The Textile and Clothing Industry
Road Map
China Industry Analysis
Part 1: Industry overview
The Textile and Clothing Industry
The world textile and clothing industry Overview of China’s textile and clothing industry
Part 2: Analyzing China’s clothing industry Part 3: Competing in the world market
ECON 515 Larry Qiu
Econ 515,
Defining the industry: textiles are any natural or artificial fiber products, and any combination of natural and artificial fiber products, in the form of yarns, fabrics, garments or other manufactured articles.
Output and Growth of Major Textile and Apparel Products in 2002/2004 Product Name
Agriculture
The industry flow Yarns, fabrics
Design, cutting & sewing, clothes
Market Econ 515,
® Larry Qiu
3
2
® Larry Qiu
Unit
Output (2002)
Growth from 2001
Output (2004)
Growth from 2003
Chemical Fiber
10,000 tons
991.20
20.11
1424.54
20.29
Viscose Rayon
10,000 tons
68.21
12.08
96.61
16.08
Synthetic Fiber
10,000 tons
915.16
20.74
1313.96
20.82
Polyester
10,000 tons
563.76
12.79
810.35
7.79
Yarn
10,000 tons
801.75
15.79
1094.86
18.54
Cloth
Billion metres
22.65
11.17
29.48
19.43
Pure Cotton Fabric
Billion metres
11.62
12.01
15.360
21.21
Chemical Fabric
Billion metres
5.22
18.33
7.42
22.81
Printed and Dyed Fabric
Billion metres
21.09
18.34
30.16
17.12
Silk
10,000 tons
8.33
12.33
10.26
1122
Silk Fabrics
Billion metres
5.34
19.87
81.53
17.03
Print and Dye Silk Textile
Billion metres
2.72
13.13
-
-
Garment
Billion pieces
8.77
8.53
11.83
15.05
Weaving Garment
Billion pieces
4.59
8.83
55.71
12.67
Knitting Garment
Billion pieces
4.09
8.59
61.14
17.05
Econ 515,
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4
Share in World Textile & Apparel Exports for Developing Countries
The world textile and clothing trade
They account for 55% of world textile exports, 70% of clothing exports
Textile and clothing (T&C) trade represent 5% of world exports. Total value $ 473 billion in 2005. Global exports
Clothing trade accounts for 60% of T&C trade. Share of World Trade
World Textile and Clothing Exports Agricuture
25
Manufacturing exports
Textile & Clothing 20
500
Clothing
450
Textiles
Share in World & Apparel Exports for Developing Countries (1995-2003)
T&C
400
Rising
10
Percentage
USD (billion)
Percentage
350
15
300 250 200 150
5
Stable
100 50
0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Econ 515,
0 1988
1991
1994
® Larry QiuYear
1997
2000
2003
2006
5
Year
Where are the markets?
Econ 515,
80 70 60 50 40 30 20 10 0 1994
Textile Apparel
1996
1998
2000
2002
2004
Year
® Larry Qiu
6
Dynamics 1 8
S h a r e s
Share of Global Imports: Clothing (2005)
in
W o r ld
A p p a r e l E x p o r ts
C h in a
EU (15) 31%
T a iw
a n
In d i a
China
41%
K o re a
1 6
US 1 4
O . A s ia
Mexica Japan 1 2
Turkey
E U
p a r tn e r s
U S
p a r tn e r s
Canada 2% 2%
11% 7%
3% 3%
Others
1 0
Share of Global Imports: Textiles (2005) 13% 2% 2% 3% 8%
8
EU (15) 6
US 44%
Japan 4
Russia Canda Switzwerland 28% Econ 515,
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2
Others 7
0 8 0
Econ 515,
® Larry Qiu 8 4
8 8
9 2
9 6
8
I n d o n e s ia
I n d o n e s ia P a k is t a n
P a k is t a n
L a b o r c o s t in I n d u s t r y ( U S
B a n g la d e s h
t e x t ile $ / h o u r )
S r i
L a b o r c o s t in a p p a r e l in d u s t r y ( U S $ / h o u r )
L a n k a I n d ia
I n d ia C
C
.70
h in a
.60
h in a
E g y p t
S r i
L a n k a M
a la y s ia
E g y p t T h a ila n d
P h ilip p in e s T u n is ia
M
a u r it iu s S .
M
A f r ic a
a la y s ia M
M
o r o c c o
o r o c c o M
S .
A f r ic a
M
H
e x ic o
T u r k e y
T u r k e y z e c h H S .
B r a z il
r e p .
P o r t u g a l
u n g a r y
S .
