Apparel Sourcing Intelligence - Worldwide

2014’s Next Big Things that weren’t.3, Part 1: China’s supposedly falling competitiveness

2014’s commonest missed prediction was that China’s rising wages, by making its garments pricier, meant its factories would lose share of the world garment market. Neither forecast materialised. Understanding why is essential.

1. The Forecasts

2014 started with apparently authoritative surveys “proving” buyers were about to quit China. According to one vendor of information, in early 2014 “74% of buyer respondents were looking for sources outside of China.” A major consultancy claimed “72% of the sourcing executives we interviewed in our Apparel CPO Survey indicated that they are aiming to reduce their exposure in China.”

2. What happened

Those sourcing executives “aiming to reduce their exposure to China” missed.

Apparel imports from china since 2000

a. The Chinese exports that didn’t collapse

In the first ten months of 2014, apparel imports from China into the EU and US, measured in square metres of fabric, were 6.7% higher than they had been in the first ten months of 2013. That growth was slightly slower than growth in apparel imports overall, so China’s share of apparel imports (measured by volume)  into the EU and US fell marginally from 40.8% to 40.7%.

EU and US apparel imports from China as % of all apparel imports and as % of previous year's

EU and US apparel imports from China as % of all apparel imports and as % of previous year’s

That compares with an all-time record share of 43.4% reached in 2010 – and the volume of apparel imported in the first ten months of 2014 was 40% than in 2010. In 2011 that share fell to 41.6%: in 2012 to 40.9%. For the US alone the 42.3% share China achieved in the first ten months of 2013 is the same as its record share in 2010. It fell to 40.9% in 2011, and has been growing since.

b. Where’s this “fleeing China” talk coming from?

There are several main reasons the “collapsing Chinese sales” myth has become widespread:

i. Japan

China’s largest external customer for garments was, till 2007, Japan, which got about 93% of its garments from China. Japan’s government and garment importers decided about five years ago Japan was unhealthily over-dependent on Chinese clothes, and decided to develop other sources. Japan’s apparel imports from China have been falling every year since 2009.

That decision  wasn’t based on rising prices in China. The prime concern was, that with worsening tensions between the two countries, it simply wasn’t wise for Japan to get almost all its clothes from China forever

ii. Rising wages

It’s easy to think that China’s rising minimum wages must reduce its relative competitiveness. But this simply hasn’t happened. This graph shows Chinese apparel’s relative competitiveness:

Chinese apparel competitiveness

Prices from China are still lower than from other apparel sources, and in Japan and the US, prices from China have actually got more competitive over the past five years. That hasn’t happened in Europe, mainly because the Euro has devalued against the Chinese  Yuan since 2008. But China’s still a cheaper source for European apparel buyers than average.

iii. Businesses’ complaints

China’s garment makers are no happier than businessmen anywhere to see wages rise – so many (especially those from Hong Kong) love complaining about how all this indulgence to greedy workers is going to destroy China’s garment industry and they’re going to go somewhere else. They never do, really – but their complaints still getr printed as if they had some significance

 iv. Competitors’ wishful thinking

Some of those complaining business have gone as far as exploring setting up a factory elsewhere. None, to my knowledge, have closed their Chinese businesses: they’ve just started making (or more often: started talking about making) somewhere else.

Just about every time they do explore somewhere else, media in the country they’re exploring talk about a Chinese factory “relocating”, as if it had shut up shop in China and moved the machines to the Philippines, or Rwanda or wherever. And if the media don’t, the local trade association certainly does.

 v. Official propaganda

Chinese official propagandists are obsessed with growth, rather than the absolute level of sales, exports or economic might. Though growth in both 2013 and 2014 has been healthy, apparel exports to the West (including Japan), measured in square metres of fabric used, were only 0.6% up in 2014 on 2010 – after an 125% increase between 2000 and 2005 and a 35% increase between 2005 and 2010.  Exports only just ahead of their 2010 levels feels to many Chinese like real decline – and that’s pretty much what a great deal of public statements from official China say.

3. So what’s the reality?

Good question. Most of the arguments for the past few years have concentrated on pricing and economics. I think we need to understand more about why buyers use China (clue: it certainly isn’t because it’s the cheapest place), and how long China will be keep its competitive edge.

And they’re the subjects of our next few blogs.