The China and Hong Kong Denim Industry
The China and Hong Kong Denim Industry
Y.LI, L.YAO and K.W.YEUNG
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The China and Hong Kong Denim Industry
The China and Hong Kong Denim Industry
Y.LI, L.YAO and K.W.YEUNG
Thelkxtile Institute WOODHEAD PUBLISHING LIMITED Cambridge, England
Published by Woodhead Publishing Limited in association with The Textile Institute Woodhead Publishing Limited, Abington Hall, Granta Park, Great Abington Cambridge CB2 1 6AH, England www.woodheadpublishing.com First published 2003, Woodhead Publishing Limited 0 Woodhead Publishing Limited, 2003
The authors have asserted their moral rights. This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. Reasonable efforts have been made to publish reliable data and information, but the authors and the pubiishers cannot assume responsibility for the validity of all materials. Neither the authors nor the publishers, nor anyone else associated with this publication, shall be liable for any loss, damage or liability directly or indirectly caused or alleged to be caused by this book. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming and recording, or by any information storage or retrieval system, without permission in writing From Woodhead Publishing Limited. The consent of Woodhead Publishing Limited does not extend to copying for general distribution, for promotion, for creating new works, or for resale. Specific permission must be obiained in writing From Woodhead Publishing Limited for such copying. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation, without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. ISBN-13: 978-1-85573-694-8 ISBN- 10: 1-85573-694-2 Printed by Victoire Press, Cambridge, England
Contents
1
Introduction Reference
1 1
2 2.1 2.2 2.3 2.4 2.5 2.6 2.7
Yarn Manufacturing in China Production capacity Rotor spinning and ring spinning production Denim yarn consumption Production by region Machinery Contamination Political and strategic significance of denim yarn manufacturing summary References
2
Denim Fabric Manufacturing in China 3 3.1 Production capacity 3.2 Production 3.3 The market 3.4 Major products 3.5 The main uses of denim fabric in the domestic market 3.6 Production by region 3.7 Sales by region 3.8 The costs of machinery 3.9 Raw material quality control 3.10 Technology development V
2 2 3 3 4
5 5 9 10 11 11 11 12 23 23 24 24 25 26 26
27
summary References
4 4.1 4.2 4.3 4.4
4.5 4.6
5 5.1 5.2 5.3
27
China Denim Apparel Industry Production Markets Production of major denim products Sales of major denim products Production and sales by region Industrial development and management implications summary References
28
Distribution Channels in China Introduction to marketing channels Distribution channels in China Development and management implications References
48
28 28 38 39 40
41 46 47
48 51
55 55
6
SWOT Analysis for the Chinese Denim Industry
57
6.1
Introduction Strengths Weaknesses Opportunities Threats summary References
57
6.2 6.3 6.4 6.5
58 60 63
66 68 68
Five-forces Competitive Analysis 7.1 Porter’s five-forces model 7.2 Threat of entry 7.3 Intensity of rivalry among existing competitors 7.4 Pressure from substitute products 7.5 Bargaining power of buyers 7.6 Bargaining power of suppliers Summary References
7
vi
70 70 71 73 73 74 75 75 76
8
wToandsustainabeCoIllpetitivenessof~'s'IPxtileandClothing~ 77 77 8.1 Introduction 8.2 Sustainable competitiveness of the TC industry 78 8.3 Development of simulation model 79 8.4 Simulation results and discussions 81 8.5 China's textile and clothing industry and WTO 83 summary 84 References 85 9 9.1 9.2
10 10.1 10.2 10.3 10.4
11 11.1 11.2 11.3 11.4 11.5 11.6
12 12.1 12.2 12.3 12.4
The Hong Kong Denim Industry Introduction History References
86 86
Denim Productslkade Introduction Exports Re-exports Imports summary References
90
86 89
90
-9297 104 108 109
Industrial Environment The Hong Kong economy Manufacturing costs Infrastructure Institutions Foreign trade systems Government policies References
110
SWOT Analysis for the Hong Kong Denim Industry Strengths Weaknesses Opportunities Threats References
120
110 113 114 115
115 117 118
vii
120 120 122 122 123
13 Strategy for the Hong Kong Textile and Clothing Industry 13.1 Hong Kong textile and apparel industries 13.2 Hong Kong garments cluster 13.3 Textile and clothing industry developing stages model 13.4 Hong Kong fashion cluster development 13.5 Strategy summary
References
...
Vlll
125 125 126 132 136 136 142 143
Acknowledgment
We would like to thank The Hong Kong Polytechnic University for funding this research through the Area of Strategic Development: “Fashion” Design and Technology Innovation’’.
ix
1 Introduction
The denim industry in China has developed since the 1980s and China is now an important producer of denim. Extensive research into the capacity, market, and geographic distribution of China's denim industry, has been carried out by the Hong Kong Polytechnic University in collaboration with the All China Marketing Research Company, which is associated with the China Statistical Bureau [13. There are more than 1,000 manufacturers of yam, fabric and garments in-bkeChinese denim industry, and they consumed about 5 per cent of total world cotton. In 1997, 712,000 tons of denim yarn, 0.9 billion metres (1.3 billion square metres) of denim fabrics and 101 million Units of denim apparel were produced. Chinese denim exports have decreased in the past few years. Denim fabric exports fell from 757 million metres in 1995 to 420 million metres in 1997, and denim apparel exports decreased from 65 million units to 35 million units in the same period. On the other hand, the domestic market grew sharply over this period. Denim apparel has become a major product line in the Chinese clothing market. Chinese denim fabric and apparel manufacturers are mainly located in the coastal areas. Guangdong Province is the most important denim product manufacturing base, where more than 90 denim fabric manufacturers and 190 denim apparel manufacturers are located. About a quarter of all Chinese denim fabric and more than half of the denim apparel output came from Guangdong Province. The Chinese denim industry has a huge labor force and relatively low labor costs compared with other major denim manufacturing countries. For example, the labor costs in the textile sector in 1996 were US$25 per hour in Belgium, US$ 16.7 in Italy, US$12.3 in USA, US$4.9 in Hong Kong, US$2.02 in Turkey and US$1.52 in Mexico, compared to US $0.58 per hour in China and US$0.56 in India (Almanac of China's Textile Industry, 1996). However, the industry also has weaknesses in terms of backward technology, and is facing strong competition from other developing countries. On the other hand, Chinese denim industry has good opportunities arising from the huge and growing domestic market within China itself.
REFERENCE 1.
China Denim Market Research Report, (1998) Beijing, Hong Kong Polytechnic University-All China Marketing Research, Additional part.
I
2 Yarn Manufacturing in China
2.1 PRODUCTION CAPACITY
China is a large denim yam producer and consumer. Based on information from USDA [13 and the Statistics Bureau of China [2], China consumed more than 2 1.4 million bales (bale size 480 lbs) or 24 per cent of total world cotton consumption in 1996-97 [3], and one-fifth of total Chinese cotton consumption was used by the denim industry. The Chinese denim industry consumed about 5 per cent of the worlds cotton in 1997 [l]. In China, denim yams are mainly made by rotor spinning and ring spinning. China has 8.4 per cent of global rotor spun yam production capacity, with 600,818 spindles of rotor spinning in 1995. This peaked with 603,6 19 spindles in 1996, but fell to 572,500 spindles in 1997. China produced 701,593 tons of rotor spun yarn in 1995, 742,300 tons in 1996 and 708,050 tons in 1997 [l]. Rotor spun production is distributed across 28 provinces in China. In the past few years, the distribution of Chinese rotor spun production has shown three trends: a move to cotton-production areas, a shift to west-middle areas and a move away from big cities to small towns.
2.2 ROTOR SPINNING AND RING SPINNING PRODUCTION
Denim yams are mainly made by rotor spinning and ring spinning. More than 90 per cent of denim yam produced in China is by rotor spinning. In 1995, 727,000 tons of rotor spun yarns were consumed by the denim fabric industry, with 698,000 tons in 1996, and 662,000 tons in 1997. (See Fig. 2.1) Ring spinning accounts for around 7 per cent of the denim yam production in China. The denim fabric industry consumed 63,000 tons of ring spun yams in 1995, reaching 65,000 tons in 1996, and falling to 50,000 tons in 1997, a decrease of more than 23 per cent. (See Fig. 2.1)
2
800 1
I
Rotor spinning
1995
Ring spinning
1996
01997
2.1 Denim yarn consumption in China Fancy yarns have only a small share of the denim yarn market in China, accounting for less than 1 per cent of China’s denim yarn consumption in 1995-1997. There was, however, some evidence indicating that fancy yarn, drum spinning, corespun and fancy slub yarns were getting popular as the weft yarn of denim fabric as these fabrics were being welcomed in the market. The market for fancy yarn in China can therefore be expected to grow. (See Fig. 2.1) 2.3 DENIM YARN CONSUMPTION
The Chinese denim fabric industry consumed 790,000 tons of yarn in 1995. The volume fell &om 763,000 tons in 1996 to 712,000 tons in 1997. In China,about 86-90 per cent of denim rotor spun yams were pure cotton, 6’to 8’. Two to 3 per cent of denim rotor spun yams were 6’ and 14’ herdcotton; 1.5 - 2 per cent of denim rotor spun yarns were polyesterkotton and silkhotton; 3 4 per cent were 8’ and 21’ pure cotton of ring spun yarns; 2-3 per cent were ramiekotton yarn; and 1.5 - 2 per cent were polyester/cotton and silklcotton yam.
-
2.4 PRODUCTION BY REGION The following analysis covers rotor spun production by region in China, as rotor spinning is the most important system of denim yarn production in China. Important rotor spun production areas included Shandong, Jiangsu and Hubei Provinces, as shown in Figure2.2. Shangdong produced 127,000 tons of rotor spun yarns in 1997, Jiangsu 127,000 tons and Hubei 106,000 tons. The sum of the production these three provinces accounted for 44 per cent of China total rotor spinning output. Shandong was the most important rotor spun product base in China, accounting for about 18 per cent of China’s total rotor spinning output in 1997, though its fell &om 144,000 tons in 1995 to 127,000 tons in 1997. Shandong has developed more than 100,000 spindles of rotor spinning machines in the past ten years, distributed mainly in Qingdao, Jinan, Zhibo and Weifan. (See Fig. 2.2) Jiangsu is the second most important rotor spinning production area in China, and has established 90,000 spindles of rotor spinning machines in the past decade. Its output was 119,000 tons of rotor spun yarn in 1995, 116,000 tons in 1996 and
3
106,000 tons in 1997, accounting for about 15 per cent of China's total rotor spun yam output in each year. (See Fig. 2.2) Hubei Province is the third important rotor spun production area in China and its production has remained steady. Hubei produced more than 75,000 tons of rotor spun yarn in 1997, accounting for 11 per cent of China's total rotor spun yam output. (See Fig. 2.2) The provinces of Henan and Xingjiang each produced 6 per cent of China's total rotor spun yarn output in 1997. Heibei province accounted for 5 per cent of national rotor spun yarn production, while the other rotor spun producing provinces accounted for the remaining 39 per cent of China's total rotor spun output in 1997. (See Fig. 2.2) 2.5 MACHINERY
The rotor spun machinery used in the Chinese denim yarn industry could best be described as being "second class". About 62 per cent of the machinery has been made in China and includes the following models: FA61OA, FA61 l,622A, Fa62 1B, F 1602, CR2 and TQFl. Each of these has 190-230 spindles, 40,000-80,000 revolutions per minute, and a cheese weight of above 4kg. About 38 per cent of the machinery has been imported and includes the following models: AUT0288, RI, FRS, BDA-202, and BD-DI. Compared with the equipment made domestically, the imported ones have larger cheeses (4-6kg), faster ring speeds (40,000-130,000 revs per minute), more spindles, stable production quality, greater output, and can produce a wider range of products.
Rotor sp(nn1ng production by m i o n
43.oto 1000.0
Thousand tons L
2.2 Rotor spun production in China
4
W
2.6 CONTAMINATION
The hot and strongly colored textile-dyeing wastewater is notoriously known to contain a large amount of suspended solids, high COD (Chemical Oxygen Demand) concentration and a highly fluctuating pH. Dyeing of denim yam with indigo can be a significant source of wastewater problems. The contamination from denim dyeing arises principally from oxidized Alkali, which was used in the dyeing process. The indigo effluent in the denim washing process is the major pollutant of the colored wastewater. To minimize contamination in the denim process is an important project for the denim producer. Thus the recovery of indigo and pH control has been applied in the denim process. In addition, contamination also arises from denim washing. To make the denim apparel soft and to create different effects, stone washing, enzyme washing, bleach washing, Ice washing or snow washing is applied. This process produces a variablepH wastewater of considerable organic strength that contains high levels of color. In the developed countries, such as the USA, and the Europeans countries, there are strict laws to regulate the treatment and discharge of the wastewater from the textile dyeing and washing sector. The Chinese denim dyeing sector invested little on wastewater treatment at the beginning of the industry's-development. The low requirement for wastewater treatment attracted much foreign investment to the Chinese denim sector. China introduced wastewater control regulations in the 1980s; however, the regulations were paid little attention and only a small proportion producer adopted centralized treatment to minimize pollution of the wastewater. To save the costs on wastewater treatment, many manufacturers discharged the wastewater with little treatment. This has posed serious pollution problems in the Chinese coastal areas, where the Chinese textile industry is concentrated.
2.7 POLITICAL AND STRATEGIC SIGNIFICANCE OF DENIM YARN MANUFACTURING 2.7.1 Cotton distribution system reform The cotton distribution system before I999 China is the world's leading cotton producer and at the same time, the world's leading cotton consumer, accounting for about a quarter of the world's total output and consumption [3]. China's cotton output is largely absorbed by the domestic textile industry. Cotton is the most important raw material for the denim industry. The textile industry is one of the pillars of the China economy, as the leading foreign currency earner. To support the textile industry, the government kept control of the cotton supply in order to support the textile industry. Over a long period, the cotton supply was under a central plan, and the state was the only buyer of cotton. Cotton distribution and price were controlled centrally, even after China carried out its agriculture reform in 1978, when most kinds of agricultural production were released from state. The China cotton supply system (Fig 2.3) was controlled by the China State Council, which determined the uniform state cotton purchasing price. The 5
Government agency, the All China Federation of Supply and Marketing Cooperatives, was the single channel of cotton distribution. Cotton producers (private household or state farm) sell cotton to a purchasing station, which was deputized by the regional Cotton & Hemp Corporation, a regional government agency, subordinate to the regional Supply and Marketing Cooperatives. In the purchasing procedures, the cotton price was determined by the cotton quality, which was classified according to the national standard made by the Bureau of Fiber Inspection of China. The cotton was then sent to a regional cotton mill to gin and pack, before being distributed to textile enterprises by the regional Cotton & Hemp Corporation. The textile mills were required to submit their cotton consumption plans to the Cotton & Hemp Corporation of their province as a foundation for making a cotton-supply plan. The Corporation would then send a directive to the sub-Corporation to distribute the cotton to the mill following the plan. Chinese cotton imports and exports are mainly arranged by the China National Cotton Corporation, a subordinate of the All China Federation of Supply and Marketing Cooperatives. It is the most important channel for cotton imports and exports in China. There are also some enterprises that enjoy a license import or export cotton, but in terms of the volume and value, the exports/imports were relative small compared with those of the China National Cotton Corporation. The Chinese cotton system has undergone changes. At the start of the 1980s, a state procurement system was put in force. Cotton planters had to meet a basic quota. Any over-quota output was offered higher prices. The provision of chemical fertilizers and insecticides were applied as tools to encourage planting more cotton. In the middle of the 198Os, China's cotton production and net exports reached their peak, and production exceeded domestic consumption in the 1984. Accompanying this need sufficient supply of cotton cause economic reforms by which the government tried to liberalize the cotton supply. The cotton marketing arrangement was first adjusted by the government so as to shift the relative returns away fiom cotton mills to other crops. A second adjustment occurred in 1985, when the state procurement system was replaced by contract purchase, which was less restrictive on price and distribution channels. As the state offered lower purchase prices, cotton producers switched to grain, because the price of grain rose relative to cotton. When producers reduced their cotton planting, the Chinese cotton processing capacity boomed in the following years. The cotton production system couldn't meet the domestic textile industry demand, and the market price for cotton surpassed the plan price. Cotton producers refused to supply raw cotton at the state-planning price without receiving rewards, such as foreign exchange, low-cost debit funds, or fertilizer. The quality of raw cotton also declined, and for example, adulteration and shorter fiber lengths were reported. In 1989, the China State Council announced all that raw cotton should be sold to the state only. The state procurement system, which was abolished in 1985, was reinstated. A poor harvest of cotton in China during 1993/94, after a bad year in 1992/93, influenced world cotton supply prices, especially in the China domestic cotton market. China had to import cotton and increase the government purchase price. The price of cotton in the Chinese domestic market was US5Ocents/lb in April 1994, considerably lower than prevailing world prices [4]. In December 1997, the price in the Chinese domestic market was US$2100/ton in China, while the international
6
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.
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x
Central Management
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x
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Distribution
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_ll__-_._.__._._._._.__._I._._._..
I
CottonMills
1
....
-
--._-._.--.I_.-.-
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Exchanging
U
..
Cotton Production System -----r
.-
Production
._ - -. _ -
-
State Farms
Private Households .
__
_ _ _ ___
_ _ I _ -
2.3 China cotton supply system price was US$1600/ton. The domestic cotton price was nearly 25 per cent higher than the international market price [5]. The low price competitive advantage of Chinese textile products declined in the international market, due to the higher raw cotton price, the adulteration and shorter fiber length in cotton fibers. Enterprises tried to find lower price cotton in overseas markets, as some production enterprises enjoyed an open license to import cotton. China was the world's second largest cotton net importer in the 1997/98. In long term, China's central government has a strict monopoly over all cotton purchasing, marketing, storage, and export. Chinese cotton textile mills have to face a single cotton supplier, a government specified company. In the past few years, the higher cotton price in the domestic market has had a negative impact on the denim yarn, fabric, and garment manufacturers, as they had to bear the burden of high raw
7
material costs, which eroded the Chinese cotton sector's competitiveness in the world market. Cotton distribution system after I999 In recent years, the Chinese State has purchased domestically produced cotton at a higher price, while huge amounts of low price cotton was imported by the cotton users who can enjoy their license to import cotton. The China cotton inventory reached a huge volume in 1998. On 13 January 1998, China's State Council decided to liberalize cotton prices from 1 September 1999 [6].The government let free market forces influence its cotton market to improve management of resources, import and export policies and use of distribution channels. After liberation, instead of the state being the only buyer of cotton, other enterprises also can purchase, process, or deal with cotton. Of course, the enterprises should be qualified as to sufficient capital, quality control and inventory facilities and have adequately trained accountants and business managers who are able to widen their operations with seed processors, state farms, textile enterprises, and agricultural departments. The officially fixed price is replaced by a "reference" price. This means that the cotton price will be determined by market forces instead of the state imposing a uniform price around the country. If things get out of hand, the government may step in and exert administrative authority over prices by its holding inventory. At the same time, textile enterprises and textile products exporters were encouraged to purchase cotton at the basic level from the Supply and Marketing Cooperative, the Cotton & Hemp Corporation and cotton mills, via a delegate or agency. The cotton price gap between the international market and the Chinese domestic narrowed in the second half of 1999. Information given by a Chinese official [7] stated that the price of cotton textile products declined in 1999 because of cotton price liberation. China became the world's fifth largest net exporter in the 1998/99. The cotton supply system reform largely benefited the Chinese denim yarn industry with a substantial price decrease and increasing flexibility of raw material selection. The liberation of the cotton supply also influenced the down stream industries i.e., the denim fabric and apparel industries, to buy raw material at prices unavailable to the international market. This will increase the competitiveness of the Chinese denim industry in the markets.
2.7.2 China textile industry reformation Textile industry restructuring The Chinese textile industry is characterized by a massive labor force, prevalence of obsolete machinery and equipment, and low productivity. The industry has fast expanded in the last two decades. However, much of the investment was duplicated. The output was improved, but the products' added-value was low. The industry faced a low profit margin with high costs. To modernize its textile industry, the Chinese government planned to restructure the industry by eliminating spindles, downsizing the workforce, and improving efficiency. The restructuring effort was made in order to reduce oversupply of the textile sector and upgrade the industry. From 1991, the Chinese government announced a plan to dismantle 10 million spindles (ring spun) about a quarter of the national total. With the dismantling of the spindles, huge
8
about a quarter of the national total. With the dismantling of the spindles, huge number of textile worker (1.2 million) would also be laid off. The government was detennined to introduce modem techniques and upgrade the quality of products through the restructuring. However, the plan has not been fulfilled. The spindle numbers did not reduced significantly. In 1998, the China State Council announced a further restructuring of the textile industry with clear objectives, including the elimination of 10 million spindles, the layoff of 1.2 million worker, and diminution 6 billion RMB losses. As one of the oldest industry in the China, textile industry has huge overemployment. Before 1978, workers were assigned permanent jobs. Enterprises not only paid the workers a salary, but also provided welfare, such as housing, pensions, medical insurance, and child-care. It was a huge burden to the industry. Most importantly, the over-manning prevented the enterprises from operating efficiently, because of workers lack of incentive, sluggishness and slackness during working hours, as they had permanent jobs. The government allowed lay off of 120 million employees, and gave enterprises more autonomy on employment to reduce the burdens. In 1998, China cut 5,120,000 spindles and laid off 660,000 textiles workers. Up till October 1999, 7,500,000 spindles were dismantled [8]. However, the additional spindles it planned to be cut in 2000 are mostly new and running at full capacity. A majority of them are in mills in interior areas that economically lag behind other parts of the country. The laid-off textile workers will increase unemployment pressures in these areas [8]. The launch of restructuring brought improvements to the Chinese textile industry, the working efficiency was improved, and the raw material was better utilized after the out-modern spindles were smash. The industry operated more healthily, especially the State-Owned sector, with loss reductions in 1999. The major challenge facing China’s textile industry is to improve efficiency and to achieve run market-oriented profit-generation. Specific challenges include training the unskilled labor pool, finding or raising capital for investment in advanced technology, and finding jobs for the unemployed in the midst of restructuring. The denim yam sector was relatively young compared to the rest of the textile industry. As mentioned in section 2.2, 85 to 92 per cent of China’s denim yams are rotor spun, ring spinning playing little part in China’sdenim yarn consumption. Most of machinery was invested after 1980,62 per cent being domestic made, and the rest imported. The restructuring of the China textile industry focused on the ring spinning sector, most of whose machines were introduced in the 1950s. So, the production capacity of denim yam will not be reduced by the plan to eliminate spindles. The implication of the restructuring of the denim yam sector was that spindles reduction would decrease the conflict between cotton supply and demand. The cotton would be better used in China textile industry. The denim yarn sector, as an important cotton user, will face less pressure from the cotton supply. The restructuring also improves the efficiency of the whole textile industry by laying off superfluous employees. In the end, the Chinese denim sector should be benefit from the efficiency improvement of the whole Chinese textile industry.
SUMMARY China is a large denim yarn producer and consumer. Its manufacturing bases are 9
mainly distributed in the provinces of Shandong, Jiangsu and Hubei. A high proportion of the denim yarn is made by rotor spinning. Although China is one of the leading cotton producers, its textile industry’s demand exceeded supply in the last few years. The unbalanced cotton supply troubled the denim yarn producers, especially with the strict monopolistic cotton distribution channels, and with the problems such as unstable cotton production, and fast growth of downstream processing capacity, the Chinese denim industry faced scarcity of raw material supply. The Country Council announcement of liberation of the cotton supply will introduce market forces into the industry and benefit the denim producer in terms of flexibility on cotton sourcing. Meanwhile, the national textile industry reformation will improve the efficiency of the whole textile industry and with it the denim yarn sector.
REFERENCES 1.
2.
3.
4. 5. 6.
7.
8.
Cotton Incorporated, US.Cotton Market, 1998, U.S. Cotton Incorporated. www.cottonincorp.com China statistical Bureau, China Denim Market Research Report.1998, China Statistical Bureau, Beijing. Cotton Incorporated, US.Cotton Market, 1998, U.S. Cotton Incorporated. www.cottonincorp.com Glasse, J., Textiles and Clothing in China, 1995, The Economist Intelligence unit. Leung, P., The coming year for cotton. Textile Asia, February 1998: p. 69. China Economic Information Center., Cotton sector to become market-wise next year, . 1998, http://www.cei.gov.cn/. China State Council Development Research Centre, China Textile Marketing TrendrsAnalysis, . 1999, http://www.drcnet.com.cn. China Textile Bureau., Instruction on Spindle-dismantle and Suspension of Newly-added Production Capacities. 1999: Beijing. http://www.ctei.gov.cn/cteitz.htm.
