Chinas Textile and Clothing Industry

Executive Summary

This study presents an analysis of Chinas textile and clothing industry. Textile and
clothing has been one of Chinas traditional industries since 1949 and has remained one
of the key industries in modern China. This industry has experienced dramatic reforms
and reached high growth for a long period of time. China is the worlds largest exporter
and producer of many products in this industry. However, there are a lot of problems
within the domestic industry. Chinese firms concentrate on the low-end product markets.
They are still very poor in management and marketing skills. Technologies in this
industry are not advanced. Profit margins are low. This report presents a comprehensive
analysis of this industry. It aims to help companies in this industry to understand the
history of their industry, to anticipate the possible changes in the future, and to formulate
good strategies for their development.










Correspondence to: Professor Larry D Qiu, Department of Economics, School of Business and
Management, Hong Kong University of Science and Technology, Kowloon, Hong Kong.
Email: larryqiu@ust.hk

Acknowledgement: I am extremely grateful for the help from Kelvin Wong and Huayang Yu, who
are graduate students in the Department of Economics, HKUST.

2005

Larry D. Qiu

HKUST

1
Table of Contents


1. Introduction

2. A Brief History before 1979

3. Performance of Major Textile and Clothing Product Categories

4. Analysis of the Structure of Chinas Textile and Clothing Industry

5. Concluding Remarks



References

2
1. Introduction

The textile and clothing industry has been a pillar industry in China for a long time.
Since the open door policy and economic reforms began in 1979, this industry has been a
driving force in Chinas exports. It is a major source of foreign exchange for the country
and thus plays an important role in Chinas foreign trade and economic development.
Over the past twenty years, the domestic textile and clothing industry itself has also
undergone tremendous changes. Most factories were located in several large coastal cities
during the 1980s and early 1990s, but now the interior regions have become homes for
many textile and clothing companies. A lot of factories are equipped with modern
technologies and produce a wide range of products. Some of them are even able to
produce high quality products for exports. China is already the largest exporter of textile
and clothing products in the world and accounts for one-tenth of the worlds exports in
this industry. Textile and clothing exports account for more than 20% of Chinas total
exports.

The textile and clothing industry is the largest manufacturing industry in China. It
has about 24,000 enterprises and employs about 8 million workers. The value of its total
output was 1,064 billion yuan in 2002. China is the largest clothing producer in the world
and has the largest production capacity for textile mill products consisting of cotton, man-
made fibers and silk.

With the improving living standard of the Chinese people, local demand for high-
quality textile and apparel goods continues to rise. This is another force for changes in
this industry. As the WTO has phased out the MFA (Multi Fiber Arrangement), which
had imposed quotas on developing countries textile and clothing exports to developed
countries markets, Chinese firms in this industry are facing very good opportunities to
expand their businesses. However, some protections still exist in international markets
and Chinese textiles and clothing exporters have to face competition from other
developing countries. It will be interesting to see how this industry will evolve in the
future.

This report uses the well-known Five-Force framework developed by Michael
Porter to analyze Chinas textile and clothing industry. In Section 2, we describe the brief
history of this industry. In Section 3, we discuss the past and current developments of
three major parts of the textile and garment industry.
1
In Section 4, we analyze the key
structural characteristics and competitive capabilities of domestic firms within this
industry. In Section 5, we offer some concluding remarks.

2. Brief History of Chinas Textile and Apparel Industry since 1949

2.1. Pre 1979 Conditions


1
In this report, we use the three words, clothing, garment and apparel, interchangeably.
3
Chinas modern textile and clothing industry began in the 1870s. Chen Qi Yuan
built up the first textile factory called J i Chang Long Reeling Mill in China. During the
following years until 1949, the textile industry developed slowly as the society was very
unstable and China had witnessed many wars over many years.

In 1949, the total output of the textile and clothing industry was 4 billion yuan,
which accounted for 38% of the Chinas industrial output value. There were 179,000
firms and almost all of them were private companies. About 745,000 workers were
employed in this industry and among them, 8,000 were technicians. This industry did not
use advanced technologies and management, resulting in very low productivity. Raw
materials and machinery were mainly imported. Most enterprises were concentrated
along the coastal trading region.

In order to increase domestic supply to satisfy internal demand, the new Chinese
government devoted a lot of resources and attention to the development of the domestic
textile and clothing industry in its first Five Year Plan (1950 1955). With government
support, many cotton and printing and dyeing plants were established and there were 9.8
million cotton spindles and 310,000 looms. Production increased significantly with about
1.3 million tons of cotton yarn and 6.3 billion meters of cotton fabric produced.

In the 1960s, China began to develop its synthetic fiber industry especially out of
polyvinyl alcohol and acrylic fibers. Four large plants including Shanghai Petrochemical
Plant, Liaoyang Petrochemical Fibers Plant, Tianjin Chemical Fibers Plant and Sichuan
Vinylon Plant were set up and their joint annual production capacity of chemical fabrics
was 650,000 tons. In addition, other textile products such as cotton, wool, and silk had
significantly increased in production. By 1978, China had 15.6 million cotton spindles
and 480,000 wool spindles. Production of cotton yarn reached 2.4 million tons, cotton
fabric 11 billion meters, wool fabric 89 million meters and wool knitting yarn 378,000
tons. These products were respectively 7.3 times, 6 times, 16 times and 21 times more
than their 1949 levels.

From 1949 to 1978, Chinas textile and clothing industry had transformed from an
old style into a modern industry. However, under the social planning economic system,
like all other industries in China, this industry could not develop into a competitive one,
especially on the world market.

2.2. Developments since 1979

China began its economic reforms and adopted its open door policy in 1979. The
government chose the textile and clothing industry as one of its domestic industries for
promotion. There were two reasons for this choice. First, China had basic infrastructure
and experience in this industry. Second, this industry is a labor-intensive one and it did
not require very advanced technologies. It exploited Chinas comparative advantage since
the country had a large population and labor force. Accordingly, the government
launched a policy called Six Priorities to promote the textile and clothing industry.
Under this policy, the industry enjoyed favorable treatments in six areas: supply of raw
4
materials, fuel and power; innovation and its transformation and infrastructure
construction; bank loans; foreign exchange, imported foreign advanced technology and
transportation. As a result, the industrys output rose rapidly. From 1979 to 1982, the
average annual growth rate of the total value of textile and clothing output was 13.2%. In
1983, China abandoned its coupon allocation system, which resulted in a discrete
expansion of both demand and supply of domestic textile and clothing products.

The sustainable growth of the textile industry results from the continuous economic
reforms, improving living standards, foreign trade expansion, and increases in demand in
both domestic and oversea markets. Today, China is the largest producer of total textile
and clothing products including cotton yarn, wool fiber, cotton fabric, silk fabric,
garments, chemical fibers and knitted goods. As shown in Table 2.1, except 1998 (the
year after the Asian financial crisis), all indicators, except total employment, of the textile
industry follow a strong growth trend. Total industrial value increased by about 7% per
annum on average between 1997 and 2002. The industry profits rose rapidly from 3.65
billion yuan in 1997, to 13.60 billion yuan in 1999 and then to 33.66 billion yuan in 2002.
On the contrary, the total number of people working in this industry decreased from
about 10.6 million in 1997 to 7.89 million in 2002. However, this reduced employment is
not a bad sign. It represents efficiency and productivity improvement due to deeper
economic reforms.