K o r e a
K o r e a
A r g e n t in a
P o la n d 0
0 Econ 515,
1
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2
1 9 9 8
3
1 9 9 5
1 9 9 0
9
® Larry Qiu
4
6
8
Econ 515,
® Larry Qiu
2 0 0 0
1 9 9 5
1 9 9 0
10
Summary
%
Part 1: Industry overview
100 90 80 70 60 50 40 30 20 10 0
Econ 515,
2
4
Dependency on T&C exports (as a share of total manufactured goods exports) of selected countries
The world textile and clothing industry
Summary
C hina
India R om ania
M oroc c o T urk ey
T unis ia
Sri Lank a N epal
C am bodia Pak is tan
Laos M ac ao
Banglades h
C
e x ic o
u n g a r y
11
Econ 515,
Growing, but slower than average More important for developing countries, because of their comparative advantages But rely on markets in developed countries
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12
Road Map
A Brief History
Part 1: Industry overview
1949 – 1979: Pre-reform Period
The world textile and clothing industry Overview of China’s textile and clothing industry
In 1949, the total output of the textile and
clothing industry was 4 billion yuan, which accounted for 38% of the China’s industrial output value Part 2: Analyzing China’s clothing industry Part 3: Competing in the world market
Econ 515,
® Larry Qiu
13
Econ 515,
14
® Larry Qiu
Major Economic Indicators of China's Textile and Clothing Industry
Development since 1979 Items
Chosen as a pillar industry Infrastructure and experience Labor-intensive
Unit
Increasing profit, reducing employment,
® Larry Qiu
1999
2000
2001
2002
2004
Billion Yuan
763.61
764.67
768.47
889.45
932.64
1064.44
1610.7
Industrial Added Value
Billion Yuan
183.56
171.61
191.03
221.61
232.11
264.94
398.9
Sales Revenue from Textile Products
Billion Yuan
671.76
653.63
707.18
833.94
866.36
1002.43
1548.1
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
51.34
10.65
8.59
7.77
7.38
7.63
7.89
8.96
Total Employment
increasing efficiency (next slide) Econ 515,
1998
Total Industrial Value
In 1983, China abandoned its coupon
allocation system (boost demand)
1997
Million Persons
_
10% of manufacturing output, 15% of industrial employment 15
Econ 515,
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16
China's Textile and Garment Exports in the World
Year
World Exports (Billion USD)
1980 1985 1990 1995 2000 2001 2002 2003 2004
95.5 103.2 218.9 307.7 356.4 340.67 355.07 395.36 454.53
China’s China’s Shares Exports (%) (Billion USD) 4.41 4.6 5.29 5.1 13.85 6.3 37.97 12.3 52.08 14.6 53.48 15.7 61.87 17.4 78.96 20.0 97.39 21.4
China’s Rank
9 6 4 1 1 1 1 1 1 Contribution to the country’s exports
Contribution to the world exports Econ 515,
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® Larry Qiu
Econ 515,
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® Larry Qiu
Export feature 2: cotton-made products and chemical fabric goods dominate the exports of textiles and clothing (70%)
Export feature 1
70
40.00
60
35.00
50
30.00 Silk-Made Product
40 Percent (%)
%
80
Textile
30
Garm ent
20
Hair-Made Product
25.00
Cotton-Made Product 20.00
Linen-Made Product Chemical Fabric Product
15.00
10
Other Product 10.00
Year
0 1980
1985
1990
1995
2000
2001
2002
2003
5.00
Fig. 2.1. Product Mix of China's Textile and Garment Exports
0.00 1998
® Larry Qiu
2000
2001
2002
Ye ar Fig. 2.2. Composition of China's Te xtile and Appare l Exports
Comparative advantages Econ 515,
1999
19
Econ 515,
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20
Export feature 3: Third, the processing trade still plays a very important role in China’s textile and clothing industry.
Export feature 4: import and export market concentration
China's Textile and Apparel Processing Trade (Billion USD)
F.g 2.3 China Textile and Apparel Exports in 2004
Total Textile and Apparel Export Textile and Apparel Processing Export Share of Processing Trade
1999
2000
2001
2002
2004
43.06
52.08
53.28
61.77
97.93
20% 28%
Japan Hong Kong
20.33
22.43
22.18
22.05
28.29
47
43
42
36
29
The U.S. EU 20%
6%
Russia Others
13% 13% Smiling curve Econ 515,
21
® Larry Qiu
28%
6%
Cotton Fabrics
Chemical Fabrics
29%
Summary
Knitted Fabrics
Textile Machinery
Bast Fiber
Fig. 3.1. Distribution of Total After-Tax Profits in the Textile and Clothing Industry (2000) Econ 515,
® Larry Qiu
The world textile and clothing industry Overview of China’s textile and clothing industry
Wool Fabrics Silk Fabrics
23%
22
Part 1: Industry overview
Garments 3%1%
® Larry Qiu
Summary
Which products are more important?
5% 5%
Econ 515,
23
Econ 515,
It had a strong start Dominant position in the world market Important industry in the domestic economy and export Apparel is getting more important vs. textile Smiling curve improvement ® Larry Qiu
24
Case Discussion: Shartex International Trading Co. (CEIBS Case-505-018)
Road Map Part 1: Industry overview Part 2: Analyzing China’s clothing
Formerly the No. 2 Business Department of the
Shanghai branch of the China Drawnwork Import and Export Company (CDIEC): a textile trade unit handling garment exports. Major clients were Hong Kong and Taiwanese trading companies. The traditional role of trading company was reduced after the reform Shartex: 1999, a joint-stock company, 51% by CDIEC and 49% by employees and managers
industry
Five forces How to win in this market
Part 3: Competing in the world market Econ 515,
25
® Larry Qiu
Econ 515,
Case Discussion: Shartex
Where is Shartex?
26
® Larry Qiu
Link
Agriculture
Shall Shartex give up its focus on trading? If yes, then how to increase its bargaining Yarns, fabrics
power vis-à-vis its suppliers, and its buyers? If no, then it should enter the manufacturing segment of the industry. Shall it produce its own products? Is entry easy?
Design, cutting & sewing, clothes
Come back to answer these questions after the 5-forces analysis
Market Econ 515,
® Larry Qiu
27
Econ 515,
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Five-forces analysis of the structure of China’s T&C industry
Excessive entry: barriers to further entry Policy barriers Export quota allocation system Quota elimination, but experience and marketing network can serve as an entry barrier
1. Entry Financial and technological barriers are not high Garment production remains very labor-intensive
Total Number of Firms in the Industry over Time
Some textiles are more tech and capital intensive (e.g.
chemical fibers), some are more resources intensive (e.g. cotton yarn)
Econ 515,
29
® Larry Qiu
Cluster and location barriers Internal economies of scale? No. External economies of scale? Benefit from clustering. Government push is both necessary and justifiable
Zhejiang
Jiangsu
Shanghai
Shandong
32.58
9.54
11.83
11.93
7.23
1998 1999
29.24
11.17
13.19
13.14
8.13
2000
25.42
14.04
14.38
13.58
9.04
2001 2002
22.75
16.35
15.3
13.61
9.68
2004
18
22
16
12
9
Econ 515,
® Larry Qiu
1995
1996
1997
1998
1999
2000
2001
2002
2004
#
53600
51200
45600
19300
18900
18862
21412
23600
23600
Econ 515,
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Large-scale firms only
30
2. Competition There were more than 24,000 firms in the textile and
Distribution of the Top Five Regions of China's Textile and Clothing Exports (%) Guangdong
Year
Total
clothing industry in 2002 (more). Competition leads to more than 20% of the firms losing money Different categories of this industry’s products exhibit
different degrees of competition.