10
3 Denim Fabric Manufacturing in China
3.1 PRODUCTION CAPACITY The Chinese denim fabric sector had developed since the end of the 1970s, when the first denim line was established in Guangdong province. The sector had more than 400 manufacturers in 1997 and is an important producer on a global scale. The capacity was 1.2 to 1.3 billion metres (1.8 to 1.95 billion square metres), accounting for 10 per cent of world total in 1997. Based on data in China Denim Market Research Report (1998), some overcapacity in denim fabric has developed in the past few years, as shown in Figure 3.1. The overcapacity was 220 million metres in 1995, and became more than 360 million metres in 1997. Production capacity grew, but the output produced fell sharply fiom 1995 to 1997. The major type of machinery used in the production of denim fabric in China is the shuttleless loom. In 1997, there were 13600 shuttleless looms producing denim fabrics, accounted for 21 per cent of China’s shuttleless looms. According to figures from the same year, about 70 per cent of denim fabrics were made on shuttleless looms. The proportion of shuttleless looms is expected to increase as 6,000 shuttle looms, currently producing thinner denim fabric below 12.5 ounces per yard, will be readjusted to become shuttleless looms.
3.2 PRODUCTION More than 1 billion metres of denim fabric was produced in China in 1995. However, with a decreasing rate of 12.1% per annual,the figure fell to 879 million metres in 1996. From 1996 to 1997, the production decreased even further, with an 8.2 per cent fall during 1996-1997, giving an output of only 807 million metres in 1997. (See Fig. 3.1)
11
1600
$
c
1
1200
.- 800
5
400
0 Production
capacity
Output
Total consumption
Export
Domestic consumption
1995 H 1996 0 1997
3.1 Denim fabric production in China and its market 3.3 THE MARKET
The market size (include domestic and overseas markets) for Chinese denim fabric was 915 million metres in 1995, but this fell by 4 per cent to 879 million metres in 1996, and was M e r reduced to 807 million metres in 1997. The reason for this decline was the depression of the export market: in 1995,757 million metres of denim fabric were exported to overseas markets, accounting for 74.5 per cent of China's total denim fabric output; in 1997 the export market fell to 420 million metres, accounting for just 46.8 per cent of China's total output [11. 3.3.1 Overseas markets The most important overseas markets for denim are found in the USA and Europe [I]. Our research has mainly focused on denim fabric produced in China for the EU and USA markets, in addition to Hong Kong, which is the most important textile-trading partner of China. The export market for denim fabric declined after 1995. Exports were reduced from 757 million metres (83 per cent of national output) in 1995 to 420 million metres (52.0 per cent of national output) in 1997. The quantity of exports was thus reduced by 22.3 per cent each year. US market The US is the most important denim market in the world, and a powerful denim fabric producer which is a fabric exporter rather than an importer. The US denim fabric industry has been developed since the end of the eighteenth-century, and the US owns world famous denim manufacturers such as Cone Mill, and Swift Textiles Inc, which are generally regarded as the world's two largest denim fabric producers. US denim producers are good at applying new technology to their production. Moreover, US denim fabric manufacturers have developed a globalization strategy to gain 12
competitiveness against stiff worldwide competition. In the past few years, many American denim fabric producers have shifted their manufaturing bases to South American countries, such as Mexico, Guatemala, Honduras, Chile, etc., to reduce costs in order to compete with Asian manufacturers. To get close to the EU market, US manufzturers also established manufacturing bases in European countries, Belgium, Turkey, Tunisia, and Turkey. Together with their sophisticated marketing skills, US denim fabric manufacturers thus tried to expand their share of the world market. USA denim products imports The USA is an important importer for denim yarn and denim apparel, but not denim fabric. About 16 per cent of USA total denim products imports was denim y a m in 1997, which was a reduction from 20 per cent in 1995. Denim apparel was the most important category of US import, accounting for more than 80 per cent in 1995 and 83 per cent of total imports in 1997. Denim fabric accounted for less than 1 per cent of USA import in the past few years. (See table 3.1) Mexico is the most important denim product supplier to the USA and contributed more than 50 per cent of the total USA imports of denim products in 1997. Hong Kong was the second most important exporter and accounted for 10 per cent of the USA total imports in 1997. They were followed by Canada, Guatemala, Costa Rica and China. (See Fig. 3.2 and Fig. 3.3)
Table 3.1 US denim product imports US denim products imports (C.I.F., 'OOO$) Denim Yarn Denim Fabric Man's or boy's denim apparel Woman's or girl's denim apparel Total denim products
1995 321011 6 791747 492203 1604967
1996 351294 7157 928218 567005 1853674
3.2 US denim product imports 13
1997 313557 9137 993132 687965 2003791
=96imPOd=
+tQv-
97 import*96price*97price
3.3 US denim fabric imports value and price USA denimfabric imports The major denim fabric suppliers to the USA were Mexico, Hong Kong, India, Italy, Pakistan, China (Taiwan), Australia, Brazil and German. Mexico owned 47 per cent of the USA denim fabric import market in 1997, followed by Hong Kong, which has 23 per cent, India (10 per cent), Italy (5 per cent) and Pakistan ( 5 per cent), and China (Taiwan) (3 per cent). The price difference of denim fabric from the different countries was significant. The average price of USA imported denim fabric (C.1.F) was US$2.0 per square metre in 1997. Among the major exporters, Mexico and Hong Kong exported denim fabric at a price close to the average. Italy exported high price denim fabric at above US$4.5 per metre, while Pakistan, China (Taiwan), and India exported denim fabric at a lower price. China denim fabric in the USA market China exported US$24 thousands worth of denim fabric to US in 1996, and did not export denim fabric to the USA in both 1995 and 1997.
EU market The Treaty on European Union came into force on 1 November 1993, and signalled that another very important economy besides the USA appeared in the world. The Union consisted of 15 European countries. The Free Trade Agreement between EU members and the monetary union has an effect on the European and world economy, and profoundly affected the denim industry manufacturing distribution and trading in Europe. Denim was born in a manufacturing center in southern France where the fabric was used for upholstery in the nineteen century. The manufacturing center was called Nimes, and the fabric was called "serge de Nimes" or "the cloth of Nimes", which is a twill cloth made from indigo dyed warp yarns and undyed (ecru) weft yams. It spread to US after the Industrial Revolution in the nineteenth century. Historically, the textile industry development was one of the symbols of the Industrial Revolution in nineteen-century Europe, and drove the European economic development into a new 14
stage. Based on the highly developed European textile industry, the denim producers in Europe are well-known for their stand-of-the-art technology and sophisticated engineering. The EU market became the second most important denim market in the world after the USA. To identify the position of China’s denim products in the EU import market, we surveyed denim apparel products trading in EU countries between 1994 and 1997, using data from Statistical Office of the Europe Communities.
EU denim products imports EU countries imported 2,869, 2,785, 3,323, and 3,241 million Euro worth of denim products in 1994,95,96, and 97. More than one half of imported denim product was from the EU members. Tunisia, USA, and Turkey were the three most important suppliers to the EU denim products market, followed by Hong Kong, Morocco, Malta, Mauritius, Pakistan, and Poland. These nine non-EU countries contributed 34 per cent of total EU imports of denim apparel, and 64 per cent of EU imports from non-EU countries. (See Fig. 3.4)
EU denim fabric imports In general, denim fabric was not a very important category of denim products imported into the EU, contributing just less than 20 per cent of EU denim products imports. EU countries imported 484,459, 543 and 461 million Euro worth of denim fabric in 1994, 95, 96 and 97, of which more than one half was within EU trading, Belgium-Luxembourg, Italy, Spain, and Greece being important denim fabric producers. (See Table 3.2) The most important non-EU supplier was the USA, which supplied 31 per cent of total denim fabric imports from non-EU members in 1997. Turkey contributed 25 per cent, Tunisia 11 per cent, and India accounted for 7 per cent. Other countries, Australia, Indonesia, Mauritius, Ivory Coast, Japan, and Hong Kong contributed less than 3 per cent of EU imports of denim products. (See Fig. 3.4 and Fig. 3.5) The average price of EU import of denim fabric was around 2.18-2.25 Euro per square metre. The average price of fabric from EU countries was higher than from non-EU members. However, in recent years, the price gap between fabric from EU members and non-EU members has narrowed. The rising average price of denim fabric from non-EU members has mainly been caused by the quickly increasing price of the fabric from the USA, which was the most important non-EU supplier. Meanwhile, the price of the fabric from other suppliers, Turkey and Tunisia, also was rising, though the growth rate was not as large as that of the US. (See Fig. 3.5) Table 3.2 EU denim product imports
EU Denim Products Imports (‘000Euro) Total Import Denim Apparel Imports Denim Fabric Imports Denim Apparel Contribution Denim Fabric Contribution
1994 2869416 2385072 484344 83% 17%
15
1995 2784736 2325501 459235 84% 16%
1996 3322892 2780300 542593 84% 16%
1997 3240675 2779323 461352 86% 14%
ru
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cMnlm prodUdl1n
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710010 H7'ft 2IlOO10 10000a00
0IIw EU Import cs.ntm proc:IUdI 11'1 ...1
- .500000
3.4 Denim products exported to ED in 1997
600000 . --
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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.5 100000
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3.5 ED denim fabric imports
China denim fabric in EU market In 1997, China was the 25th in the list of non-Elf exporter of denim products to the ED. She accounted for 0.1 per cent of denim products imported from non-ED country and only 0.04 per cent of all ED denim imports. China exported 205, 155, 129 and 207 thousand Euro worth of denim fabric to ED countries in 1994, 1995, 1996 and 1997 respectively. Denim fabric was not an important export category of denim products for China, just accounting for less than 1 per cent of Chinese exports of denim products to ED countries. China exported denim fabric to the ED market at a price between 1.5 to 1.2 Euro per square metre. Compared with the price of denim fabric from other countries in the ED market, such as DSA (1.8-3.1 Euro per square metre), Turkey (2:4-2.9 Euro per square metre) and Tunisia (2.5-2.7 Euro per square metre), it was relatively low.
16
The highest price of denim fabric was from Japan with a price between 3.1 to 4.7 E u o per square metre. Pure cotton denim fabric was an important category for China manufacturers. Little denim fabric exported fromChina contained less than 85 per cent cotton. 1998 is the first year that recorded China exporting to the EU market denim fabric containing less than 85 per cent cotton. In recent years, new material denim fabric was widely used in the world denim fashion market, such as Tencel, Lycra Spandex, and Polyester. The new materials were blended in denim lines to make the fabric soft,easy care, and breathable to meet the modern consumer requirements. Tencel' is high-tech and high fashion in the 1990s. It is regarded as a kind of environment-fiiends fabric because it is a natural fabric with an eco-friendly manufacturing process and most important, it is degradable. It is soft, durable and lightweight, has a nice smooth touch and blends well with other fabrics. The denim made from Tencel is fluid, soft and comfortable. The Chinese denim fabric industry made little progress in new material development compared with its competitors in the developed countries. The core product of the China denim fabric still was pure cotton, which didn't meet the world denim fabric market trends. Hong Kong market According to the Hong Kong Special Administration Region (HKSAR)government statistics, out of Hong Kong's total re-exports (US$148.6billion in 1998), 95 per cent (US$141 billion) either originated from or were destined for China [3]. Furthermore, Hong Kong is the most important textile trade partner for China. To find the position of Chinese denim fabric in Hong Kong's important and reexport market, we survey Hong Kong denim trading between 1992 and 1998. The trading data was obtained from Hong Kong Trade Development Council (HKTDC).
Hong Kong denim product imports Hong Kong is not only an important market for Chinese denim products, but also a major trade channel to other countries, and China is the most important supplier of denim products to Hong Kong.
Tencel is a kind of Lyocell, a type of washable rayon, produced from natural cellulose in wood pulp using a solvent spinning technique. Virtually all of the solvent--amhe oxide--is recycled, minimizing GELLENE, D., THE CUlTZNG EDGE FZBER OPTZMSM The Fashion Industry's pollution. 2. Excited Over a New Pollution-Free Rayon, but Its Price Could Be a Snag, in?Los Angeles Times.O3/24/1997.p.PageD-1. 1. The wood pulp is mixed with amine oxide. 2. The mixture is heated, and the pulp dissolves. 3. The solution passes through filters to remove impurities. 4. The solution is forced under high pressure through small holes to form filaments, a process known as solvent spinning. 5 . Strands of fiber are washed to remove amine oxide, dried and cut into pieces to be woven into fabric. 6.Water is evaporated fiom the amine oxide, which is reused to process more lyocell filaments. Source: Courtaulds Fibers Inc.
17
Hong Kong imported HK$8.2 billion worth of denim products in 1992, expanding by 10.2 per cent per year on average, and peaking in 1996 with HK$ 11.5 billion. However, both Hong Kong denim fabric and denim apparel imports declined between 1996 and 1998. After a 9.7 per cent decline in 1997, Hong Kong's total imports of denim products dropped by 20.6 per cent in 1998, a fall caused by weak demand and by the Asian Financial Crisis. (See Fig. 3.6)
E
p c
-=
14000 12000
z
10000
2 m >
6000
0
0
E
-E"
8000
4000 2000 0
Total
Import
CHINA
CHINA
PEOREP T A N A N
p 1 9 9 2 .1993
SOUTH
JAPAN
USA
INDIA
MACAO
KOREA
O1994 O1995 .1996
=1997 = 1 9 9 1
3.6 Hong Kong denim product imports
3.7 Hong Kong denim product imports in 1998
18
3.8 Hong Kong denim fabric imports Hong Kong denimfabric imports Denim fabric imports contributed 28 to 34 per cent by value of Hong Kong total imports of denim products in value between 1992 and 1998. The recession in the Hong Kong economy and lackluster consumer spending between 1997 and 1998 caused Hong Kong's denim fabric imports to drop by 6.9 per cent in 1997 and 22.9 per cent in 1998, amounting to HK$ 7.3 billion and HK$ 5.6 billion in those years respectively. The important sources of Hong Kong imports of denim fabric were the Asian countries, such as China, China Taiwan, South Korea, and Japan. They supplied more than 90.3 per cent of Hong Kong denim fabric imports every year. (See Fig. 3.8) The average price of Hong Kong imported denim fabric was at HK$ 6.4 7.7 per square metre. The price from China Taiwan, and South Korea was around HK$ 4.5-6.6 per square metre. The highest price was from USA,which sold at about HK$ 25 per square metre. Denim fabric from Japan sold at HK$ 21 per square metre in 1998, while prices from India (HK$9.0 per square metre) and Macao (HK$13.30 per square metre) were lower. (See Fig. 3.8)
-
Chinese denimfabric in the Hong Kong market Between 1992 and 1995, the exports of denim fabric from China to Hong Kong soared from HK$ 1.2 billion in 1992 to HK$ 2.9 billion in 1995. China became the most important supplier of Hong Kong denim fabric imports in 1995. From 1996 to 1998, the value reduced from HK$ 2.8 billion in 1996 to HK$ 2.1 billion in 1998, in which year China accounted for 36.8 per cent of Hong Kong total imports of denim fabric. In terms of quantity, exports of denim fabric from China increased between 1992 and 1995 with a growth rate of 4.8 per cent per year on average. In the year 96/97, exports from China declined by 4.3 per cent, and in 97/98, the reduction reached 17.3 per cent. China exported 798 million square metres of denim fabric to Hong Kong in 1998. The price of denim fabric from China suffered a turbulent period fiom 1992 to 1998. The price was around HK$7.4 -7.2 per square metre in the years 1992 to 94. The price then grew to HK$ 9.0 9.2 per square metre in the next two years. However, the price didn't stay at this high level and fell to HK$ 8.1 per square metre in 1997, and to HK$ 7.6 per square metre in 1998. The price of denim fabric from
-
19
China was, however, higher than the average price of Hong Kong imports of denim fabric. Re-exports via Hong Kong Hong Kong is an important trade channel for Chinese denim products seeking access to overseas markets. The Chinese mainland exported HK$ 4.0 billion worth of denim products through Hong Kong in 1998, accounting for 52.5 per cent of Hong Kong's total re-exports in that year.
Hong Kong s re-exports of total denim products The important origins of Hong Kong re-exported denim products were China, China Taiwan, South Korea, Japan, the USA and Macao. From 1992 to 1998, these countries (areas) supplied around 95 per cent of Hong Kong re-exported denim products. (See Fig. 3.9) Among these suppliers, China was the most important supplying 52.5 per cent of Hong Kong re-exported denim products in 1998. China supplied HK$ 3.2 billion worth of denim products for Hong Kong re-export in 1992. With an average growth rate of 15.8 per cent per year, the value became HK$ 5.7 billion in 1996. After 1996, the value reduced by 16.3 per cent per year, becoming HK$ 4.0 billion in 1998. The second most important supplier, China Taiwan, supplied 28.3 per cent of Hong Kong re-exports in 1998. South Korea was the third most important source of Hong Kong denim products re-exports, followed by Japan, the USA and Macao. (See Fig. 3.9 and 3.10)
Re-export value Million HK$)
1
12000
10000
8000 6000 4000
2000
0 Total
1.1992
CHINA PEPREP
CHINA SOUTH TANAN
01993 01994 01995 Dl996 01997 D l 9 9 8
JAPAN
USA
1
3.9 Hong Kong denim product re-exports by origin
20
MACAO
...
3.10 Hong Kong denim product re-exports by origin
Hong Kong denimfabric re-exports by origin Among the suppliers of denim fabric re-exports via Hong Kong, China Taiwan was the most important. China Taiwan supplied HK$3.0 billion worth of denim fabric to Hong Kong for re-export in 1996, which was the peak from 1992 to 1998. In 1998, HK$ 2.2 billion worth of denim fabric from China Taiwan, accounting for 38.9 per cent of Hong Kong denim fabric, was re-exported. The denim fabric fiom China peaked in 1995 with HK$ 2.4 billion. China supplied HK$ 2.0 billion, accounting for 35.8 per cent of Hong Kong re-exported denim fabric in 1998, as the second most important supplier of Hong Kong reexported denim fabric. (See Fig. 3.1 1) South Korea, the third most important origin of Hong Kong re-exports, exported its denim fabric via Hong Kong, contributing about 9.6 per cent of Hong Kong reexports denim fabric in 1998. Japan was the fourth important supplier that exported HK$ 291 million worth of denim fabric in 1998. 1.9 per cent of Hong Kong reexported denim fabrics were fiom the USA, and 1.2 per cent were from Macao. (See Fig. 3.1 1) The average price of Hong Kong re-exported denim fabric was around HK$6.3 to HK$ 8.1 per square metre between 1992 and 1998. The denim fabric from China Taiwan sold at HK$ 5.2 to HK$6.1 per square metre. The denim fabrics from Japan, USA, Canada, Norway and United Kingdom were at a higher price (more than HK$ 17 per square metre), while the denim fabrics from South Korea, India and Indonesia were at lower prices (less than HK$ 10 per square metre). (See Fig. 3.1 1)
21
3.1 1 Hong Kong denim fabric re-exports by origin China denimfabric re-exports via Hong Kong As discussed in the preceding paragraphs, China was the second most important denim fabric origin for Hong Kong re-exports in the recent years. HK$ 994 million worth of denim fabric was re-exported via Hong Kong from China in 1992, accounting for 20 per cent of total denim fabric re-exports via Hong Kong. The amount of denim fabric re-exported via Hong Kong from China decreased after 1995, after years of increase. 110 million square metres of denim fabric from China were reexported via Hong Kong in 1992. In 1995, the volume became 230 million square metres, which was the peak of the denim fabric from China in our investigation period. To gain some insight into the China denim fabric exported to Hong Kong and reexported via Hong Kong between 1992 and 1998, we found that the amount of China denim fabric either exported to or re-exported via Hong Kong reduced from 1996. The first reason for this was the higher cotton price in China, which in 1997, was much higher than in the international market. This eroded the competitiveness of Chinese denim fabric in the markets. Second, the Asian financial turmoil that raged in many countries in 1997 caused their currency to be devalued. China and Hong Kong were the two countries or areas that succeeded in keeping their currency steady. The price of denim fabric from China and Hong Kong thus increased compared with that of fabric from the other countries. After the financial turmoil, Chinese denim fabric exports to Hong Kong will be resuscitated. The denim fabric from China re-exported via Hong Kong was at higher price compared with the denim fabric directly exported to Hong Kong. The price was HK$ 9 per square metre in 1992, and peaked in 1996 with a price of HK$ 11.1 per square metre. The average price from China was HK$10.2 per square metre in 1998. 3.3.2 The domestic market
The domestic market for Chinese denim fabric has grown steadily in the past few years. Domestic consumption of denim fabric rose from 158 million metres in 1995 to 22
388 million metres in 1997, an expansion rate of 72.8 per cent per year. The domestic market was thus becoming more and more important for the Chinese denim fabric industry. Despite this, in the years under investigation, denim fabric oversupply increased by around 1 million metres per year, becoming a major problem for the denim fabric industry. In 1998, the oversupply of denim fabric was reduced. However, when two thirds of the total textile production in China was superfluous during the second half of 1998, the producers of denim as well as that of 37 other kinds of textiles managed to keep a balance between supply and demand [16]. Furthermore, based on a study of the supply and demand of 610 major commodities in the latter half of 1998, the State Bureau for Internal Trade in China has forecast that the supply and demand of denim in 1999 will continue to be in balance [4].
3.4 MAJOR PRODUCTS News fi-om journal of Japan Textile News (JTN) indicated [5] that extra heavy & thick jeans (over 14.5 oz./sq. yard) were in great demand in European and American regions, While Japan and Taiwan were the major markets for ultra light & thin jeans (under 6.5 oz./sq. yard). The demand for newly developed fancy denim such as sandwashed denim, colored denim was tending upwards. In the period, the major denim fabrics in China were 7’ x7’, 13.5-14 ounce per square yard, accounting for 60 per cent of Chinese output. 7’x 6’, heavier than 14.5 ounce per square yard, are thick denim fabric, and accounted for 18 per cent of China’s output. Denim fabrics of 10’ x lo’, 10’ x7’ and 12’ x12’ with weights between 8 oz./sq. yard and 11.75 oz./sq. yard accounted for 19 per cent of total output. Thin denim fabric fiom 16’ (6 ounce per square yard) accounted for just 3 per cent of Chinese output. China denim fabric products were mainly made fiom pure cotton rotor spun yams. Indigo remains the predominant color for denim, though other color denim fabrics, such as black, yellow, red and green, were also made in China. Denim fabrics were mainly made into 311 and 2/2 twill and finished by stone and snow washing. China produced mainly extra heavy & thick denim fabric, at the time when ultra light & thin varieties were becoming fashionable in world markets. In China, most denim fabrics were still made of pure cotton yam for the domestic market. China denim fabric production thus did not meet the demand of overseas markets, which was a problem that China denim fabric industry had to face.
3.5 THE MAIN USES OF DENIM FABRIC IN THE DOMESTIC MARKET
In the Chinese domestic market, about 90 per cent of denim fabric was used for denim apparel. Thus, about 42.7 per cent was used for jeans, 29 per cent for jackets, 10.5 per cent for Children’s denim apparel and 7.8 per cent for denim skirts. The usage of denim fabric was concentrated on denim apparel. About 10 per cent of denim fabric was used for accessories: about 6 per cent were used for travel products such as hats and bags, about 2.5 per cent for house-wear, and 1.5 per cent for toys and relevant goods. 23
In overseas countries, especially in the most important denim market (USA), denim fabric was used for bedspreads, solid denim pillows, denim rugs, window shades, place mats and so on from the family room to the kitchen. The use of denim fabric for non-apparel uses was becoming more popular. 3.6 PRODUCTION BY REGION Figure 3.12 shows the geographic distribution of Chinese denim fabric production and sales in 1997. The denim fabric manufacturers were distributed in 27 provinces of China, concentrated mainly in the coastal areas. Three provinces, Guangdong, Jiangsu and Shandong were the most important denim fabric bases in China, accounting for more than 54.7 per cent of Chinese output in 1997. Guangdong was the most important province, in which 210 million metres of denim fabric were produced, accounting for 23 per cent of Chinese total output in 1997. In the three years under investigation, the production of Guangdong peaked in 1996 with 228 million metres (23.4 per cent of Chinese total output). In 1995, denim fabric made in Guangdong accounted for 21.4 per cent of China's total output. Although the production of Guangdong fell in 1997, the province still was the most important denim fabric production base in China. Jiangsu was the second largest denim production area in China, producing 212 million metres of denim fabric in 1995, although this fell to 186 million metres in 1997: a fall of 6.2 per cent per year. The production of Jiangsu accounted for 21 per cent of Chinese output in 1997. Shandong was the third important production base, producing 116 million metres of denim fabric in 1995, but this fell to 96 million metres in 1997. About 11 per cent of China denim fabric was made in Shandong. Among the rest of provinces, Liaoning produced 6 per cent of Chinese output, Hunan, Hubei, Henan, Shanghai and Hebei each produced about 4 per cent of Chinese denim fabric in 1997. 3.7 SALES BY REGION
Guangdong, Jiangsu and Shandong were the important exporters and domestic suppliers in China. (See Fig. 3.12) Guangdong, accounting for 32.4 per cent of China denim fabric export in 1997, was a leader in China denim fabric exports. Its denim fabric exports reduced from 178 million metres in 1995 to 136 million metres in 1997 with a reduction rate of 7.9 per cent each year, which was lower than the reduction rate (14.8 per cent) of national denim fabric exports. Guangdong was not only a leading exporter, but also an important domestic market supplier, after Jiangsu province. 39 million metres of denim fabric sales in the domestic market was from Guangdong in 1995, and the volume increased to 73 million metres in 1997 with a growth rate 10.1 per cent per year. In the domestic market, about 15.4 per cent of denim fabric came from Guangdong province in 1997. In total export and domestic sales, Guangdong province was the leader of denim fabric sales, and sold 20.7 per cent of China's denim fabric.