Table 2.1: Major Economic Indicators of China's Textile and Clothing Industry

Items Unit 1997 1998 1999 2000 2001 2002
Total Industrial Value Billion Yuan 763.61 764.67 768.47 889.45 932.64 1064.44
Industrial Added Value Billion Yuan 183.56 171.61 191.03 221.61 232.11 264.94
Sales Revenue from Textile
Products Billion Yuan 671.76 653.63 707.18 833.94 866.36 1002.43
Gross Profits Billion Yuan 27.40 24.28 39.87 60.18 56.16 65.13
Net Income Billion Yuan 3.65 0.86 13.60 29.53 25.83 33.66
Total Employment
Million
Persons 10.65 8.59 7.77 7.38 7.63 7.89
Remark: 1997 statistics consider data in towns and above only.
Statistics from 1998 to 2002 include SOEs and Non SOEs with revenue above 5 million yuan only
Source: Zhongguo Fang Zhi Gong Ye Nian Jian (China Textile Industry Yearbook), 2002/03

Major textile and clothing products grew even faster in 2002. In particular, Table
2.2 shows that the growth rate of synthetic and chemical fibers increased over 20% while
other products like various kinds of clothes, and silk products increased by more than
10%. Garments also had about an 8% growth in 2002. This boom is partly due to
Chinas entry to the WTO in that year.

Table 2.2. Output and Growth of Major Textile and Apparel Products in 2002

Product Name Unit Output Growth from 2001
Chemical Fiber 10,000 tons 991.20 20.11
Viscose Rayon 10,000 tons 68.21 12.08
Synthetic Fiber 10,000 tons 915.16 20.74
5
Polyester 10,000 tons 563.76 12.79
Yarn 10,000 tons 801.75 15.79
Cloth Billion metres 22.65 11.17
Pure Cotton Fabric Billion metres 11.62 12.01
Chemical Fabric Billion metres 5.22 18.33
Printed and Dyed Fabric Billion metres 21.09 18.34
Silk 10,000 tons 8.33 12.33
Silk Fabrics Billion metres 5.34 19.87
Print and Dye Silk Textile Billion metres 2.72 13.13
Garment Billion pieces 8.77 8.53
Weaving Garment Billion pieces 4.59 8.83
Knitting Garment Billion pieces 4.09 8.59
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03


2.3. Export Pattern

2.3.1. Export Performance and Product Mix

The open door policy and domestic economic reforms in China brought large
changes to its textile and clothing industry. Moreover, various export promotion policies
also helped to expand this industrys exports. As a result, the Chinese firms have been
able to gain a substantial market share in the worlds textile trade. In 1980, this industry
exported US$ 4.41 billion, accounting for only 4.6% of the world exports and ranking at
the ninth position in the world. In 1995, Chinas export of textiles and garments ranked
number 1 in the world and China has maintained its first position ever since. In 2002, its
textile and garments exports accounted for about 15.6 % of the worlds exports (Table
2.3).

Table 2.3. China's Textile and Garment Exports in the World

Year

World Exports
(Billion USD)
Chinas Exports
(Billion USD)
China's
Shares (%)
China's Rank

1980 95.5 4.41 4.6 9
1985 103.2 5.29 5.1 6
1990 218.9 13.85 6.3 4
1995 307.7 37.97 12.3 1
2000 356.4 52.08 14.6 1
2001 342.0 53.48 15.6 1
2002 353.0 63.54 18.0 1
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03

While the textile and clothing industry rapidly expanded domestically and
internationally, the export composition of the industrys products changed over the past
twenty years. In 1980, textile products dominated the industrys exports, accounting for
63% of the total exports, but declined continuously and dropped to 32% in 2001, as
shown in Table 2.4 and Fig 2.1. On the contrary, garments accounted for only one-third
6
of exports in the early 1980s but then rose rapidly and exceeded 50% in the 1990s.
Garments accounted for almost 70% of total exports in 2000 and 2001.

Table 2.4. Product Mix of China's Textile and Garment Exports (Billion USD)

Year Textile Products Garments Proportion (%)
Export Amount World Rank Export Amount World Rank Textile Garment
1980 2.76 8 1.65 7 62.6 37.4
1985 3.24 4 2.05 6 61.2 38.8
1990 7.22 4 6.85 3 52.1 47.9
1995 13.92 2 24.05 1 36.7 63.3
2000 16.06 1 36.02 1 30.8 69.2
2001 16.83 1 36.65 1 31.5 68.5
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03


Fig. 2.1. Product Mix of China's Textile and Garment Exports
0
10
20
30
40
50
60
70
80
1980 1985 1990 1995 2000 2001
Year
%
Textile
Garment

Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03


2.3.2. Export Characteristics

Based on the export statistics of the textile and clothing industry from 1998 to 2002,
we notice the following four patterns. First, as indicated by Table 2.5, the export growth
rate of textile products is 12.6%, which is higher than that for garment exports (8.2%).
But the proportion of garments still accounts for a larger proportion of the industrys
exports.

Table 2.5. The Export of Chinas Textiles and Garments between 1998 and 2002 (Billion USD)

7
1998 1999 2000 2001 2002 Average Annual
Growth (%)
Textile Products 12.80 13.00 16.06 16.74 20.58 12.61
Garment 30.06 30.06 36.02 36.54 41.19 8.2
Total 42.85 43.06 52.08 52.28 61.77 9.57
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03

Second, as shown in Table 2.6 and Figure 2.2, cotton-made products and chemical
fabric goods dominate the exports of textiles and clothing. These two groups of products
together contribute about 70% of total export of the industry.

Table 2.6: Composition of China's Textile and Garment Exports (%)









Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03

Fi g. 2.2. Composi ti on of Chi na's Texti l e and Apparel Exports
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
1998 1999 2000 2001 2002
Year
P
e
r
c
e
n
t

(
%
)
Silk-Made Product
Hair-Made Product
Cotton-Made Product
Linen-Made Product
Chemical Fabric Product
Other Product

Third, the processing trade still plays a very important role in Chinas textile and
clothing industry. Processing refers to using imported materials and exporting final
products. This type of export accounts for a large proportion of the textile and clothing
1998 1999 2000 2001 2002
Silk-Made Products 3.89 3.04 3.07 4.07 3.25
Wool-Made Products 7.01 7.12 6.97 6.56 5.66
Cotton-Made Products 31.21 31.25 31.01 32.67 35.02
Linen-Made Products 1.01 0.97 1.08 0.93 0.87
Chemical Fabric Products 34.38 36.03 35.41 34.30 34.18
Other Products 22.50 21.60 22.47 21.47 21.02
8
industry exports, but its share has declined continuously in recent years, from 47.2% in
1999 to 35.7% in 2002 (see Table 2.7).



Table 2.7. China's Textile and Apparel Processing Trade (Billion USD)

1999 2000 2001 2002
Total Textile and Apparel Export 43.06 52.08 53.28 61.77
Textile and Apparel Processing Export 20.33 22.43 22.18 22.05
Share of Processing Trade 47 43 42 36
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03

Finally, the major import and export markets concentrate on a few countries/regions,
which are J apan, Hong Kong, the United States, the European Union (EU) countries and
Korea, as shown in Table 2.8 and Fig. 2.3. These five markets account for about 70% of
the total textile and clothing exports in 2002.

Table 2.8. Major Importing Countries/regions of China's Textile and Apparel Products
(Billions USD)

Countries/Regions 1999 2000 2001 2002
J apan 10.29 13.28 13.72 13.12
Hong Kong 11.36 11.45 10.67 12.88
The U.S. 4.93 6.02 6.13 7.07
EU 4.15 4.99 5.19 6.42
Korea 1.65 2.26 2.65 3.40
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03

Fig. 2.3. China Textile and Apparel Exports in 2002
21%
21%
11%
10%
6%
31%
J apan
Hong Kong
The U.S.
EU
Korea
Other

9
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03


2.3.3. Trade Agreements

While data indicates a rapid increase in Chinas production and export of textile and
clothing products in the past 10 years, the development of exports in this industry has
been limited by a number of bilateral and multilateral agreements made between China
and some of its trading partners. Protectionism in clothing and textiles is almost as old as
the industry itself. But since 1974 it has been formalized and greatly expanded by a web
of curbs imposed by the US, Europe and other rich countries on imports from developing
country producers. The system, known as the Multifibre Arrangement (MFA), has not
succeeded in its aim of stemming a steady fall in employment in the industry in the west.
However, it has severely distorted trade and cost western consumers, as well as
developing economies, dearly.
A bilateral agreement was signed with the US in 1980 following strong requests
from the US to protect its textile industry from Chinese imports. The agreement set
quotas on imports of specific Chinese-made textile and clothing products. Later, this
agreement was renegotiated and augmented by four times. The latest modification was in
1997. The China-US Textile Agreement of 1997 set quotas on a wide range of Chinese-
made textile and cloth products including cotton, wool, man-made fibers, and other
vegetable fibers such as linen, for four years until the end of 2000. Nearly 100 product
categories were covered by this agreement.
2


China and the European Union signed a textile agreement based on the MFA
framework in 1998, which imposed quota restrictions on imports of Chinese products.
China and the EU also signed an agreement in 1995 to extend the quota restrictions to
silk products that the MFA does not cover. These two agreements were amended in 2000
to cover 70 Chinese-made product categories. They have been phased out together with
the MFA in J anuary 2005.