73.11 74.87 76.46 77.69 82 77
31
Econ 515,
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32
Garments
How do firms compete? Ningbo Youngor Co Ltd. (宁波雅戈尔) Top apparel sales in 2002 Reorganizing a network of 370 direct management stores and 500 franchised retail stores (POS info management system) Build brand, overseas market Shanshan Group Co Ltd. (杉杉) No. 2 apparel sales in 2002 JV to produce high quality men’s suits (3000-6500 yuan vs. 1000-1500 yuan) Extend product line to ties, shoes, etc.
The industry is making profit but fierce competition There were 7797 garment firms in China in 2002. Many small firms producing under constant returns
to scale, thin profit margin, quota elimination simply leads to output expansion, not about efficiency But some are very large:
Econ 515,
In 2003, Younger’s (雅戈尔 ) share in shirt market was 11.03% and its share in men’s suits market was 12.7%. Shanshan Group Co Ltd. (杉杉). 33
® Larry Qiu
Econ 515,
® Larry Qiu
34
® Larry Qiu
3. Substitutes (demand)
Some of the strategic variables chosen by firms Product features and quality Targeting of customers Product line Product standardization Technological leadership Research and development Product marketing and positioning Market development and education Provision of complementary goods Delegation of decision making “Build to order” or inventory Flow of internal communications
Econ 515,
vertical integration cost reduction focus service provision warranties input pricing government relations brand identification inventory levels product pricing distribution channels types of corporate divisions geographic markets
35
No close substitutes Intra-industry substitution vs. inter-industry substitution Sales of Apparels in Main Big Department Stores in China in 2002 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
Jeans wear
100 pieces
26,545
4.4
Jacket
100 pieces
37,681
13.1
Cold-resistant apparel
100 pieces
79,151
38
Leather apparel
100 pieces
4,664
-21.9
30,196
-9.7
Weaved underwear
100 pieces
409,831
9.8
Knitted sweater
100 pieces
165,567
7.3
item
Fur coat
Econ 515,
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36
4. Bargaining power of buyers (demand)
GDP, Consumption of Clothing and Engle Coefficients
Demand Analysis GDP growth and textile and clothing consumption
Fiber consumption in China in 1995 was 4.6 kg per capita 4.2 kg in developing countries 19 kg in developed countries Income growth 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%. Next slide. 8% per capita GDP growth in the future, translating to 3% textile and clothing domestic demand growth, or 20 billion yuan increase in revenue
Rural Household’s Per Capita Expenditure on Clothing
Share (%) of Consumptive Expenditure
13.36
-
7.77
13.55
89.79
6.85
500.46
10.01
95.18
5.75
7651
533.66
10.05
-
5.67
2002
8184
590.88
9.8
104.54
5.72
2003
9300
637.72
9.79
109.5
5.67
2004
9400
686.79
9.56
119.6
5.56
2005
9600
800.51
10.08
147.9
5.81
Average Growth Rate between 95 and 02
7.75%
3.03%
Engle Coefficient
2.20%
Engle Coefficient
Per Capita GDP (yuan)
Urban Household’s Per Capita Expenditure on Clothing (yuan)
Share (%) of Consumptive Expenditure
1990
4854
170.90
1995
4854
479.50
2000
7086
2001
Increasing expenditure Econ 515,
® Larry Qiu
37
Econ 515,
® Larry Qiu
Engle coeff increases in rural
Cotton
5. Bargaining power of suppliers (cost)
Econ 515,
® Larry Qiu
Cotton
Wool
1999
6692
63772
2000
7411
103731
2001
7586
104917
Cotton textile producers do
2002
18644
103777
not have strong bargaining power (70% of the cost)
2003
317624
120715
2004
319709
131797
2005
116885
91335
producing country in the world (24%) China is the largest cotton-
consuming country because of its large production of garment products
Raw material supply Rich in resources in absolute term, but not so in relative term; abundant in some but not in others Abundant supplies of some fibers such as ramie, silk, and angora rabbit hair Insufficient in cotton, wool, and manmade fibers
39
38
China’s imports (USD10,000)
China is a major cotton-
Two groups of suppliers Textile producers supply for clothing production Raw material suppliers for textile production
Strong demand
Econ 515,
® Larry Qiu
40
Summary
Garments
Part 1: Industry overview
Two groups: import and domestic textile suppliers
Part 2: Analyzing China’s clothing Import: high quality, large bargaining power
industry
Domestic: low quality, low bargaining power
Size but not strength Massive production without branding Following but not leading Diversity without focus Where in the smiling curve?
Econ 515,
® Larry Qiu
41
Econ 515,
42
® Larry Qiu
Road Map Design
Part 1: Industry overview Part 2: Analyzing China’s clothing
industry
High quality textile
Five forces How to win in this market
Production
Part 3: Competing in the world market Econ 515,
® Larry Qiu
China 43
Econ 515,
® Larry Qiu
44
Case Discussion: Shartex
Case Discussion: Shartex
Link
It tried to follow the Li&Fung model:
It chose to focus on trading Why and how? It repositioned its target clients from trading companies in HK
reorganizing the company structure to establish/focus on supply chain management The Li&Fung Model: a HK-based export trading company with a turnover of more than $5.5 billion and a network in close to 40 countries.
and Taiwan to garment retailers in Europe and the U.S., specifically the low-and middle-end fashion apparel companies and retail chains, including department stores and supermarkets. Could it get these buyers to purchase from Shartex? How can it guarantee the product design, materials, delivery, quality control, etc?
Econ 515,
45
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Market
Li & Fung
Econ 515,
® Larry Qiu
46
Specific Questions for T&C Industry How to deliver your clothes to consumers when
Shipping
Order
Design
Quotas Logistics Supply Chain
Materials
How would you build your brand in this market when
everyone can produce clothes (no barrier to entry)? The export quotas have been (or would be)
Q control Manufacturing
department stores have strong bargaining power to force suppliers to reduce the wholesale prices?
abolished, should you get more orders from foreign clients and expand your production capacity?