24
O.Otol.0 l.OtoS.0 S.0 to 12.4 12.4 to 17.0
(7.0 to JOR 30.0 to 17.0 17.0 to 80.0 10.0 to 1w.o
3.12 China denim fabric production, domestic consumption and exports by region Jiangsu accounted for 21.2 per cent of China's denim fabric export in 1997, as the second most important exporter. From 1995 to 1997, its exports reduced from 138 million metres in 1995 to 89 million metres in 1997. Jiangsu was the leader of the domestic denim fabric suppliers, and sold 74 million metres of denim fabric in 1995 increasing to 97 million metres in 1997 with a growth rate of 28.2 per cent each year. In 1997, about 20.2 per cent of denim fabric in the China domestic market was from Jiangsu. Shandong province was the third most important denim fabric exporter, and exported 79 million metres of denim fabric in 1995 but this fell sharply in the next two years to 40 million metres in 1997 with a reduction rate of 16.2 per cent per year. Shandong also was the third most important denim fabric domestic supplier. Its share of the domestic market has increased in the past few years. 37 million metres of denim fabric came from Shandong in 1995. In 1997, it supplied 56 million metres of denim fabric to the Chinese domestic market, accounting for 11.7 per cent of Chinese total output. Apart from these three provinces, other China provinces exported 251 million metres of denim fabric in 1997 and accounted for 52.8 per cent of China denim fabric exports. They have enlarged their domestic market share from 1995 to 1997, supplying 195 million metres for China's domestic market in 1997, accounting for about 36.7 per cent of it.
3.8 THE COSTS OF MACHIIWRY
In China's denim fabric industry, a large part of the machinery was imported. An imported production line would cost about UD$5 to 7 million. If the machine worked at full-capacity, the costs from machinery would be US$ 0.24 per metre, which was
25
s u m of the total costs from interest, depreciation and maintenance together. In general, manufacturers needed a loan from a bank for equipment purchase and would pay large amount of interest, as interest rates in China were of two digits in most years of the 1990s. The high costs on machinery eroded the profit margin for the Chinese denim manufacturers. We knew that the price of Chinese denim fabric exported to the EU market was less than US$ 1.2 per metre. Regarding to above information, we could estimate that machinery costs accounted for about one fifth of this price for most denim manufacturers. 3.9 RAW MATERIAL QUALITY CONTROL Cotton and yarn are the raw material for denim fabric. The quality of the raw material was very important to the denim fabric quality. What kind of cotton used in the fabric influenced the quality of the denim: high quality denim fabric should use only high quality cotton. The quality of the denim fabric should be controlled fiom first step of production process-i.e. in the choice of cotton. In China, there were just a few denim fabric manufacturers who produced yarn themselves. Many producers buy yarn from factories that don’t produce denim yarn professionally. Rotor spinning was widely used in China mainly because it can utilize cotton waste and lower grade cotton. Moreover, in the years when cotton demand exceeded supply, the cotton was adulterated and short fiber lengths appeared. This made it more difficult for the producer to adopt high quality cotton and yarn in denim fabric production, and consequently much denim fabric made in China has low quality and has lost it competitiveness in the world market. 3.10 TECHNOLOGY DEVELOPMENT
The technology in the China textile industry is not the most developed. Even though it is the leading textile exporter in the world, more than half of its export clothing used imported fabric. The undeveloped technology became a bottleneck for the China textile industry. To enhance its textile products’ competitiveness in the world market, the countries textile industry Bureau announced the five most important key points for the country textile industry technology development in the following years [6]. The first key point focused on fiber manufacturing technology development, which will work on multi-function, high simulation and hctional fiber technology development. The second point was yam manufacturing technology development. To improve the proportion of combed yam in all yam used, they will apply new rotor spinning, air-jet spinning, and so on. Machinery, such as new blowing-carding Units (chute fed cards), auto-cone winding machines, and spinning+oning (winder) units will be widely used. The third point was weaving technology development. Through weaving and electronic jacquard technology innovations, adopting the latest machinery, it is hoped to improve the national proportion of shuttleless looms. The fourth point is dyeing and finishing technology development. This covers adopting computer pattern design, computer color separation, electronic stencil and 26
electronic control system, developing & applying new dyestuffs, chemicals and additive, promoting new environment friendly technology. The final point was design & innovative technology development. To follow fashion trends in the world, CAD/CAM (computer aid design and manufacture) and CAM (computer aid management) should be applied more widely, and digital technology also will be adopted in textile design and pattern design. Combining these developing technologies, the status of the China denim industry will be changed profoundly. It will improve the grade of Chinese denim fabric, enhance its competitiveness in markets such as the USA and the EU, and will also improve denim fabric used in exported denim apparel.
SUMMARY The Chinese denim fabric sector is an important producer on a global scale, and its manufacturing bases are mainly distributed in the coastland. The industry product belonged to a low level of quality so that the denim fabric was competitive in the lower price market. Pure cotton denim fabric was the most important kind of product, which didn’t meet the world fashion trends. To upgrade the whole textile industry’s products in the world market, recent focus has been on the developing technology. This will significantly improve the quality of Chinese denim fabric, and enhance the competitiveness of fabric in international markets.
REFERENCES 1. 2.
3. 4.
5. 6.
Zimmermann, R., Denim: what might the fiture hold for the world’s hottest textile sector? ITS Textile Leader, 1998.2/98, p.34-48. GELLENE, D.,THE CUTTING EDGE FIBER OPTIMISM The Fashion Industry’s Excited Over a New Pollution-Free Rayon, but Its Price Could Be a Snag, Los Angeles Times.03/24/1997.p. D-1 . TDC, H.K., Hong Kong & China Economies: Market ProJile on Chinese Mainland.1999 Hong Kong TDC. China’s State Bureau for Internal Trade, Textile Supply and Demand Pattern To Remain Unchanged in 1999.1999, www.cei.gov.dn. Anon, Jeans fashions in ascendant. JTN-Monthly, 1995.484, p.75-77. XiHuaShe, Five Key Point for the Textile Industry Technology DeveIoping.2000, www. cei .gov.d nXiHuaShe.
27
4 China Denim Apparel Industry
4.1 PRODUCTION
The Chinese denim apparel industry consists of more than 400 manufacturers and has a huge production capacity, as shown in Figure 4.1. The industry had the capacity to produce 164 million units per year in 1995, and 172 million units in 1996. However, the capacity fell by 8.7 per cent to 157 million units in 1997. The actual production of Chinese denim apparel was 115 million, 116 million and 101 million units in 1995, 1996 and 1997 respectively. Production fell by 12.9 per cent in 1997, and there were more than 48 million units of overcapacity in 1995, growing to 56 million units in 1996. This over-capacity didn’t reduce until 1997. The over-capacity wasted a large amount of investment in China’s denim apparel industry and brought considerable pressure on denim apparel producers. (See Fig. 4. I) 4.2 MARKETS
The total sales volume of denim garments in China fell between 1995 and 1997 as shown in Figure 4.2. In 1995, 110 million units of denim garments were sold in China, rising to 1 16 million units in 1996. However, in 1997 the sales fell to less than 100 million units. The reason for the decline was the sharp fall in exports markets. China exported 65.3 million units of denim apparel in 1995 but only 35.2 million units in 1997. (See Fig. 4.2) The established industry is export-oriented, and over 80 per cent of Chinese denim apparel was exported to overseas markets. However, exports have declined in recent years. China exported 65.3 million units of denim apparel in 1995. From 1996, the situation in which overseas markets played a dominant role for China’s denim apparel industry has changed. In 1996, with a reduction of 17.7 per cent in 1996, its denim apparel exports reduced to 54 million units. This was the first time that domestic consumption exceeded the export volume. Furthermore, with a reduction of 34.5 per cent in 1997, China exported only 35.21 million units of denim apparel. Compared 28
with the export volume in 1995, the decrease was significant. On the other hand the domestic consumption increased from 45.04 million units in 1995 to 63.8 million units in 1997, and became the most important market to the China denim apparel industry. (See Fig. 4.2) 4.2.1 US market
The US denim market is the largest in the world. The NPD Group, a Port Washington, N.Y., consumer research group, reported that 544.3 million pairs of denim jeans were sold in the US in 1996 [l]. Apart from denim jackets, skirts, and other denim products, over 1.5 million pairs of denim jeans were sold daily. Denim jeans were beloved by everyone, from blue collar to white collar; and from miners to the President of the United States. Having broken through all class and age baniers, thus ultimately became the uniform of America and symbols of the American lifesvle. The US denim jeans market was dominated by a few leading producers. At the beginning of the 1990s, Levi Strauss shared 3 1 per cent of the USA jeans market, VF (Lee, Wrangler) contributed 17.9 per cent, LicensedDesigner had 6.0 per cent, Private label took 3.2 per cent, and Gap Inc. had 2.7 per cent. At the end of 1990s, the
200.00 150.00 100.00
50.00
n nn 1995 019@6 El997
I
I
163.69
115.49
172.24
116.46
157.36
101.10
100.00 50.00 0.00
65.33
11995 13 1996
\El997
1
1
45.04
53.74
1
62.42
35.21
I
63.77
110.37 116.16
I
98.98
1
4.2 China denim apparel total sales (million units)
29
US denim jeans market concentrated in leading companies more and more. More than 74.3 per cent of the USA denim jeans sales were from leading companies (Levi's contributed 16.9 per cent, VF (Lee, Wrangler) 25.3 per cent, LicensedDesigner 7.0 per cent, Private label 20.2 per cent, Gap Inc. 4.9 per cent) and others shared the remaining 25.7 per cent. (Source: Tactical Retail Monitor) [Carol Emert, 02/23/1999 #184]. Foreign made denim apparel has a very small part to play in the USA market. To define the position of Chinese denim apparel in the USA market, the US import market was surveyed. Introduction to the USA denim apparel import market Besides absorbing its huge domestic production, the USA also imports a lot of denim apparel from overseas. Denim apparel imports played a dominant role in USA total denim product imports, which accounted for about 83 per cent of US total denim product imports (see table 1). The denim apparel import value has increased in recent years. It was US$ 1.3 billion in 1995, US$ 1.5 billion in 1996 and became US$ 1.7 billion in 1997. The increasing import trend continued in the first eleven months of 1998 so that more than US$2.0 billion worth denim apparel was then imported to the USA. The most important denim apparel supplier was Mexico, which shared more than one half of USA imported denim apparel. Benefiting from a member of NAFTA (North American Free Trade Agreement), Mexico played a more and more important role in the US import market. Following Mexico, other suppliers were Hong Kong, Guatemala, Canada, Costa Rica, Dominican Republic, Nicaragua, Colombia, China, Philippines, and Indonesia. Except Hong Kong, China, Philippines, and Indonesia, many important denim apparel suppliers are American countries. (See Fig. 4.5 and 4.6) The average price of the US imported denim apparel was around US$7.2-7.5 per unit. The USA imported high price denim apparel fiom Italy, France, Belgium, and Japan. The denim apparel fiom Macao was around US$9-11 per unit, and was US$ 12 to 15 per unit for from Canada. The low price denim apparel was mainly from the South American countries and the developing Asian countries. (See Fig. 4.3 and 4.4) Chinese denim apparel in the USA market China exported US$38,44, and 37 million worth of denim apparel to USA in 1995, 96 and 97 respectively, which amounted to 3.0, 2.9, and 2.2 per cent of US denim apparel imports in each year. China was the 9th largest supplier to the USA denim apparel import market in 1997, declining from being the 7th exporter in 1995 and 1996. The export value of Chinese goods reduced sharply in 1997. However, in the first eleven months of 1998, the export value increased to US $52 million, and grew 44 per cent compared with the same period in 1997. After Mexico, Hong Kong, Guatemala, Colombia, Canada, Nicaragua, and Costa Rica, China was the 8th largest men's or boy's denim apparel exporter to the US market in 1997. China exported US$21,21 and 26 million (C.1.F) or 2.75,2.42 and 2.38 million units of men's or boy's denim apparel to the USA in 1995, 1996 and 1997 respectively, showing that China's men's or boy's denim apparel export volume decreased but the value increased.
30
4.3 USA denim apparel imports
USA denim apparel import 16.00
1800000 3 1600000 8 1400000 8 1200000 1000000 800000 600000 5 400000
14.00 12.00
c
ly)
8.00
2
B
.=
io.oa 3 8.00 4.00
8 B& Y
2.00
200000 0
0.00
-cif95'OOOS
-
cif96'OOOS -cif97'OOOS
--pp95(USS/unit)
++p96 --x--.
p97
4.4 USA denim apparel imports by value and price Between 1995 and 1997, the price of men's or boy's denim apparel exported fiom China increased in the USA market. The average export price was increased fiom 7.78 US$ per unit in 1995 to 10.9 US$ per unit in 1997, an average growth rate of 13.4 per cent every year. (See Fig. 4.5) China also was the 8th exporter of women's or girl's denim apparel in the USA market in 1997, behind Mexico, Hong Kong, Costa Rica, Dominican Republic, Canada, Jamaica and Philippines. China exported US$ 17,23 and 1 1 million (C.I.F.) worth of women's or girl's denim apparel to the USA market, accounting for 3.4,4.1 and 1.5 per cent of US total female's denim apparel import in 1995, 1996 and 1997 respectively, and amounting to 2.7,3.5 and 1.1 million units in volume. The export of women's or girl's denim apparel feIl sharply in 1997 in terms of both value and volume. The price of Chinese exported women's or girl's denim apparel increased fiom US$6.1 per unit in 1995 to US$9.3 per unit in 1997. (See Fig. 4.6)
31
1200000.---
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
... 1000000
160 ~
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5
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o
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120 ~
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- . - 200
2000 00
80
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40
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96 imp~ 97 import-6- Price95- - Price96- - - Price97
4.5 Men' s or boy's denim apparel imports into USA
... 800000 ..----
-
-
-
-
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-
-
-
-
-
-
-
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150
~ 400000 Ol
100
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R200000
50
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R £
4.6 Women's or girl's denim apparel imports into USA From 1997, the price of female's denim apparel from China (US$ 9.28 per unit) was higher than the average price of US imports (US$ 7.12 per unit). The price of male's denim apparel was higher than the USA average import price from 1996, the relevant prices being US$ 8.66 per unit from China and US $7.8 for the import average. The price of male's denim apparel continued to increase in 1997, when it was US$ 10.9 per unit. Among the USA's ten largest denim apparel suppliers, China was the second highest priced supplier after Canada. Other high price denim apparel suppliers, such as Italy, France, German, etc. have a very small market share in the USA import market. In contrary with the EU market, the data indicated that China has changed from being low-value added denim products supplier to a middle-high value added denim apparel supplier in the USA market. (See Fig. 4.6)
4.2.2 The ED market Europe is an important denim apparel market with its own features. The denim market in Europe is traditionally fashion-oriented, and not basic as in the US. Many famous brand denim apparel were designed and manufactured in Europe, with names such as Versace, Armani Jeans, Diesel, Esprit jeans, Gaultier, Moschino Jeans, Replay etc 32
prominent. European top fashion designers introduced their denim apparel in the house show every season. The European demand for denim has been vastly diversified, and there are many different fabric styles with short life cycles. The European market was regarded as high class with trendy innovation. The local manufacturers applied quick response and just-in-time as competing tools, availability being more important than cost in the European market [2].
Introduction to the EU denim apparel import market EU is an important denim apparel import market. EU members imported 2.9,2.8,2.8, and 3.2 billion Euro worth of denim products in 1994, 95, 96 and 97 respectively. Among these, most are denim apparel and little denim fabric was imported. There were 2.4, 2.3, 2.8 and 2.8 billion Euro worth of denim apparel imported to EU members in 1994, 95, 96 and 97. EU countries importing denim apparel get them within the EU: more than half of the imports were fiom EU members. The USA, Hong Kong, Morocco, Netherlands, and Turkey were the four most important non-EU member exporters to the EU. (See Fig. 4.3) EU countries imported 1.1, 1.1, 1.2 and 1.3 billion Euro of denim apparel &om non-EU countries in 1994, 1995, 1996 and 1997 respectively. The top three denim apparel suppliers (non-EU countries) were Tunisia, USA, and Hong Kong. (See Fig. 4.7 and 4.8) The average price of denim apparel imported to EU countries was around 10 Euro per piece. The average price of denim apparel imports from within the EU was above 13 Euro per piece, higher than the price of apparel imported from non-EU countries at about 8 Euro per piece on average. Among the non-EU countries, Japanese denim apparel exports were at the highest price (above 16 Euro per piece), followed by the US with a price between 12-15 Euro per piece. (See Fig. 4.7)
1
EU denim apparel import value and price 300000Q 18
log 8 u 6 4 2 0
D 94 import Va-l --Y- 95 import pri-
95 import v a i m Q6 import Val96 import p r i c a C 97 import price
97 import va1ue-A-
4.7 EU denim apparel imports
33
94 import price
...
‘5
U denim apparel lmpoi IInPOItVaIY. PWEURO)
otos
aara
7ototn 200 to 7a* 100 a ton 1100 a 77aa
7100 to znw 10000 to 10000000
0m.r ImportvaIms (OOOEURO) l S O O 0 0 0
7 S 0 0 0 0
17S000
0
OOEURO 1,000 2 . W O O O
YIIea
4.8 EU denim apparel imports
Chinese denim apparel in the EU market China exported 26.3, 17.7, 31.1 and 17.8 million Euro worth of denim apparel to the EU in the years 1994 to 1997. China was the 25th largest exporter of denim apparel among all countries in 1997, and the 14th exporter among non-EU countries. The China denim apparel sector seems weak in the EU market compared with China’s other textile sectors. China’s denim apparel was exported to EU at an average price of 6.67 Euro per piece in 1997. Though it increased from 4.9 Euro in 1995 and 5.34 Euro in 1996, the price was much lower than the EU average import price, and also lower than the average price from non-EU members. The price was similarly to those of Pakistan and Bangladesh. In the EU market, China denim apparel were thus in low value added products even though that the price has increased in the past few years. The effect of the establishment of the European Union and the North American Free Trade Agreement, on denim trading in the most two important markets in the world -the US and the EU has been the rise of regional concentration. Trading between the EUNAFTA members and their surrounding countries grew, while it decreased with other countries. This threatens the trade between China and the EU/US. In both markets, the share of China’s denim apparel has declined in the past few years. In foreign markets, China’s denim apparel industry was facing not only trade barriers, such as trading regional concentration, quotas and tariffs, but also stiff competition from other developing countries. In the EU market, its neighboring countries Tunisia, Turkey, Morocco, and Poland, become major competitors of China. These countries have low labor costs compared with the EU countries, and their closeness tends to mean that they have similar cultural background. Many EU producers shifted their manufacturing factories to these countries, which became new denim apparel producing bases outside the EU. In the same way, US producers moved their manufacturing processing to the South American countries to reduce the labor costs, and also provided favored tariff rates to denim products made in these countries. In the long term, low labor costs are the most important competition advantage in the world market. China was facing more and more stiff competition 34
from the low labor costs countries, and had to change its competitive strategy from low cost dependent to higher value-added. In the years under consideration, the average price of the product from China had been increased. This testifies the progress the Chinese denim industry has made.
4.2.3 Denim apparel in Hong Kong market and re-export through Hong Kong Hong Kong denim apparel imports Denim apparel is an important category of denim products imported into Hong Kong, and accounted for 66 to 72 per cent of total denim products imported between 1992 and 1998. Hong Kong imported H a 2 . 3 billion worth of denim apparel in 1992. The import value peaked in 1996 with HK$ 3.6 billion, increasing by 14.4 per cent every year from 1992 to 1996 on average. Hong Kong import values fell sharply in the next two years, when it imported HK$ 3.1 billion worth of denim apparel in 1997, and H U 2 . 6 billion in 1998. (See Fig. 4.9) China was the most important source of Hong Kong imported denim apparel, and played such a dominant role that about 94 per cent of Hong Kong's imported denim apparel was from the Chinese Mainland between 1992 and 1998. (See Fig. 4.9) The average price of Hong Kong imported denim apparel was from H a 3 1 to 37 HK$ per unit in the investigation period. The price of denim apparel from the Chinese Mainland was very low at HK$ 30-odd per unit. The denim apparel from the second most important exporter-Italy--was above HK$ 330 per unit, from Germany was close to HK$400 per unit, and from France was H a 2 6 5 per unit. In the Hong Kong market, apparel from US, United Kingdom and China Taiwan was above HE§ 100 per unit. China's products thus belong to the low ground in the Hong Kong market. (See Fig. 4.9)
Dv1992 P92
mv1993 mv1994
0 ~ 1 9 9 5m v 1 9 9 6
mv1997
mv1998
-4--P93
+P95
-P97
-P98
*P94
-P96
4.9 Hong Kong denim apparel imports
35
4.10 Hong Kong denim apparel re-exports by origin Re-export through Hong Kong More than HK$ 3.3 billion worth of denim apparel was exported via Hong Kong to overseas markets in 1996, which was the peak between 1992 and 1998. The Chinese Mainland was the most important source of Hong Kong denim apparel re-exports. In 1998 HK$2.0 billion worth of denim apparel went to other countries via Hong Kong from the Chinese Mainland, accounting for 97.0 per cent of Hong Kong denim apparel re-exports. (See Fig. 4.10) The price of denim apparel from the Chinese Mainland was around HK$36 to 47 per unit; compared with the USA (HK$ 160 per unit), Italy (HIS$ 350 per unit) this was relatively low. Denim apparel from the Philippines, Macao, Singapore and Indonesia were sold at HK$95,71,50 and 43 per unit in 1998, respectively. (See Fig. 4.10) Hong Kong and Macao are the two areas through which most China textile products are re-exported. To restrict Chinese made textile and apparel products via Hong Kong and Macao being exported to the US, the US rules of origin for imported textile and apparel products took effect in July 1996. The US rules of origin changed the factor which determines the country of origin of product from the country of cutting to the country of assembly, as part of the Uruguay Round Implementing legislation passed by the US in late 1994. The following are the additional documentation requirements to the textile and apparel products to US exported from Hong Kong and Macao: 1. All importations of products the new rules afTect must be accompanied by an original textile declaration signed by the manufacturer or subcontractor, ie, the actual producer of the merchandise (textile declarations signed by an exporter who is not the actual producer and those signed by importers will no longer be accepted); 2. A signed statement by the importer that such origin declaration is accurate; 3. A single entry bond for all entries.
36
4. Conditional releases for up to 180-days.USA Customs has up to 30 days after the end of a conditional period in which to request redelivery. Therefore, redelivery can be requested up to 210 days after entry. 5. In the event that a USA Customs verification team is in Hong Kong, all merchandise will be detained until production is physically verified. The new requirement was effective for the items in the following textile quota categories: 336,636,342,442,642,351, 352, 652,443,643,331, 338/339,348,and 350. In these categories, four items of denim product are included. They are: Under category 348,item 6204624010,Women's trousers & breeches of cotton blue denim, not knitted and item 6204624040,Girl's trousers of cotton blue denim, not Imp playsuit OT, not knitted; Under category 342, item 6204522030, Women's skirts & divided skirts of cotton blue denim, not knitted; and item 6204522040,Girls' skirts & divided skirts of blue denim, not knitted; The rule significantly influenced Chinese denim apparel access to overseas markets via Hong Kong in the next few years. Although the new requirement had no significant negative effect on China's denim apparel expodre-export to/via Hong Kong in 1996, expodre-exports in 1996 grew sharply. However, the expodreexports to/via Hong Kong shrank in the following years. In 1997 and 1998,the Asian financial crises loomed. China and Hong Kong were the few countries (area) to keep their currency stable, when many countries devalued their currency to gain export competitiveness in the international market. The steady currency of China and Hong Kong brought huge pressures for denim product exports. After the above analysis of Chinese denim apparel performance in the three markets, features of Chinese denim apparel in world markets can be pointed out. The competitiveness of the Chinese denim apparel sector was stronger than that of the Chinese denim fabric sector. In 1997,China exported US$37 million worth of denim apparel to the US, US $20million to the EU, US$372 million to Hong Kong and US$ 359 million via Hong Kong to other countries. Hong Kong was the most important market and a channel to access overseas markets for China's denim apparel industry. Denim apparel in the three markets exhibits different features and China's denim apparel has had different experiences. Denim apparel is fashion-oriented in the EU market, and China denim apparel has little market share there. In the US market, denim apparel was regarded as the uniform of America and a symbol of the American lifestyle. It was basic rather than fashion, so again denim apparel from China has only a small market share. Except for an abundance of denim apparel re-exported through Hong Kong, there is also much low price denim apparel exported to the Hong Kong domestic market. Denim apparel made in is basic rather than of interesting fashion. It was strong in competing in low price markets, but weak in competing in the high fashion, high value-added market. 4.2.4 Domestic market
Denim apparel has appeared in China's garment market since the 1980's.Nowadays, denim apparel has become very popular in China. It was reported that in 35 large China domestic department stores from January to October 1994,the sales volume of denim apparel reached 5 million units 131. China's domestic market grew very quickly between 1995 and 1997;in particular, from 1995 to 1996 the market size
37
Total output
Jeans
Denim jactket
Denim skirt
( 1 1 9 9 5 11996 01997
Children denim wear
1
4.1 1 China denim apparel products output grew from 45 million units to 62 million- an increase of 38.6 per cent. In 1997, 64 million units of denim apparel were sold in the Chinese domestic market, indicating that denim apparel has a bright future in China.
