AN OVERVIEW OF CHINA'S TEXTILE INDUSTRY      

By: David Armstrong

China has experienced a long and successful history, both in invention and in the manufacturing arts, but in examining the present textile manufacturing situation we are confronted with a number of paradoxes. While there are a vast number of highly successful organizations and individuals in China who have seized the available opportunities, there are many businesses either failing or underperforming and in this appraisal we seek to understand some of the influencing factors. 

The Textile Industry has played a highly important role in China, both historically and with the recent economic development and success of China. However, there are a number of areas of concern that require examination and remedy if the industry is to achieve ongoing prosperity. The Export Value of China's textile and garment industries exceeds USD$60 Billion P.A. in 2010 and equals approximately 7% of the total Chinese exports according to Chinese publications. By and large, China has attracted a reputation for cheap, poor quality goods, and the current uncoordinated approach encourages participation by both professional and unprofessional companies at every price level, but is often wasteful of China’s resources. The general and complex issue of improving the value and market price should be addressed to secure the future of China’s textile industry. We have described below several points that deserve further elaboration.

Structural Inheritance: 

Since the introduction of the privatization initiatives in China over a decade ago, the traditional structure of a fragmented textile industry has largely remained intact. The dominance of the trading companies in the customer/market interface has resulted in underdeveloped industrial companies which are compelled to compete for business as commission processors on the basis of price alone, which has resulted in many impoverished manufacturing companies. As a consequence these factories have little or no opportunity to create a surplus and build the capital of the business, purchase equipment to control environmental pollution or improve quality and productivity.

Furthermore, as a consequence of the poor economic performance of the textile industry, the Chinese banks will not easily lend to the textile sector. As these factories are unable to borrow or generate surplus funds, it appears that the present pace of capacity shrinkage in the textile industry will continue. We must also remember that the industry has existed for a long time with large underutilized capacity. Part of this adjustment will provide benefits to those companies that survive this process.

Indeed many manufacturing enterprises exist in fear of antagonizing the small number of trading companies they supply. As a consequence, they will often accept loss making deals as to not threaten the existing relationship. These practices are further exaggerated by cash accounting methods and lack of provisional accounting techniques. Therefore the real costs are not recognized in the short term and become detrimental to business survival.

It is also evident that many business owners and working shareholders have received little training or exposure to international best practice. The same can be said for any management or marketing training prior to the leveraged purchase of these formerly state owned enterprises. Furthermore, due to cultural and historical reasons, the questioning of existing practices is not encouraged. The lower levels of management tend to be more concerned with continued employment, and take great care not to provoke or cause loss of face to their superiors. 

There is little evidence of industry based organizations acting as industry spokespersons, or of any cross-industry co-operation. The violent movement from government controlled enterprises to a privatized “free for all” has produced winners, but also a great many losers as a consequence of the education and policy vacuum that accompanied this change. 

It is my opinion that we will continue to see enterprise failures in the textile sector of China. A relatively few companies are prepared to acquire the assets of these enterprises and given the low profitability in the industry, there are very few new entrants into the more capital intensive sectors of the textile industries. Given the limited portability of the textile sector, it is in the interest of the Chinese government to develop policy initiatives to secure the future of this industry.

Development of Management and Marketing Culture:

There is a general disconnect in the Chinese textile industry between manufacturing and customer requirements due to structural, cultural and language issues as well as customer insulation by the trading companies. This is a poor environment for new product creation and development. Most manufacturing enterprises have limited ability to address the market in their own right and have little understanding of external customer needs and how to address these needs. This is compounded by poor organizational skills in the areas of materials requirements planning, accurate production scheduling, language and cultural perspective, lack of exposure to western market requirements, and limited understanding of the demands and disciplines required of quality systems. 

All too often, an employee engages with customers with only an elementary education in English and is found to be unable to communicate to a satisfactorily level with the customers, buyers and controllers to achieve accurate outcomes. China has allowed freedom of access to external business people (HK, Taiwan, Japan, USA and Europe) and there have been many positive benefits that have resulted from this enlightened and open approach to economic stimulation. However, there are limited opportunities to share information in China across the industry and as “knowledge is power” - it is diligently guarded. 

