As labour costs in China continue to rise, the country's apparel and textile industry is seeing some orders transferred to other outsourcing locations as foreign buyers seek lower-cost manufacturers.

This move could be especially damaging for smaller, low-end Chinese manufacturers, leaving China-based orders increasingly concentrated amongst larger companies, according to a report from the China Cotton Textile Association.

"Small to medium manufacturers said their orders dropped sharply during the first quarter of the year, while big manufacturers said they had enough orders to keep them busy," it explains.

In Guangdong province, the nation's major export-oriented production base, only 22.3% of about 4,600 local manufacturers said they have sufficient orders. While more than 66% said they only had orders for three months' work, according to a survey published in March by the Guangdong Association of Garment and Garment Article Industry (GAGGAI).

The study also revealed that of 4,647 local manufacturers in the province, 574 local manufacturers reported a combined operating loss of CNY573.40bn (US$92.3bn), up 13.2% from 2012. That said, the nation's largest province for textile and apparel exports is still making money, as it reported combined profits of CNY25.8bn, up 19.95% year-on-year.

One problem for manufacturers is China's minimum wage, which is about US$0.8 per hour (CNY4.90), compared with US$0.28 in India, according to a report from US broker ConvergEx Group.

Other factors contributing to increased costs include the appreciating yuan, plus high cotton and energy prices.

Proximity sourcing
Also, according to a 2013 report by US consulting company McKinsey & Co, proximity sourcing is becoming more important for certain European and American clothing brands, pushing them to look for manufacturers closer to home than China.

As a result, a growing number of big Chinese textile companies are moving parts of their businesses overseas. A recent example has been the Zhejiang province-based Keer Group Co's plans to invest US$218m in building a cotton yarn plant in South Carolina.

Huang Guogang, a Keer spokesman, has been open about the reasons: "It's our first facility overseas, marking the beginning of our global strategy that could help us dodge the rising cost in China." Also, a quality workforce and lower electricity costs in this region of the US were reasons behind the move.

Keer is not alone. The Shanghai-based Texhong Textile Group Limited, a major cotton yarn supplier listed in Hong Kong, opened a plant in Turkey last year, aiming to better serve its European clients. The company's key focus, however, is in Vietnam, where it launched operations in 2006.

Texhong CEO, Hong Tianzhu, said in a recent note to investors that Vietnam will be Texhong's major manufacturing base, benefitting from Vietnam's membership of the planned Trans-Pacific Partnership Agreement (TPP), which includes the US.

Texhong enjoyed CNY860m (US$138.39m) in net profits in 2013, up 77% year-on-year. In the investors' note, Hong attributed this to the growing production capacity in Vietnam, where the company has five plants.

Leading role assured
Despite these shifts, however, China remains the world's most important country for clothing manufacture outsourcing, stressed the 2013 McKinsey report, which questioned 29 chief purchasing officers. Of these, 72% said China will remain as their largest sourcing market, despite moving some orders to other Asian countries over the next five years.

Mainland China, still, for instance, still manufactures 40% of Adidas's global apparel products, even though the German company closed a manufacturing facility in China in 2010, moving orders to neighbouring countries including Vietnam, Cambodia and Bangladesh.

"China will continue to be the most important outsourcing market for the Adidas group. In total, we work with 339 factories in China, and 1,214 globally," says an Adidas spokesperson. She adds that Adidas owns only ten production facilities worldwide, and relies heavily on outsourcing.

Value-added services
In the meantime, large Chinese clothing and textile companies are focusing on keeping their high-end foreign clients by offering value-added services, including developing innovative materials.

Shanghai Challenge Textile Co Ltd and Shenzhen-based Huafu Top Dyed Melange Yarn Co Ltd are two examples.

Challenge is known for developing high-end functional fabrics for sportswear. Working with giant chemical companies such as DuPont, Challenge serves high-profile clients including Nike Inc and Icebreaker (New Zealand). Listed in Shenzhen, Challenge reported revenues for 2013 of CNY896.4m (US$144m).

Huafu's advantage is its melange yarn, spun from pre-dyed fibres. The company has a series of high-profile clients, including Zara, Hennes & Mauritz (H&M) and Uniqlo. Also listed in Shenzhen, Huafu reported CNY200m (US$32.20m) in net profits in 2013, up 120.7% year-on-year.

"There's no doubt that China will continue to lose low value orders to other countries, and many small manufacturers will be out of business, but it's not necessarily a bad thing because it forces the Chinese textile industry to upgrade," says Li Jiajia, an analyst at Shanghai-based Guotai Junan Securities Co Ltd - adding Chinese companies will move on to providing high value services, including "R&D [research and development], marketing and design."

Examples of this can already be seen in the luxury fashion business. At the Prestige Brands Forum, held in Shanghai in March by the China Europe International Business School (CEIBS), Michel Gutsatz, advisor for consultants MGC, said one emerging business model in the luxury fashion business is "designed in China, made in Italy."

He cited the high-end Italian brand Anteprima as an example. The fashion house has two design offices in Hong Kong and Milan, and manufactures woven and leather products in Italy, and the rest in China using materials from Italy.

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