4.3 PRODUCTION OF MAJOR DENIM PRODUCTS
The main products of the Chinese denim apparel industry are jeans, denim jackets, denim skirts and children’s denim wear. (See Fig. 4.1 1) Jeans is an important apparel product category in China, and accounts for half of total denim apparel production. Jeans production in China reduced from 59 million units in 1995 to 49 million units in 1997, a reduction of 5.8 per cent per year. The production of denim jackets was 33.6 million units in 1995, increased to 37.3 million units in 1996, and fell to 3 1.7 million units in 1997. The production of denim jackets accounted for about one third of total denim apparel production. Children’s denim apparel is also a major product of China’s denim apparel production. Manufacturers produced 12.5 million units of children denim apparel in 1995, and this grew to 14.0 million units in 1996, falling to 11.9 million units in 1997. Children’s denim apparel accounted for an average of 11.6 per cent of denim apparel production between 1995 and 1997. In 1995, 10.3 million units of denim skirts were produced in China, reducing to 8.6 million units in 1997, a reduction of 5.3 per cent per year. In the last few years, the structure of China denim apparel products has not changed very much. Jeans are still the most important products though their market share reduced fiom 51.2 per cent in 1995 to 48.3 per cent in 1997. Denim jackets became more important, their market share increasing fiom 29.1 to 3 1.3 per cent from 1995 to 1997. Children’s denim apparel increased by one percent and denim skirts fell by 0.3 percent. Influenced by the declining overseas market, the production of jeans and jackets decreased, especially jeans. The production of children’s denim apparel and denim skirts was kept steady, compared with jeans and jackets. 38
‘i 4u P
6 30 cn
Q 20
.-
P
-.-5 10 5 0 Jeans Jeans domestic export consumption
Denim Denim skirt Denim skirt Denim Jackets Jackets domestic domestic export. consumption.export consumption
1995
Children
Children
Denimyear Denim Wear domestlc consumption expart
1996 0 1997
4.12 Sales of major denim products 4.4 SALES OF MAJOR DENIM PRODUCTS
Jeans The domestic market for jeans grew strongly in the past few years. The market size increased from 23.6 million units in 1995 to 29.3 million units in 1997. About 40 per cent of all jeans’ output was sold in domestic markets in 1995, increasing to 60 per cent in 1997. Jeans in China’s domestic market are getting more and more important. On the other hand, their foreign market has declined. The exported volume was 35.5 million units in 1995,but fell to 19.5 million units in 1997,by 15.0 per cent per year. Jeans exports accounted for 60 per cent of total jeans sales in 1995,but fell to 40 per cent in 1997.(See Fig. 4.12) Denim jackets Denim jackets are the second most important item of denim apparel in China. 45 per cent of denim jackets were sold in the Chinese domestic market, volume being 15.1 million units in 1995. In 1997,22.2 million units of denim jackets (70 per cent of total denim jacket production) were consumed in the domestic market. The average growth rate of domestic market size was thus 15.7 per cent per year. Conversely, the overseas market for denim jackets declined between 1995 and 1997. The exported volume was 18.5 million units in 1995, but fell to 9.5 million units in 1997, a reduction of 16.2 per cent per year. In 1995, more than one half of denim jackets were exported, but the proportion decreased to less than one third in 1997. (See Fig.
4.12) Children’sdenim apparel
In 1995, 6.3 million units of children’s denim apparel were sold in the Chinese domestic market, accounting for one half of the total Chinese children’s denim apparel output. In 1997,the volume increased to 8.4 million units, accounting for 70 per cent of total output. On the other hand, its export market size shrank from 6.3 million units in 1995 to 3.6 million units in 1997.(See Fig. 4.12) Denim skirts In 1995, the size of the domestic and foreign market were similar, each of them accounting for half of production. About 5.1 million units of denim skirts were
39
exported and the same volume was sold in the domestic market. In 1997, about 6 million units of denim skirts were sold in the domestic market, accounting for 70 per cent of total denim skirt production. Denim skirt exports thus accounted for 30 per cent of total output, with a volume of 2.6 million units. (See Fig. 4.12) We can see that the domestic markets for all denim apparel products, has become larger than their overseas markets. The domestic market thus becomes more and more important for China's denim apparel industry.
4.5 PRODUCTION AND SALES BY REGION Figure 4.13 shows the geographic distribution of Chinese denim apparel production and sales in 1997. There were 437 denim apparel manufactures in China, distributed in 26 province, 193 in Guangdong, 71 in Fujian, 32 in Shandong, and 30 in Jiangsu. Guangdong Province leads the production of denim apparel products. Between 1995 and 1997, more than 56 per cent of Chinese denim apparel production was from Guangdong. Shanand Fujian were the other two important denim apparel production bases in China after Guangdong, with shares of about 7.6 per cent and 6.9 per cent, respectively, of total Chinese denim apparel output from 1995 to 1997. Jiangsu and Shandong Provinces were the most important production bases following the top three, accounting for more than 5.0 per cent and 4.5 per cent respectively of China total denim apparel production. (See Fig. 4.13) Guangdong produced 66 million units of denim apparel in 1996, but the production decreased to 57 million units in 1997, a fall of 13.9 per cent. In 1995, 11.9 million units were sold in the domestic market and 27.8 million units exported. In 1997, 36 million units of denim apparel fkom Guangdong were sold in the domestic market, but export trade decreased to 19.8 million units. Thus the domestic market increased sharply, while the foreign market shrank considerably. (See Fig. 4.13) Shanghai produced 8.8 million units of denim apparel in 1995 and 7.4 million units in 1997, accounting for 7.5 per cent of China's denim apparel output between 1995 and 1997, on average. Its domestic market increased fiom 3.7 million units in 1995 to 4.8 million units in 1997, but exports fell from 5.0 million units in 1995 to 2.7 million units in 1997. (See Fig. 4.13) Fujian produced 8.2 million units of denim apparel in 1995 and 7 million units in 1997. Fujian's production accounted for an average of about 7 per cent of China total denim apparel output between 1995 and 1997. Its domestic market sales volume increased from 3.2 million units in 1995 to 4.5 million units in 1997, while its exports declined fiom 4.6 million units in 1995 to 2.4 million units in 1997. (See Fig. 4.13) About 4.7 per cent of China's denim apparel output came from Jiangsu between 1995 and 1997 on average. Jiangsu produced 5.5 million units in 1995 and 4.9 million units in 1997, exporting 3.1 million units of denim apparel in 1995 but only 1.7 million units in 1997. In the Chinese domestic market, about 2.3 million units of denim apparel came from Jiangsu in 1995 and 3.0 million units in 1997. (See Fig. 4.13)
40
0.0 b 0s
2
RlbM 0.4-1.1
4.13 Denim apparel production by region
Shandong produced 4.8 million units in 1995 and 4.6 million units in 1997, accounting for 4.1- 4.5 per cent of Chinese denim apparel production. In 1997, 2.9 million units of denim apparel from Shandong Province were sold in the Chinese domestic market, but exports fell from 2.7 million units in 1995 to 1.6 million units in 1997. (See Fig. 4.13) These five provinces produced 80 per cent of China's denim apparel output, whose production is thus concentrated in the southern and eastern region of China. The domestic market grew sharply in the years under study, while exports declined significantly.
4.6 INDUSTRIAL DEVELOPMENT AND MANAGEMENT IMPLICATIONS The garment industry is one of China's leading foreign exchange earners. The Chinese government has implemented several successful policies in the garments sector to help industry development and growth in the past few years. These include: (1) Special loan packages to garment factories. (2) Favorable policies for foreignfunded garment factories. (3) Export tax rebates and export subsidies. (4) Development of the garment-reprocessing sector and border trade. (5) Low-interest loans for technology upgrades. (6) Reform of the garment quota allocation system. (7) Granting garment factories import and export rights. (8) Encouraging garment retailing and wholesaling in the private sector [4]. Most Chinese denim apparel factories are in the small or of medium size. Shortage of capital is the major problem they faced, which prevents the factories from updating machinery, developing technology, and promoting marketing. Policies (1) and (5) help the factories to get lone capital from the bank, speed the industry's technological development and machinery updating, and to apply marketing skills to promote their products. The implication of other policies will be discussed below. 41
4.6.1 Export subsidies and export rebate Export subsidies, according the Dictionav of International Trade [ 5 ] , are described as: (1) Payments made by a government to companies that export specific goods to encourage them to compete in foreign markets. (2) Government benefits made available to domestic producers of goods contingent on their exporting those items for which the benefits received apply. These include support prices, tax incentives, etc. (3) any form of government payment or benefit to an exporter or manufacturing concern contingent on the export of goods." Under GATT, subsidies, especially export subsidies, are seen as a tool that distorts the normal behavior of the market. The Tokyo Round produced an agreement on subsidies and countervailing duties that prohibits export subsidies by developed countries on manufactured and semi-manufactured goods. On the other hand, GATT permits less developed countries to subsidize their export manufactures provided that significant material damage does not result to the economies of highly developed countries as consequence. Subsidies usually take an indirect form (e.g. R&D support, tax breaks, loans on preferential terms, and provision of raw materials at belowmarket prices). Export subsidies applied to China's denim apparel producers will provide an opportunity to develop their technology and update their machinery, and promote the development of the denim industry. Export rebates occur when government pays back or exempts some tax to the domestic manufacturers when they export goods, to encourage exports and enhance the competitiveness of domestic products in the international market. It is a kind of export subsidy though there are different views about this. Export rebates were always regarded as a tool to stimulate domestic exports, especially for the textile and garment sectors. Export rebates widely exist in many countries. Before 1997, the tax rebates for textiles products declined from 17 to 14 per cent, then to 9 per cent, and the textile products exporters had to face decIining profit margins. In 1997, a financial Crisis erupted in most Asia countries and caused their currency to be devaluated. Among these countries, some are important garment exporters, such as South Korea, Thailand, and Indonesia. China, as the country that kept the exchange rate steady, found its garment exports facing huge pressure because of the other countries' devaluation, and garment exports decline in 1998 and the first half of 1999. To encourage textile products exports, the State Administration of Taxation of China increased the rebate rate of textile products in order to boost exports. The tax rebates for apparel and textile machinery were increased to 17 per cent in January 1, 1998, and tax rebates for other textile products were also increased between 1998 and 1999. While the tax rebate rate for garments was raised to 17 per cent, the tax rebates for textile raw materials and fabric were increased to 15 per cent. As China's official value-added tax on exports is 17 per cent, the current tax rebate rate means that exported garments enjoy a full tax refund. Thus, the barrier to exports was reduced and allowed Chinese exporters to compete in foreign markets with less pressure arising from the devaluation by other countries. 'I
4.6.2 Internal export quota management system
China's Ministry of Foreign Trade and Economic Cooperation (MOFTEC) promulgated Rules for the Implementation of Methods of Export Quota Bidding with 42
Compensation on April 29, 1996. For the Chinese textile and clothing sectors, the new rules were significantly expanded and modified a program that was established on a limited, trial basis several years ago. The experimental bidding system, initiated in 1994, covered just four minor quota categories (TIC bleached goods, cotton bleached goods, ramie yarn and ramie gray). That program has now been expanded to cover the following very important categories: 334 (cotton overcoats-men’s and boy’s) 347/348 (cotton trousers, slacks and shorts-men’s, women’s, boys’ and girls’) 351 (cotton night gowns and pyjamas) 352 (cotton underwear) 634/635 (manmade fibre overcoats- men’s, women’s, boys’ and girls’) 636 (manmade fibre dress) 638/639 (manmade fibre knitted shirts/blouses-- men’s, women’s, boys’ and girls’) 641 (manmade fibre non-knitted shirts and blouses-women’s and girls’) 645/646 (manmade fibre sweaters--men’s women’s boys’ and girls’) 647 (manmade fibre trousers, slacks and shorts-men’s and boys’) 652 (manmade fibre underwear) 840 (linen and cotton shuttle-woven blouses)
In China, under the expanded system, an organization called the Bidding Committee for Quotas of Export Commodities, undertakes the responsibilities of handling the bidding for export quotas with compensation. The Bidding Committee is accountable to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), and regional departments (commissions, bureaus) of foreign trade and economic cooperation undertake the responsibility for advertising and organizing the bidding in their localities. All quotas for the affected textile categories is to be sold through a bidding process, with 60% of the quota subject to ‘open bidding’ and 40% to ‘bidding by agreement’. Bidding by agreement differ from open (public) bidding in that it is reserved for former state-owned companies with past-performance records, who areguaranteed quota in the phase. The bidding enterprises have to pass a series of qualifications, such as that the export commodity manufacturing enterprise applying for public bidding should mainly concentrate on a certain commodity, even though the enterprise has no export performance. Foreign-funded enterprises which have joined the Foreign-Funded Enterprises Association, and enterprises which have been checked and accredited by MOFTEC with the right to do border trade of small quantity, may participate in public bidding. Eligibility for bidding by agreement will be determined by a MOFTECestablished “Bidding Office”, based on the volume of a company’s textile exports to the US prior to implementation of the relevant import restriction. As noted above, bidding by agreement is reserved for companies with past-performance records, such as the provincial authorities which traditionally issue visaed invoices in their names. Under the new bidding system, bids are submitted simultaneously by facsimile and mail within deadlines established by the administering authorities. While prices in open bidding are to be decided by the participating companies, that Bidding Office has the discretion to set minimum prices or reject offers which obviously deviate from “normal price levels.” In bidding by agreement, the Bidding Office will announce the 43
maximum volume that a company may did for, based on the volume the company was granted in the previous year’s bidding by agreement, less (I) any amount of quota the company returned to MOFTEC or transferred to another company in the previous year, and (ii) double the amount of quota “wasted” by the company in the previous year (a company will be considered to have “wasted” quota in the same category for two to three years; where the wasted quota was received in bidding by agreement, volume limitation will be imposed. Under the new quota system, export quota users could use export quota on a relatively equal footing through public quota bidding. However, after study the effect of the new quota system to the Chinese textile and clothing industry, some scholars indicated that the new quota system will likely have an inflationary effect on the price of goods in the affected categories, because those factories or shippers which are receiving the highest prices for their goods should be better able to absorb the additional cost of obtaining quota [6]. Denim apparel manufacturers or exporters, (like other textile products manufacturers or exporters,) gain quotas by bidding. The reform of the textile quota system, aims to phase out the “life-time system” and to introduce a system of public bidding for quotas of quality consumer goods which are in high demand but short supply. According to this policy, quotas of sixty percent in each of 21 categories of textile products, including pants and T-shirts, exported to the United States, were open to public bidding. Quota system reform is intended to favor textile manufacturing and research enterprises over foreign trade, which previously controlled the most quotas. However, the policy has caused some problems, such as waste of quotas and increasing costs. Because of management problems, many manufacturing and research enterprises that won the bidding could not fill their quotas by the end of the year. Whether because these enterprises did not turn their surplus quotas over to higher authorities, or because the government did not adequately supervise quota use, quotas were often wasted, and enterprises which needed quotas could then take them up. Meanwhile, because enterprises had to win intense bidding for quotas of consumer goods, the cost of products increased and, as a result, the power of China’s textiles to compete in a global market was greatly weakened. Because of this, China’s Ministry of Foreign Trade and Cooperation is planning to inquire into the present textile export quota system and is considering appropriate adjustments [7]. The government holds an annual auction to sell off the textile export quotas allotted to it by other nations. To develop China’s textile foreign trade, the Chinese government took its textile-quota bidding process online as a sign that e-commerce is beginning to emerge in China, according to the October 20 Zhongguo Maoyi Bao (China Trade News). The e-auction attracted over 2,000 companies, of which 95 per cent successfully submitted electronic bids [8]. The program will usher in a new “ecommerce business era.” 4.6.3 China promotes medium and small enterprises
Medium and small enterprises play an important role in the China apparel industry and other labor-intensive industries [9]. Under the standard modified by the State Economic and Trade Commission in 1998, medium and small enterprises are those with total assets or sales revenue of RMB 50 million (US$ 6million) a year or less. Medium and small enterprise are responsible for almost all of the clothing, toys, crafts, and other labor-intensive goods produced in mass quantities for export in 44
China. More than 80 per cent of China's small and medium enterprises deal with apparel, leather, stationery, sports products, plastic goods, and metal products. Developing medium and small enterprises was one of main objectives for China's industrial development in 1999, as determined by the Central Economic Working Conference held at the end of 1998. The policy of promoting medium and small enterprises outside the framework of the state ownership system began in 1998. In 1999, the policy makers decided to adopt more effective policies and measures to promote the development of these enterprises f9]. These included the establishment of a principal lender for medium and small enterprises, (the China Minsheng Bank in 1996, the Medium and Small Enterprises Service Center in Shanghai in 1998,) and a credit guarantee fund for medium and small enterprises in Beijing. The State Economic and Trade Commission's "Guidance for the Establishment of the Credit Collateral System for Medium and Small Enterprises" and a meeting on loan credit guarantees for medium and small enterprises, reported on the enactment of the "Loan Credit Service Management Regulations" [9]. 4.6.4 Open market
The globalization of the world economy has grown up since the 1980s. Globalization reflects the increasing interdependence of world society [lo] (p. 528), and involves the substantial internationalization or regionalization of an activity previously handled in a single-country context [111 (p. 37). Globalization can be traced back to the sixteenth century and the spread of imperialism and capitalism across the globe. As a result of globalization, States and societies are more interconnected and thus more interdependent [12], and the borderline of their economies have become fuzzy. Under such a more 'open' world economy environment, China launched an 'opening' policy at the end of the 1970s. China, is no longer as an enclosed ancient eastern country, but a modem reforming new market economy, playing a more and more important role in the global economy. The Chinese market was opened step by step by allowing foreign companies enter to the Chinese domestic manufacturing, investing, retailing, capital, etc. sectors. The trade barriers were also removed by tariff cutting, permitting more foreign products to enter China. For denim apparel, two aspects of reform brought challenges fiom the foreign competitors. They were tariff cutting and the elimination of tariff barriers.
Tariffcuts Until the mid- 1990s, China's tariffs were often high enough to preclude most imports. China has taken steps to reduce tariffs pursuant to its bilateral commitments and to support its WTO accession bid. In 1996, China lowered its average import tariff fiom 42.1 percent to 23 percent, and on October 1, 1997, further lowered the average import tariff to 17 percent. Effective from January 1, 1999, further tariffs for 1,014 products in the forestry, textile and toy sectors were cut. In the textile sector, tariffs were reduced on fabric, clothing, and textile products for industry use and packaging materials. The reductions decreased the average textile tariff from 27 to 25 per cent 1131.
45
Non-tarif barriers elimination Licensing, quotas, tendering, transparency, national treatment, judicial review, state trading, offsets, transfer and protection of technology, local content, export performance, and trade and foreign exchange balancing requirements were regarded as the principal types of China’s non-tariff barriers [14]. Among these, licensing and quotas were the major two kinds of barrier. Under China’s Foreign Trade Law, certain products are subject to quotas and import and/or export licensing. Licensing and quotas overlap in many product sectors. Licenses are issued based upon the justifications to import given by the applicant, stating that the import is necessary and also that the applicant has the necessary foreign exchange. The value or quantity levels of quotas on imported products are not publicized, and there is little transparency. With the opening of its market more and more, China has hammered at eliminating its non-tariff barriers to become a member of the WTO. Import licenses on many products have been eliminated, and the process for license application has been simplified. China has also reduced the number of products subject to quota management. In the near future, when China becomes a member of the WTO, more non-tariff barriers will be eliminated. Although apparel is still one of the 246 Chinese tariff HS subheadings subject to import quota management [14], the volume of import quotas may be improved. Tariff cutting and the elimination of non-tariff barriers will allow greater foreign denim apparel access to China domestic market. Meanwhile, foreign products can compete with the China domestic products at lower prices. While Chinese domestic producers concentrate on the low-middle class market, high-tech foreign companies with their sophisticated marketing experience, and well designed apparel will occupy a big part of the Chinese high-class apparel market. As China opens its market more and more, more foreign manufacturer will enter this huge market, and Chinese domestic producers will compete with foreign competitors in the domestic market with the little protection. Domestic producers will face challenges from foreign competitors, who own huge capital, sophisticated marketing skills, and state-of-the-art technology. SUMMARY China owns huge denim apparel capacity, mainly distributed along coastal areas. Hong Kong is the most important market, and is the most important channel for accessing overseas markets. The products of the China denim apparel industry belong to the low value category. It has competitive advantage in low price markets but not in the high value-added and fashion-orient market. The Chinese government has shaped the industry’s course to promote the industry’s development. With the open market policy of the country, the denim apparel industry is facing stiff competition from foreign competitors, not only in the overseas market, but also in its domestic market.
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REFERENCES 1.
2. 3. 4. 5. 6.
7.
8. 9. 10. 11. 12. 13. 14.
WHITE, J., The great American fabric evolves to meet the late ‘90s // CLOTHES: New technology and new styles help keep denim as popular as ever, in Knight-Ridder Newspapers (The Orange County Register). 09/19/1997. p. E03. Ferre, E., Z’ke Mediterranean alternative. Textile Asia, 1992. January: p. 137140. Anon, Jeansfashions in ascendant. JTN-Monthly, 1995.484, p. 75-77. Anon., China’s Garment Industry Wrap-up, 1998, http://www.chinaonline.com/industry/consumer/newsarchive/secure/ 1998/dec ember/cn-b8121708.asp Rosenberg, J.M., Dictionary of International Trade. 1994, New York J. Wiley. 121. Horowitz, R.L.E.a.P.A., China’s new quota system. Textile Asia, 1999. x x x ( 2 ) : p. 39-41. Anon, China To Change Textile Export Quota Arrangement. 1999, China online. http://www.chinaonline.com/issues/foreign_relations/currentnews/sec~e/c9 10 1806.asp Anon, China Conducts Textile Quota Auction Online. 1999, China Online. http://www.chinaonline.com/industry/infotech/newsarchive/secure/1998/octob er/it-b8 102137.asp U e h a , K., China Promotes Medium and Small-Sized Enterprises. 1999, China Online. http ://www.chinaonline.com/commentaryana.. .cs/currentnews/open/c9082670uehara-ss.asp Giddens, A., Sociology. 1993, Cambridge: Polity Press. Unleavy, P.a.H., C, From old public administration to new public management. Public Money & Management, 1994. 14(No. 3). Stephen Cope, F.L.a.P.S., Globalization, new public management and the enabling State. International Journal o f Public Sector Management, 1997. 1O(No. 6): p. 444-460. Anon., China Drops Selected Import Tariffs. 1999, China Online. http://www. chinaonline.codissuedecon-news/newsarchive/secure/19994mu ary/en-b9011808.asp &OM Butcher., Assessment of the Economic Efects on the United States of China’s Accession to the WTU, . 1999, US International Trade Commission: Washington DC. p. 3-1.
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5 Distribution Channels in China
5.1 INTRODUCTION TO MARKETING CHANNELS
As more and more foreign products and factories enter China, and the more developed their denim industry becomes, the environment (domestic and international) in which denim businesses operate has become intensely competitive. This competition is creating fierce battles for market shares, and the distribution channel is an important factor in this competition. 5.1.1 The definition of a marketing channel and its tasks The American Marketing Association defines channel of distribution as "an organized network of agencies and institutions which, in combination, perform all the activities required to link producers with users to accomplish the marketing task." [l]. Distribution is the physical flow of goods through channels; as suggested by the definition, channels are composed of a coordinated group of individuals or f m s that perform functions adding utility to products or services [2]. It is not always a practicable solution that the producer delivers directly to the consumer or the consumer collects directly from the producer. Intermediate agents pass the products along to the consumers. Distribution channels, as the intermediate between producer and consumer, perform specific h c t i o n s that the manufacturer cannot or prefers not to do. As we have seen, a channel of distribution is a group of individuals and organizations that direct the flow of products from the point of their production to the consumers. [3]. The consumer is the ultimate driver of all channel activities. Marketing channels provide utilities for customers that could be a basic source of competitive advantage and product value. The major categories of channel utility are pZuce (the availability of a product or service in a location that is convenient to a potential customer); time (the availability of a product or service when desired by a customer);form (the product is processed, prepared, and ready to use and in proper
48
condition); and information (answers to questions and general communications about useful product features and what benefits are available) [2]. There are two essential parts of the concept of a marketing channel. One is moving a product fiom the manufacturer to the consumer or user; this is called a physical distribution structure. Another is established as a part of the channel of distribution to assure the manufacturer that all marketing objectives are accomplished. a marketing structure [4]. The tasks to be accomplished in the marketing channel may be described by four actions [4]:
1.
