Economy, Talking Point

End of the line

Bangladesh sees garment growth, but China hasn’t lost its label yet

End of the line

Soon to be a thing of the past? Chinese clothing manufacturers face competition from low cost rivals

“$18 a dozen, quality absolutely guaranteed” sounds like a fairly standard sales pitch. Especially as it was heard last month at a trade show in Shanghai from Tang Qun, a factory boss from Jiangsu.

More unusual, said Global Entrepreneur magazine, was that the shirts Tang was selling were made in Bangladesh – and were 30% cheaper then those of his China-based rivals.

Tang claims to have made his first business trip to Bangladesh in 1994, when his peers scoffed at the notion that China would ever be challenged as a garment powerhouse. Now he sells clothes made by a factory that he owns in Dhaka, one of at least 4,000 garment producers in Bangladesh, which together employ 3.5 million workers.

This gives Bangladesh the largest production capacity after the Chinese, as well as second place in global share for garment exports last year. McKinsey, the consulting giant, has even taken to calling Bangladesh “the next China” of the garment world, predicting that its current exports of almost $20 billion a year could triple in value by 2020.

Alongside the rise of other Asian exporters, like Cambodia and Vietnam, the implication is that China’s own garment firms are facing a new threat, as buyers shop around for cheaper goods and producers set up operations in more cost-effective surroundings.

Could this be the beginning of the end for the dominance of the ‘made in China’ label, or is the challenge from producers in places like Bangladesh being overstated?

So garment manufacturing in China is in decline?

Tales of the industry’s woes tend to draw on high profile cases of multinationals upping sticks, or the dismal warnings of Chinese garment bosses that their industry is becoming increasingly uncompetitive.

The anecdotal evidence can sometimes point to companies transferring production elsewhere. Adidas closed its final factory in China in October, moving most of its operations to Southeast Asia (see WiC160 for earlier news of the switch). Nike did something similar two years ago for its running shoes, making Vietnam its largest production base.

Even Chinese businesses have been looking further afield, including online clothing retailer Vancl, which has been placing orders with Tang’s factory in Bangladesh, according to Global Entrepreneur.

This ‘great migration’ is enough for another garment boss – this one from Fujian – to liken producers in China to nomads, as they consider whether to move more of their own operations overseas in response. “There is no grass here any more, so we must go abroad where there is still some grazing,” he lamented.

But doesn’t China lead the pack in garment exports?

Claims that countries like Bangladesh are posing a mortal threat to China’s garment makers have to deal with the data, which shows a different story.

Certainly, Bangladesh’s garment trade has grown quickly in recent years to $18 billion in exports last year. But this is still a fairly minor amount compared to China’s sales overseas, which saw $117 billion worth of exports over the first nine months of 2012, according to Xinhua.

An analysis of China’s share in key markets, such as the United States, offers further context on its perceived decline. So says David Birnbaum, a garment specialist at Third Horizon, an advisory firm that works with a variety of industry clients in Asia. Talking to WiC this week, Birnbaum recognised that China’s market share dropped in unit terms in the US last year – the result perhaps of retailers destocking at a time when Chinese producers were struggling with increasing costs for labour, materials and overheads. But China was still by far the largest source of garments sold to American consumers in 2011, after taking share for much of the previous two years. That left it in a strong position. “Can you really call China a loser, when it still has 39% of the market?” Birnbaum asks.

How about the challenge from other markets? “If you group the ASEAN countries together, they would have about 23% of America’s garment imports,” Birnbaum continued. “But these countries don’t operate as a bloc. And in individual terms, China is so much bigger than all of them.”

Aren’t the others going to challenge China with lower wage costs?

That’s how their main competitive advantage is usually framed, especially in a context of rising wages for factory workers across most of the Chinese provinces. Additionally, it is getting harder for garment factories to source labour in China, with workers preferring to look for employment in other industries. This recruitment challenge will grow in future, too, because of China’s fading demographic dividend.

Wage differentials are difficult to measure, with different companies paying different rates to their workers. But at the lowest end of the pay scale, Bangladesh has a legal minimum of 3,000 taka a month (about $37 or 14 cents an hour). Some companies pay their workers more but, even so, the Bangladeshi average out-competes Chinese wages (in the $500-600 a month range) by as much as a factor of 10. Wage levels in Vietnam are higher than Bangladesh but still substantially down on China, says Birnbaum, at between $200 and $300 a month.

But pay needs to be adjusted for productivity, with analysis from McKinsey last year suggesting that Bangladeshi output was 30-40% below Chinese levels. But even then, basing a competitive assessment purely on the cost of labour would be misleading. Even factoring in productivity differences, China doesn’t look competitive in pay terms, and certainly not to a degree that explains its disproportionately large share of garment exports globally.

The answer, of course, is that labour is just a single component of the overall production cost, and that in a number of other areas, China has more of an advantage over its rivals.

So where is China stronger?

