Apparel is a significant export industry in the world economy. Global apparel manufacturers supplied $1,025.9 billion worth of retail apparel in 2008. World trade in apparel accounted for $361.9 billion. The wholesale clothing manufacturing industry is an important means of driving the economic growth and industrialization of China. With worldwide competition increasing, China strives to win sustainable competitiveness.
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China’s clothing industry has grown substantially while playing a leading role in China’s economic growth and export performance since the late 1970s. In fact, China is the world’s largest producer and exporter of apparel. While the global economic recession of the past few years resulted in a decline in China’s apparel exports, the country’s apparel trade reached a value of $120.06 billion in 2008, accounting for 8.44 percent of its total merchandize export revenue and 33.2 percent of world apparel trade.
China is a dynamic force in the global clothing value chain, but it faces competition in global apparel trade from other low-cost clothing manufacturing countries including India, Mexico, Turkey and Vietnam. In order to maintain its competitive edge, China must move up in the global clothing value chain.
Competitiveness in the Global Clothing Value Chain
Apparel production is a labor-intensive industry, with labor accounting for 30 to 50 percent of final production costs. Over the last 30 years, this has led firms in industrialized countries to maintain their competitiveness by outsourcing production, innovating in design, minimizing inventory and spending heavily on marketing. The industrialized countries have been able to dominate the global clothing supply chain for decades, and this leaves developing countries in the lower value-added segment of the manufacturing process.
Competitiveness requires the use of cost-cutting techniques such as Just-In-Time (JIT) inventory practices, Computer-Aided-Design (CAD) techniques and Quality Control programs. China is among the countries that have upgraded their clothing manufacturing facilities, thus becoming more competitive in the global clothing market.
There are two types of commodity chains in the clothing market: buyer-driven and producer-driven commodity chains. The apparel industry is a buyer-driven value chain which is common in labor-intensive, consumer-goods industries such as clothing and toys. The clothing commodity chain consists of three types of leading firms: large retailers like Wal-Mart, branded marketers like Liz Claiborne, and clothing manufacturers such as Levis Strauss. These leading firms are the dominant players in industrialized countries, which control and run the clothing industry.
Since the rise in production costs in the 1960s, which led to fragmented markets and the demand for product variety, large Western producers have outsourced their production processes to low-cost developing countries. Offshore sourcing continued to increase in the late 1970s and 1980s. As a result, branded marketers, or retailers like the Gap, no longer produced apparel themselves, but shifted to design, branded marketing and distribution of apparel made by subcontractors, which is more profitable.
For the last 30 years, the global networks of apparel production and supply have been operating under the jurisdiction of prevailing trade laws, including the Uruguay Multi-Fiber Arrangement (MFA) and the World Trade Organization Agreement on Textile and Clothing (ATC). As a result, developing countries were limited by the quota restrictions in these trade laws.
However, the quotas on clothing imports were phased out on January 1, 2005. As a result, more production shifted from the higher-cost industrialized countries to the lower-cost developing countries, expanding global production substantially and creating more intense competition among global garment producers. This had an impact on the development of the clothing industry in China.
China’s Position in the Global Clothing Value Chain
China’s clothing firms are highly integrated in the global manufacturing chain through Original Equipment Manufacturing (OEM) to markets in advanced economies and are suppliers to many international brands. Major buyers from the U.S., Europe and Japan import over 50 percent of the clothing exports, with privately-owned Chinese firms accounting for 45 percent of those exports.
At present, the clothing firms in China still use low-cost production methods and cheaper prices as their competitive advantage in the global market. However, three-fourth of the added-value still remains in the hands of powerful retailers and branded manufacturers in the industrial countries because they remain the dominant players with influence and power by controlling design, marketing, advertising and branding at the high value-added segment of the value chain.
China’s clothing manufacturing firms also face the rising cost of material and labor as well as stiff competition worldwide. The cost of the Chinese workers is 20 percent more than workers in India and Sri Lanka, 40 percent more than in Indonesia, 100 percent more than in Pakistan, and 180 percent more than in Bangladesh. This puts pressure on China’s clothing suppliers to reduce costs and profit margins, keeping them in the low value-added segment of the value chain.
As the world’s largest clothing manufacturer, the Chinese clothing industry is vulnerable in terms of sustainable development in the long term. Price and cost competitiveness are not enough to sustain China’s clothing firms. China must strive to win sustainable competitiveness by moving into the high value-added segment of the global clothing value chain that controls design, marketing, advertising and branding.