Communication Communication includes all forms of communication in marketing, covering advertising, literature, product promotions, mail, telephone, training, and any contact related to marketing information. Communications must be timely and accurate to be effective in serving the marketing channel. In addition, the channel communications are a two-way system, with information flowing from the manufacturer to the consumer and feedback fiom the user to the producer.
2.
Selling The selling task is the act of transferring title to the product fiom one channel member to another.
3.
Shipping and storing The capabilities of receiving, storing, and shipping products may be a requisite on for some channel members. However, this function of physical distribution may also be performed by facilitating agencies, such as public warehouses and common fkeight carriers, at one or more levels in the channel of distribution. Providing product and customer services Customer services include those tasks needed to inform, train, fulfil legal and regulatory requirements, and provide facilitating services such as credit extension.
4.
These tasks of communicating, selling, shipping, storing, and providing customer services are usually carried out by the members of the marketing channel. However, some of the tasks are facilitated by companies that are not direct channel members but nonetheless have a part to play in providing special services that make the actions effective or efficient. These include facilitating agencies such as banks, truckers, advertising agencies, market research agencies, and the like.
5.1.2 Distribution channel participants The participants are all members of the marketing channel and are either merchants or agents. Merchant participants are manufacturers, marketers, wholesalers, jobbers, distributors, retailers, branch operators, users, consumers, and any other term that applies to the industry involved. Brokers, manufacturer's representatives, and commission agents are the three kinds of agent members. Agencies/facilitators that indirectly facilitate the tasks of the marketing channel such as banks, advertising agencies, sales promotion firms, transportation companies, public warehousing and
49
storage companies, insurance companies, and marketing or market research companies are also added into the distribution channel. With the approach of new technology, the membership of distribution channels has developed. The traditional direct participants such as wholesalers, jobbers, retailers, etc, still play an important role in commodity goods distribution, but have now been joined, for example, by the Internet. Wholesalers distribute goods in large quantities, usually to retailers, for resale. Wholesalers are an extension of the producer's sales force, performing specialized stock accumulation and distributor allocation functions, allowing producers to concentrate on producing and developing goods, and assisting retailers by holding stock until needed, thereby reducing the retailer's need for storage [3]. Retail includes all transactions in which the buyer intends to consume the product through personal, family or household use. A retailer is a business that purchases products for the purpose of reselling them to the ultimate consumer, and normally provides an assortment of competing products to meet consumer demand. Because retailers have direct and, in many cases, personal contact with the customers, they are able to feed back accurate information to the producer about the market. The types of retailers include department stores, supermarkets, chain stores, discount stores, speciality shops, convenience stores, factory outlets, warehouse clubs, superstores, catalogue showrooms, and non-store retailing. During the twentieth century, more manufacturers have joined in goods distribution themselves in order to shorten the distance between the manufacturer and consumer. The success of distribution channels such as direct selling, direct marketing, and the Internet testify to this. Direct selling delivers goods from producer to consumer directly through one-toone selling. Later, as a development from one-to-one selling, the party plan appeared, in which a "host" invites fiiends to come and see a range of goods for sale. In that way, consumer resistance is reduced and peer pressure is used to make the sale. Another kind of direct selling, multilevel marketing, is when a company recruits individual business people to act as distributors for the product. Those people will, in turn,recruit sub-distributors who, in turn,recruit still more. Direct marketing includes marketing by catalogue, television shopping, telephone marketing, and vending machines. Direct marketing is sidestepping traditional retail stores and dealing directly with customers, cutting the time and cost of transactions. In 1986, French enterprises began to dispense Levi's 501 jeans in France, and later expanded into Canada, Britain and Spain. The price of jeans sold in vending machines was cheaper than the jeans in department stores, as it didn't need a person to operate it. This approach was quite successful at that time [ 5 ] . The Internet has been a hot topic from the 1990s, since it brought a new type of distribution channel--e-commerce. A combination of computer and communication technology, the Internet developed rapidly in the 1990s, and became one of the newest and best business communication channels. It is fast, reasonably reliable, inexpensive, and universally accessible, and serves a huge and growing consumer group. Doing business online is regarded as a new direct channel to the consumer. Worldwide famous brand denim apparel, such as Levi's, VF, Guess, etc, successively set up a shopping window on the web in 1998, after introducing their Internet Web to consumers. In this way, buyers can shop not only in stores, but also at home, or any place where the Internet has arrived. Online shopping also can help producers to reach the right customer more frequently, communicate with the consumer more easily,
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provide the best and most appropriate products, and strengthen customer relationships, thus improving loyalty. The channel numbers deliver not only goods and information between producer and consumer, but also create value (service) for the consumer. The manufacturer gives up some control over the products and markets involved, paying a part of the profits for these services.
5.2 DISTRIBUTION CRANNELS IN CHINA 5.2.1 China's distribution system and its reform The reform of China's distribution channels was launched as soon as the country began its economic reforms. During the past two decades, the steps of restructuring, consolidation, and rectification had been carried out. Sherriff T.K. Luk [6], investigated the period from 1978 to1995, and studied the structural changes in China's distribution system, which stemmed from the elaborate procedure of distribution channel reform. Before China economic reform, the Chinese economy was under a central planning system. The Chinese government adopted a central, three-tier distribution system, including Grade I Wholesale Stations (State level), Grade I1 Wholesale Stations (Province Level), Grade I11 Wholesale Stations (District Level), and Grade IV wholesale Stations (City/Country/Township), to control the flows of commodities. Within this system, the first-level (State Level) wholesalers acted as general control agents responsible for primary national or regional distribution. The second-level (Province Level) wholesalers were in turn responsible for provincial or major urban distribution. Finally, the third-level (District Level) distributors administered local distribution centers and dispatched goods to retailers within their areas. The three-tier distribution system was operated by a top-down approach in the allocation of production and distribution quotas according to the central government's mandatory plan. Local state-owned wholesalers served as intermediaries between the producers and the retail outlets and were required to store products and transport them to local retailers. Under the central planning distribution system, market forces were restrained and suppressed and distribution activities were monopolized by stateowned commercial units in city districts and co-operatives in the countryside, resulting in a highly rigid, inefficient distribution network spreading its links to both wholesale and retail areas. After 1978, reforms were launched in phases. The first was from 1978 to 1985, when the Chinese government extended autonomic power to enterprises: financial power, planning and operational power, the power to fix and regulate the prices of some commodities, personnel management power, and established democratic rights of the workers and staff in 1984. In addition, enterprises were allowed to sell not only those products produced on their own initiative but also products in excess of the sales quota imposed by the government. Thus, both manufacturers and commercial enterprise would have a greater degree of autonomy to explore new markets and to select their customers and middlemen. The second period was between 1986 and 1988, when the government focused on developing horizontal links between enterprises across different industries and/or provinces to promote and distribute the products to different regional markets and to sweep out bureaucratic and geographic barriers. In the third phase, from 1989 to 1991, the major project was to rectify the 51
loopholes that emerged in tandem with the distribution reform, which were caused by the lack of relevant experience and a well-developed legal system. In the fourth phase, from 1992 to the present the sturdy determination of the government is to create a market economy, further reforms have been launched. The government has allowed more commercial enterprises and large manufacturers greater autonomy to import and export goods and components. Meanwhile, several ministerial systems within the distribution sector have been re-organized with the primary objective of improving the administrative efficiency of governmental organizations, improving the internal management mechanisms of commercial enterprises, avoiding the duplication of resources and functions in various governmental departments, and, ultimately, of facilitating the cultivation of a more market-oriented system. The re-organization took place both at the state level and at the local level. At the state level, various administrative departments within the old Ministry of Commerce were transferred to specialized corporations to improve operational efficiency, and the former Ministry of Commerce and the Ministry of Materials and Equipment were merged to form the new Ministry of Commerce of Domestic Trade. At the local level, re-organized government bureaus were implemented on an experimental basis in a few sample provincedcities. With the phased reforms, the Chinese distribution system was changed from being selling-oriented to being market-oriented. The retail sector was reformed from the traditional supply-driven system to an increasingly demand-driven one. It was composed of department stores, retail shops and groceries, supermarkets, free market, collective owned distribution networks etc. The wholesale sector, following the retail sector, reformed to become market-oriented through reducing the level of control, constructing regional wholesale markets in urban and rural areas throughout China, building and operating state-level wholesale markets on a market-oriented concept, and improving the competitiveness of state-owned wholesale enterprises. The new distribution channels, not only provide "time" and "place1'utilities, they now perform value-added and differentiated marketing activities. 5.2.2 Current Chinese denim products distribution channels
Chinese textile product distribution has undergone every phase of the distribution system reform, and changed fiom a central planning system to a market-oriented one. Denim products are a newcomer in the textile sector, and its current distribution channels will be discussed in the following sections. Distribution channels to overseas markets Figure 5.1 shows the distribution channels for Chinese denim products to overseas markets [7]. There are three main patterns of distribution channel for China denim apparel. Pattern A consists of the denim manufacturer, a domestic agency, a foreign jobber and a retailer. In pattern B denim apparel was distributed fiom the manufacturer to a foreign jobber directly and then to a foreign retailer. The last pattern was that in which manufacturers sold products to the Chinese office of foreign jobber, then to a foreign retailer. Among these, pattern A is applied most widely in China.
52
I
Distribution channels to overseas markets
,./
office of
........... .............
......-...... ............
Foreign
..a-
...%....,.
./
(gz>..-.e .,'
Jobber
Agency
-...._-. ...................................
.......
................. ............-.
"
I
5.1 Distribution channels to overseas markets
Distribution channels in domestic markets A survey [8] has been carried out on the distribution channels in China of 77 manufacturers, which are located in 14 provinces, 28 in Guangdong, 10 in Fujian, 9 in Jiangsu, 8 in Shandong, 5 each in Zhejiang and Shanghai,3 in Jiangxi and Henan, and 1 in each of Beijing, Hebei, Shaanxi, Guangxi, Liaoning and Jilin. Among the 77 manufacturers, 5 enterprises owned specialty stores, and 9 owned chain stores. The main distribution channels for denim products in the Chinese domestic market are shown in Figure 5.2 [7]. Again, there are three major distribution channels. Pattern A is that in which manufacturer sell their products to wholesalers, then to retailers, was the most important distribution pattern in China domestic market. In pattern B manufacturers sell their products directly to retailers. Currently, in the Chinese apparel market, private retailers, supported by huge wholesale markets, play an important role in China apparel market. This pattern is accepted widely in China, particularly in the rural market and part of the urban lowgrade products market. Department stores were the major distribution channels for high-grade garments, such as imports and some domestic brand denim apparel. The sale strategy of Chinese department stores was to operate on a commission basis. This didn't benefit the monies flowing to the apparel manufacturers, and the department stores are facing a strong challenge fiom new style distribution channels.
I
Domestic distribution channel
a a a
5.2 Domestic distribution channel
53
Speciality stores are a new, quickly developing outlet in China. They offer competitiveness in ensuring a brand image and a fast cash return. Hyper markets, Super markets, and Chain stores are the fastest developing distribution channels, having low operating costs and competitiveness on low prices. They are seen to advantage in jeans, underwear, shirts etc. not in fashion items. They are usually large scale, sale at low prices and are welcomed by consumers. In our investigation, we found that most of the China denim apparel is distributed in domestic market was by pattern A, involving wholesalers, and retailers. New style outlets, such as specialty stores and chain stores sold about 5.0 per cent of manufacturers' products.
Channels offoreign products access to China market According to statistics released four years ago, there were barely 300 jointly-funded (Sino-foreign) retail companies in China, but more than 3 13,000 domestically-funded retail companies. Foreign-funded retail companies do not even make up 0.1 per cent of the total. The number of their sales locations is even smaller when compared to those of domestically-funded retail companies, making up only 0.003 per cent of the total [9]. The domestic retail sector does not really face direct competition from its foreign competitors in the Chinese domestic market. Foreign goods gain access to the Chinese market through many kinds of channels. The first is through foreign retail joint ventures, who were allowed to operate retail businesses on a limited experimental base from 1991, but whose imports must not exceed 30 per cent of their total sales. The other channels are through agencies of national or regional Import & Export companies, and larger enterprises who own licenses to operate an impodexport business. These channels shared a big part of the distribution of foreign goods in China. Exhibitions and Fairs provide opportunities for finding agencies for foreign goods. 5.2.3 Retail of denim apparel
Denim apparel was introduced into China in the 1980s and was considered a young and fashionable product. Denim apparel has now become a major category in the China clothing market, since Chinese consumers have found them to be natural, unrestrained and durable. In 1997 the China Statistical Bureau surveyed denim apparel sales in 112 important department stores in China and found that more than one million units of denim apparel were sold, which accounted for more than 1 per cent of the total Chinese domestic denim apparel sales. Eighteen brands of denim apparel accounted for more than 75 per cent of the total denim apparel sales in the surveyed department stores. Among the eighteen brands, Boton had the biggest market share of 17.4 per cent of total department stores sales, the second most important brand was Weipeng with a share of 15.6 per cent, followed by FUN and Jianlong, with 5.8 per cent and 5.1 per cent of market share respectively. The other 14 brands of denim apparel such as Popo, Qipanwang, Dali, Red Taps, Guoshu, Apple, Nanfang, Lanyi, Gaorpu, Billy, Yiren, Mingshi, Lanlington, and Aochai, shared the 3 1.6 per cent of market share. Denim apparel is sold not only in department stores, but also in special stores and free markets. Branded denim apparel products are usually sold in such place. Non54
branded denim apparel is usually sold in street markets and wholesale markets with lower prices. 5.3 DEVELOPMENT AND MANAGEMENT IMPLICATIONS In the past, foreign retail business was forbidden, and retail joint ventures were only allowed in 11 cities including Beijing, Shanghai, Guangzhou etc. in 1992. In June 1999, China’s State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation promulgated new rules that would relax restrictions on Sino-foreign joint ventures in the retail and wholesale sectors. According to the new rule, retail joint ventures in China may now open businesses in any of China’s provincial capitals and autonomous regions as well as in other major cities. Wholesale joint ventures will also be allowed, but for new only in Beijing, Tianjin, Shanghai, and Chongqing for new ones. However, foreign investors are still not permitted to maintain one hundred per cent ownership of wholesale and retail companies in China for the time being [lo]. Under the new rules, multinationals who have multiple manufacturing plants in China will benefit the most as they will be able to consolidate their sales force and have a more direct relationship with retailers. Meanwhile, the rule also helps importers, who under current restrictions are required to pass their goods through licensed domestic importers and wholesalers [lo]. To protect domestic industries, currently foreign firms in China may not distribute products other then those they make in China, and they may not own or manage distribution networks, wholesale outlets or warehouses. Such restrictions may lessen as required by other WTO members because China is applying to be WTO member [lo]. If in the near future China enters the WTO, China would open its market more and more, and foreign leading brand denim jeans manufacturers may enlarge their market share in China via: 1) share more of the China domestic market by lower cost products made in China, 2) establish own international retail network.
REFERENCES 1.
2.
3. 4. 5. 6.
Bennett, P.D., Dictionary of Marketing Terms. 1988, Chicago: American Marketing Association. 29. Keegan, W.J., Global Marketing Management. 1999: Upper Saddle River, N.J. :Prentice Hall,. p. 435-451.. Gower, The Gower Handbook of Management, ed. D. Lock. 1998: Aldershot ; Brookfield, Vt. Gower Publishing Limited. p. 52 1 McCalley, R.W., Marketing Channel Development and Management. 1992, London: Quorum Books Westport, Connecticut. London. p.3. French Entrepreneurs Find Marketing Gimmick Vending Machines Dispense Jeans, in Los Angeles Times. 1986: Los Angeles. p. 4. Luk, S.T.K., Structural Changes in China’s Distribution System. International Journal of Physical Distribution & Logistics Management, 1998. 28(1): p. 4467
55
7. 8. 9.
10.
China Denim Market Research Report, (1998) Beijing, Hong Kong Polytechnic University-All China Marketing Research, Additional part. China statistical Bureau, China Denim Market Research Report. 1998, Beijing.p.Add part. .Anon., Foreign Not a Threat to China's Retail Market. 1999. China Online, http://www.chinaonline.com/industry/consumer/currentnews/sec~e/c9 111103 Anon., China Welcome Joint Venture Wholesalers, Opens More Cities to Retailers, 1999, China Online. http://www.chinaonline. com/industry/consumer/newsarchive/secure/ 19991iulv /cn b2 99070802.a~~
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6 SWOT Analysis for the Chinese Denim
Industry
6.1 INTRODUCTION
After investigated the production, consumption, geographic distribution and distribution channels of the Chinese denim industry, we how carry out a further analysis, which is a critical part of the strategic management planning process. As a producer absorbing 5 per cent of world’s cotton, the principal supplier of Hong Kong, the most important trading center in Asia, and the fifth largest supplier of the US, the most important denim market, the Chinese denim industry is very powerful in the world market. However, in Europe, where denim has a higher fashion character, China is only the 25thsupplier. In earlier sections, we found that business scope was wide, from denim fabric to denim apparel, fiom jeans to children wear, and the objective of the Chinese denim industry is to enlarge its market share in the markets (global and domestic). The industry was positioned as export-oriented when it was established. As more people in China’s domestic market accepted the denim apparel, the industry also focused on its domestic market, which has one fifth of the world’s population. We positioned the China denim industry as a power in the international market, and in its domestic market, and now go on to analyze it strengths, weaknesses, opportunities and threats, comparing it with its major competitors to identify its competitiveness. SWOT is a common and widely recognized tool for finding a match between organizations capabilities and opportunities within a competitive environment. It was introduced in the second half of the last century help in analyzing a company’s extra and intra environment as an important part of strategic planning [l]. The major work of a SWOT analysis is identifying and analyzing the threats (T) and opportunities (0) in the external environment and assessing the organization’s weaknesses (W) and strengths (S). Then to design a strategy to position the organization, so as maximize the strengths and opportunities, and minimize the weaknesses and threats. Later, the tool was used in industry and for national analysis [Z]. In this section, the operating environment and the industry’s internal strengths and weaknesses are focused on. The SWOT items are summarized in Table 6.1. 57
6.2 STRENGTHS
6.2.1 Huge product capacity The Chinese denim industry processed 5% of the world's total cotton consumption in 1997 (Yi, L., and Lei, Y.,1999), and owned huge production capacity. The industry has been built up since the late 1970s, when China began its open door policy. In the database we built, more than one thousand enterprises manufacturing denim yams, fabric and apparel were included. In term of location, we found that most of them were situated in the coastal areas (Guangdong, Fujian, Jiangshu, and Shangdong provinces) of China which are the relatively economically advanced areas. These coastal areas have better-developed physical infkastructure, no matter in energy, transportation, and communications, compared with other areas in China. They are also the earliest most practiced market-oriented economic areas in China. Since China's economy has become more market-oriented, the industry has learned to operate under market forces. They have relied on the market to obtain their input factors and sell their output, rather than having them allocated by state planning. Further, it was a sector that attracted much foreign investment at the beginning of the 1980s, when many Hong Kong denim factories shifted their manufacturing factories to the Chinese mainland. Our database showed that the Chinese denim industry consisted mainly of collectively-, joint venture-, and privately owned enterprises, which were regarded as having high autonomy, high flexibility and low governmental intervention compared with state-owned enterprises [3]. Factories in the denim sector have higher autonomy over determining how and with whom they will conduct business. The denim industry, in contrast to other industries, is more dynamic, flexible and "marketized".
1. 2. 3. 4.
5. 1. 2. 3. 4. 5.
6. 7.
Opportunities Strengths 1 . Growing domestic markets Huge production capacity 2. Liberation of restrictions on cotton supply Dynamic, flexible and "marketized" fiom lstSeptember 1999 Huge labor force 3. Potential increase in foreign trading space Lower production costs (compared with developed countries) Familiar domestic business environment Threats Weaknesses 1. Restricted international trade space Shortage of funds 2. Competition fiom developed countries and Low value-added products Weak in technology development, utilization, other developing countries 3. Concentration in US and EU clothing retail commercializationand marketing research industry Low product Innovation Low skilled labor Growing labor costs Unfamiliar foreign markets and low marketing skill
58
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6.2.2 Huge labor force The denim industry is labor intensive rather than a capital intensive industry. The labor force is an important input factor. With a population of more than 1.2 billion, China is the world's most populous country, with more than 80% of the population in rural areas. As a result of the conflict between limited agricultural land and a huge rural population coupled with the big difference in life style between rural and urban areas in China [ 6 ] , large numbers of unemployed and underemployed rural people immigrated to urban areas to find jobs. Most of these people from rural areas had poor skill levels and poor education, and provided virtually unlimited cheap labor resources to the Chinese denim industry.
6.2.3 Low production costs Labor costs play an important role in the production costs that are involved in a labor intensive industry. There is data to indicate that the labor costs in China are low compared with those in other traditional denim manufacturing countries, such as USA, 'Italy and Belgium [7], and in some developing countries, such as Turkey and Mexico, as shown in Figure 6.1. The labor costs in the industrial countries such as USA, Belgium, and Japan were ten times higher than in China. Furthermore, the labor costs in some important denim producing developing countries such as Turkey and Mexico were also higher than in China. The low labor costs determined that the production costs of denim products in China were relative low compared with those in developed countries, where firms faced higher costs for labor, land, and environmental protection. In China, on the other hand, the low requirements on environmental protection meant low costs for wastewater treatment. This helps the 59
production costs of Chinese denim, but at the expense of a serious environmental problem for China. 6.2.4 The familiar domestic business environment The size of the market for denim wear in China has been growing fast since 1978 when China opened its doors so that foreign culture and life-style were introduced. Jeans appeared on the China mainland in the 1980s, when people, especially the young, accepted them as a fashion, a symbol of Western life-style. Now, denim apparel is an important category of casual wear in China. As China’s textile market hasn’t yet fully opened to foreign competitors, domestic producers have dominated the home market. They are familiar with the Chinese domestic business environment because they have the same background and culture. China has a mystical aura owing to its long history and ancient culture. Unlike in with many Western countries, business in China has a special character. Guanxi, literally meaning in Chinese relationships, or more accurately, connections, probably is the key issue for business success in China, and many scholars have emphasized the importance of Guanxi in their research reports [8] [9]. The Chinese domestic market, determined by its huge population and increasing consumption, is an important target market for many foreign denim producers. China’s unique culture and social environment are perhaps barriers for most foreign businessmen doing successful business in China. On the contrary, China’s domestic denim producers have the advantage of knowing the domestic culture and social environment and operate their business in its unique business environment.
6.3 WEAKNESSES 6.3.1 Unfamiliar foreign markets and low marketing skill From its inception China’s denim industry was export-oriented. However, unlike the US denim producers, who have more than a-century of business experience, the Chinese denim industry’s history is very short, having developed only in the last twenty years or so. Further, since China closed its borders from the end of 1940s, most the local enterprises were short of direct experience about the foreign markets and consumers, and also lacked the marketing skills to promote their products in the stiff competitive markets.
6.3.2 Shortage of funds As in other sectors in China, shortage of funds was a big problem the denim manufacturers faced. The manufacturers working in the sector were established in a short time and most of them were dependent on bank loans for their development. In the 199Os, China’s money market was stringent; it was very difficult to obtain a loan from a bank. And if one succeeded, the interest was in two figures. In the second half of the 199Os, many investors invested in the denim business with little differentiation.