2.4. Structural Changes and Reform of the Textile and Clothing Industry

The economic reform changed the incentive system in the Chinese economy in
general and the textile and clothing industry in particular. This industry, like the whole
economy, had short supplies (demand was greater than supply) in the 1980s. As a result,
the industry output soared in the 1980s due to productivity improvements in the state-
owned enterprises (SOEs) and entry of many new privately owned enterprises. The
industry entered a different stage in the 1990s: saturated demand, redundant workers,
outdated machinery, and poor management. In particular, the textile segment lost money
from 1993 until 1998 (see Table 2.9). Most SOEs recorded heavy losses during this
period and they had to rely on financial support from the government to exist.

2
HKTDC (2001a).
10






Table 2.9. After-Tax Profits of China's Textile Industry between 1993 and 1998 (100 Million Yuan)

Year Total Textile Garments and
Other Fiber Products
Chemical
Fibers
Textile
Machinery
1993 6.83 -4.73 28.94 32.93 11.12
1994 100.44 33.97 32.55 37.85 4.07
1995 32.76 -41.30 24.39 46.03 3.65
1996 -16.97 -71.30 33.13 20.26 0.81
1997 36.54 -26.52 38.14 23.64 1.16
1998
1999
2000
2001
2002
8.63

43.24
14.46
65.72
-32.33

-10.16
-13.30
22.61
41.75

31.99
37.50
41.56
1.69

21.93
-11.28
-2.28
-2.48

1.07
1.42
3.92
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 1993 1999;
China Textile Industry Development Report 2000/2001, 2002/2003

.
To overcome this difficulty and strengthen this important pillar industry, the
government instituted new reforms in this industry. It laid off excess workers to lower
excess production capacity and eliminated outdated equipment. It shut down hundreds of
money-losing companies and allowed profitable firms to acquire unprofitable ones. By
the end of 1999, 1.16 million workers had been laid off and 9.6 million old-fashioned
cotton spindles were removed, resulting in a drop in production costs. For instance, about
300,000 outdated wool spindles were removed over the period between the end of 1998
and 2000. The number of spindles for wool spinning is about 3.6 million now.

The reform of Chinas textile industry made a significant progress and returns the
industry returned to profitability in 2002. In particular, the government expended a lot of
effort on state-owned enterprises in the textile industry. The number of SOEs and state-
controlled firms in textile industry was reduced from 2839 in 1997 to 2236 in 1999.

In the 21
st
new century, the government has shifted its reform focus from
downsizing to industry restructuring, technological enhancement, and R&D (research and
development) spending.

2.5. Performance of SOEs and non-SOEs

Before the reforms, SOEs dominated the textile industry, accounting for more than
80% of the whole textile and clothing industry. Since the reforms, many non-SOEs have
entered the industry and become the main force for the development of the domestic
11
textile and clothing industry. The output value of the SOEs accounted for 62% of the
textile industry total output in 1985. However, this share fell to 50% in 1990 and further
down to 23% in 1997 and eventually only 19% in 2002.

Table 2.10 shows the total after-tax profits of the SOEs in various categories of the
textile and clothing industry from 1996 to 1998. We can see that the performance of the
SOEs in this industry was very poor over this period. The total loss was about 10 billion
yuans in 1996 and 7 to 8 billion yuan in each of 1997 and 1998. Although the SOEs still
earned positive profits in chemical fabric and machinery, they had serious loss in both
textile products and garments, especially the textile products.

Table. 2.10. After-Tax Profits of China's SOE in Textile and Clothing Industry between 1996 and
1998 (100 Million Yuan)

Year Total Textile Sector Garments and
Other Fiber
Products
Chemical
Fibers
Textile
Machinery
1996 -105.81 -95.60 -0.91 24.30 7.40
1997 -72.69 -65.55 -1.38 23.61 8.18
1998 -78.61 -61.76 -1.41 10.72 3.69
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 1997/1999

The profit situation has changed in recent years. However, according to Table 2.11,
in 2001 and 2002, 30% of the SOEs in this industry still recorded losses, resulting in a
loss of 3 billion yuan in 2002 and a loss of 4 billion yuan in 2002. Similar amounts were
lost by the non-SOEs in this industry; however, only 20% of the non-SOEs in the textile
industry recorded losses.

Table 2.11. Profits and Losses of SOEs and Non-SOEs from 2000 to 2002

State Owned Enterprises
No of Enterprises No of Deficit Enterprises Share (%)
Loss Amount
(100 Million Yuan)
2001 3679 1139 30.96 33.47
2002 3153 1013 37.31 42.19

Non State Owned Enterprises
No of Enterprises No of Deficit Enterprises Share (%)
Loss Amount
(100 Million Yuan)
2001 15183 2752 18.13 36.33
2002 20877 3636 17.42 47.47

Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03

Although there were still a large number of non-SOEs in the textile and clothing
industry experiencing losses in recent years, the overall performance of the non-SOEs in
this industry was much more satisfactory than that of the SOEs in the 1990s. While the
SOEs experienced losses in most of the years during that period, profits of non-SOEs
12
reached on average 23.5% annual growth between 1990 and 1997. The successful result
and rapid expansion of non-SOEs is largely attributed to foreign direct investment (FDI).
In 1995, the number of foreign-funded enterprises in the textile and clothing industry was
10,690, accounting for 14% of the total number of firms in this industry. In 1997, the
output value of foreign funded enterprises was 185 billion yuan, accounting for 23% of
the total output value of the industry. These firms profits reached 2.5 billion yuan, about
68.4% of the total industrys profits. In 2002, non-SOEs earned 31 billion yuan,
contributing 92% of total profits of the whole industry.


3. Performance of Major Textile and Clothing Categories

According to Figure 3.1, we can see that cotton fabrics, garments and chemical
fabrics jointly accounted for 80% of total after-tax profits of the textile and clothing
industry in 2000. These product categories accounted for 29%, 28% and 23%,
respectively of these profits. Other products such as wool, silk and knitted products
accounted for about 5% each.

Fig. 3.1. Distribution of Total After-Tax Profits in the Textile and Clothing
Industry (2000)
28%
29%
23%
6%
5%
5%
3%1%
Garments
Cotton Fabrics
Chemical Fabrics
Wool Fabrics
Silk Fabrics
Knitted Fabrics
Textile Machinery
Bast Fiber
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2000/01

In terms of textile exports in 2002, cotton and chemical fiber products jointly
accounted for 70% of the textile industrys exports. Accordingly, in this section, we
analyze the performance of garments, cotton and chemical fabrics.
13
Fig. 3.2. Distribution of the Textile Industry's Exports in 2002
35%
34%
6%
3%
1%
21% Cotton
Chemical Fiber
Wool
Silk
Bast Fiber
Other

Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 2002/03

3.1. Clothing

Since the start of the economic reforms, China has experienced rapid economic
growth with about a 10% annul growth rate on average. Rising income and improving
living standards contribute to an increase in the demand for garments. Both the internal
and external markets have created good opportunities for the local clothing industry to
grow.