Labor Stability and Skills :

It is now common for factories on the Eastern seaboard of China to lose 30% - 50% of their staff every Chinese New Year when the workers return to their home provinces. One can only imagine the resulting cost and effect that has on customers, as well as the need for recurring training effort. Although basic labor skills can be readily obtained, specialized textile skills are becoming increasingly difficult to obtain. As a result, now many textile companies are moving to northern and western provinces where labor is more easily obtainable and cheaper. However, lack of management and technical skills in these more remote provinces becomes an even more apparent issue.

Costs : 

Labor, energy, raw materials and compliance costs are all rising and the inflation level in China is greater than most western countries. We will continue to see fluctuations as the central government continues to adjust economy settings and resources. However, as there is increasing instability throughout the major textile producing economies, it would be reasonable to suggest that the Chinese government soon start to develop some policy initiatives to provide some direction and stability to the still valuable textile sector. 

Productivity : 

The definition of productivity and the techniques used to achieve productivity improvement are not well known in China. It was always easier to direct abundant and cheap labor at an increasing output. This is becoming increasingly difficult to do with the rising costs and limited availability of labor and other resources. As a result, the management of productivity improvement has become a more pressing need. However, as there is little tradition of seeking external assistance and cultural / historical impediments, there is a need for a policy catalyst to encourage intervention in this area.

Environment : 

The primary environmental concerns in China’s textile sector are obviously in the textile dying and finishing plants. Due to the reasons of under-capitalization, use of substandard low-cost materials and poor technology, this sector is still contracting. At the same time, it is coming under increased scrutiny by various organizations such as Greenpeace, Oecotex, etc. High profile brands that purchase from China who cannot be assured of an environmentally compliant supply chain run an increasing risk of being “named and shamed” with consequential risk to their commercial success.

China is reluctant to maintain the pace of coal fired power generation due to the resulting environmental load. This causes serious power outages that occur throughout the summer months and which result in power being unavailable on a regular and extended basis. This, in turn, has a negative consequential effect on delivery performance and resource utilization.

Competition :

While a substantial amount of making up activity has transferred out of China to lower labor cost countries, the transfer of textile capacity has been limited. This is due to the long lead-times required to achieve economic and commercial viability in low labor cost environments that have little previous textile tradition or skills. Presently, this mitigates in China’s favor, but may not always be the case. Therefore, it may be prudent for the Chinese government to commence examination of these factors.

Quality : 

It does not require a great deal of imagination to visualize the negative effect on product quality that is caused by a fragmented supply chain structure, along with the fact that no individual producer is likely to take effective responsibility for finished product quality. This along with the tendency to employ extreme efforts to utilize low cost components all results in poor quality. There are a large number of inspection services but it is well known that inspecting a product after it is manufactured will not ensure “built –in” quality and compromises are often required to ensure that delivery expectations are met. 

All the elements described above have an effect on product quality and obtainable price levels. In addition, other external factors that will also influence events are; the flattening of supply chains and the reduction of non value-adding elements, such as wholesalers and buying agencies as retailers that will increasingly seek to work directly with manufacturers to maintain margins. There will be the emergence of a “new protectionism’ in the form of demanded supply chain conformance. Factors such as environment, working conditions, product life, carbon footprint etc. will come into play and if these elements are not addressed it will cause business to redirect to suppliers that are capable of addressing these requirements.

Consumers in today’s economic times are seeking higher product quality, with purchases occurring less frequently. This is evident by higher-end retailers continuing to prosper, while the lower-end retailers are generally experiencing more difficulties. It is not possible to address all issues simultaneously and successfully in the short term, but the creation of an overall strategy supported by policy, education and investment incentives can create an environment that will generate progressive incremental improvement to the security and profitability of China’s textile industry.

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