Econ 515,
® Larry Qiu
48
Case Discussion: Shanshan
Shanshan: The Reform
(ACRC 05/211C)
Its predecessor: Yingxian County Yonggang
Garment General Factory, 1984 The first production line for suits in China as well as foreign patterns, fabrics, techniques and tailoring, etc. 1989: RMB3 million in debts, unable to pay the 300 employees Suits for wages at RMB12 each
Econ 515,
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49
May 1989 Zheng Yonggang, director Changed the name to Shanshan Recalled all the suits Looking for means to differentiate the company’s products from the others, how? He took out a loan of RMB100,000, 60% in TV commercials in Shanghai, 40% as start-up fees for ten clothing stores in downtown Huge (unexpected) success: RMB100-200, even 300, all sold out in 3 days
Econ 515,
® Larry Qiu
Shanshan: Its Road to Brand Building
Shanshan: Its Road to Brand Building
The first strategy: brand building “Shanshan, the No.1 brand in suits in China” Advertising was the first move Firs suits. You can never be too cool Stay strong. Challenge the future From 1993 to 1999, top in suits sales, 37%
Designers RMB 1 million Design headquarters Lafancy: high-end product, RMB2,000 per suit, whitecollar women Fashion shows Milestone in the garment industry in China: from
garment industry to fashion industry To make it international Joint ventures with Japan, Italy and others Introduced 8 brands
market share. Profit margin 50 times of the industry average.
Econ 515,
® Larry Qiu
50
51
Econ 515,
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52
Shanshan: The Problems
Shanshan: The Problems
Results
How to protect its brands from piracy? Discard the previous sales agent arrangement and
Gross profit went up Sales and market share dropped, lost to Youngor. Franchising is no panacea. What is the problem? What to do with it? Since 2004, Shanshan began a new round of reform: to reclaim franchise stores in major cities Sales channels -- self-owned: controllable (JV): franchised: 1:2:3 What do we learn from this case?
opt for “specialty stores”. Unsold inventory as a result of over supply in the
economy. Two reforms
Econ 515,
Switch the core business from production to design and brand management Switch the distribution system from wholly-owned specialty stores to franchise. Nike, smiling curve, can shanshan do it?
® Larry Qiu
53
Econ 515,
® Larry Qiu
54
Road Map
Case: Li & Li
Part 1: Industry overview
Mr. Li was a manager in a garment company
Part 2: Analyzing China’s clothing industry
before 2004. The company had two factories in China, one in Cambodia, one in Mexico and one in Turkey. It had a headquarter in HK. He, and some other managers, bought out the company with RMB 5m in 2004. This is part of the state-owned enterprises reform: partial or complete privatization
Part 3: Competing in the world market
Econ 515,
® Larry Qiu
55
Econ 515,
® Larry Qiu
56
Case: Li & Li
Case: Li & Li
Problems faced SOEs enjoyed some quota advantages over private firms, but now it is equal competition: increased competition, low entry barriers Existing employees are used to the lifetime employment environment: culture and management The company does not have its own brand, does not have high-end clients: product and market Focus: In view of the abolishment of export quotas in the beginning of 2005, Should the company close down its plants outside China? Should it expand its production capacity and get more orders from US and EU markets? Econ 515,
® Larry Qiu
It tried to close down its overseas plants and
planed to receive more orders. It makes sense for the company to do so But it does no make sense for the whole industry/country to do so Then, what should be a good strategy?
57
Econ 515,
® Larry Qiu
58
59
Econ 515,
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60
MFA, Quotas and Protection Multifiber Arrangement (MFA) in the 1974 Bilateral agreement: The China-US Textile
Agreement, signed in 1980 (1997) China-EU Textile Agreement The GATT/WTO, phaseout period, 2005 Evidence of export surge
Restrictions on bras were phased out in 2002, bra imports by the US from China more than tripled in 2003. Infant wear restrictions ended in 2001, Chinese exports of infant wear skyrocketed by 298% in 2002 and 81% in 2003 2005?
Econ 515,
® Larry Qiu
The largest five exporting countries to the US T&C market (Jan-Feb 2005)
Ranking
Econ 515,
® Larry Qiu
61
Countries
Imports (0.1 B USD)
% change from last year
Market share of imports （%）
36.02
33.47
1
China
10.55
2
Canada
2.64
1.36
8.39
3
India
2.56
16.69
8.13
4
Pakistan
2.25
4.66
7.14
5
Mexico
1.69
1.06
Econ 515,
® Larry Qiu
5.36
62
WSJ, Nov 10, 2005 Econ 515,
® Larry Qiu
63
Econ 515,
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64
What happened?
MFA, Quotas and Protection China voluntarily imposed export tax on 148 products
Piles of Chinese clothing were trapped in the
ocean terminals waiting to clear the customs. The negotiation between China and EU The negotiation between China and the US.
Econ 515,
® Larry Qiu
65
in six categories (coats, skirts, trousers, shirts, nightwear and underwear)
0.2 to 0.3 yuan for every piece or set of finished apparel garments 0.5 yuan per kilogram of clothing parts or accessories
Are the taxes sufficient? What’s the benchmark? Quota prices $2.70 per pair of trousers $2 to $3 per finished garment (including sweaters, sleepwear, coats, jackets, and dresses and skirts) $13.57 for winter outerwear
Econ 515,
66
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Industry analysis framework applied to China’s textile and clothing
Summary
Exit
Market
Entry
Part 1: Industry overview Part 2: Analyzing China’s clothing industry Part 3: Competing in the world market
Costs, location, technology, product
• The effects of trade policy (opportunity) High-end or low-end
• Increasing international competition (risk)
Demand competition
• China’s comparative advantage (focus of the value chain)
Econ 515,
® Larry Qiu
Profits Revenue
Cost
Labor, materials, supply competition
67
Econ 515,
® Larry Qiu
The five forces
Costs, options
Labor, resale value
acquisition
68
China Industry Analysis
Part 1: Industry overview
The Textile and Clothing Industry
The world textile and clothing industry Overview of China’s textile and clothing industry
Part 2: Analyzing China’s clothing industry Part 3: Competing in the world market
ECON 515 Larry Qiu
Econ 515,
Defining the industry: textiles are any natural or artificial fiber products, and any combination of natural and artificial fiber products, in the form of yarns, fabrics, garments or other manufactured articles.