China has been the largest garment producer across the world since 1994. From 1985
to 2000, the industry grew by 15% per year on average (see annual production in Fig
3.3.). Mens wear, womens wear, shirts, jackets, down-filled garments and childrens
wear are the major products in this category. Due to rising living standards and rapid
urbanization, demand for new types of clothing have emerged, including denim wear,
casual wear and sports wear.
3



3
Wholesale and Retail Distribution of Garments in China (1996).

14

Fig. 3.3. China's Garment Output (Billion Pieces)
1.3
2.9
3.2
6.4
9.5
9.7 9.7
10.3
11.6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1985 1988 1990 1993 1996 1997 1998 1999 2000
Year

Source: Zhongguo Fang Zhi Gong Ye Nian Jian, (2000/01), Wholesale and Retail Distribution of
Garments in China (1996).

The development of clothing products has also led to a greater proportion of their
exports across the whole textile and clothing industry, for example, from 40% in 1980 to
about 70% in 2001. In 2002, the value of garments exported was US$41.3 billion, which
accounted for 70.8% of the industrys total exports. The export of garments can be
divided into two main categories: weaved garments and knitted garments. The growth
rate of exports of knitted garments is 10% higher than that of weaved garments. The top
markets for these Chinese exports are J apan, Hong Kong,
4
the United States, Korea,
Germany and Australia (Table 3.1). Their joint demand accounts for 70% of the exports
of Chinese-made weaved garments and 65% of the exports of knitted garments.

Table 3.1 Top Five Garment Importing Countries from China in 2002

Weaved Garments Knitted Garments
Ranking Country/Region Ranking Country/Region
1 J apan 1 J apan
2 Hong Kong 2 Hong Kong
3 The U.S. 3 The U.S.
4 Korea 4 Korea
5 Germany 5 Australia
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03


4
A very large proportion of Chinas exports to Hong Kong are eventually re-exported to other countries.
15
The major export enterprises are mainly located in coastal regions, including
Guangdong, J iansu, Shanghai, Zhejiang and Shangdong. Table 3.2 presents a picture of
their contributions to the countrys total exports.

Table 3.1.2 Garment Exports from Five Provinces in 2002

Weaved
Garments
($ billion)
Share of the
country (%)
Knitted
Garments
($ billion)
Share of the
country (%)
Guangdong 4.722 22.9 4.086 25.6
J iangsu 3.572 17.4 2.877 18.0
Shanghai 3.377 16.4 2.208 13.8
Zhejiang 3.115 15.1 1.932 12.1
Shandong 1.143 5.6 1.355 8.5
source: China Textile Industry Development Report 2002/2003

3.2. Cotton Textiles

Cotton textiles was the largest part of Chinas textile and clothing industry before the
1980s. In the 1970s, Chinas cotton yarn and fabrics even took the first position in the
world. Table 3.3 indicates that China contributed over 20% of the worlds cotton
production in the past two decades. In particular, Chinas production of yarn and cotton
fabrics increased from 330,000 tons and 1.9 billion meters in 1985 to 8,500,000 tons and
32.2 billion meters in 2002, with a 23-fold increase and a 15-fold increase, respectively.
Chinas yarn and cotton fabric production is the largest in the world. Figure 3.4 presents
the cotton yarn production growth trend.

Table 3.3. Cotton Production by China and Chinas Share in the World Market (10,000 tons)
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03

Year Global China Share (%)
1980 1425 271 19
1985 1754 415 24
1990 1871 443 27
1995 2028 477 27
1996 1948 420 22
1997 1965 460 23
1998 1980 450 23
1999 1916 383 20
2000 1904 432 23
2001 2071 480 24
16
Fig. 3.4. China's Cotton Yarn Production (10000 tons)
0
100
200
300
400
500
600
700
800
900
1977 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03

In the mid-1980s, world textile production shifted to developing countries to exploit
their cheap labor. China took this opportunity to develop this industry and expand its
exports. As a result, Chinas domestic production and exports of cotton products
increased sharply. In 1990, cotton textiles and cotton garments generated a US$6.2
billion trade surplus, accounting for 42% of the total textile and garment export surplus,
3.5 times more than in the pre-reform level. In 2002, domestic cotton textile and cotton
garment production was 1.8 times more than that in 1990.

As discussed before, this industry encountered many problems in the 1990s such as
overcapacity, redundant laborers and inefficient management, leading to losses in several
years since 1993. Since 1997, the government has deepened its reforms of this industry,
for example, by removing 10 million outdated spindles and laying off 1.2 million workers
during 1997-99. In 1999, the cotton textile category of the industry returned to making
profits. In 2002, this categorys industrial value reached 208 billion yuan, accounting for
19.5% of the whole textile and clothing industrial value, and it generated 5.34 billion
yuan in after-tax profits. It employs about 2 million workers.

Major cotton textile products consist of yarn and cotton fabric products. Export of
yarn products brought US$1.07 billion and export of cotton fabric products US$3.715
billion to the country in 2002, which accounted for 12% and 44.4% of total cotton textile
industry, respectively. Similar to clothing exports, Guangdong is the largest exporter of
cotton textile products, followed by Zhejiang, Shandong Shanghai and J iangsu.

However, Chinas competitive advantages in cotton textile production have been
diminishing in recent years. Cotton is the major raw material required for production and
China needs to import cotton from overseas markets since the domestic supply is not
sufficient. Hence, the profitability of cotton textiles is largely affected by the worlds
17
cotton production and prices. Besides, other developing countries such as Vietnam,
Indonesia and Pakistan are able to produce even cheaper but high-quality cotton yarn.
They are strong competitors of the Chinese producers.


3.3. Chemical Fibers

Table 3.4 shows that the average annual growth rate of Chinas domestic chemical
fiber output was more than 10% between 1981 and 2000. Chinas chemical fiber
production has been ranked first in the world since 1998, when it exceeded the U.S. In
2001 and 2002, production increased by 20% each year. Furthermore, the after-tax profits
in these two years were 1.8 billion yuan and 2.9 billion yuan, respectively, accounting for
13% and 16% of the whole textile and clothing industrys after-tax profits.

Table 3.4. China's Chemical Fabric Production (10000 Tons)

Year Output Average Growth Rate (%)
1981 45.0 -
1986 94.8 16.1
1991 164.8 11.7
1995 320.2 14.2
1996 375.8 17.4
1997 460.9 26.4
1998 510.7 10.7
1999 600.4 17.6
2000 694.2 16.3
2001 825.2 20.2
2002 991.2 20.1
Source: Zhongguo Fang Zhi Gong Ye Nian Jian, 1999/00, 2002/03

Chemical fabrics consist of viscose rayon and polyester, which includes four minor
categories: nylon, polyvinyl alcohol fiber, acrylic and vinylon. Table 3.5 presents
production statistics on the different kinds of chemical fibers from 1999 to 2002.

Table 3.5. Production of Different Kinds of Chemical Fibers (10000 Tons)

1999 2000 2001 2002
Viscose Rayon 48.10 56.42 60.86 68.21
Synthetic Fiber 540.84 629.52 757.96 915.16
Polyester 436.73 510.18 628.82 772.16
Nylon 31.71 36.79 42.05 47.49
Polyvinyl Alcohol Fiber 41.08 47.50 53.37 59.40
Acrylic 24.84 28.51 28.09 29.92
Vinylon - - 3.10 3.25
Total 596.89 694.16 825.25 991.20
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2000/01, 2002/03

18
From 1996 to 2000, the worlds chemical fiber production rose from 21.98 million
tons to 28 million tons, with an increase of 1.2 million tons per year. In the same period,
Chinas chemical fiber output grew from 3.34 million tons to 6.94 tons, with an increase
of 0.7 million tons per year. China contributed to the growth by a considerable amount
(over 60%). While European countries and the U.S. either restructured their own
industries or retreated from this market, Asian countries, especially China, have become
the major production base for chemical fibers.

