Apparel imports into the US from China in March were 39% down year-on-year

Apparel imports into the US from China in March were 39% down year-on-year

Slowing economic growth and growing competition are hitting the profits of Chinese retailers, while the country's clothing exports to the US dropped 39% year-on-year in March. Mike Flanagan takes a closer look at what this might mean for the apparel industry.

Burberry, The Sunday Times told us earlier this month, will announce a 7% fall in its 2015 profits due to "spending curbs by its Chinese customers" since China's in a "slump."

While in late April The World Bank announced "a huge opportunity" for India and its neighbours "to create good jobs…given China's rising apparel prices."

Some slump. Chinese consumer spending on clothes grew around 7% (in yuan) in 2015. Though lower than the 25% growth seen in 2010, that's still a rise of 14% when translated into the British pounds that Burberry's results are also reported in.

Some rising prices. Chinese clothes on the US market have been getting cheaper every year this decade.

China's not slumping. Just growing slower
The value of China's total output in 2015 grew 6.8%, which meant its growth was a bit slower than India's 7.3%. But China's growth was worth $750bn – or five times that of India – because its economy is so much bigger.

Not everyone in China benefitted from that 6.8% growth. Many who profited from the past decade's faster growth – from construction workers to once apparently rich real estate tycoons – found themselves a lot worse off. Others, like most garment workers whose wages kept rising as inflation fell – were better off.

Slowing economic growth is not the only change affecting Chinese retailing
Over the past quarter-century, China has been transformed. Tens of millions of people have moved from near-starving Chinese villages to its often flashy cities. The internet accounts for more of its apparel market than in any other substantial country. And fashion retailing depends infinitely more on ordinary shoppers than on the big-spending super-rich.

So there are two new problems for Western brands in China:

  • Perceived rip-offs. Most Western brands have been charging their Chinese customers up to twice what they charge at home – but with the internet offering easy and instant price comparisons, the Chinese aren't accepting it any more. Hugo Boss, for example, decided it had to cut its Chinese prices by 20% at the beginning of 2016, after a 10% cut a few months earlier.
  • The Chinese are becoming tougher retail competitors. Amazon is a minnow in China compared to Alibaba, and from Walmart to Asos, almost all Western retailers have cut back their once ambitious projections for China.

Those changes need nimbleness
These aren't just problems for Westerners: growing competition is hitting the profits of more Chinese retailers too.

Foreigners can't react as sensitively and nimbly to changing local demand and business environment as the locals. And we can't dismiss the possibility the Chinese government is giving its local shopkeepers the odd unfair advantage.

The World Bank misunderstands garment manufacturing
The World Bank is plain wrong to imply China's manufacturing prices are rising faster than its Asian rivals. China's apparel prices overall are falling because growing competition and falling raw material, energy, freight and interest costs outweigh wage growth. It is also wrong to claim:

  • "China is looking to shift production to higher value-added industries like electronics". Many Chinese economists once wanted that. But with job losses in growth-linked industries, China's main priority now is to maintain full employment in stable industries like garments. Hence its half-billion dollar investment in 2015 to increase cotton-growing, spinning, weaving and garment making in the Far Western provinces.
  • "Buyers plan to decrease their share of apparel sourcing from China between 2012 and 2016". European and US buyers told McKinsey that in 2013, but in reality they bought 3m square metres more clothes from China in 2015 than in 2012 – four times the growth in apparel imports from India. Since 2010, buyers' predictions of lower procurement from China have proved consistently wrong.

Whether through nimbler owners, better public and private investment or unfair government help, China's garment makers have coped with the problems of the past decade better than most of their competitors. Every claim I've investigated of Western brands switching procurement elsewhere has turned out to be a new Asian supplier added, with little reduction in Chinese manufacturing.

But not universally
Chinese apparel imports have stayed at around 42% of the US market since 2008, while their prices fell faster than those of other countries. Japanese buyers, though, in 2008 decided that China's 92% share of Japanese clothing imports made them dangerously dependent on China, while the euro has been losing value against the yuan since 2012.

In Japan and Europe, China has been losing share. There are limits to the challenges even Chinese nimbleness can overcome.

And China might have started losing US share
In March 2016, America's apparel imports from China were 39% down on March 2015. At the same time, US apparel prices from China grew 3% on March 2015, while prices from Vietnam, India and Bangladesh fell 3%.

US apparel imports fall by one-fifth in March

Has China's dominance of US imports finally ended?

Possibly not. Since 2007, China's share has dropped below 30% in just three of the following one hundred months: March 2008 (when it fell to 22%), March 2011 (24%) and March 2016 (26%). An early February Lunar New Year holiday often disrupts trade from Vietnam, Cambodia and China in March.

In March this year, US apparel imports from China, Vietnam and Cambodia fell 20% or more – but not from India or Bangladesh, or any major Central American supplier. After the March collapses in 2008 and 2011, China's share of the US market rebounded sharply the following year.

What happens next?
Grand macro-economic theories don't dictate who does well, whether in their share of the Chinese retail apparel market or Western apparel imports. Instead, it's how businesses respond to changing conditions.

Over the past decade, Chinese retailers have been a lot sharper than their Western rivals in adapting to changes in the Chinese market. Chinese manufacturers, though, have been less able to react to changes in the European and Japanese markets than their Vietnamese or Bangladeshi rivals.

The Chinese might have hit a new challenge in the US this March. As for who might best exploit the opportunities created, I'll take a look next time. My money, though, is on the Chinese rising to the challenge.

Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.