Output and Growth of Major Textile and Apparel Products in 2002/2004 Product Name
Agriculture
The industry flow Yarns, fabrics
Design, cutting & sewing, clothes
Market Econ 515,
® Larry Qiu
3
2
® Larry Qiu
Unit
Output (2002)
Growth from 2001
Output (2004)
Growth from 2003
Chemical Fiber
10,000 tons
991.20
20.11
1424.54
20.29
Viscose Rayon
10,000 tons
68.21
12.08
96.61
16.08
Synthetic Fiber
10,000 tons
915.16
20.74
1313.96
20.82
Polyester
10,000 tons
563.76
12.79
810.35
7.79
Yarn
10,000 tons
801.75
15.79
1094.86
18.54
Cloth
Billion metres
22.65
11.17
29.48
19.43
Pure Cotton Fabric
Billion metres
11.62
12.01
15.360
21.21
Chemical Fabric
Billion metres
5.22
18.33
7.42
22.81
Printed and Dyed Fabric
Billion metres
21.09
18.34
30.16
17.12
Silk
10,000 tons
8.33
12.33
10.26
1122
Silk Fabrics
Billion metres
5.34
19.87
81.53
17.03
Print and Dye Silk Textile
Billion metres
2.72
13.13
-
-
Garment
Billion pieces
8.77
8.53
11.83
15.05
Weaving Garment
Billion pieces
4.59
8.83
55.71
12.67
Knitting Garment
Billion pieces
4.09
8.59
61.14
17.05
Econ 515,
® Larry Qiu
4
Share in World Textile & Apparel Exports for Developing Countries
The world textile and clothing trade
They account for 55% of world textile exports, 70% of clothing exports
Textile and clothing (T&C) trade represent 5% of world exports. Total value $ 473 billion in 2005. Global exports
Clothing trade accounts for 60% of T&C trade. Share of World Trade
World Textile and Clothing Exports Agricuture
25
Manufacturing exports
Textile & Clothing 20
500
Clothing
450
Textiles
Share in World & Apparel Exports for Developing Countries (1995-2003)
T&C
400
Rising
10
Percentage
USD (billion)
Percentage
350
15
300 250 200 150
5
Stable
100 50
0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Econ 515,
0 1988
1991
1994
® Larry QiuYear
1997
2000
2003
2006
5
Year
Where are the markets?
Econ 515,
80 70 60 50 40 30 20 10 0 1994
Textile Apparel
1996
1998
2000
2002
2004
Year
® Larry Qiu
6
Dynamics 1 8
S h a r e s
Share of Global Imports: Clothing (2005)
in
W o r ld
A p p a r e l E x p o r ts
C h in a
EU (15) 31%
T a iw
a n
In d i a
China
41%
K o re a
1 6
US 1 4
O . A s ia
Mexica Japan 1 2
Turkey
E U
p a r tn e r s
U S
p a r tn e r s
Canada 2% 2%
11% 7%
3% 3%
Others
1 0
Share of Global Imports: Textiles (2005) 13% 2% 2% 3% 8%
8
EU (15) 6
US 44%
Japan 4
Russia Canda Switzwerland 28% Econ 515,
® Larry Qiu
2
Others 7
0 8 0
Econ 515,
® Larry Qiu 8 4
8 8
9 2
9 6
8
I n d o n e s ia
I n d o n e s ia P a k is t a n
P a k is t a n
L a b o r c o s t in I n d u s t r y ( U S
B a n g la d e s h
t e x t ile $ / h o u r )
S r i
L a b o r c o s t in a p p a r e l in d u s t r y ( U S $ / h o u r )
L a n k a I n d ia
I n d ia C
C
.70
h in a
.60
h in a
E g y p t
S r i
L a n k a M
a la y s ia
E g y p t T h a ila n d
P h ilip p in e s T u n is ia
M
a u r it iu s S .
M
A f r ic a
a la y s ia M
M
o r o c c o
o r o c c o M
S .
A f r ic a
M
H
e x ic o
T u r k e y
T u r k e y z e c h H S .
B r a z il
r e p .
P o r t u g a l
u n g a r y
S .