Rapid expansion of domestic chemical fiber production is largely stimulated by
domestic demand, as indicated by the rapid increase in the share of chemical fiber in total
fiber consumption, from 35% to 56%. FDI, encouraged by Chinas open door policy,
also helped in the development of this industry. FDI brought in new and advanced
technologies to China. For instance, by the end of the 1990s, Chinas technology level in
polyester filament fiber had reached the international level. Huge foreign investment
inflows into the domestic chemical fiber industry not only upgraded the existing
production and capital structure, but also brought in new technologies and management
experience. This resulted in continuous high growth rates of about 19%, in Chinas
chemical fiber production over the 1996-2000 period.


4. Analysis of the Structure of Chinas Textile and Clothing Industry

In Sections 2 and 3, we discussed the developments and current performance of the
local textile and clothing industry. In this section, we present a detailed analysis of the
main structural features of Chinas domestic textile and clothing industry following the
Five Competitive Forces approach. The five competitive forces are (1) entry, (2) threat
of substitution, (3) bargaining power of buyers, (4) bargaining power of suppliers and (5)
rivalry among current competitors. These five forces jointly determine the intensity of
competition within an industry and in turn help individual firms to construct their
competition strategies. Since China joined WTO in 2001, domestic textile and clothing
enterprises have faced increasing competition from overseas and good opportunities in
the foreign markets. This section will also cover the impact of WTO on the business
environment of the Chinese firms in this industry.

4.1. Entry

New companies entering an industry will bring new supply, new ideas, and seize
market share as well as profits from existing companies. New competition from the
entrants usually reduces existing companies profits. If able, incumbents will try to deter
any potential entry. The threat of entry affects industry profitability.

There are various factors that affect entry to the textile and clothing industry: capital,
technology, policies and the business environment. Basically, the whole textile and
clothing industry is labor intensive in the sense that the required capital investment is not
so large compared with many other industries and its production does not require very
advanced technology. In this regard, the financial and technological barriers to entry are
19
not high. For example, it is not difficult for a new company to set up a textile mill. It is
even easier to build a factory to make clothes. At the minimum, you only need some
sewing machines and workers with certain skills.

However, textile production and garment production have become more advanced
these days. Garment production remains very labor intensive. Some textile production
has become more technology and capital intensive, e.g., chemical fiber, while some
others remain quite resources intensive, e.g., cotton yarn. Thus, it has become
increasingly more difficult to enter this industry than in the past. Moreover, competition
from developed countries is not diminishing. Firms in developed countries such as J apan
continue to innovate technologies for textile production, which more than offsets the low
labor cost advantage enjoyed by Chinese firms. Furthermore, there exists excess capacity
for textile production in China due to local governments policies to encourage local
production and keen competition among existing manufacturers to expand their
production scales. Therefore, although entering the textile market is not hard, the
question is whether it is profitable to enter. The above discussion and the discussion in
Section 3 seem to indicate that there are already excessive incumbents in this industry.

Policy is another barrier to entry to this industry. Export quota systems were
established in the past due to bilateral and multilateral agreements. Although all of them
have come to an end in theory, some are still in effect in practice for at least a few more
years. When export quotas are used, they are used according to an allocation system. In
China, export quotas are distributed by the Ministry of Commerce (called MOFTEC in
the past). Those who have export rights will have priority in receiving quotas.
Companies that receive basic quotas in a year would obtain the same quotas in the
following year unless their export performance is not satisfactory. This is the old
allocation method, which gives strong protection to existing export enterprises and limits
the export ability of new companies. The allocation system has been amended several
times since 1994. For example, auctions have been used for 27 textile products. Although
the export quota system does not serve as a barrier to entry for firms that want to sell their
products only to the domestic market, without exports these firms competitiveness and
profitability will be lower. Also, even though most of the quota agreements have been
terminated, their effects on Chinese firms export abilities still exist and are lasting. It is
likely that some restrictions for exporting textile and clothing products to the US may be
still imposed even after 2005 due to the pressure from the US and the China-US
agreement, which allows a certain degree of protection until 2009. Even without any
restriction, new entrants do not have experience with and business networks in the
overseas markets and therefore are inferior to the incumbents in market competition.
Experience can thus serve as an entry barrier.

In summary, the barriers to entering the textile and clothing industry are not high.
However, potential investors should consider seriously whether their entry is profitable
given the fact that the industry is very mature and incumbent companies enjoy certain
degrees of advantages. Table 4.1 shows the expansion of the industry in terms of total
number of firms, including both exits and entry.

Tabel 4.1. Total Number of Firms in the Industry over Time
20

Year 1995 1996 1997 1998 1999 2000 2001 2002
# 53600 51200 45600 19300 18900 18862 21412 23600
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2000/01, 2002/03

A final point about entry is about economies of scale and location of entry. There
are two types of economies of scale: internal and external economies of scale. Internal
economies of scale refer to the case of decreases in average cost of production when a
firms own production level increases. Since the fixed investment is not too large for a
plant in the textile and clothing industry, internal economies of scale are not very
significant. External economies of scale refer to the case of decreases in the average cost
when the whole industrys production level increases. One of the important features of
this industry, especially clothing products, is that firms need to adapt their production to
the market demand quickly. Therefore it is very important for a firm to be located in an
area where information can be obtained easily and quickly. This is similar to external
economies of scale. Companies in the textile and clothing industry have advantages by
locating themselves near each other and forming production clusters. In return, the
clusters lead to formation of efficient information networks and a complete business
environment, which attracts many potential buyers and suppliers to the area.

External economies of scale are strong in Chinas textile and apparel industry.
Firms are concentrated in Guangdong, Shanghai, J iangsu, Zhejiang, Shandong, Shandong
and Fuijian. The joint industrial value produced by these regions made up to 67% of total
industrial value of China in 2001 in this industry. For clothing, 95 out of the top 118
apparel enterprises are located within these regions. Tables 4.2a and 4.2b present data on
the top textile and clothing regions in China.





Table 4.2a. The Top Five Textile and Clothing Export Regions in China, 1998 and 2001,
(Billion US$)

Guangdong Zhejiang J iangsu Shanghai Shandong
Export Rank Export Rank Export Rank Export Rank Export Rank
1998 13.96 1 4.09 4 5.07 3 5.11 2 3.1 5
1999 12.85 1 4.81 4 5.68 2 5.66 3 3.5 5
2000 13.24 1 7.31 3 7.49 2 7.07 4 4.71 5
2001 12.12 1 8.71 2 8.15 3 7.25 4 5.16 5
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03

Table 4.2b: Distribution of the Top Five Regions of China's Textile and Clothing Exports (%)

Guangdong Zhejiang J iangsu Shanghai Shandong
Total
1998 32.58 9.54 11.83 11.93 7.23
73.11
1999 29.24 11.17 13.19 13.14 8.13
74.87
21
2000 25.42 14.04 14.38 13.58 9.04
76.46
2001 22.75 16.35 15.3 13.61 9.68
77.69
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03

Textile and clothing production and development in the western region of China
including Sichuan, Shanxi, Yunnan, Guizhou, the Guangxi, Tibet and Xinjiang is lagging
far behind production in the eastern coastal region. The western region contributed only
10% of the countrys total textile and clothing output in 2000. Nevertheless, it is
important to realize that the central government has carried out many go west projects,
including projects in the textile and clothing industry. The western region suffers from
the problem of no external economies of scale, but they have rich source of raw materials,
such as high-quality cotton, and cheap labor. The government push is both necessary and
justifiable for development of the textile and clothing industry in the western region.

4.2. Rivalry among Existing Competitors

China is a large exporter of textile and apparel products. It means that supply is far
greater than domestic demand. This situation leads to fierce competition among the
domestic textile and apparel firms. Due to low entry barriers, excessive entry has added
more competition to the market. Price competition and price wars are often observed.
Companies in this industry are fighting for materials and customers. As shown in Table
2.11, there were more than 24,000 firms, both SOEs and non-SOEs, in the textile and
clothing industry in 2002. Competition leads to more than 20% of the firms losing money.