60
Competing in the same battlefield with little differentiation causes the profit margin of the manufacturers to be reduced. This made it difficult for the manufacturers to accumulate funds. The shortage of h d s limited the manufacturer’s ability to update machinery, invest in R&D, train its labor and indulge in marketing promotions. 6.3.3 Not the most advanced machinery
China does not own state-of-the-art technology and techniques in the fields of spinning, weaving, dyeing, and fhishing. The Chinese domestic textile machinery industry couldn’t supply the most advanced machinery to produce efficiently high quality, products for the China denim industry. Most of the textile machinery in the denim industry was imported fiom industrialized countries, such as Italy, Germany and Japan in the middle 198Os, and denim firms had to pay huge capital for machinery imports. An imported production line would cost about US$ 5 to 7 million. Because of the shortage of funds, the mandacturers have found it impossible to update their machinery quickly and the machinery currently working in the sector is not the most advanced compared with that of its competitors in the world market. 6.3.4 Weak in technology development, utilization, commercialization and marketing skill
China’s denim industry is also was weak in technology development, utilization, commercialization and marketing research. Most of the firms just have one production line in China; they are small or middle-size enterprises, so they can not achieve an economy of scale and have no ability to develop new products by themselves. They are also weak in utilizing new technology. New technology, such as CAD/CAM (digital design) and Electronic Commerce (Internet) was regarded as the major means to fight back competition from low cost countries by producers in USA and Europe. However, the technology is still not widely used in the China denim industry. The industry is also weak in new material research. In the 199Os, manufacturers in developed countries introduced new materials that led to softer fabric, that were easier care, more breathable and eco-friendly, and applied them in denim apparel to meet consumer requirement. Compared with its competitors, the Chinese denim industry did little work in this field. 6.3.5 Low value-added products
There was information in our survey that indicated that the gap of processing-skill level between China and other advanced producers is narrow [lo]. In the US market, the average price of denim jeans imported into the US was US$7.2-7.5 per unit, and the price of denim jeans from China was US$9-10 per unit. China denim apparel was positioned as middle quality products. However, when the price of denim apparel fiom China is compared with that fiom the advanced producers such as US, Italy, Belgium, and France, it was relative low. For example, the average price of denim apparel EU imports was around 10 Euro per piece, while the price fiom China was 6.67 Euro per piece in 1997. Although the processing-skill has improved and the price
61
for unit denim apparel has increased in the past years, Chinese denim products are still medium to low grade products in the international market. Many of f m s in China’s denim industry have only recently joined the processing business. A big proportion of Chinese denim apparel enterprises process denim for foreign agencies; even though overseas markets are very important to Chinese producers, few of manufacturers have done business on the distribution channels in overseas markets. The value-added of Chinese denim products was relative low in the US and EU markets [l 11. As its competitors increased consumerism, Chinese firms mostly acted as processors and did little work on marketing, and brand building. They recognized the importance of bands in the mid-l990s, and build some national famous brand such as Boton and Weipeng. However, this is far from the brand awareness seen across the world, and they did not sell products or supply services in overseas retailing markets directly, even though the overseas markets were their important target markets. Their products were given foreign brand names, just being marked Made in China, and could be found in every type of retail outlet in foreign countries. Similarly, in the domestic market, few enterprises integrated into retailing or provided services. Chinese denim f m s competing in the market mainly rely on price oriented strategies and compete in price-sensitive market segments. Most firms are also weak in market understanding because they do little marketing and consumer research. In the middle of the 1990s, China produced mainly extra heavy & thick denim fabric, while ultra light & thin varieties were becoming fashionable in world markets. In China, most denim fabrics were still made of pure cotton yarn only for the domestic market. China’s denim fabric production thus did not meet the demand of overseas markets, a big problem the Chinese denim fabric industry is facing. Relying on price oriented strategies, low value added products, and higher liability interest, all these factors influenced the enterprises’ margin and kept it relatively low. This prevented the enterprises from a accumulating with which to upgrade the industry.
6.3.6 Low skill labor Another factor that weakened the industry was the low skilled labor. The Chinese denim industry employed many unskilled labors who had migrated from poor rural areas and were poorly educated. Although low skilled labor may imply the low labor costs, it is weak in understanding new technology, which affects the introduction of the latter as a means of increasing productivity.
6.3.7 Growing labor costs The most important strength of the China denim industry was low labor costs. However, gradually increasing labor costs in China’s clothing sector have taken the edge off the most important strength of China. The labor cost in the Chinese apparel industry increased from $0.28 per hour in 1996 to $0.43 per hour in 1998 [12]. With economic growth, the labor cost will continue to increase.
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6.4 OPPORTUNITIES 6.4.1 Growing domestic markets The most important opportunity for the Chinese denim industry is the growing domestic market. 63.77 million Units of denim apparel were consumed in China’s domestic market in 1997. Between 1995 and 1997, the domestic denim apparel market size increased by 41.59% and its growing potential is expected to continue for some time. On the other hand, denim fabric is widely used in the non-apparel sector in foreign markets. With the Chinese economy developing increasing competitive power, China itself is becoming a large upholstery market. As more Chinese accept a foreign lifestyle denim fabric, with the feature of homeliness and durability, will be applied more and more in the Chinese upholstery market, where denim has a bright future.
6.4.2 Growing developed countries imports Some research has indicated that the clothing markets in developed countries will increasing depend on imports [13]. In the two most important denim products markets, USA and EU, import values of denim products have been increasing. With a growth rate of 8.28% per year fiom 1995 to 1997, the USA imported US$2.0 billion worth (at C.I.F. prices) of denim products in 1997. In the second largest denim market, the EU, the import figure has increased fiom 1.1 billions in 1994 to 1.5 billions 1997, a growth rate of about 6.1 1% per year. Denim wear is an important kind of casual wear that meets many people’s requirements on comfort and easily maintain clothing. Furthermore, denim fabrics are becoming widely used in non-apparel products in overseas markets, such as bedspreads, solid denim pillows, denim rugs and so on, these products helping to create an atmosphere of relaxed comfort for everyone to enjoy. Denim products therefore have a bright future, and it is an opportunity for China’s denim industry.
6.4.3 More free cotton sourcing Inside China,an opportunity also arose fiom the nation’s reform of its cotton policy. China’s textile manufacturers have had deal with a single cotton supplier because China’s central government has had a strict monopoly over all cotton purchases, marketing and storage. At the same time, due to problems such as unstable cotton production, and the rapid growth of downstream processing capacity, China’s textile industry faced scarcities of raw material supply. The controlled cotton price and single cotton sales channel created for the denim yarn industry high raw material prices and lost flexibility in raw material selection. The high raw material cost in denim yarn industry influenced the Chinese denim fabric and denim apparel industries, because they had to face the burden of higher raw material costs in competition with foreign companies. The high raw material costs eroded China denim products competitiveness in the world market. The Chinese government decided to
63
liberalize cotton prices from 1'' September 1999 (China Economic Information Center, 1998), when the officially fixed price will be replaced by a "reference" price. Further, textile mills will be allowed to buy their raw materials directly from farmers, and China's denim yarn manufacturers should largely benefit from a substantial price reduction and increased flexibility in raw material selection.
6.4.4 Enlarge foreign trade after entry to the WTO Till now, China has not been a World Trade Organization (WTO) member. The nonWTO member status has brought considerable difficulties to its textile foreign trade since it could not enjoy the WTO membership benefits of the textile quota and reduced tariff rates. China is the most powerful textile product exporter in the world, but many industrially developed countries have discriminatory that disadvantage rules textile products fiom China. China has had no opportunity to dispute these rules it because it was not a WTO member (we will discuss this later in the section on Threats) After applying to enter the WTO, Chinese and US negotiators reached an historic trade deal in Nov. 1999 that removed significant trade barriers between the two countries, and cleared the way for Chinak entrance into the WTO. If China joins the WTO, the Chinese denim industry will benefit on two counts. The first is an improvement in China's macroeconomics improvement; another is an enlargement of the trading space for denim products. The World Trade Organization (WTO) has its roots in the General Agreement on Trade and Tariffs, or GATT. The work they began in 1948 has continued for over fifty year, and their faith in freedom, open markets and the rule of law has been abundantly vindicated, through eight rounds of negotiations, and as 112 new members joined the 23 founders of GATT [141. China has operated reform policies for some time, and most of the remaining reform requirements are of an institutional nature. Currently, China's economy and institutional framework are still underdeveloped and in transition. The administrative and legal environment (including judiciary procedures) requires considerable further development toward internal consistency, completeness, transparency, and enforceability to meet the demands of a more completely competitive market economy. They will require years of further social, legal, and administrative reform and development. From the point of view of the macroeconomy, joining the WTO was an essential building block for completing the opening up and modernization process for China. It would help China to design and implement the difficult and often painful economic, financial, and institutional adjustments that still lay ahead [15]. It would provide structure and legitimacy to important components of the domestic reform process, particularly the most challenging parts of it, such as the creation of genuinely rulebased and transparent systems of governance and dispute resolution. Joining the WTO would help China to accelerate its reform by having closer links with the international economy. Without WTO membership, China's remaining reform agenda will be harder to implement and China will face serious additional uncertainties regarding international market access for some of its exports [15]. The Chinese denim sector will benefit from China's economic reform and enhance efficiency that would result from joining the WTO [161.
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Joining the WTO would help China to accelerate its reform by having closer links with the intemational economy. Without WTO membership, China's remaining reform agenda will be harder to implement and China will face serious additional uncertainties regarding international market access for some of its exports [15]. The Chinese denim sector will benefit fiom China's economic reform and enhance efficiency that would result fiom joining the WTO [161. China is the world's largest textiles producer and exporter, and the production and export of textiles is of vital importance both to its economic development and its foreign exchange balance, as well as to the balanced supply and demand for textiles and sound trade patterns in the world market. The discriminatory rules of the industrially developed countries have limited its foreign trade space. If China joins the WTO, this will be helpful in enlarging that space. Since the 1970s, the international textiles trading system, governed by the "Multifiber Arrangement" (MFA), has deviated fiom the fundamental principles of the General Agreement on Tariffs and Trade (GATT), and developed countries that import textiles have imposed discriminatory quotas on developing countries that export textiles. After long and arduous negotiations, the "Agreement on Textiles and Clothing" was reached during the Uruguay Round of GATT talks. The agreement finally brought the MFA into the GATT orbit again and enabled the gradual liberalization of international textile trade. The World Trade Organization (WTO) Agreement on Textiles and Clothing (the ATC) provides for the phased liberalization and elimination over a transition period of quotas on textiles and apparel imported fiom WTO member countries. The ATC went into effect on January 1,1995. Under the agreement, world textile trade was liberated in two ways. One is product integration, including the phasing out of Multi-Fiber Agreement (MFA) quotas and the acceleration of quota growth rates for products not yet integrated into the WTO is to occur over 10 years, in three stages. ("Integrated" products are those removed fiom the universe of textile products subject to MFA-type quotas.) [171. The timing of the 3 phases and the percentage of trade that must be integrated, and the increase in quota growth rates for products remaining under quota are shown in Table 6.2.
The second way was by applying increased growth rates to quotas outlined in the bilateral agreements under the Multi-Fiber Arrangement. Under the ATC, the growth rates allowed under the bilateral will increase in three successive stages over the course of the 10-year transition period. For major supplying countries the growth rates will increase by 16% in 1995, an additional 25% in 1998 and an additional 27% in 2002. The following chart shows how the quotas will grow. Because of its non-WTO member status, China has lost the benefit of the quota liberation under the WTO between 1995 and 2000. After becoming a WTO member in the near fbture, China could enjoy the quota liberation in the subsequent stages. In addition to the benefit fiom quota liberation, if China were a WTO member, China could settle trade disputes under the negotiated trade rules of WTO, reducing the negative effect of the discriminatory rules which are produced by industrially developed countries. This would help China's manufacturers to compete with their foreign competitors in a fairer way.
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Table 6.2 Phases of trade inteerated and increase to the auota glowth rate TRADE INTEGRATED
STARTING DATE Phase I Phase I1 Phase I11 Final Phase
1/111995 1/1/1998 1/1/2002 1/1/2005
16% 17% 18%
INCREASE TO THE QUOTA GROWTH RATE 16% 25% 27%
all restrictions are eliminated
PHASE I
PHASE I1
PHASE I11
RATES
16% increase (1 995-1997)
25% increase (1998-2001)
27% increase (2002-2004)
1% 2% 3% 4% 5% 6%
1.16% 2.32% 3.48% 4.64% 5.8% 6.96%
1.45% 2.9% 4.35% 5.8% 7.25% 8.7%
1.8415% 3.683% 5.5245% 7.366% 9.2075% 11.049%
MFA GROWTH
J
I
However, some trading barriers, such as the rule of origin imports in the US market, discriminatory restrictions under a special safeguard provision (Protocol of Accession of China), regionalism in North America and enlargement of the EU, antidumping, and new products stands, will not be eliminated after join the WTO. These will still have an adverse effect on China's exports. 6.5 THREATS
6.5.1 Restricted international trade space Serious trading barriers exist for the exports of Chinese denim products. For example, the export of Chinese made WomenWgirl's trousers, breeches, skirt, and divided skirt denim made via a third country (area) to the US was restricted by the rule on the origin of imports in the US market. These were important categories that China exported. Alongside the rule of origin, other discriminatory rules have existed. The textile and apparel agreement with China for the years 1994-1996 provided for no quota growth in the first year and for 1-percent annual growth, on an overall tradeweighted basis, in the following 2 years. Many of the largest apparel items that China exports to the US were subject to individual quotas with even lower annual growth rates ranging from 0.2 percent to 0.5 percent. In February 1997, the United States concluded new agreements with China on textile and apparel trade. One agreement extended U.S.quotas on Chinese non-silk goods for 4 years through the year 2000. This agreement reduced quotas for products in which China had repeatedly violated quotas by transhipping through third countries, strengthened enforcement terms against illegal transhipments, and, as in to the 1994 agreement, allowed the United States to "triple charge" quotas for repeated violation of the agreement [181.
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In the meantime the US restricted Chinese denim (textile) product exports to US, while NAFTA and CBERA countries enjoyed the US "special regime" and "special access program". Some types of apparel import from Mexico entered free of duty and quota and similar CBERA goods enter under preferential quotas but are still subject to duty on the value added offshore. AfTected by NAFTA and special treatment to CBERA, China lost its important position in many textile categories exported to the
us.
6.5.2 Competition from developing countries In recent years, in overseas markets, China's denim industry not only faces competition from the developed countries, but also fkom other developing countries such as Turkey, Mexico, and India. Turkey benefits fkom an agreement with the EU; Mexico enjoys its membership of NAFTA; India is a powerful denim products producer, with an advantage of low labor costs, who invested much on technology and research, in alliance with leading denim producers (CONE) and benefited fkom its membership of WTO. Mexico had one third of the US imported denim products market in 1995. With a growth rate of 42.8% per year, Mexico owned 50.2% of the US denim import market, while from January to November 1998 Mexico contributed 52.3% of the US imported denim market (Data sources: USA-STAT). Turkey occupied 3.2% of the EU import market in 1994, and this grew to 4.6% in 1997. In the same period, India's market share was increased from 0.3% to 0.6% in the EU import market (Data source: Statistical office of the European Communities). Meanwhile, China's market share declined fkom 0.9% to 0.6% in the EU import market, and decreased from 2.3% to 1.9% in the US market (Data source: USASTAT). 6.5.3 Challenges in the domestic market Apart from the threat from the international markets, as Chinese government has operated an open policy continue since 1978, China has opened her domestic market step by step, and there has been a heavy threat from foreign competitors in China's domestic market which previously had been protected. More foreign competitors appeared in China's domestic market to compete with Chinese f m s with their huge capital, sophisticate marketing experience, wide international retailing nets and famous brands. Chinese domestic manufhcturers did not seem to be prepared for this threat from foreign competition. 6.5.4 Retail concentration Concentration in the US and EU clothing retail markets increased their bargaining power, and they asked suppliers for better service and reduced order sizes and delivery times. When other countries employed a quick-response strategy to meet the concentration in the US and EU clothing retail markets, China simply acted as a processor creating low value added products.
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SUMMARY Summarized the above analysis, the Chinese denim industry had huge production capacity, a huge and growing domestic market, low labor costs and an abundant labor force. However, the industry was facing weakness internally and threat externally. Internally, China's denim industry has faced problems that reduce its competitiveness, such as low skill labor, low technology development, utilization and commercialization. Externally, the industry has been facing a number of serious threats: (1) stiff competition from other developing countries such as Mexico, India and Turkey; (2) the trade regionalisms in North America and Europe; (3) the concentration of the clothing retail industry in Western countries, which has increased buyer's bargaining power on price, order size and delivery time [6]. However, there were opportunities such as entry to the WTO to enhance its foreign trade space, its growing domestic market and the liberation of the cotton supply.
REFERENCES
1.
2. 3.
4. 5. 6. 7. 8.
9. 10. 11.
Weihrich, H., The TOWS Matrix--A Toolfor Situational Analysis. Long Rang Planning, 1982. 15(2): p. 54-66 Weihrich, H., AnaIyzing the competitive advantages and disadvantages of Germany with the TOWS Matrix-an alternative to Porter's Model. European Business Review, 1999.99( 1): p. 9-22. Lane Kelley, a.Y.L., An Introduction to Emerging Business Issues for China 2000, in China 2000 :emerging business issues. 1999, Thousand Oaks, International Educational and Professional Publisher: London. p. 3-24. Ian Graham,P.K., Textiles and Clothing in China Current developments and firture prospects,. 1994, Financial Times: London.. Anon., China Review, ed. 2. Yushou. 1998, Hong Kong: Hong Kong Chinese University press. Starr, J.B., Understanding China: a guide to China's economy, history, and political structure. 1997, New York: Publisher New York: Hill & Wang, 1997. p.3-18. The Editorial Board of the Almanac of China's Textile Industry., Almanac of China's Textile Industry. 1996, Beijing, China: Texile Press of China. p. 266267. Helms, M.M., How to be successfil in China: A SWOT analysis. Competitiveness Review, 1999.9(2): p. 1-10. Luo, Y., The Dominance of Greater China Multinationals' Investment in China, in China 2000, Emerging Business Issues. 1999, International Educational and Professional Publisher: London. p. 235-250.. Hong Kong Trade Development Council., Brand Competition in the China Clothing Market, . 1999, The Hong Kong Trade Development Council. p. 24. Yi, Y and Yao L. The Current Status and Challenges of the Denim Industry in China. 5th Asian Textile Conference.1999, Sept. Kyoto, Japan.
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12. 13. 14. 15.
16. 17. 18.
Arona Butcher., Assessment of the Economic Efects on the United States of China’s Accession to the WTO,. September 1999, U.S. International Trade Commission: Washington. DC. p. 8-6. Coker, J., World textile and Clothing consumption: Forecasts to 2005. Textile Outlook International, 1997. MarchJ997: p. 35-76. Barshefsky, C., Barshefsky on China WTO, Congressional Trade Status Vote, .2000, China Online. http://www.chinaonline.com/commentary-~ysis/wto/currentnews/op. Bottelier, P., China, The US., And the WTO: Missed Opportunity, 2000, China Online. http://www.chinaonline.com/commentaryanalysidwto/currentnews/open/c912016Owto-ss.asp Yu Yongding, Zheng Bingwen and Song Hongren.., New Chinese Academy of Social Sciences Report: China Afler WTO Entry, 2000, Chinaonline. http://www.chinaonline.com/commentary-analysis/wto/currentnews/open/ WTO, WTO textile trade agreement.1995. OTEXA. US International Trade Commission, Industry Trade Summary Apparel, . 1999, Washington DC. p. 28.
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7 Five-forces Competitive Analysis
7.1 PORTER'S FIVE-FORCES MODEL
A useful way of gaining insight into the nature of competition is through industry analysis. As a working definition, an industry can be defined as a "group of firms that produce products that are close substitutes for each other." In 1980, Porter defined the five forces that reflect the fact of competition in an industry [l]. He contended that the competitive environment is created by the interaction of five different forces acting on a business. The five competitive forces include entry, the threat of substitution, the bargaining power of buyers, the bargaining power of suppliers, and rivalry among current competitors. Porter's 'five forces' model provides a practical analytical tool for describing the forces that shape competitive strategy. It forms an important element of environmental analysis. As Porter explained, the threat of entry into an industry depends on the barriers to entry, and the fact that the new entrant brings new capacity, the desire to gain a market share, and often substantial resources. Rivalry among existing industry members occurs because one or more competitors either feels the pressure or sees an opportunity to improve their position. All firms in an industry are competing with others producing substitute products, which limits the potential returns of an industry. The force fiom buyers is that they are forcing down prices, bargaining for higher quality or better services. The force from suppliers is that they exert bargaining power by tbreatening to raise prices or reduce the quality of purchased goods and services c11. After diagnosing the forces affecting competition in an industry and their underlying causes, and identifying the strengths and weaknesses of the analyzed subject relative to the industry, possible approaches of competitive strategy, including offence or defense (positioning, influencing the balance, and exploiting chance), can be taken.
70
New Entrants .Low prodact JXfferenthtion -No proprietary p d a c t d a e r a K u -Low bnnd idcotity *Mediamcapital mqniremm *HighSwitching Cortr *Lowdownstream integration(Access to Distribation C b 8 ~ e )b .Cost rdv8nbge 00 government rubsidia (rebate oa export) .Mediam exit barricn
Industry Competitors Suppliers
&wining
aimport control: Joreign currency -import &8Md
Power of
<-High Buyen
*Governmentcwtrd: a l t o 0 price a t t o a sapply cb8nnd
Buyers Concentration in 0velx.s retailing market3 Low switchii cortr on fiading 8Itel'U8hE SIIpplierS from other developing countries
Substitutes -Low switching costs to snbrtitptu .Huge range of sabstitntu *More substitutuwill a p p r in Chinese markel
7.1 Five-forces analysis for China's denim industry Relating the Chinese denim industry to its environment is the essence of the competitive strategy the industry relies on. Using Porter's 'Five forces' model, we have analyzed the key aspects of the Chinese denim industry's environment and competition, which are the essence of the related competitive strategy. The goal of this section is to find a position for China's denim industry in which the industry can best defend itself against these competitive forces or can influence them in its favor. 7.2 THREAT OF ENTRY
New entrants bring competitive forces such as new capacity, the desire to gain a market share, and often substantial resources. In the case of China's denim industry, a number of factors determined that the threat of entry was high. First is the low product differentiation; second is the low entry barriers, and the third is the medium exit barrier. We analyze the aspects that determine the entry baniers of the China denim industry in turn.
Low product diferentiation The product of the China denim industry is of low differentiation, which shows itself mainly in its low brand identification and mass product with low value added, low technology and lack of fashion design. A large proportion of the firms in the industry rely on processing business and their value chain is short. This causes low value 71
added products to be produced. Weaknesses in technological development, utilization and commercialization means that the industry makes few little products demanding the application of new material, high quality, and good design. At the same time, the products from the industry are also weak in brand identification. In the long term, China’s producers have been satisfied with the status as a processor in the world’s denim producing industries. Building brand awareness requires huge investment on advertising. For example, Levi’s, an internationally famous brand, invested about US$lOO million per year to on advertising improve the brand awareness of customers. Chinese producers, limited by the shortage of cash, mostly have little power to build self-brands in the market. As an export-oriented industry, and an important denim producer, it has owned no world famous brand till now.
Low entry barrier The sources of an entry barrier include economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, and government policy. Factors ensuring that the entry barriers of the China denim industry were low included: 1. Medium capital requirement. The denim industry is a labor intensive industry rather than capital intensive one. To invest in a denim-line needed about US$5-7 million if machinery was to be imported fiom developed textile machinery producing countries, though less if domestically made. The capital requirement is not large compared with other industries. 2. Government subsidies. Since the denim industry is a labor densely industry, it provides large employee opportunities, which is very important to China because of huge pressure fiom the large number of unemployed. On the other hand, the denim industry is export-oriented, a foreign currency earner, and to encourage these exports, rebates on export were launched. Such government subsidies attracted small and medium size enterprises interested in the denim business. 3. Traditional distribution channels played an important role in the Chinese denim business. Traditional distribution channels, such as jobbers and wholesalers were still the two most important styles. Few of the denim producers have integrated downstream with distribution channels. They have little power to control outlets. Some distribution channels well known overseas, such as specialty stores, chain stores, warehouse stores, have, however, been introduced into recent years. A specialty store selling jeans appeared in China in 1995. Because most of the enterprises in the denim business were small or of medium size, they have little power to build self-distribution channels. Because of this, the distribution channels tend to be controlled by others. The above factors combine to ensure that the entry barrier to the Chinese denim industry was low that the new comer could enter the industry with medium capital requirement, and little challenge fiom the distribution channels. At the beginning of the 1980s, investors were attracted by the high profit margins in the industry, and invested much in the denim business. The capacity of the China denim industry grew quickly in that period. However, a few years later, over-capacity reduced the margin and the investment return was poor, bringing huge pressures to the investors.