K o r e a
K o r e a
A r g e n t in a
P o la n d 0
0 Econ 515,
1
® Larry Qiu
2
1 9 9 8
3
1 9 9 5
1 9 9 0
9
® Larry Qiu
4
6
8
Econ 515,
® Larry Qiu
2 0 0 0
1 9 9 5
1 9 9 0
10
Summary
%
Part 1: Industry overview
100 90 80 70 60 50 40 30 20 10 0
Econ 515,
2
4
Dependency on T&C exports (as a share of total manufactured goods exports) of selected countries
The world textile and clothing industry
Summary
C hina
India R om ania
M oroc c o T urk ey
T unis ia
Sri Lank a N epal
C am bodia Pak is tan
Laos M ac ao
Banglades h
C
e x ic o
u n g a r y
11
Econ 515,
Growing, but slower than average More important for developing countries, because of their comparative advantages But rely on markets in developed countries
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12
Road Map
A Brief History
Part 1: Industry overview
1949 – 1979: Pre-reform Period
The world textile and clothing industry Overview of China’s textile and clothing industry
In 1949, the total output of the textile and
clothing industry was 4 billion yuan, which accounted for 38% of the China’s industrial output value Part 2: Analyzing China’s clothing industry Part 3: Competing in the world market
Econ 515,
® Larry Qiu
13
Econ 515,
14
® Larry Qiu
Major Economic Indicators of China's Textile and Clothing Industry
Development since 1979 Items
Chosen as a pillar industry Infrastructure and experience Labor-intensive
Unit
Increasing profit, reducing employment,
® Larry Qiu
1999
2000
2001
2002
2004
Billion Yuan
763.61
764.67
768.47
889.45
932.64
1064.44
1610.7
Industrial Added Value
Billion Yuan
183.56
171.61
191.03
221.61
232.11
264.94
398.9
Sales Revenue from Textile Products
Billion Yuan
671.76
653.63
707.18
833.94
866.36
1002.43
1548.1
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
51.34
10.65
8.59
7.77
7.38
7.63
7.89
8.96
Total Employment
increasing efficiency (next slide) Econ 515,
1998
Total Industrial Value
In 1983, China abandoned its coupon
allocation system (boost demand)
1997
Million Persons
_
10% of manufacturing output, 15% of industrial employment 15
Econ 515,
® Larry Qiu
16
China's Textile and Garment Exports in the World
Year
World Exports (Billion USD)
1980 1985 1990 1995 2000 2001 2002 2003 2004
95.5 103.2 218.9 307.7 356.4 340.67 355.07 395.36 454.53
China’s China’s Shares Exports (%) (Billion USD) 4.41 4.6 5.29 5.1 13.85 6.3 37.97 12.3 52.08 14.6 53.48 15.7 61.87 17.4 78.96 20.0 97.39 21.4
China’s Rank
9 6 4 1 1 1 1 1 1 Contribution to the country’s exports
Contribution to the world exports Econ 515,
17
® Larry Qiu
Econ 515,
18
® Larry Qiu
Export feature 2: cotton-made products and chemical fabric goods dominate the exports of textiles and clothing (70%)
Export feature 1
70
40.00
60
35.00
50
30.00 Silk-Made Product
40 Percent (%)
%
80
Textile
30
Garm ent
20
Hair-Made Product
25.00
Cotton-Made Product 20.00
Linen-Made Product Chemical Fabric Product
15.00
10
Other Product 10.00
Year
0 1980
1985
1990
1995
2000
2001
2002
2003
5.00
Fig. 2.1. Product Mix of China's Textile and Garment Exports
0.00 1998
® Larry Qiu
2000
2001
2002
Ye ar Fig. 2.2. Composition of China's Te xtile and Appare l Exports
Comparative advantages Econ 515,
1999
19
Econ 515,
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20
Export feature 3: Third, the processing trade still plays a very important role in China’s textile and clothing industry.
Export feature 4: import and export market concentration
China's Textile and Apparel Processing Trade (Billion USD)
F.g 2.3 China Textile and Apparel Exports in 2004
Total Textile and Apparel Export Textile and Apparel Processing Export Share of Processing Trade
1999
2000
2001
2002
2004
43.06
52.08
53.28
61.77
97.93
20% 28%
Japan Hong Kong
20.33
22.43
22.18
22.05
28.29
47
43
42
36
29
The U.S. EU 20%
6%
Russia Others
13% 13% Smiling curve Econ 515,
21
® Larry Qiu
28%
6%
Cotton Fabrics
Chemical Fabrics
29%
Summary
Knitted Fabrics
Textile Machinery
Bast Fiber
Fig. 3.1. Distribution of Total After-Tax Profits in the Textile and Clothing Industry (2000) Econ 515,
® Larry Qiu
The world textile and clothing industry Overview of China’s textile and clothing industry
Wool Fabrics Silk Fabrics
23%
22
Part 1: Industry overview
Garments 3%1%
® Larry Qiu
Summary
Which products are more important?
5% 5%
Econ 515,
23
Econ 515,
It had a strong start Dominant position in the world market Important industry in the domestic economy and export Apparel is getting more important vs. textile Smiling curve improvement ® Larry Qiu
24
Case Discussion: Shartex International Trading Co. (CEIBS Case-505-018)
Road Map Part 1: Industry overview Part 2: Analyzing China’s clothing
Formerly the No. 2 Business Department of the
Shanghai branch of the China Drawnwork Import and Export Company (CDIEC): a textile trade unit handling garment exports. Major clients were Hong Kong and Taiwanese trading companies. The traditional role of trading company was reduced after the reform Shartex: 1999, a joint-stock company, 51% by CDIEC and 49% by employees and managers
industry
Five forces How to win in this market
Part 3: Competing in the world market Econ 515,
25
® Larry Qiu
Econ 515,
Case Discussion: Shartex
Where is Shartex?
26
® Larry Qiu
Link
Agriculture
Shall Shartex give up its focus on trading? If yes, then how to increase its bargaining Yarns, fabrics
power vis-à-vis its suppliers, and its buyers? If no, then it should enter the manufacturing segment of the industry. Shall it produce its own products? Is entry easy?
Design, cutting & sewing, clothes
Come back to answer these questions after the 5-forces analysis
Market Econ 515,
® Larry Qiu
27
Econ 515,
® Larry Qiu
28
Five-forces analysis of the structure of China’s T&C industry
Excessive entry: barriers to further entry Policy barriers Export quota allocation system Quota elimination, but experience and marketing network can serve as an entry barrier
1. Entry Financial and technological barriers are not high Garment production remains very labor-intensive
Total Number of Firms in the Industry over Time
Some textiles are more tech and capital intensive (e.g.
chemical fibers), some are more resources intensive (e.g. cotton yarn)
Econ 515,
29
® Larry Qiu
Cluster and location barriers Internal economies of scale? No. External economies of scale? Benefit from clustering. Government push is both necessary and justifiable
Zhejiang
Jiangsu
Shanghai
Shandong
32.58
9.54
11.83
11.93
7.23
1998 1999
29.24
11.17
13.19
13.14
8.13
2000
25.42
14.04
14.38
13.58
9.04
2001 2002
22.75
16.35
15.3
13.61
9.68
2004
18
22
16
12
9
Econ 515,
® Larry Qiu
1995
1996
1997
1998
1999
2000
2001
2002
2004
#
53600
51200
45600
19300
18900
18862
21412
23600
23600
Econ 515,
® Larry Qiu
Large-scale firms only
30
2. Competition There were more than 24,000 firms in the textile and
Distribution of the Top Five Regions of China's Textile and Clothing Exports (%) Guangdong
Year
Total
clothing industry in 2002 (more). Competition leads to more than 20% of the firms losing money Different categories of this industry’s products exhibit
different degrees of competition.