However, due to changes in the demand structure and various degrees of
technological advancements, different categories of this industrys products exhibit
different degrees of competition.

Chemical fibers. In 2001, China produced 8.415 million tons of chemical fibers,
with 18.4% growth in production over the previous year. China was the biggest man-
made fiber producer in 2001 and its output contributed 25% of the world production, two
times more than the output of the second largest producer, the U.S. In 2002, Chinas
output reached 9.91 million tons with 20.11% growth. The average annual growth rate of
chemical fabric output has been over 10% since 1978. But demand is not able to catch up
with the supply, leading to an overcapacity problem. Other products such as yarns are
also in overproduction.

In particular, polyester fiber is the driving force in the increase in chemical fiber
output. Private enterprises and rural enterprises have joined a reckless race to increase
production capacity in the past few years, which inevitably unbalances the supply and
demand balance. One problem associated with this product category is the existence of
too many small-scale factories. In the whole country, there are only 10 polyester
producers whose output each exceeds 100,000 tons per year. Several hundred firms with
a capacity of around 10,000 tons are competing severely with each other. The output of
polyester fiber in 2005 was expected to be about 7,500,000 tons. The total number of
22
firms in chemical fiber industry is 896 in 2001 and 921 in 2002. This part of the industry
is expected to undergo selection and restructuring.

Increasing competition has led to a fall in prices. Between October 2000 and the
end of 2001, prices for most of chemical fiber products fell by an amount ranging from
20% to 38%. In 2002, the prices of most chemical fabrics rose a bit, but this was the
result of increasing raw material costs.

Large companies in this industry try to avoid head-to-head price competition.
Yizheng Chimerical Fiber Co (YCF) (), which is the largest polyester producer
in China, has developed 18 new products, improved the quality of its products to build up
its brand name, and differentiated its products from those of its competitors. In 2001 YCF
has developed spun-dyed yarn for seats of Passat jointly with Shanghai Volkswagen.
YCF is not marketing fabrics, but owns the textile development center equipped with
looms and dyeing & finishing facilities and places special emphasis on the development
of yarn suitable for composite woven fabrics.

Cotton fabrics. In the cotton fabric category, firms performance in terms of
output and sales is more satisfactory than in chemical fabrics in recent years. This part of
industrial profits was increased by 60.58% from 2001 to 2002. The profit in cotton
fabrics industry was 1,136.15 million yuan in 2001 and 1,969.24 million yuan in 2002.
This is mainly due to increases in both internal as well as external demand for cotton
fabric products. The export revenue of cotton fabrics in 2002 is 3.715 billion dollars and
accounts for 44.41% of all the cotton textile exports.

Garments. Fierce competition also occurs in the garment market. There were 7797
firms producing clothing in 2002. Many unpredictable factors, such as the weather, can
affect the demand seriously. Demand is very sensitive. For example, in 2003, competition
in winter wear was especially keen among department stores in Shanghai as the demand
was weak due to mild winter weather that year. The sales discounts, although increasing
purchasing incentives, reduced profits. Winter clothes are expensive and hence their sales
revenue is important to apparel enterprises. Poor sales of winter wear greatly reduced the
profit of department stores and apparel producers.

In order to outperform other competitors, Ningbo Youngor Co Ltd. ()
the top apparel firm in sales ranking in many years, reorganized its department stores, a
network of 370 direct management stores and 500 franchised retail stores, to increase its
efficiency. By connecting the head office on-line with these direct-management stores
and branches in the countryside, the company plans to establish a POS (point-of-sales)
information management system. In addition, it has developed its own brand and has
tried to expand its overseas markets after the removal of quotas. Shanshan Group Co Ltd.
(), ranked third in clothing sales in China (No.2 in sales revenue in 2002: Matsuoka
) has formed a joint venture with an Italian company called Forall to produce and
promote a new brand mens suits. The aim of Shanshan is to open new markets. As the
average price of mens suits made of Italian fibers are 3000 to 6500 yuan while the price
of a usual Shanshan product is about 1000 to 1500 yuan, the suits produced by the joint
23
venture are used to open the medium and high grade market and attract new customer
groups. The company has also extended its product line from mens suits, womens wear
and casual wear to ties, shoes and cuff links.
5



Silk. Competition among the Chinese firms is not confined to the domestic market.
They also compete in the international market fiercely. We can find this problem in silk
products, for example. Eighty percent of Chinas silk production is exported, which
accounts for 60% to 80% of the worlds silk exports. Competition leads to price
decreases. For example, the price of Chinese-made silk ties is only worth 1% of the price
of similar products made in Italy. Hence, although export-quantity silk products increased
in 2002, the export value declined due to a 20% decrease in prices. Severe price
competition among local producers is due to over production capacity. The price of silk
was very high in the past, which attracted many new companies to enter the industry.
However, most of these firms are small to medium in size without the ability to develop
new products and create new designs. They expand their production without enhancing
quality and updating their technologies. As a result, price competition is inevitable. By
2005, the export quota on silk products will be removed. But without changing the
vicious competition situation, liberalizing the silk export market will make the
competition even worse, causing even lower silk prices in the world market and hurting
the profits of domestic silk producers. This is a serious problem faced by the Chinese
textile and clothing industry in general, and the silk producers in particular.

In summary, domestic competition is expected to intensify. Firms can no longer
rely on price competition to survive. Product quality improvement, business
diversification, product differentiation, and improvement in marketing and management
will become more and more important. Only those who have competitive advantages will
survive while a majority of inefficient and small-scale companies will close under fierce
competition. Chinese firms will meet competition from other developing as well as
developed countries not only in the international markets, but also in the domestic market.
China could also lose its comparative advantage in cheap labor. Tables 4.3 and 4.4 list the
top textile and apparel firms and their performance.

Table 4.3. Top Textile Firms

Top 5 Textile Firms
Rank by Sales Revenue Rank by Exports
1
CWGC Guangdong Silk
2
Weiqiao CWGC
3
YCF Younger
4
Younger Fuan
5
Wanjie Weiqiao
Source: China Textile Industry Association Statistics Center

Table 4.4. Top Apparel Firms


5
One can look at the example of Li Ning sports wear series (http://english.li-ning.com.cn/about_ln.asp).

24
Top 5 Apparel Firms in 2003 Rank by Sales Revenue Rank by Total Profits
1 Younger Younger
2 Hongdou Hailan
3 Hailan Hongdou
4 Shanshan Matsuoka
5 Matsuoka Hemboug
Source: China Garment Association


4.3. Substitutes: Features of Consumption and Sales

As textile and apparel products are necessities to every person, there are no close
substitutes for them. Thus, in this subsection we will focus on substitutes between
different categories of the textile and clothing products. That is, we talk about intra-
industry substitution, rather than inter-industry substitution.

4.3.1. Consumption Strata
As China economy develops quickly and peoples life goes into the xiaokang (well-
to-do) stage, the demand for clothes increases greatly and the consumption structure has
been changed much. The distinction of demand among people becomes more and more
clear; instead of mainly medium- and low-end demand in the past, now the demand is
mainly in medium-end consumption and the high-end demand also has some market
share. Some consumers have obviously lifted their demand level and the consumption
gap continues to be larger.
Famous-brand apparel consumption stratum: this class consists of employees at
foreign enterprises, well-known stars in the entertainment circle, entrepreneurs, high-rank
officials in foreign affair-related institutes and people in financial industry, etc. They
constitute about 0.61% of the total population, but their consumption share is about 3%.
Medium-end apparel consumption stratum: this class mainly consists of working
class people in cities and richer peasants in countryside. They constitute about 60% of
urban population and 20% of the countrys population.
Low-end apparel consumption stratum: mainly citizens with low-level income or
out of work in cities and towns. They constitute about 25% of urban population and about
60% of the countrys population.
As shown by some surveys, about 29% of the apparel consumers (especially urban
middle-aged or youngsters with medium-level income or above) like pure cotton products,
about 15% prefers fur clothes; the low-end clothes are mainly made of chemical fibers.
4.3.2. Sales
25
In 2001 the main big department stores in China sold 141 million clothes. The sales
increased by 19.4% compared with 2000. The breakdown of various categories is shown
in Table 4.5.

