Many big Chinese clothing and textile manufacturers have built bases overseas to lower costs

Many big Chinese clothing and textile manufacturers have built bases overseas to lower costs

Once clothing sourcing was all about China. Not any more. Recent years have seen a decline in China's export industry, especially in labour-intensive sectors such as clothing and footwear manufacturing, because of rising labour costs and an appreciating Chinese yuan. But while many China garment makers are moving out or moving online, production shifts are not necessarily a linear process.

2016 does not look any better.

According to China Customs, clothing exports in January and February 2016 dropped 11.8% year-on-year to CNY157.05bn (US$24.1bn), and textile exports fell 9.3% to CNY100.5bn (US$15.4bn).

Many big Chinese clothing and textile producers have built manufacturing bases overseas to lower costs.

The Hong Kong-listed Chinese cotton-spun yarn manufacturer Texhong Textile, for example, already has production units in Vietnam and Turkey. And in March it revealed it is to build a textile supply chain platform in Vietnam this year through an agreement with the Hong Kong knit fabric manufacturer Wan Fung to jointly develop knitting and dyeing facilities.

Moving-out is also an option adopted by Hengrun Import & Export Corp, a garment manufacturer based in Suzhou that makes men's, ladies' and children's clothing for clients in the US and Europe. The company has a factory in Cambodia.

"Cost cuts is a major reason. After all, the average salary in Cambodia is only one-fifth of that in China," Yu Hua, Hengrun general manager, told just-style.

He dismissed assumptions – prevalent inside and outside China – that workers in Southeast Asia are not as skilled as their Chinese counterparts. "If trained properly, Cambodian workers can make quality clothing too," he says.

However, like many other Chinese companies, Hengrun still has manufacturing operations within China. "We only moved the most labour intensive part – the garment manufacturing – outside of China," Yu says. He adds that this was important to guarantee good service, which ultimately is Hengrun's core function, underpinning its competitiveness.

"Service is a broad concept, including work ethics and efficiency. China's solid infrastructure guarantees a solid supply chain, which ensures efficiency, which is very important to our clients. That is why we still have fabrics manufactured in China," Yu says.

His idea is in line with that of John Cheh, CEO of the Hong Kong-based cotton shirt maker Esquel. Cheh has made it clear that China's infrastructure and supply chain strengths are highly regarded by the company, which will continue to remain in China while investing abroad.

Esquel has a well-established supply chain in China, covering spinning, dyeing, fabric manufacturing and garment making. But the company also has production facilities in Malaysia, Cambodia, Vietnam and Mauritius. 

Esquel CEO says automation core to competitiveness

Cost cutting is not the only reason for Hengrun to shift some production to Cambodia: full service demands an effective trade policy too.

"Cambodia enjoys preferential policies from the US and Europe, where our clients are based. We want to take advantage of the policies," Yu says. He cites Cambodia's integration within the US's Generalized System Of Preferences (GSP) in the US and its European Union (EU) counterpart the Generalised Scheme Of Preferences (GSP).

Neil Wang, China managing director and partner of US consulting company Frost & Sullivan, echoes such a strategy. "Many Chinese clothing and textile companies built factories overseas as a way to react to the trade protective measures from the EU and US," he says, predicting the moving-out trend will continue.

Closer ties with central Asia

But do not expect this to be a linear process. Some shifts in production may be within China. The government has pursued with significant fanfare a 'One Belt, One Road' strategy, which aims to establish close ties with central Asia, boosting exports to these neighbouring markets.

"Central Asian countries' economies rely on the energy trade, so their textile industry is underdeveloped. To seize this opportunity, Chinese clothing and textile companies should identify local consumers' likes and dislikes, promote trading communication and expand investment in advance," Wang suggests.

Indeed, textile and clothing exports from Xinjiang region, which is located in northwest China and the country's gateway to central Asia, soared 76.3% year-on-year in January to CNY3.64bn (US$559.4m), according to the Xinjiang regional government.

That said, the region is beset with economic problems, so it may not become a new hub for Chinese-owned production. "I went to Kyrgyzstan not long ago. I'd say I'm not impressed enough to make any investment plan at the moment. The local spending capability is low and the infrastructure is not established," Hengrun's Yu Hua says.

Online opportunities

He is also as yet unenthused about reorienting Chinese production towards the country's burgeoning online sales, despite clothing having long been a top web seller in China.

"[It's] because I think this is essentially a price war among a large number of online stores. It brings us little value. So we still want to focus on overseas markets and keep the quality and our service through reasonable profits," Yu explains.

But other companies are not so sure. Among them is Changshu-based Lan Zhi Garment, which used to serve clients in Japan and South Korea, but now mostly has Chinese customers.

"We learned a lot about design and fabrics during the days we were doing exports, so we have turned this knowledge to our advantage to serve Chinese clients, who are mostly online store owners," says a Lan Zhi salesperson.

She adds that soaring online clothing sales, especially women's clothing, are too attractive to be ignored. "Export is increasingly difficult. It now only accounts for about 10% in our sales," she says.

Click on the following links to read other reports in this management briefing:

Sourcing shifts – Multiple country choices require complex decisions

Sourcing shifts – The potential and pitfalls of local sourcing

Sourcing shifts – Manufacturing hubs vying for business