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Medium exit barrier Much machinery and equipment in denim manufacturing are specially designed to make denim, such as continuous pad dyeing with sizing machines. A switch to another business means that much of the machinery and equipment wouid be unusable. The three aspects, low product differentiation, low entry barriers, and medium exit barriers, determined that the threat from new entrants to the China denim industry was high. 7.3 INTENSITY OF RIVALRY AMONG EXISTING COMPETITORS
When competitors either feel the pressure or see an opportunity to improve their position, rivalry occurs. The factors that result in intense rivalry include numerous or equally balanced competitors, slow industry growth, high fixed or storage costs, lack of differentiation or switching costs, capacity augmented in large increments, diverse competitors, high strategic stakes and high exit barriers [l]. After quickly growing in the 1980s and the beginning of the 1990s, the Chinese denim industry entered a period in which it developed developing slowly. Its total market size reduced, although its domestic market grew sharply. Its foreign market shrank much in recent years (as discussed in sections 3 and 4). The production reduced and over-capacity appeared from the second half of the 1990s, and the competition for market share became stiff. As we discussed in the earlier section (threat of entry), the low capital requirement, high profit margin and government subsidies attracted many investors to the denim business in the 1980s and the first half of the 199Os, which caused quickly product capacity in the period. However, limited by lack of capital, most of the firms in denim manufacturing owned only one sizing-dying finishing line (just eight firms owned four lines), so that the production capacity is not concentrated in a few firms. Numerous similar denim manufacturers were competing in a battlefield. Because of weaknesses in marketing skills, simple and traditional tactics like price competition was always applied. As regards to marketing promotion, many manufacturers tended to promote their products via strengthening their relationship with clients. Many firms faced high loan interest in past years because they had borrowed from the bank to buy machines and equipment. The interest rate was high in China in most years in the 1990s. This brought high pressures on the costs, and reliance on price oriented strategies, price wars booms between competitors further eroded the profit margin. In recent years, existing over capacity and the market’s recession have made the growth of the denim industry in China slow. High fixed costs, medium exit barriers, and lack of differentiation in products (discussed in our section on Threat of entry) ensured this. In order to expand, competition among existing firms was stiff. 7.4 PRESSURE FROM SUBSTITUTE PRODUCTS
All firms in the denim industry are competing with industry’s producing substitute products, for example, non-denim casual wear, formal wear, and sports wear. In the 73
view of Porter, substitute products limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge [l]. Substitute for denim range from non-denim casual wear to new fiber material. Nowadays, few people are willing to sacrifice comfort for fashion, and care fmt and foremost about comfort. Casual attire has been accepted in different occasions, in the workplace or in entertainment. Denim's advantage is in its traditional, emotional image, and its disadvantages are the fact that its sensory properties run counter to modern consumer trends and requirements. Non-denim casual wear is the principal substitute for denim apparel. For example, the sale of slacks has increased greatly in recent years. The most important denim apparel, jeans, has faced a strong challenge from "Khakis Flat Front", which are becoming as important as jeans in a people's wardrobes. Today "khakis" or "chinos" are becoming a staple -alongside jeans -of casual dressing for both men and women in the US market, in the European market and in China, by and large. China is also an important non-denim casual wear producer with huge production capacity. Denim is also challenged by synthetic-fiber and high-performance fabrics. Any fabric, with ease of care and comfort, whether 'denim look' or not, is a substitute for denim. The existing and potential substitutes for denim threaten the denim business and limit its profitability. After China becomes a WTO member and opens its market further; more foreign producers will enter the Chinese domestic market with their high tech products, new materials and fashion style jeans. They would provide denim products of high quality with famous brand names. More producers existing means that buyers could select the products widely; buyers can easily find substitutes fiom other foreign producers. Summarizing above about the threat from substitutes, we conclude that the threat to the Chinese denim industry from the substitutes is high, no matter whether it is from vast substitute apparel, fabric made from new material, or denim apparel made by foreign producers that are well designed, of high quality, and with famous brand names.
7.5 BARGAINING POWER OF BUYERS
Buyers compete with the industry by forcing down prices, bargaining for higher quality or better service, and playing competitors against each other--all at the expense of industry profitability [l]. The bargaining power of buyers depends on buyer concentration, undifferentiated products, and low switching costs for buyers, etc. In the case of China's denim industry, the bargaining power of buyers arises mainly fiom the industry's concentration on the overseas retailing marketing, which can easily find alternative suppliers from other developing countries and primarily, its undifferentiated products. A big part of the Chinese denim production was exported to the US and EU markets. However, the EU and US clothing retail markets are concentrated. A few buyers can give large order and have high requirements on deliver times, quality and price. China's denim producers have little control over the distribution channels, and rely on jobbers to distribute goods to overseas markets. Consequently, retail markets concentration is factor in improving the bargaining power of buyers.
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Meanwhile, the low differentiation of Chinese denim products means that buyers can find alternative suppliers easily because numerous competitors exist from developing countries, such as Thailand, Vietnam, India, and Pakistan,where the labor costs are similar to China, and which produce mass denim products. The industry mainly competes in price-sensitive market segments, and the strategy of the firms in the industry relies on price orientation that can easily be imitated by competitors. Buyers have increasing bargaining power over China’s producers, always asking for better manufacturers’ service, while reducing order sizes and delivery times. 7.6 BARGAINING POWER OF SUPPLIERS
Suppliers can influence the industry’s margin by raising prices or reducing the quality of goods and services [ 13. Suppliers can charge higher prices if they have a monopoly or offer a differentiated product. The most important raw material to the China denim industry is cotton. Although China is the leading cotton producer in the world in recent years, the existing cotton supply policy meant that the Chinese denim industry had little flexibility to change suppliers. In China’s domestic market, the strict monopoly on cotton purchases, marketing and storage led to the Chinese denim manufacturers having to face a single cotton supplier, a government specified company. Meanwhile, due to problems such as unstable cotton production, fast growth of downstream processing capacity, China’s denim industry faced a scarcity of upstream raw material supplies. CCTV has reported that the cotton suppliers supplied low quality cotton to firms at high prices. The controlled cotton price and single cotton sale channel resulted in China’s denim yarn industry facing great pressure from the bargaining power of the suppliers. On 13 January 1998, China’s State Council decided to liberalize cotton prices from 1 September 1999 [2]. At that time, textile mills were allowed to buy their staple commodity directly from farmers. In that way, the bargaining power of suppliers to the China denim industry will be reduced. In the cotton import market, a subsidiary company of the All China Federation of Supply and Marketing Cooperatives, named the China National Cotton Corporation was the most important company arranging the cotton importlexport business. Except for this company, only a few large manufacturers could join the import cotton business. In addition, the import business was also arranged under foreign currency control. The few cotton suppliers controlling the majority of the cotton supply have great bargaining power to the industry.
SUMMARY Based on the above analysis, we have concluded that each of the five forces the China denim industry currently faces is high. There were high threats from new entrants and substitutes, high bargaining power from buyers and suppliers, and high intra-industry competitive rivalry. This analysis has highlighted some weaknesses that really affect the industry’s market advantage in competition. There were low differentiation products and lack of 75
marketing skill. These two weaknesses brought negative forces to the competitive ability of the industry, and are the critical two that the Chinese denim industry should improve and strengthen. The bargaining power of cotton suppliers will be reduced following the more open market economy policies launched by the government. REFERENCES
1. 2.
Porter, M.E., Competitive Strategy.1980, New York, The Free Press. China Economic Information Center., Cotton sector to become market-wise next year, . 1998, CEI . http://www.cei.nov.cn/sicnet/siccew/efor.htm
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8 WTO and Sustainable Competitiveness of China’s Textile and Clothing Industry
8.1 INTRODUCTION
Globalization and emergence of new players have intensified the competition in the world clothing markets. China has been a major player of world clothing and textile trade in the last decades. In the past years, high concerns have been generated on how the competitiveness of China textile and clothing (TC) industry will be influenced by WTO and trade globalization. If we take trends of export values as one of the key indicators for measuring competitiveness, the competition is intensive and highly concentrated among the top ten exporting countries. The total export value in world clothing trade was US$180 billion in 1998, with 62.5% shared by the top ten exporting countries. China was the world leader, accounted for 16.7% of global export market share, followed by Hong Kong as the second leader with 12.3% market share, and the Italy, US, Germany, Turkey, Mexico, France, UK and Korea. Among the top 10 exporting countries/regions, Mexico had the highest growth as a result of Outward Processing Trade (OPT) with the US [ 11. In world textile trade, the total export value of textiles was US$ 151 billion in 1998, with the top ten countries accounted for 69.3% of the global export market share. The leader was Germany, followed by Hong Kong, Italy, China, Korea, Taiwan, USA, France, Belgium-Luxembourg and Japan. In 1998, the total export values fiom Germany, Hong Kong, Italy and China were US$ 13.3 million, US$ 13.0 million, US$ 13.0 million and US$ 12.8 million respectively. On a compound basis, the total export fiom China increased by 6.8% annually fiom 1992 to 1998. USA enjoyed the highest compound growth rate of 7.8% from 1992 to 1998 due to the establishment of the North American Free Trade Agreement [1,2]. After China’s entry to WTO and the world trade globalize, the competition among the major players will be intensified. How to sustain competitiveness in a more open and fiee business environment is a major concern. This paper aims to explore this issue by developing a model to evaluate the sustainable competitiveness of China textile and clothing (TC) industry against the major competing countries/regions in various scenarios with China’s entry or non-entry to WTO.
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8.2 SUSTAINABLE COMPETITIVENESS OF THE TC INDUSTRY The competitiveness of the TC industry in a country or region is not only dependent on the level of core competence of individual enterprises in the industry, but also on the integration of the whole supply chain and relevant supporting industries, as well as internal and external business environments. The core competencies of individual enterprises are the fundamental elements for the sustainable competitiveness of an industry. Prahalad and Hamel [3] pointed out that the current competitiveness of a company derived from the price/performance of existing products. Future competitiveness derives fiom the ability to build, at low cost and more speedily than competitors. A corporation is a large tree. The trunk and major limbs are core products, the smaller branches are business units,the leaves, flowers and f i t are end products. The root system that provides nourishment, sustenance and stability is the core competence, which involves harmonizing streams of technology, organization of work and delivery of value. Core competence has the following features: (1) does not diminish with use, (2) provides potential access to a wide variety of markets, (3) makes a significant contribution of the perceived customer benefits of the end products, (4) is difficult for competitors to imitate. At the level of core competence, the goal is to build world leadership in the design and development of a particular class of product functionality. To sustain leadership in their chosen core competence areas, the company seeks to maximize the worldmanufacturing share in core product [3]. Javidan further discussed the hierarchy of competencies and defined the terms. Resources, at the bottom level, are the inputs into the organization’s value chain, including physical resources such as plant and equipment, human resources such as manpower and management team and organizational resources such as culture and reputation. Capabilities, at the second level, are the ability of an organization to exploit its resources, which is functionally based and consists of a series of business processes and routines to transform inputs to outputs including marketing capabilities, production capabilities, distribution and logistics capabilities and human resource management capabilities. A competence, at the third level, is a cross-functional integration and co-operation of capabilities such as a set of skills and know-how resulting fiom interfaces and integration of functional capabilities. For instance, the competence of developing new products may consist of integrating MIS capabilities, marketing capabilities, R&D capabilities and production capabilities. Core competencies, at the highest level, are skills and areas of knowledge that are shared across the corporation as collections of competencies. Core competencies require collective organizational learning, involvement and commitment to cross-SBU (subbusiness unit) integration. In above example, new product development is a core competence if it goes beyond one SBU [4]. Javidan also argued that each level in the hierarchy is resulted from integration of elements in the lower level. Each level encompasses a higher level of value added to the corporation. Core competencies add the highest value since they exploit resources and capabilities at the broadest level across the corporation as a whole. Also, the higher levels in the hierarchy have broader scope and are more difficult to achieve. In terms of regional competitiveness, Porter [5, 61 pointed that the enduring competitive advantages in global economy lie increasingly in local things, which distant rivals cannot match, including knowledge, relationships and motivation. Modem economic map of the world is considered dominated by clusters, which is 78
defined as geographic concentrations of interconnected companies and institutions that achieve unusual competitive success in a particular field. Porter and other researchers further argued that productivity, not exports or nat~ralresources, determines the competitiveness and prosperity of any state or nation. Birth and growth of clusters are highly dependent on their productivity growth that is largely determined by the local competition and innovation. This highlights the importance of industrial supply chain integration, support of relevant industries as well as general business environment. Storper [7] pointed out that in growing world trade; export specialization based on specific products becomes increasingly important. Export specialization is largely due to product-based “absolute” technological advantages, which is renewed through learning in a variety of dynamic economies. Such export-oriented absolute advantage industries tend to be organized into production and distribution networks combining the advantages of specialization and flexibility, called as “technology districts”. The features of such technology districts are: (1) trade specialization is achieved by obtaining absolute technological scarcity of the products; (2) the technological scarcity is gained through technological dynamism in product through continuous learning; (3) production networks are organized on the basis of elaborated shifting division of labor between firms or between units of a single firm,for achieving technological dynamic flexibility; (4) key collections of physical, capital, labor, and information resources for the production network are highly geographically concentrated in one or a few sub-national regions of the host countries; ( 5 ) the technological learning rests on the conventions of the regional production system, which guide the mobilization and maintenance of resources in mutual engagement between firms. The conventions are rooted in local political, cultural and other noneconomic forces, which determine the quality of the technology districts. The theory of core competence focuses on the competitiveness of individual enterprises, while the theory on competitiveness of a nation or region highlights the effects of integration and dynamic interaction across the industry, relevant industries and environment (called clusters). Both theories are equally important for developing intellectual understanding of the competitiveness and sustainable developments in specific areas of a nation or region. Sustainable competitiveness of an industry in a nation orhegion shall be determined by the levels of competencies in individual enterprises and the collective natiodregional learning, involvement and commitment to cross industry integration of their competencies. 8.3 DEVELOPMENT OF SIMULATION MODEL
On the basis of this understanding, we assume that a hierarchy of six factors (dimensions) determines the sustainable competitiveness of an industry in a nation or region, as shown in Figure 8.1. Resources, internal business environment and external business environments are at the bottom level of the hierarchy. Resources are the inputs into the industry supply chain, including physical resources such as materials, plant and equipment, human resources such as manpower and knowledge and technology, financial resources such as capital and social resources such as culture and reputation. Internal business environment is a variable representing the impact of the conventions rooted in local economical, political, cultural and other non-economic forces on the competitiveness of the industry. This variable includes factors such 79
Competences Capability
/
I
\
External Busmess Internal Business Environment Environment
8.1 Hierarchy of the sustainable competitiveness of an industry
8.2 Roots of competitiveness
as political environment, domestic economy, market opportunities, taxation, policies for private enterprises, foreign investment and foreign currency, capital market, labor market and physical infrastructure. External business environment is a variable indicating the influence of external (international) trading environment on the industry, including factors such as tariff, quotas and non-tariff barriers to TC products. Capabilities, at the second level of the hierarchy, are the abilities of an industry to exploit its resources. Capability is functionally based and consists of a series of business processes and routines to transform inputs to outputs including marketing capabilities, production and machinery capabilities, number of establishments of companies and human resource management capabilities. Competencies, at the third level of the hierarchy, are the cross-hctional integration and co-operation of capabilities such as a set of skills and know-how resulting from interfaces and integration of functional capabilities in the industry. This variable includes factors such as international trade and export capacities, R&D and new product development abilities, as well as marketing and management abilities. The competencies of an industry may consist of the core competencies in individual enterprises. Core competencies of an industry, at the highest level of the hierarchy, are skills, abilities and areas of knowledge that are shared across the industry as collections of competencies. Core competencies require collective industrial/ regional learning, involvement and commitment to cross enterprise integration, including factors such as design culture, creativity and network, flexible production network, trading and merchandising clusters, technology and product innovation learning network, original branding and international marketing culture and capability. Mathematical description of this model can be represented as follows:
sc = f ( X I , X2, X3, X4, x5, Xr5) = = w XT,
(1)
Where SC is the sustainable competitiveness, X, = core competencies, x 2 = competencies, x3 = capabilities, xq = resources, x5 = internal business environment, x6 = external business environment, X = [ X I , x 2 , ...,x g ] and W = [WI, w 2 , ..., wg].These six variables (dimensions) are functions of many sub-variables (factors): T j = 1,2,..., rnl (2) A (aljyl, ) = 1' 7
80
Where, y~ and aGare the sub-variables and their weights respectively. Figure 8.2 shows the structure and specifications of the model and the number of sub-variables in each of the dimensions, in which a total of 207 variables are included in the model. According to this model, extensive research has been carried to obtain relevant quantitative data and qualitative information. Majority of the data are obtained fkom The world competitiveness yearbook [8], Asia PaciJic Market Handbook [9], Consumer Asia 1999 [lo], Consumer Europe [l 13 etc. for the dimensions of internal business environment and resources. For the dimensions of capabilities, competencies and core competencies, the data are obtained or estimated also from The World Competitiveness Yearbook [8], Almanac of China's textile industry [12], and some professional institute reports [l, 2, 131 [14]. The data for individual variables are standardized. Ratings on the six dimensions, including internal business environment, external business environment, Resources, capability, competencies and core competencies, are calculated then according the model. The values of these six dimensions are further standardized for the calculation of the overall sustainable competitiveness with specification of weights according to the levels of individual variables in the competence hierarchy. The overall ratings of sustainable competitiveness of clothing industry are generated for fifteen countries (regions) that are the major players in the global clothing markets. 8.4 SIMULATION RESULTS AND DISCUSSIONS
Figure 8.3 shows the positions of overall sustainable competitiveness of TC industry in 15 nations / regions. USA TC industry has the highest sustainable competitiveness, followed by German, France, Japan, UK, Hong Kong, Italy and China. Indonesian and Thailand are at the low end of the list. The reasons of the ranking can be illustrated by analyzing the strength and weakness of individual countries/regions in the six major dimensions.
81
Country I Region
8.3 Sustainable competitiveness of clothing industry in the fifteen countrieshegions .
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.
.
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._
China
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E 3 x
w
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1
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8.5 Capability and resources
8.4 Internal and external business
environment Figure 8.4 shows position of individual countries in the dimensions of internal and external business environments. USA has the best position in internal business environment. UK, Germany and France have the good positions in upper comer of the figure, showing good internal and external business environments. Hong Kong owns very good internal business environment but relatively less favorable external business environment. Japan has very good external business environment and good internal business environment as well. Italy, Korea, Poland, Turkey and Mexico are positioned in the left upper comer of the figure with very good external business environment but less favorable internal business environment. Thailand, Indonesia, Korea and China are positioned at the left lower comer of the figure, showing less favorable external and internal business environment. In Figure 8.5, positions in the dimensions of capability and resources are shown for TC industry of individual countries. China has extraordinary capability but 82
2.0
.
."%I
Germany
m
Competence
8.7Comparison between USA and China textile-clothing industry
8.6 Competence and core competence
relatively low resources. India has the similar position with relatively high capability but low resources. USA, Germany, Hong Kong, France and UK are positioned in the right lower comer of the figure, showing very good resources but less strong in capability. Japan, Italy, Turkey, Korea, Mexico, Poland, Thailand and Indonesia are positioned at the left lower comer of the figure with weaker resources and lower capability. Figure 8.6 shows that the positions of individual countries in the dimensions of core competence and competence. USA has superior position in the dimensions of competence and core competence. Germany, France, Japan, UK and Hong Kong are positioned at the upper right comer with very good competence and core competence. Italy and Korea are positioned at the left upper comer with very good core competence (especially Italy) but weaker competence. China, India, Turkey, Mexico, Poland, Thailand and Indonesia are positioned in the left lower comer, showing weakness in both competence and core competence. In Figure 8.7, China TC industry is compared with USA in the six dimensions and the overall sustainable competitiveness. USA textile and clothing has excellent strength in the six dimensions of internal and external business environments, resources, capability, competence and core competence, as well as the overall sustainable competitiveness. China TC industry is weak in the dimensions of business environment, resources, competence and core competence, but much higher capability; its overall sustainable competitiveness is significantly lower.
8.5 CHINA'S TEXTILE AND CLOTHING INDUSTRY AND WTO
In order to investigate the impact of WTO on the sustainable competitiveness of China TC industry, we carry out a systematic study of the scenarios on China's entry or non-entry to WTO and the conditions on quota, tariffand non-tariff barriers. Nine scenarios of two categories are considered in the simulation, as shown in Table 8.1. The two categories include (1) The Uruguay Round (UR)excluding China (Scenarios
83
!
Chinaentryto WTO 1 RTB Scenario ! No i No A ! No ! No 0 C i No i No ; N o ! No I D 1 Yes No i Yes 1 No E i Yes 1 No F i Yes 1 No G H I Yes I No
1 I
,
I
1
!
1 ! i
! 1 1
i
Uruguay Round Aareement Other countries TCQuota i [ NTBs i TCQuota ! T C T a M [ Stav ! ! stav i stay i stay i stay stay i stay i stav i 1 Reduction ! Stav i Stav i Elimination i i Stav Stay i i stay ! Elimination ! Reduction stav i stay Stav stav i Stavasitis i ! Reduction i Stay i Stav ! Reduction i stay i Stayasitis I Reduction 1 i Stay Elimination i Stav i Elimination i stav i Elimination ! Reduction i stay i Elimination 1 Reduction Elimination i Reduction i Elimination 1 Elimination j Reduction 1 China TCTarlff Stay
NTBs
Stay stay stav StaV stay Stay
stav stav Elimination
1
0.14
0.12
0.10 0.08
0.M 0.04 0.02 0.00
4.02 4.04 A
B
C
I
D
E
F
G
H
Scenarios
8.9 Impact of WTO on China’s sustainable competitiveness
8.8 Impact of WTO on the sustainable competitiveness of the 15 countries
A, B, C and I) and (2) The UR including China (Scenarios D to H). Besides WTO, the impact of regional trade blocks (RTB) such as EU and NAFTA are also considered. Figure 8.8 shows the impact of WTO on the sustainable competitiveness of TC industry of the 15 countries. For the 9 scenarios, the rankings of the sustainable competitiveness are affected only by the change in external business environment. The position of China relative to other countrieshegions in sustainable competitiveness is not effected by WTO in general. This conclusion is derived on the basis of the assumption that the other five dimensions on internal business environment, resources, capability, competence and core competence do not change, indicating that WTO as a factor influencing external business environment has limited impact on the overall sustainable competitiveness of TC industry. Improvements in other aspects such as competence and core competence are at least as important as or even more important than accession to WTO. Further, Figure 8.9 shows that non-entry to WTO does have negative impact on the sustainable competitive of China TC industry if U R agreements on tariff reduction and elimination of quotas take into effect in among WTO members. With entry to WTO, China TC industry will increase its sustainable competitiveness in general when the UR agreements take into effect, except the case where some non-tariff barriers are imposed on China (Scenario G).
SUMMARY The simulation results have shown that the sustainable competitiveness of China TC industry will decrease without entry to WTO and will increase with entry to WTO.
84
The impact of WTO on China TC industry depends on the UR agreements on deduction tariff and elimination of quotas as well as non-tariff barriers imposed on China. However, WTO is only a factor influencing the external business environment and does not have significant impact on the position of the sustainable competitiveness of China TC industry. To increase sustainable competitiveness significantly, China TC industry needs to improve internal business environment, resources, competencies and core competencies. Particularly, core competencies of collective industrialhegional learning, involvement and commitment to cross enterprise integration need to be enhanced in the key areas of design culture and creativity network, flexible production network, trading and merchandising clusters, technology and product innovation learning network, original branding and multinational marketing capability. REFERENCES 1. 2. 3. 4. 5.
6. 7. 8. 9. 10. 11. 12.
13. 14.
WTO (2000). International trade Statistics 2000. WT0.148-154. http://www .wto.org/english/res-e/statis-e/stats2000-e.pdf Anon, Trends in world textile and clothing trade. Textile Outlook International, 2000 (85), p.128-164. Hamel, C. K. P. a. G. (1990). The Core Competence of the Corporation. Harvard Business Review. 1990, May-June, page 79-91. Javidan, M., Core Competence: What Does it Mean in Practice, Long Range Planning, 1998.31(1) p.60-7 1. Porter, M.E., Clusters and Competition, on competition M.E. Porter, Editor. 1998, Harvard Business School, Bost0n.p. 197-288. Porter, M.E., Clusters and The New Economics of Competition. Harvard Business Review, 1998.November -December 1998,p.77-90. Storper, M., Regional 'WorMs' of Production: Learning and Innovation in the Technology Districts of France, Italy and the USA. Regional Studies, 1992.27.5, p.433-455. Development, LLf.M., The world competitiveness yearbook.2000, Lausanne, Switzerland, Lausanne, Switzerland : International Institute for Management Development, c 1996-. Intelligence, A.M., Asia Pacific Market Handbook 1998.1998 Hong Kong, SMI Business Consulting, Asia Market Intelligence Ltd.72. Anon, Consumer Asia 1999.6* ed. 1999, London, Euromonitor.43. Anon, Consumer Europe. 1997, London: Euromonitor Publications.346. Anon, Almanac of China's textile industry.1999, Beijing: Fang zhi gong ye chu ban she.393-412. Butcher, A,, et al., Assessment of the Economic Egects on the United States of China's Accession to the WT0.1999,U.S.International Trade Commission. Washington DC.p.8-1 to 8-26. Shi Yan-jiu. (2000). China's entry into WTO: the analysis of the China's textile industry. Research report on China's entry into WTO: the analysis of the China's industries (In Chinese). Social Science Documentation Publishing House, Beijing.