Table 4.5. Sales of Garments in Main Big Department Stores in China in 2001
Item Unit Sales Increase%
Total sales revenue 10,000 yuan 13637764 15.3
Retail revenue 10,000 yuan 11298646 18.1
Weaved Products 10,000 yuan 107360 24.6
Knitted Products 10,000 yuan 410539 10.9
Garments 10,000 yuan 2677047 29.9
Apparels as a whole 100 pieces 1411289 19.4
Coat for men 100 pieces 38833 27.5
Shirt for men 100 pieces 84256 7.8
T-shirt 100 pieces 52428 19.9
Apparel for women 100 pieces 327663 35.5
Garment for children 100 pieces 105746 13.9
J eans wear 100 pieces 22500 1.2
J acket 100 pieces 30915 25.8
Cold-resistant apparel 100 pieces 50601 70.5
Leather apparel 100 pieces 5165 3.3
Fur coat 33817 38.5
Weaved underwear 100 pieces 354074 23.3
Knitted sweater 100 pieces 151133 13.9
Source: ChinaInfoBank (China National Information Center)
From a survey by China Commerce Information Center, the main big department
stores in China sold 194 million clothes in 2002. The sales increased by 21.2% compared
with 2001 (see Table 4.6).
Table 4.6. Sales of Apparels in Main Big Department Stores in China in 2002
Item Unit Sales in 2002 Increase%
Apparels as a whole 100 pieces 1,941,417 21.2
Coat for men 100 pieces 56,339 13.5
Shirt for men 100 pieces 102,926 4.2
T-shirt 100 pieces 74,476 23.7
Apparel for women 100 pieces 506,000 34.7
Garment for children 100 pieces 151,143 26.8
J eans wear 100 pieces 26,545 4.4
J acket 100 pieces 37,681 13.1
Cold-resistant apparel 100 pieces 79,151 38
Leather apparel 100 pieces 4,664 -21.9
Fur coat 30,196 -9.7
26
Weaved underwear 100 pieces 409,831 9.8
Knitted sweater 100 pieces 165,567 7.3
Source: China Retail Trade White Book

4.3.3. Sales Channels
In Chinese Mainland the main retailing channel for medium-end and high-end
garments is still department stores, especially in middle- and small-sized cities and in-
land regions. But in some more commercially-developed cities, including the capitals of
provinces, garment franchised stores and brand franchised stores developed very quickly
in these years. In addition, comprehensive supermarkets and storage emporium such as
J USCO, Carrefour, Wal-mart have also become the main sales channels of medium-end
garments.
Now the main distribution channels in Mainland are:
Big department stores: mainly sell medium- and high-end and well-known brand
apparels. The customers constitute about 30% of all consumers.
Ordinary emporium apparel stores: mainly sell medium- and low-end garments
and the customers are mainly working class consumers. The Ordinary emporiums mostly
utilize the sales means of counter sale or self-select sale.
Brand franchised stores: mostly concentrate in cities, and mainly sell
internationally-well-known apparel brands.
Storage emporiums, supermarkets and chain stores: garments are sold by the
means of open-shelf. The price is relatively cheap and the garments are mainly medium-
and low-end. The goods are mostly non-fashion style products, e.g., underwear, shirts and
jeans, etc.
Wholesale market: garment wholesale markets are marketplaces exclusively
selling garments by apparel factories and dealers. The biggest share of garment sales
revenue in China is covered by all kinds of individual garment retail stores, which are
supported by big wholesale markets. Such wholesale markets also support the vast
market in the countryside and low-end market in some cities.

4.4. Bargaining Power of Buyers

4.4.1. Demand

Let us first look at the demand for textile and apparel products in the domestic
market.
27

Despite its continuous high economic growth, Chinas per capita GDP is still very
low, as shown in Table 4.4. Consequently, fiber consumption in China was only 4.6 kg
per capita in 1995, which is slightly higher than the average level of the developing
countries 4.2 kg, but it is far below the average level of the developed countries 19 kg.
Chinas domestic textile and apparel market is anticipated to have sustainable growth due
to the following reasons.

Income. The domestic demand for apparel in China has achieved moderate growth
with an average of 3.03% per year in urban areas between 1995 and 2002. It is estimated
for China that a 1% increase in per capita GDP will raise general consumption by 0.8%
and the consumption of garments by 0.4%. From Table 4.4, we can see that associated
with 7.75% growth in per capita GDP is a 3.03% increase in cloth consumption. As the
economic growth rates in China is believed to be sustained at about 7% to 8% per year in
the near future, accordingly the apparel market should expand by 2% to 3% per year.
This means that the domestic apparel market will bring at least 20 billion yuan additional
revenue to the textile and clothing industry every year.

















Table 4.7. GDP and Consumption of Clothing


Per Capita
GDP (yuan)
Urban Households Per
Capita Expenditure
on Clothing (yuan)
Share (%)
of
Consumptive
Expenditure
Rural Households
Per Capita
Expenditure
on Clothing
Share (%)
of
Consumptive
Expenditure
1990 4854 170.90 13.36 - 7.77
1995 4854 479.50 13.55 89.79 6.85
1996 5576 527.95 - 113.77 -
1997 6054 520.91 - 109.4 -
1998 6038 480.86 - 98.06 -
1999 6551 482.39 - 92.04 -
2000 7086 500.46 10.01 95.18 5.75
28
2001 7651 533.66 10.05 - 5.67
2002 8184 590.88 9.8 104.54 5.72
Average Growth
Rate between
95 and 02
7.75%

3.03%

-

2.20%

-

Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03

In terms of consumption, Chinas per capita spending on garments, 590.88 yuan in
year 2002, is low by world standards. With a population of 1.3 billion and annual
production of 8.8 billion pieces of apparel, Chinas per capita garment production of
about 7 pieces is also well below that of developed countries. At present, the domestic
market for low-end clothing is quite saturated while the markets for medium and high-
end clothing remain strong and have room to expand as rising living standards improve.
Experience from major cities, such as Beijing, Shanghai and Guangzhou, shows that
when residents per capita income increases, demand for high-end garments expands
rapidly.

Urbanization. At present, urban households account for 36% of the total population
in China and this proportion is expected to reach 50% in 2010. From Table 4.4, we can
see that the per capita consumption of clothing in rural households in 2002 was 104.5
yuan, which is only 17.6% of the urban consumption level. Urbanization will inevitably
increase total demand for clothing.

Consumer Preferences. Large coastal cities have the greatest potential among all
regions in China to develop high-end garment markets. In the past, many residents have
bought clothes only for basic functional use such as keeping warm. With an increase in
purchasing power, local residents buy clothes for fashion, beauty and symbols of wealth.
For men, suits and belts made by famous brands are symbols for sought-after status.
Every year, major cities hold fashion shows and large apparel firms spend a lot of money
on promotion and advertisement, leading to rise in consumers brand consciousness.
Chinese enterprises have already recognized the importance of brand recognition and
loyalty and spend more and more resources on brand building. According to a 2002
survey conducted by the Hong Kong Trade and Development Council on six major cities
including Hangzhou, Nanjing and Ningbo in eastern China, and Tianjin, Shenyang and
Harbin in northern China, about 40% of interviewees said that they would visit clothing
stores at least once a week. The survey also indicates that local brands are increasingly
popular in Chinas clothing market. Examples include Youngor, ShanShan, Kaiser and
Romon for office wear and F4, Etam and Lining for casual wear. All these reflect that the
local consumer market for clothing has become more mature over time.

