the New China' contest. I vote for China. Yes, I believe that once again, China will be the new China. To paraphrase Mark Twain, rumours of China's death have been greatly exaggerated. 

The above notwithstanding, Bangladesh is clearly everybody's 2013 favourite. There is something to be said for this. In 2012 the share of the US market held by Greater China (China + Hong Kong +Macao) decreased, while at the same time Bangladesh's US market share increased (-0.1% compared with +0.2%).

Should this trend continue uninterrupted, Bangladesh is scheduled to over overtake Greater China as the US leading garment supplier at precisely 8:26am, 23 June 2568. However, given our industry's many complexities, I would not hold my breath.

Benchmark study
To be serious. Garment sourcing is a lot more than finding the place with the lowest labour rates. If wages were all that mattered, then Bangladesh with its $60 per month would be number one, while China with its $450-$600 per month would be out of business.

We at Third Horizon are in the process of completing a detailed benchmark study for the government of India, comparing garment-exporting industries in Bangladesh, Cambodia, China, India, Indonesia, Turkey and Vietnam.

It may well be the most detailed research effort of its type in the history of the global garment industry. We have collected an enormous amount of data; and our teams have visited over 150 factories in 7 countries.

However, the most interesting and probably most relevant part are our confidential interviews with a large number of the most senior sourcing specialists in the industry. If you want to learn customers' sourcing preferences, ask the customers.

Each sourcing specialist was asked to rate each of the seven countries in 15 areas that professionals normally consider when making their selections: 

  • High = 4 points
  • Medium = 2 points
  • Low = -2 points

Why China and why not Bangladesh? Take a look at the following scorecard.

Benchmark study – customer survey
Group Sourcing areas China Bangladesh
    Points Rank Points Rank
Social responsibility Compliance 55 4th 5 7th
  Sustainability 50 3rd -15 7th
  Pollution 41 3rd 3 7th
Reducing costs Productivity 89 1st 21 7th
  Service 86 2nd -5 7th
Product development Material sourcing 100 1st 4 6th
  Salesman sample fabric 100 1st 34 7th
  Original garment design 96 1st -19 7th
  Design assists 93 2nd 16 6th
Production Lead times 84 1st -2 6th
  FOB price 61 3rd 76 1st
  Quality 88 1st 47 6th
Business culture Ease of doing business 93 2nd 8 6th
  Reliability 87 1st 13 6th
Shipping terms Open account / credit 91 1st 38 7th

FOB is still important, although even here we should be talking of FOB value, which is a great deal more than FOB price.

I have never joined in the name-the-new-China contest, although we at Third Horizon have been retained on several occasions to examine the question.

However, when we looked at the competing-with-China question more analytically and brought to bear a wide range of data, we reached two immediate conclusions:

  1. This is a an extremely complex problem; and
  2. Fast answers are almost invariably silly answers.

For example, Vietnam appears to have come the closest with a 9.2% share of the US market in 2012. However, this conclusion reflects only the US point of view. From the EU point of view, Vietnam is at best a good second level supplier with a 2.7% market share.

This leads to yet a more serious problem. The contestants in the name-the-new-China contest are for the most part US based, with a US perspective and most importantly a US bias. The current world is different than they imagine.

  • US garment imports account for 21.5% of the world total, compared with 45.8% for the EU.
  • The US market is quickly becoming a secondary market for US brand labels and retailers.
  • The US has virtually no domestic garment industry, while 46.6% of EU imports come from other EU countries.

When picking the new China, we would do well not to jump in blindly, but rather to consider the whole garment industry world. 

The serious question is not "Who will be the new China?" But rather, "Who can possibly become the new China?" And, more importantly, "What steps must they take to become the new China?" 

My conclusion is that no single country can become the new China. The answer to the new China question is not a country but rather a region, such as NAFTA/CAFTA, South Asia, or ASEAN.

Source ASEAN
In 2009, Third Horizon was retained by ASEAN to try to bring the countries together to better compete with China. 2009 was not a good year for ASEAN. Vietnam, which previously enjoyed double-digit market share increases, had been reduced to only marginal increases. The other two major exporters, Indonesia and Cambodia, were moving towards outright declines, while Philippines and Thailand were in rapid decline.

We asked ourselves, "What steps must they take to become the new China?"

We concluded that China's advantage was not primarily as a product maker, but rather as a service supplier. To compete with China, ASEAN suppliers would have to learn to provide the same services as China. And so was created the Source-ASEAN-Full-Service-Alliance (SAFSA).

The SAFSA strategy was:

  • To bring textile mills and garment factories together as virtual vertical factories (VVF) capable of providing the required services
  • Publish a service manual, outlining each service
  • Retain SGS to audit each VVF for services
  • To provide the detailed results of the audits to the brand importers and retailers.

It is hard to measure the success of the SAFSA project. The good news is that today, ASEAN is the most successful garment major exporting region in terms of growth rate.

For single countries, however, efforts to become the new China are a waste of time. That said, many countries have the potential required to compete successfully with China. How to accomplish the goal is quite simple:

  • Develop national advantages
  • Remove obstacles restraining development
  • Enrol the government, the industry, and the customers.

Of course, implementing the solution might prove difficult.

This is the goal of Third Horizon's current India project. India is the world's third-largest garment exporting country and is quite capable of competing effectively with China. We just have to bring potential to reality.

David Birnbaum is the founder of garment/textile consultancy Third Horizon Ltd (THL).