Simply put, China’s garment factories operate in more productive conditions than the majority of their rivals in other markets. Two of the most obvious advantages are in infrastructure and energy supply. Again, a comparison with Bangladesh – where only 45% of households have access to electricity – is instructive. Disruption from power outages of up to eight hours a day is relatively common, according to a World Bank study released in July.

An underdeveloped road network also adds significantly to delivery times. The primary culprit is the main highway between Chittagong and Dhaka, which carries most of the garments headed for export. Almost the entirety of its 200km length is two-lane and much of it woefully congested. Attempts to upgrade the road began more than two years ago but the work is largely incomplete, Bangladeshi newspaper the Daily Star complained last week, after local resistance to earthmoving efforts on adjacent agricultural land.

The contrast with the speed of implementation of most of China’s infrastructure projects is meaningful. And while they wait for the road to be widened, Bangladeshi garment firms have to put up with journey times of as long as 15 hours, says Global Entrepreneur.

There are similar challenges once garment trucks arrive at the coast. China boasts nine container ports in the world’s top 50 (including Hong Kong) but Bangladesh relies on a single point, Chittagong, an outdated facility lacking deep-sea mooring. Again, the government has promised to address the bottleneck and a Japanese firm was commissioned three years ago to outline a plan for a larger, more efficient port. But little has happened since, despite various offers (Chinese included) to build it.

Of course, this creates much longer lead and delivery times in a time-sensitive industry. The internet retailer Vancl is experiencing this too. Media reports from earlier this year suggest that it was facing production cycles of as long as six months for its orders from Bangladesh, far in excess of the 30-45 day deadlines demanded of Chinese manufacturers. And without significant investment in its wider infrastructure, it’s difficult to see how Bangladesh will be able to take sizable market share from China-based manufacturers in the future.

How about product range and quality?

Another of China’s advantages is the cluster effect – the benefit of producing in locations in which hundreds of suppliers and manufacturers have gathered.

Sometimes these clusters can be highly specialised. WiC has talked before about “clothing capitals”, where towns and cities concentrate on a particular product, like Zhili in Zhejiang which produces children’s clothing, or Datang in Sichuan, which makes six billion pairs of socks a year.

The clusters offer customers the chance to scale up or switch production much more easily than many of the alternative options in other countries. But they also help the manufacturers, by embedding an industry supply chain within an easily accessible area, and driving down the costs to produce.

“Compare that to how the industry worked in the early 1980s,” Birnbaum told WiC. “Back then, the Hong Kong firms would send containers full of fabric across the border, with written instructions for the Chinese factories on how to make the garments. But now the facilities there are some of the largest and most sophisticated in the world. It’s the same with access to fabric – the material is either already being made locally or the manufacturers will know how to source it quickly and cheaply.”

Additionally, China’s product mix is far more diversified than other garment exporting markets, which tend to be much more reliant on the four basic commodity products: cotton T-shirts, cotton trousers, woven shirts and underwear. But China offers a much fuller range, in many cases dominating the garment category.

Birnbaum uses the example of women’s wool sweaters: “You can go to China (87% market share). You can go to Italy (6% market share), a great alternative if you are Giorgio Armani or Ralph Lauren. After that you have the UK (1% market share), followed by Peru (0.6%). But for all practical purposes your choice is China, China or China. And what is true for women’s wool sweaters is equally true for cotton sweaters, wool knit blouses, women’s wool suits, men’s synthetic jackets and 36 other products. It does not matter if prices rise substantially. You have to stay with China because no other country supplies your product.”

So what lies ahead?

There is no room for complacency from the Chinese producers, although Birnbaum’s view is that it is the decisions of the leading multinational garment makers like Esquel Group or Crystal Group (both headquartered in Hong Kong) that will be crucial in setting industry direction. China’s state-owned firms are less likely to explore options in other markets, but the multinationals will assess their options if costs rise at a faster pace in China than in other markets.

Another factor for the foreign firms is the “China plus one” strategy, designed to reduce dependence on Chinese operations. The recent unhappy experience of Japanese carmakers – which faced industrial turmoil in China when Beijing and Tokyo fell out over a group of disputed islands – was an eye-opener for many manufacturers. To hedge their risk, some firms now want to have factories not just in China but in another country (the ‘plus one’).

Then again, for many a more pressing priority is figuring out how to reduce costs in China itself. Foxconn, Taiwan’s best-known manufacturer in mainland China, seems to have taken a similar view, opting to move inland to less-developed provinces in search of lower costs for its contract electronics business. And some firms are already back in China after trying their luck overseas. Zhang Yuanheng, a general manager at Max Group, a shoemaker from Taiwan, told 21CN Business Herald last month that he knew of a number of Taiwanese manufacturers who had already returned after an unsatisfying stint in other markets, with cultural differences, lower productivity, unconvincing infrastructure and logistics costs largely to blame. So don’t write-off that ‘made in China’ label just yet…

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