73.11 74.87 76.46 77.69 82 77
31
Econ 515,
® Larry Qiu
32
Garments
How do firms compete? Ningbo Youngor Co Ltd. (宁波雅戈尔) Top apparel sales in 2002 Reorganizing a network of 370 direct management stores and 500 franchised retail stores (POS info management system) Build brand, overseas market Shanshan Group Co Ltd. (杉杉) No. 2 apparel sales in 2002 JV to produce high quality men’s suits (3000-6500 yuan vs. 1000-1500 yuan) Extend product line to ties, shoes, etc.
The industry is making profit but fierce competition There were 7797 garment firms in China in 2002. Many small firms producing under constant returns
to scale, thin profit margin, quota elimination simply leads to output expansion, not about efficiency But some are very large:
Econ 515,
In 2003, Younger’s (雅戈尔 ) share in shirt market was 11.03% and its share in men’s suits market was 12.7%. Shanshan Group Co Ltd. (杉杉). 33
® Larry Qiu
Econ 515,
® Larry Qiu
34
® Larry Qiu
3. Substitutes (demand)
Some of the strategic variables chosen by firms Product features and quality Targeting of customers Product line Product standardization Technological leadership Research and development Product marketing and positioning Market development and education Provision of complementary goods Delegation of decision making “Build to order” or inventory Flow of internal communications
Econ 515,
vertical integration cost reduction focus service provision warranties input pricing government relations brand identification inventory levels product pricing distribution channels types of corporate divisions geographic markets
35
No close substitutes Intra-industry substitution vs. inter-industry substitution Sales of Apparels in Main Big Department Stores in China in 2002 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
Jeans wear
100 pieces
26,545
4.4
Jacket
100 pieces
37,681
13.1
Cold-resistant apparel
100 pieces
79,151
38
Leather apparel
100 pieces
4,664
-21.9
30,196
-9.7
Weaved underwear
100 pieces
409,831
9.8
Knitted sweater
100 pieces
165,567
7.3
item
Fur coat
Econ 515,
® Larry Qiu
36
4. Bargaining power of buyers (demand)
GDP, Consumption of Clothing and Engle Coefficients
Demand Analysis GDP growth and textile and clothing consumption
Fiber consumption in China in 1995 was 4.6 kg per capita 4.2 kg in developing countries 19 kg in developed countries Income growth 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%. Next slide. 8% per capita GDP growth in the future, translating to 3% textile and clothing domestic demand growth, or 20 billion yuan increase in revenue
Rural Household’s Per Capita Expenditure on Clothing
Share (%) of Consumptive Expenditure
13.36
-
7.77
13.55
89.79
6.85
500.46
10.01
95.18
5.75
7651
533.66
10.05
-
5.67
2002
8184
590.88
9.8
104.54
5.72
2003
9300
637.72
9.79
109.5
5.67
2004
9400
686.79
9.56
119.6
5.56
2005
9600
800.51
10.08
147.9
5.81
Average Growth Rate between 95 and 02
7.75%
3.03%
Engle Coefficient
2.20%
Engle Coefficient
Per Capita GDP (yuan)
Urban Household’s Per Capita Expenditure on Clothing (yuan)
Share (%) of Consumptive Expenditure
1990
4854
170.90
1995
4854
479.50
2000
7086
2001
Increasing expenditure Econ 515,
® Larry Qiu
37
Econ 515,
® Larry Qiu
Engle coeff increases in rural
Cotton
5. Bargaining power of suppliers (cost)
Econ 515,
® Larry Qiu
Cotton
Wool
1999
6692
63772
2000
7411
103731
2001
7586
104917
Cotton textile producers do
2002
18644
103777
not have strong bargaining power (70% of the cost)
2003
317624
120715
2004
319709
131797
2005
116885
91335
producing country in the world (24%) China is the largest cotton-
consuming country because of its large production of garment products
Raw material supply Rich in resources in absolute term, but not so in relative term; abundant in some but not in others Abundant supplies of some fibers such as ramie, silk, and angora rabbit hair Insufficient in cotton, wool, and manmade fibers
39
38
China’s imports (USD10,000)
China is a major cotton-
Two groups of suppliers Textile producers supply for clothing production Raw material suppliers for textile production
Strong demand
Econ 515,
® Larry Qiu
40
Summary
Garments
Part 1: Industry overview
Two groups: import and domestic textile suppliers
Part 2: Analyzing China’s clothing Import: high quality, large bargaining power
industry
Domestic: low quality, low bargaining power
Size but not strength Massive production without branding Following but not leading Diversity without focus Where in the smiling curve?
Econ 515,
® Larry Qiu
41
Econ 515,
42
® Larry Qiu
Road Map Design
Part 1: Industry overview Part 2: Analyzing China’s clothing
industry
High quality textile
Five forces How to win in this market
Production
Part 3: Competing in the world market Econ 515,
® Larry Qiu
China 43
Econ 515,
® Larry Qiu
44
Case Discussion: Shartex
Case Discussion: Shartex
Link
It tried to follow the Li&Fung model:
It chose to focus on trading Why and how? It repositioned its target clients from trading companies in HK
reorganizing the company structure to establish/focus on supply chain management The Li&Fung Model: a HK-based export trading company with a turnover of more than $5.5 billion and a network in close to 40 countries.
and Taiwan to garment retailers in Europe and the U.S., specifically the low-and middle-end fashion apparel companies and retail chains, including department stores and supermarkets. Could it get these buyers to purchase from Shartex? How can it guarantee the product design, materials, delivery, quality control, etc?
Econ 515,
45
® Larry Qiu
Market
Li & Fung
Econ 515,
® Larry Qiu
46
Specific Questions for T&C Industry How to deliver your clothes to consumers when
Shipping
Order
Design
Quotas Logistics Supply Chain
Materials
How would you build your brand in this market when
everyone can produce clothes (no barrier to entry)? The export quotas have been (or would be)
Q control Manufacturing
department stores have strong bargaining power to force suppliers to reduce the wholesale prices?
abolished, should you get more orders from foreign clients and expand your production capacity?
