No End in Sight - Why China Is Still King in Garment Manufacturing?

Here are three questions to test your fashion manufacturing IQ, from easiest to hardest. First question: Which country is the world's leading textile and fashion manufacturer? The answer should come easily to anybody working in fashion: China is the undisputed manufacturing leader in everything from women's handbags to men's neckties and will remain so, for some time to come.

Next question: Who are Ma Ke, Masha Ma and Ji Wenbo? Are they unfamiliar names? Maybe now they are, but here's a clue to their profession: Imagine traveling back in time to Japan in the late 1970s to mid-1980s-when Japan's economy was booming-and seeing small Tokyo boutiques from Issey Miyake, Yohji Yamamoto, or Kenzo Takada. Back then, would those names have rung a bell with international consumers? Most likely not, but today they are among the global leaders in fashion and design. In the same way, Ma, Ma and Ji are at the forefront of the new fashion trend: Chinese designers finding new success at home and abroad.

Here's the last question: What do Bangladesh, Vietnam, Bulgaria and Tunisia all have in common? Not much, you might think, but they share at least one characteristic today: They are all vying for a piece of the global fashion manufacturing pie by becoming competitors to China as outsourcers. Furthermore, they all have lower labor costs than China. These markets have other advantages over China. In the case of Bulgaria, it is closer to the large consumer markets in the EU and, in the case of Tunisia and Vietnam; their managers might be able to speak better French than the typical Chinese factory owners.

There have been a growing number of articles in major media all trumpeting the end of cheap manufacturing in China. There are an equal or greater number of company executives in such articles claiming they have moved or will be soon moving manufacturing away from China because of rising costs. Is this really a trend, or is it just sensational journalism?

Here are some facts that are often reported alongside the quotes of sourcing managers commenting about China's loss of competitiveness: China's labor costs are rising, rapidly. In some industries, textiles and fashion included, wages are up 15% a year or more depending on the region. A second commonly reported fact is that China's national five-year plan stresses the importance of value-added industries, which would seem to leave light manufacturing of basic clothing out in the cold.

Here are some other facts, which are less-often reported in the same articles. China is, depending on whose survey you read, the world's number one or number two consumer of luxury products. Second, China's five-year plan also stresses the development of a consumer-driven economy: Retail sales, for example, have been growing at greater than 15 percent for the last five years.

This presents an interesting decision for the garment industry companies that source in China: Should they continue sourcing in China, even though there are other, cheaper, manufacturing locales elsewhere?

First, the cost differential means that China is certainly no longer the cheapest, but it is still cheap. Furthermore, the difference between a cheaper China and the cheapest manufacturer of some garment is not an order of magnitude larger; it is sometimes negligible at best.

With the price of cotton and other commodities so high, a t-shirt that might cost $1.05 in China could be produced for $0.95 in Bangladesh. Is that ten cents of savings worth the logistical issues that manufacturing in Bangladesh- prone to flooding might entail? Can the appropriate subcontractors be found in the supply chain there?

Would they be as numerous or as experienced as the China textile supply chain has become? Not to mention that the Bangladeshi Taka fluctuates wildly against the dollar, euro and yen.

And while the low quality connotations of "made in China" still applies to many products and regions, Chinese manufacturers are climbing up the value chain in high-tech materials, sports wear and safety wear. They may still depend on their clients to bring the technical expertise to them initially, but a cycle or two is usually all it takes to get the hang of it. All one needs to do is look to Italy's famous garment and textile towns such as Biella and Como, where centuries-old, family-run businesses making the highest quality silks, wool, cashmere, and leather, have shut down, or outsourced manufacturing to China.

"We used to be the Chinese of Europe;' says Carlo Piacenza, who runs a 270year old cashmere company Fratelli Piacenza with his brothers. In the 1950s and 1960s, we took the market from England and France. Now we have to be prepared to leave this to someone else."

Fratelli Piacenza is just one company among hundreds from Italy that has shifted manufacturing to China. And it has not taken long for their suppliers to create the quality of materials and garments that were developed over decades in these pioneering Italian towns.

Now the business case for outsourcing to Bulgaria or Tunisia is simpler: While those countries may not be significantly cheaper than China in terms of production costs, they are much closer to the large consumer markets in Europe, meaning logistics costs and transportation are likely to be lower, and overnight deliveries are possible.

As time to market is becoming even more critical, with fast fashion business models like that of Inditex's Zara setting the bar - China is losing the advantage here.

The dilemma for companies like Zara, and any firm that sees China as a growing market worth being in, is that having manufacturing outside of China will be a liability when it comes to selling in China. Having the cake and eating it too just will not be an option considering how China protects its domestic markets from imports, either via tariff (e.g., taxes on luxury products) or nontariff barriers (e.g., high standards for quality). As AI Gore once pointed out in relation to cars, China has tougher emission standards than the United States. The same high standards are found in everything from bottled spring water to cosmetics: China uses these rules to block or penalize foreign manufacturers.

As for the issue of low value-added light manufacturers no longer being offered preferential tax credits and other incentives for China, which is true, those incentives will not be coming back. Export credits on the other hand, for manufacturers in China, are far more likely.

A growing number of mid-market and even luxury brands are coping with this trend by producing some or all of their complex or luxury garment products in mainland China. One example is Coach, which makes many of its bags in China already, and as a brand is increasingly popular with Chinese consumers. While "Made in China" may still carry an unfashionable image with today's Chinese consumers, and is synonymous with "cheap" in the West, this is changing on both counts.

As China moves up the value chain, as its consumers become richer and as its market becomes bigger (and eventually biggest in the world), producing in China is going to be the smarter move. If you don't believe it, ask the consumers of Issey Miyake's many brands, the eponymous Kenzo stores, or Comme de Garcons if Made in Japan had anything to do with their popularity in their home countries. For Ma, Ma and Ji, they already know the answer.

(Courtesy: Jason Inch, author of the new book, China's Economic Super trends, and is a consultant and independent economist based in Shanghai)

This article was originally published in the New Cloth Market magazine, October, 2012.