4.4.2. Buyers Bargaining Power

The whole industry consists of both an upstream part, i.e., textiles, and a
downstream part, i.e., clothing. Therefore, it is difficult to define one consumer group. In
fact, there are two distinct consumer groups. With regard to textile products,
manufacturers of clothing products are the buyers. With regard to clothing products,
29
individual people are the buyers. We must discuss these buyers bargaining power
separately.
Clothing manufacturers as the buyers of textile products. The number of
clothing firms is 7797 in 2002. The largest firms have been listed above. As is shown in
the lists, some of the largest clothing firms are at the same time the largest textile firms,
e.g. Younger.
However, overcapacity production problems persist in several local textile product
categories such as silk, cotton, chemical fibers. This gives bargaining power to the
garment producers who use these materials for their products. As shown in Table 2.9, the
textile industry has experienced many years of losses, indicating severe competition
among textile producers and their inability of bargaining over prices.

Buyers of clothing products. It is clear that the final consumers, i.e., individual
people, do not have any bargaining power in the market. However, clothing
manufacturers sell their products to retailers unless they have their own outlets. Hence,
we should take a look at the retailing industry.

As mentioned earlier, the majority of Chinas garment products are for exports.
Relative to domestic sales, producers of garments have less bargaining power vis--vis
foreign retailers. In the past, manufacturers were not allowed to sell their products to
foreign markets by themselves. Exports and imports were conducted by foreign trade
corporations. That system should have given Chinas foreign trade corporations a large
bargaining power because they could act as a monopoly in exports. However, that export
distribution system was not inefficient and therefore did not achieve the purpose.
Decentralization of the foreign trading system allows large manufactures to export their
products directly. However, thanks to the past centralized system, these manufactures did
not have their foreign market networks and experiences. They are the new comers in the
international market and thus have no bargaining powers.

Overcapacity further weakens the bargaining power of domestic garment
manufacturers in both the domestic market and the overseas market.

Since a significant share of Chinese garment products are exported to the foreign
market, Chinese garment producers are facing foreign buyer groups. One important
phenomenon is that a large number of Chinese garment manufacturers are enaging in
processing trade, in which they simply receive materials, samples and orders from foreign
buyers and just provide labor service to the sew-and-cut process of the production. As
shown in Table 2.7, processing trade in textile and clothing industry contributed to 50%
of the textile and clothing trade in the 1990s and the share was 36% in 2002. Most
garment factories in China are supplying labor in the processing trade activities and
therefore they have absolutely no bargaining power at all.

4.5. Bargaining Power of Suppliers

30
As discussed in the previous section, the whole industry consists of both the
upstream part, i.e., textile, and the downstream part, i.e., clothing. Therefore, we need to
define the suppliers carefully. In fact, there are two distinct supplier groups. With regard
to textile products, raw material producers are the suppliers. With regard to clothing
products, textile producers are the suppliers. We discuss the bargaining power of these
suppliers separately.

First, note that the case where textile producers are suppliers to the clothing
industry is the counterpart to the case discussed above about clothing manufacturers as
the buyers of textile products.
Thus, we need only to examine the case where textile raw materials providers are
the suppliers to the textile industry. In this case, the upstream sector mainly belongs to
the agriculture industry. There are a large variety of textile products and China has
abundant resources in some of the raw materials, but not in some others. For example,
China is a major cotton-producing country in the world, contributing to 24% of cotton
production in 2001 (see Table 3.2). However, at the same time, China is also the largest
cotton-consuming country because of its large production of garment products. Local
demand for cotton far exceeds local supply and so China has to import a lot of cotton
from other countries such as the US, Uzbekistan and Benin. The import from the US
accounts for more than 60% of all the imports in 2003. During J an-Aug in 2004,
China imported 1,736 thousand tons of cotton, among which the import from
the US was 990 thousand tons and accounted for 57% of all the imports. The
import from Uzbekistan was 180 thousand tons and accounted for 10%. And China
imported 44 thousand tons of cotton from India. Table 4.8 provides information on recent
years cotton imports.







Table 4.8. Cotton and Wool Imports by China

Cotton Wool
Volume (10,000 tons) 5 19.8 1999


Amount (US$10,000)

6692

63772

Volume 5 30.1
2000

Amount

7411

103731

Volume 6 30.9
2001

Amount

7586

104917

31
Volume 18 23.7 2002

Amount 18644 103777
Source: China Statistics Yearbook, 2001-03

Since most Chinese textile firms are relatively small, they have no bargaining
power in the international cotton markets when they import cotton. Besides, in the past
enterprises that wanted to import cotton from foreign markets needed to apply for import
licenses and the allowed quota amounts were determined by the government. As a result
of this, the domestic market often was short of cotton supplies. When cotton fabrics
producers are in such a disadvantageous position, their market position will be weak.
Moreover, domestic cotton procurement was monopolized by the government, putting
textile firms in an even worse position with regard to bargaining for cotton prices. In the
mid-1990s, due to insufficient supply of many essential raw materials for textile
production, textile firms were competing seriously for cotton, ramie and silk, and
competition wars broke out several times. The domestic cotton price was higher than the
world price by 10 to 15%.
In 1999, the government relaxed its control on the cotton industry. Farmers no
longer had to sell any of their output at the government-set prices.
6
Upon the accession to
the WTO, China also reduced its import controls. A tariff-quota system replaces the
existing quota system. Import quotas on cotton are also increased. This helps the
domestic cotton fabric producers. The import quota volume is 894,000 tons in 2005 and
the share of state-operating trade is 33%.
China is also a large wool producer. As shown in Table 4.9, China produces more
than 10% of the wool in the world. Similar to the cotton situation, although China is also
a major wool producer in the world, 60% of the countrys wool consumption in recent
years has to come from imports (Table 4.5). In 2002 the import quota of wool is 310,000
tons. The actual import volume is about 237,000 tons.

Table 4.9. Chinas Wool Production (Unit: 10,000 Tons)

China World Chinas Share (%)
1980 15.9 285.1 5.6
1985 17.8 294.6 6.0
1990 23.9 335.8 7.1
1995 27.7 251.6 11.0
1996 29.8 253.6 11.8
1997 25.5 248.7 10.3
1998 27.7 242.3 11.4
1999 28.3 236.1 12.0

6
Before 1999, farmers were required to sell a certain amount of their products at the prices set by the
government. However, after 1999, the farmers were no longer guaranteed to be able to sell their products at
the fixed prices. Greater uncertainty was present. This is a trade-off and is crucial to agriculture products.

32
2000 29.2 233.0 12.5
2001 29.4 223.8 13.1
Source: Zhongguo Fang Zhi Gong Ye Nian Jian 2002/03

5. Conclusion

Chinas textile and garment industry has grown rapidly since 1979. It is one of the
most important industries in the economy. China has been the largest textile and apparel
producer in the world for many years. Chinas accession to the WTO brings both
opportunities and challenges to the domestic textile and clothing industry.

Although the future is bright, there are a lot of problems that Chinese firms face in
this industry. In the past, China relied too heavily on its comparative advantage in cheap
labor. This traditional advantage has been diminishing. Over the past two decades,
although production expanded sharply, it mainly focused on the low end of the market
where growth was limited. Furthermore, other developing countries are catching up
quickly with China. For example, Pakistan uses more modern machinery and can produce
better quality yarn. It has gradually replaced Chinas share in many export markets in this
industry. Over capacity led to keen price competition, reducing profit margins. Low
technologies and old-fashioned equipment resulted in poor quality and restricted China
from entering premium markets. Other problems such as poor management, marketing
and promotion skills, a high debt burden especially in SOEs, and controls on imports and
exports as well as raw materials jointly resulted in serious losses in the textile and
clothing industry in the mid-1990s. These problems are still present today.

Despite the difficulties, the textile and clothing industry will remain a key industry
in the Chinese economy. Firms in this industry should find their own position and
strategies to survive and grow.


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