Econ 515,
® Larry Qiu
48
Case Discussion: Shanshan
Shanshan: The Reform
(ACRC 05/211C)
Its predecessor: Yingxian County Yonggang
Garment General Factory, 1984 The first production line for suits in China as well as foreign patterns, fabrics, techniques and tailoring, etc. 1989: RMB3 million in debts, unable to pay the 300 employees Suits for wages at RMB12 each
Econ 515,
® Larry Qiu
49
May 1989 Zheng Yonggang, director Changed the name to Shanshan Recalled all the suits Looking for means to differentiate the company’s products from the others, how? He took out a loan of RMB100,000, 60% in TV commercials in Shanghai, 40% as start-up fees for ten clothing stores in downtown Huge (unexpected) success: RMB100-200, even 300, all sold out in 3 days
Econ 515,
® Larry Qiu
Shanshan: Its Road to Brand Building
Shanshan: Its Road to Brand Building
The first strategy: brand building “Shanshan, the No.1 brand in suits in China” Advertising was the first move Firs suits. You can never be too cool Stay strong. Challenge the future From 1993 to 1999, top in suits sales, 37%
Designers RMB 1 million Design headquarters Lafancy: high-end product, RMB2,000 per suit, whitecollar women Fashion shows Milestone in the garment industry in China: from
garment industry to fashion industry To make it international Joint ventures with Japan, Italy and others Introduced 8 brands
market share. Profit margin 50 times of the industry average.
Econ 515,
® Larry Qiu
50
51
Econ 515,
® Larry Qiu
52
Shanshan: The Problems
Shanshan: The Problems
Results
How to protect its brands from piracy? Discard the previous sales agent arrangement and
Gross profit went up Sales and market share dropped, lost to Youngor. Franchising is no panacea. What is the problem? What to do with it? Since 2004, Shanshan began a new round of reform: to reclaim franchise stores in major cities Sales channels -- self-owned: controllable (JV): franchised: 1:2:3 What do we learn from this case?
opt for “specialty stores”. Unsold inventory as a result of over supply in the
economy. Two reforms
Econ 515,
Switch the core business from production to design and brand management Switch the distribution system from wholly-owned specialty stores to franchise. Nike, smiling curve, can shanshan do it?
® Larry Qiu
53
Econ 515,
® Larry Qiu
54
Road Map
Case: Li & Li
Part 1: Industry overview
Mr. Li was a manager in a garment company
Part 2: Analyzing China’s clothing industry
before 2004. The company had two factories in China, one in Cambodia, one in Mexico and one in Turkey. It had a headquarter in HK. He, and some other managers, bought out the company with RMB 5m in 2004. This is part of the state-owned enterprises reform: partial or complete privatization
Part 3: Competing in the world market
Econ 515,
® Larry Qiu
55
Econ 515,
® Larry Qiu
56
Case: Li & Li
Case: Li & Li
Problems faced SOEs enjoyed some quota advantages over private firms, but now it is equal competition: increased competition, low entry barriers Existing employees are used to the lifetime employment environment: culture and management The company does not have its own brand, does not have high-end clients: product and market Focus: In view of the abolishment of export quotas in the beginning of 2005, Should the company close down its plants outside China? Should it expand its production capacity and get more orders from US and EU markets? Econ 515,
® Larry Qiu
It tried to close down its overseas plants and
planed to receive more orders. It makes sense for the company to do so But it does no make sense for the whole industry/country to do so Then, what should be a good strategy?
57
Econ 515,
® Larry Qiu
58
59
Econ 515,
® Larry Qiu
60
MFA, Quotas and Protection Multifiber Arrangement (MFA) in the 1974 Bilateral agreement: The China-US Textile
Agreement, signed in 1980 (1997) China-EU Textile Agreement The GATT/WTO, phaseout period, 2005 Evidence of export surge
Restrictions on bras were phased out in 2002, bra imports by the US from China more than tripled in 2003. Infant wear restrictions ended in 2001, Chinese exports of infant wear skyrocketed by 298% in 2002 and 81% in 2003 2005?
Econ 515,
® Larry Qiu
The largest five exporting countries to the US T&C market (Jan-Feb 2005)
Ranking
Econ 515,
® Larry Qiu
61
Countries
Imports (0.1 B USD)
% change from last year
Market share of imports （%）
36.02
33.47
1
China
10.55
2
Canada
2.64
1.36
8.39
3
India
2.56
16.69
8.13
4
Pakistan
2.25
4.66
7.14
5
Mexico
1.69
1.06
Econ 515,
® Larry Qiu
5.36
62
WSJ, Nov 10, 2005 Econ 515,
® Larry Qiu
63
Econ 515,
® Larry Qiu
64
What happened?
MFA, Quotas and Protection China voluntarily imposed export tax on 148 products
Piles of Chinese clothing were trapped in the
ocean terminals waiting to clear the customs. The negotiation between China and EU The negotiation between China and the US.
Econ 515,
® Larry Qiu
65
in six categories (coats, skirts, trousers, shirts, nightwear and underwear)
0.2 to 0.3 yuan for every piece or set of finished apparel garments 0.5 yuan per kilogram of clothing parts or accessories
Are the taxes sufficient? What’s the benchmark? Quota prices $2.70 per pair of trousers $2 to $3 per finished garment (including sweaters, sleepwear, coats, jackets, and dresses and skirts) $13.57 for winter outerwear
Econ 515,
66
® Larry Qiu
Industry analysis framework applied to China’s textile and clothing
Summary
Exit
Market
Entry
Part 1: Industry overview Part 2: Analyzing China’s clothing industry Part 3: Competing in the world market
Costs, location, technology, product
• The effects of trade policy (opportunity) High-end or low-end
• Increasing international competition (risk)
Demand competition
• China’s comparative advantage (focus of the value chain)
Econ 515,
® Larry Qiu
Profits Revenue
Cost
Labor, materials, supply competition
67
Econ 515,
® Larry Qiu
The five forces
Costs, options
Labor, resale value
acquisition
68