85
9 The Hong Kong Denim Industry
9.1 INTRODUCTION
The denim industry in Hong Kong developed earlier than that in China, and was a world-class manufacturing base of denim apparel in the 1970s and 1980s. As a pioneer of ladies designer jeans in the 1970s, the Hong Kong denim jeans business has been hugely successful, bringing fame and fortune to Hong Kong. Currently, Hong Kong is the second most important supplier in the U.S. market and the fourth largest non-EU supplier in the EU market, and plays an important role in the international denim trade. However, the size of the Hong Kong denim industry has declined in the last decade, the number of enterprises in the industry has reduced, and the industry’s production capacity also fell. With a quickly developing economy, labor costs became very high in Hong Kong. Meanwhile, as a developed metropolitan economy, there were limited land and natural resource. Consequently, since the denim industry is a labor-intensive industry, the high labor costs and limited resources prevented the indigenous industry expanding and developing. As a result, manufacturers shifted their manufacturing factories to low-costs countries or invested in setting up self distribution channels. 9.2 HISTORY
Weaving and knitting began in the 1920s with manually-operated machines in small units located in tenement buildings and the back rooms of cottages [l]. These sectors quickly developed after the end of the 1940s, encouraged by the capital, experience and skill brought by immigrants from the Chinese Mainland, when the Chinese Civil War erupted. The immigrants fi-om the mainland in the 1950s and 1960s also brought a pool of the low wage labour, and this was undoubtedly a major factor contributing to the dramatic growth of garment manufacturing in Hong Kong. By the early 1960s the garment industry had overtaken the textile industry to become the largest foreign
86
exchange earner and employer in the manufmturing sector. Hong Kong's garment firms are largely export oriented [2] In the late 1960s, the youth revolution overwhelmed the world, and omnipresent blue jeans became a universal symbol of freedom. Denim jeans didn't only become popular in the US; they also entered the European and Asian markets as a new commodity and were quickly welcomed by young people. There is no way of establishing a certain date when the Hong Kong denim industry was established. In general, it developed h m the beginning of the 197Os, according to information from a senior professional in the industry. In the middle of 1970s, demand for denim in the world market suffered a downturn after soaring for decades. Producers suffered fiom overproduction, a glut of inventories, and low price goods from developing countries [3]. Design jeans were therefore introduced into the market and became a fashion trend. New comers, like Gloria Vanderbilt, Calvin Klein, Bill Blass, Jordache, and Sergio, entered the denim business with their designer denim jeans. Of these labels, Gloria Vanderbilt inaugurated the women's designer denim apparel business and had a big success. Gloria Vanderbilt jeans were introduced by Mujani International Ltd., a Hong Kong based mandacturer, which was founded in Hong Kong by B.K. Mujani, father of Mohan B. Mujani, who became the Gloria Vanderbilt jeans designer, producer and marketer [4]. Gloria Vanderbilt jeans caused Hong Kong to play an important role in the 1970s' world denim fashion market. Murjani International Ltd. was founded in Hong Kong in 1945 and became a maker of Gloria Vanderbilt blouses in 1976 [4]. Hong Kong is the headquarters of the company though, to be close its target market, the U.S.,the company established another headquarters in New York. In 1975 jeans were designed exclusively for men, but Mohan B. Mujani turned work clothes into high fashion by cutting them to fit women and, by associating them with a known designer name, sold them by television advertising in the most prominent denim jeans market, the U.S. The jeans were made to a higher quality than normal jeans, which are designed for durability rather than style. The products sought a personality that would lift jeans above the level of work clothes - and justify the $34 price tag in 1977 when Levi jeans were selling for about $15 [4, 51. Skeptics wondered how it could succeed. Four months later, backed by a US$1 million TV ad campaign, they became an immediate success and so began a period of craze for status jeans [4]. The success of the MujaniVanderbilt team established a sure-fire formula for the selling of "designer" jeans and set in motion a new trend in apparel marketing and advertising [5]. The Murjani Company had sales $150 million in the fiscal year ended March 1980, and most of them were Gloria Vanderbilt jeans [6].The marketing of Vanderbilt jeans is a tribute to promotion, advertising and respectable hype. And it is one of the most dramatic U.S. business success stories of the decade [7]. When Gloria Vanderbilt jeans made a big success in the US market, many enterprises in Hong Kong joined the business, in which Hong Kong was the manufacturing base for Gloria Vanderbilt jeans. The Made in Hong Kong label meant the garment was cheap in price and quality in the 1970s [8]. However, Hong Kong became a hot-selling designer jeans supplier to overseas markets in the 1980s. In 1980, 60 factories in Hong Kong and nearby Macao produced the Gloria Vanderbilt line. Gloria Vanderbilt is the first Hong Kong garment maker to produce a successful brand-name garment of its own [7]. It has a profound effect on the development of the Hong Kong textile and garment industry in the next following decades, drawing on all aspects of marketing skill and the image of Hong Kong products improved. Hong 87
Kong became the place to find factories that do quality work and meet deadlines. However, all denim products were under quota, restricted by the MFA. The hottest of the hot quotas was for jeans jackets in the 1980s, which were in great demand in the US, and were being sold at $9 per jacket [9]. Apart from Gloria Vanderbilt jeans, other brands of denim jeans were also produced in Hong Kong, such as Jordache, Pepe and Union Bay. Jeans had brought fame and fortune to Hong Kong. Most of f m s that produced the jeans were small size and not even listed in yellow pages 191. Workers worked in small factories with simple machinery, at great intensity. The Hong Kong denim dyeing sector was developed fiom the beginning of the 1970s to meet the demands of denim production, and a number of weaving mills established slasher dyeing plants in 1971 to obtain better quality and control [l]. Hong Kong has no domestic indigo production, and all the indigo had to be imported fiom other countries. The sudden demand for indigo led to its price soaring. In the second half of the 1970s, the world denim demand reduced. The size of orders generally decreased and the denim business declined, thus increasing the competition between the large and the medium-sized dye houses [l]. In the latter half of 1979, the denim business started to revive again fiom its decline in 1977, but escalating land prices and fuel costs had greatly increased the overheads of the industry [ 11. The booming denim industry in the 1980s brought serious pollution to the Hong Kong environment. Stonewashing, acid washes, ice washes, oxide washes, oxy washes, and whitewashes were applied in the denim washing process in Hong Kong. One source indicated that one washing factory went through 2,000 pounds of bleach each day. In the 1980s, environmental protection in Hong Kong consisted of an understaffed agency that could only ask factories to be more careful. In some piers in Hong Kong, at the high tide line, one can see that the lower part of the pier is pure, dark blue, and then you notice that the water is such a thick blue color it's almost black. That is because indigo dye, the stuff and wastewater that makes the blue in blue jeans, is dumped straight into the harbor from the weaving factories, with a paler version coming from the washing factories and their used bleach. The situation was changed in the 1990s when the Hong Kong government improved the investment in environmental protection, and new technology was applied (biodegradable treatment of indigo dyes). With the economy developing, labor and land costs became very expensive in Hong Kong. The denim industry is labor intensive, just as other textile and garment sectors. It faced huge pressure from the high labor and land costs when competing with producers in other developing countries. At the end of the 1970s, the industry found a vast arena in which to deploy the assets and skills they had developed in low-cost, low-end manufacturing. With the opening of China to foreign direct investment and the new market-oriented experiments in coastal regions and special economic zones from 1978 on, Hong Kong denim manufacturers found an enormous field for expanding their operations. The manufacturers transferred and expanded production facilities into South China, thereby solving the problems of rising labor and land costs in Hong Kong. They also invested in other nearby developing countries such as Vietnam and Thailand. By the early 1990s, the North American Free Trade Agreement (NAFTA) has come into force. The North American free-trade zone emerged as a huge and potential market for Hong Kong enterprises. When the NAFTA was launched, the producers grasped the opportunity, and invested in free trade countries such as Canada, where there are no quotas for US bound denim fabric. After several years, the competition 88
f?om other American countries, such as Mexico, Costa Rica, etc., who have low labor and land costs, became stiff. The US denim market was shared by such American countries more and more. In such conditions, in order to keep the US market, and diminish the influence of NAFTA, Hong Kong enterprises also invested in other South American countries, such as Costa Rica and Panama and also in Morocco, where there are also low labor costs. Besides transferring their manufacturing bases to developing countries, more direct involvement in retailing business was found among Hong Kong clothing enterprises. Many chain stores had already built intensive networks in the local retailing market, as well as overseas. Giordano, Jeanswest and Bossini, were typical examples. Furthermore, many attempts were made to develop new non-quota markets, such as Japan, the Middle East, and South-east Asian countries. Jeanswest, Giordano, and Bossini set up retailing networks in the Middle East and had a significant market share there. REFERENCES 1. 2. 3.
4. 5.
6. 7. 8. 9.
Sui, L.Y.C., A Centenary History of the Dyeing and Finishing Industry Hong Kong Region. 1985, West Yorkshire: The Society of Dyers and Colourists; Perkin House. Tony Fu-Lai Yu., Entrepreneurship and Economic Development in Hong Kong. 1997, London and New York: Routledge, 2. Ettore, B., (Section 4), in New York Times Abstracts. 06/11/1979: New York. P 1, Col. 4 Rim, P., Great Moments In Jeans History, in The Seattle Times. 11/29/1987. p. L4. Hollie, P.G., Murjani Seeking a Stable of Designers, in The New York Times. 06/21/1983: New York. P 4, Col. 1. Sloane, L., Business People: Murjani's Chief Aims To Divers& From Jeans, in The New York Times. 09/11/1980: New York. P. 2, Col. 5. VanderbiltJeans Turn Around Hong Kong Clothing Maker. Dow Jones News Service-Edited Wall Street Journal Stories, 05/27/1980. Hong Kong has new approach, in The Globe and Mail.09~811984.p.P F9. Lacitis, S.E., Hong Kong Brokers Fashion Profit From Jeans, in The Seattle Times.12/01/1987.p.P F1.
89
10 Denim Products Trade
10.1 INTRODUCTION
Hong Kong is an important textile and clothing exporter. It was the second most important garment exporter in the world and the leading textile exporter in 1998 [l] [2]. Against the strong background of its textile and clothing industries, Hong Kong has played an important role in the world denim trade. In 1997, in the world’s two largest denim markets, Hong Kong was the second largest exporter in the U.S. market just after Mexico, and was the fourth most important exporter in the EU market, after Tunisia, US, and Turkey. The Hong Kong denim trade can be divided into three sectors- imports, domestic exports, and re-exports. The imports market includes all the denim products imported into Hong Kong. Domestic exports mean export products manufacturedprocessed in Hong Kong itself. Re-exports are the export products previously imported into Hong Kong and which are re-exported without having undergone in Hong Kong a manufacturing process. By analyzing the three sectors, Hong Kong’s performance as a trading hub can be carried out. Figure 10.1 indicates the status of the Hong Kong denim trade between 1992 and 1998. Hong Kong was an important importer for denim products. Before 1997, imports expanded at a rate of 10.2 per cent per year on average, as Hong Kong imported denim products increased from HK$ 8.2 billion worth in 1992 to a peak in 1996 with HK$ 11.5 billion. However, influenced by the recession in the Hong Kong economy and lackluster consumer spending, both denim fabric and denim apparel imports declined in 1997 and 1998. After a 9.7 per cent decline in 1997, Hong Kong’s total imports of denim products dropped by 20.6 per cent in 1998. Because Hong Kong is a clothing manufacturing base, denim fabric had an important role in Hong Kong’s total denim product imports, and comprised around 70 per cent of the total imports. Denim clothing was not as important as denim fabric, because its domestic market size was not very large.
90
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Domestic export
reexport
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10.1 Hong Kong denim products trade Between 1992 and 1995, Hong Kong's domestic exports to its major markets were steady and the export value was kept at around HK$ 6.8 billion. After 1995, Hong Kong the exports of denim products shrank in its US, United Kingdom, and German markets, which were the most important overseas markets for Hong Kong. Hong Kong's exports dropped by 19.4 per cent in 1996 23.5 per cent in 1998 and 8.7 per cent in 1998. In 1998, Hong Kong's export decline continued, because it's most important market, the Chinese Mainland, declined by 15.6 per cent. On the other hand, other major markets, such as the United Kingdom and the US, rebounded in the same year. In detail, Hong Kong's denim apparel sector was healthier than denim fabric's, for its domestic exports grew by 2.3 per cent in 1998 compared with the reduction of 17.6 per cent in denim fabric exports. Hong Kong's denim fabric was getting more important to Hong Kong domestic exports; it contributed 41.2 per cent of Hong Kong's exports in 1992 and became 49.8 per cent in 1998. Between 1992 and 1997, the unfavorable balance of Hong Kong denim product trade increased; what was HK$ 1.3 billion in 1992 became HK$6.3 billion in 1997. Hong Kong was a denim product importer rather than an exporter, and was losing it importance as a world denim product manufacturing base. The weak Hong Kong domestic economy in 1998 caused the Hong Kong denim import market to shrink, and consequently the unfavorable balance was reduced to HK$4.5 billion in 1998. As a trading hub, re-exports were very important for the Hong Kong economy. So they were to denim trading. HK$ 7.1 billion worth of denim products were reexported through Hong Kong in 1992. The value escalated by an annual 12.4 per cent and peaked in 1996 with a value of HK$ 10.6 billion. However, because of the Asian financial crisis, Hong Kong denim product re-exports fell rapidly, and dropped by 23.7 per cent in 1998 after a 5.6 per cent decrease in 1997. There were HK!§7.6 billion of denim products re-exported through Hong Kong in 1998. With the closer link with the China Mainland in both economy and trade, the Chinese Mainland has become the most important trading partner of Hong Kong. The Mainland is not only the leading supplier for Hong Kong imports and the leading importer for Hong Kong domestic exports, but also the most important market and origin for Hong Kong re-exports. 91
10.2 EXPORTS
10.2.1 Introduction Hong Kong, as the second most important supplier in the U.S. market and the fourth largest non-EU supplier in the EU market, has played an important role in international denim trade. It exported (including domestic exports and re-exports) HK$ 13.9 billion worth of denim products in 1992. Domestic exports accounted for 49.2 per cent of denim products total exports, and the rest was re-exporting. Between 1992 and 1994, Hong Kong's domestic exports were steady. However, they reduced from 1995 onwards, and the export value became HK$3.7 billion in 1998, accounting for 32.9 per cent of total exports. Re-exports grew by 12.4 per cent per year on average between 1992 and 1996, and peaked in 1996 with HK$ 10.6 billion. In 1997 and 1998, Hong Kong denim product re-exports fell by 5.6 per cent and 23.7 per cent; Hong Kong re-exported HK$ 7.6 billion worth of denim products in 1998, 67.1 per cent of Hong Kong total denim exports.
10.2.2 Domestic exports Before 1994, Hong Kong denim products domestic exports were fairly steady; about HK$6.8 billion worth of domestic denim products were exported from Hong Kong every year. After 1995, with the trend to factories offshore, the Hong Kong domestic
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10.2 Hong Kong denim products domestic exports
92
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10.3 Hong Kong denim products domestic exports by markets
manufacturing size reduced, and Hong Kong's domestic exports declined. Between 1995 and 1997, the rate of decline increased fiom 3.3 per cent in 1995 to 19.4, and 23.5 per cent in 1996, and 1997 respectively, and recovered to 8.7 per cent in 1998. In 1998, Hong Kong's domestic export value was just HK!§ 3.7 billion. This fall was mainly caused by the influence of the Asian Turmoil, when many Asian countries devalued their currency to stimulate export. However, Hong Kong currency was kept steady as it was linked with the U.S. dollar. This brought big pressure to domestic textile export, and hence to denim apparel exports. In 1998, Hong Kong domestic export fell in most of its major overseas markets except the United Kingdom and the U.S. In the three most important domestic export markets, Hong Kong domestic exports to the Chinese Mainland dropped 15.6 per cent in 1998, after several years of growth. In the U.S. and United Kingdom markets, Hong Kong domestic exports rebounded by 4.4 and 57.5 per cent in 1998 after sharply falling in 1997 and 1996. The Chinese Mainland was the most important denim products consumer for Hong Kong in 1998, and imported 32.8 per cent of Hong Kong total denim products domestic exports. It also was the fastest growing market in that the imports fiom Hong Kong increased by 5.0 per cent per year on average between 1992 and 1998. With a growth rate of 14.8 per cent each year, Hong Kong's domestic exports to the Chinese Mainland increased fiom HE=$ 944 million in 1992 to HK$ 1.5 billion in 1997. Because of the Chinese Mainland's lucrative consumer market, low-cost structure and proximity in culture and geography, it is the favorite place for Hong Kong manufacturers to set up overseas plants. A big part of Hong Kong's exports to China Mainland is for outward processing. This is one factor that caused Hong Kong domestic exports to China to increase [3]. On the other hand, the steady increase in the Chinese Mainland's household income and demand for a better quality of life also helped to stimulate the export of Hong Kong denim products to the Chinese Mainland. Because a big part of Hong Kong's exports to the Chinese Mainland was for outward processing, the slowdown in overseas markets was expected to drag down 93
Hong Kong's exports to the Chinese Mainland in 1998, and Hong Kong domestic exports to the Chinese Mainland decreased to HK$ 1.2 billion. Before 1996, the most important market for Hong Kong was the U.S., who imported H a 2 . 0 billion worth of denim products each year, accounting for 29.4 per cent of Hong Kong domestic exports in 1992. Hong Kong domestic exports to the US declined later. To protect its domestic market, the U.S. made rules and regulations to restrict denim products from other countries. From mid June 1996, Hong Kong clothing exports to the US were affected by trade disputes over illegal transhipments and the implementation of new rules of origin and additional import documentation requirements of selected Hong Kong clothing products [3]. U.S. imports of denim products were greatly reduced in 1996 and 1997. However, US imports rebounded 4.4 per cent in 1998, and it imported HK$ 1 .O billion worth of denim products from Hong Kong, though compared with the value in 1992 (HK$ 2.0 billion), it was still relatively low. The U.S. accounted for 28.1 per cent of Hong Kong exports of domestic denim products in 1998 as the second most important consumer. The United Kingdom was the third most important market for Hong Kong domestic exports in the recent years. In 1992 and 1993 the United Kingdom was the second most important consumer for Hong Kong denim products after the U.S. At on average declining rate of 16.5 per cent, the value of domestic exports to the United Kingdom reduced from 1.1 billion in 1992 to HK$ 187 million in 1997. In 1998, the value of domestic export to United Kingdom rebounded by 57.5 per cent, and became HK$294 million, accounting for 7.9 per cent of Hong Kong domestic exports. Other major markets for Hong Kong denim products were Germany, who accounted for 5.1% of Hong Kong domestic export, Banglandes (3.7%), Canada (2.4%), Indonesia (2.1%), Philippines (2.0%), Sri Lanka (1.8%), Malaysia (1.7%) and Netherlands (1.4%)in 1998. Denim fabric exports Denim fabric is regarded as a capital intensive industry rather than a labor intensive one. Comparing with the denim apparel sector, the high labor costs in Hong Kong influence the denim fabric sector relatively little. Denim fabric exports played a more and more important role in Hong Kong domestic exports and in the years between 1992 and 1998, denim fabric contributed 41.2 per cent of Hong Kong's total domestic exports in 1992 rising to 49.8 per cent in 1998. (See Fig. 10.4) In 1992, HK$2.8 billion worth of denim fabric was exported fiom Hong Kong. In the next three years, the export value increased and peaked in 1995 with a value of HK$ 3.1 billion. However, the value of exports reduced to HK$ 1.9 billion in 1998. Although the value of domestic exports of denim fabric decreased, denim fabric exports became as important as denim apparel to Hong Kong denim product exports. Influenced by weak market demands in 1998, Hong Kong denim fabric exports shrunk more slowly in most major overseas markets except the Chinese Mainland. (See Fig. 10.4)
94
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10.4 Hong Kong denim fabric domestic exports Adapted from Hong Kong Census and Statistics Department (1999)
The Chinese Mainland has become the most important market for Hong Kong denim fabric, as more Hong Kong companies shift their manufacturing factories there to utilize the lower labor costs to process denim apparel. As a processing base, the Chinese Mainland denim fabric imports fkom Hong Kong grew by 4.9 per cent every year on average between 1992 and 1997. The Chinese Mainland absorbed 47.2 per cent of Hong Kong’s domestic exported denim fabric (HK$ 1.1 billion). However, because of the overall Hong Kong domestic export recession, denim fabric exports to the Chinese Mainland dropped by 30.4 per cent in 1998 when HK$741 million worth of denim fabric (39.9 per cent of Hong Kong domestic export) was exported there. (See Fig. 10.4) The second most important market after the Chinese Mainland was the U.S. Although an important denim fabric producer, the US also imports denim fabric fkom Hong Kong. Hong Kong’s denim fabric exports to the U.S. peaked in 1995 with HK$ 687 million, then dropped by 22.0%, 30.1% and 3.6% in 1996, 1997 and 1998 respectively. The U.S. imported HK$362 million worth of Hong Kong denim fabric, contributing 19.5%of Hong Kong’s domestic exports in 1998. (See Fig. 10.4) Bangladesh, which imported 7.3% of Hong Kong denim fabric domestic exports in 1998, was the third most important denim fabric market for Hong Kong. The Bangladesh’s market grew from HK$ 57 million in 1992 to HK$ 136 million 1998, making it a fast growing market for Hong Kong. (See Fig. 10.4) The above mentioned countries were the three most important consumers for Hong Kong denim fabric and captured 66.6%of Hong Kong denim fabric domestic exports. The price of Hong Kong denim fabric exports was at HK$ 12.0 to 13.8 per square metre in the investigation period. The price gap between different markets was not large. (See Fig. 10.4)
95
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10.5 Hong Kong denim apparel domestic exports Adapted from Hong Kong Census and Statistics Department (1999)
Denim apparel exports As a world famous denim apparel manufacturing base, Hong Kong exported HK$4.0 billion worth of denim apparel, or 58.8 per cent of the total Hong Kong domestic exports of denim products in 1992. The export value declined on average by 10.9 per cent every year, to become HK$ 1.83 billion in 1997. In 1998, after years declining, Hong Kong denim apparel export rebounded by 2.3 per cent, exported HK$ 1.87 billion worth denim apparel was exported, accounting for 50.2 per cent of Hong Kong domestic exports. While the denim fabric sector stiIl suffered fiom the weak overseas market and Hong Kong economy, Hong Kong's domestic denim apparel exports were competitive with respect to workmanship, flexibility, responsiveness and sensitivity to fashion trends, and thus recovered faster than the fabrics sector. (See Fig. 10.5) The most important market for Hong Kong denim apparel was the U.S., which imported HK$ 1.6 billion worth of denim apparel in 1992, accounting for 40.3 per cent of Hong Kong's exports. However, between 1992 and 1997, U.S. imports from Hong Kong declined, especially after 1993. In 1997, US. imported only HK$ 629 million worth of denim apparel from Hong Kong. Although the Hong Kong export to US recovered by 9.1% in 1998, there was just HK$ 686 million worth of denim apparel exported to US contributing 25.8 per cent of Hong Kong denim apparel domestic exports. (See Fig. 10.4) Another important market for Hong Kong denim apparel was the Chinese Mainland, which grew fiom HK$ 120 million in 1992 to HK$ 483 million in 1998. Mainland China shared 25.8 per cent of Hong Kong's exported denim apparel in 1998; comparing this with 1992 (when it shared 3.0 per cent of Hong Kong denim apparel exports), it was getting more important to Hong Kong. However, the market size of the Chinese Mainland was small compared with the U.S., the leading foreign market, and the U S . still played an important role in Hong Kong domestic denim apparel exports. (See Fig. 10.5) The United Kingdom imported 13.5 per cent of Hong Kong denim apparel exports, and was the third most important market for Hong Kong in 1998. Hong 96
Kong's exports to the United Kingdom declined from HK$ 999 million in 1992 to HK$ 158 million in 1997, but 1998 was a good year for Hong Kong exports to the United Kingdom, when HK$252 million worth of denim apparel was exported to the United Kingdom a rise of 59.4 per cent, after shrinking for six years. (See Fig. 10.5) Germany shared 10.3 per cent of Hong Kong denim apparel exports in 1998. Germany's imported value declined from HK$ 567 million in 1992 to HK$ 192 million in 1998. However, this reduction of imports slowed down to 13.5 per cent in 1998 from 39.0 per cent in 1997. (See Fig. 10.5) In 1998, Canada and Netherlands contributed 3.7 and 2.8 per cent of Hong Kong denim apparel exports. Denmark shared 0.9 per cent of Hong Kong export, Sweden 0.8 per cent, China Taiwan 0.7per cent, Ireland 0.7per cent, and Singapore 0.6per cent in 1998. (See Fig. 10.5) The average price of Hong Kong export denim apparel was HK$65.1 per unit in 1992. Between 1992 and 1998, the price decreased year by year, and the average price of Hong Kong domestic exported denim apparel became HK$53.9 per unit in 1998. The reason for this price decrease was that more and more lower price denim apparel was exported to the Chinese Mainland, and the contribution of the higher price denim apparel markets contributed less to Hong Kong domestic apparel exports. (See Fig. 10.5) 10.3 RE-EXPORTS4
As a trade hub in Asia, re-exporting is an important activity for the Hong Kong economy. To describe the status of Hong Kong denim product re-exports, two aspects should be studied. The first is via an analysis of the Hong Kong re-export target market to get to know the Hong Kong major re-export market consumers and their characters. The second is via an analysis of the origin of Hong Kong re-exports to understand the suppliers of them. The peak of Hong Kong denim product re-exports occurred in 1996 with the value of HK$ 10.6 billion. Between 1992 and 1996, with an average growth rate of 9.9 per cent per year on average, Hong Kong's re-exports increased from HK$ 7.1 billion in 1992 to HK$10.6 billion in 1996. However, the value reduced in 1997 and 1998, and was HK$7.6 billion in 1998. Re-exports contributed 50.8 per cent of Hong Kong's total exports in 1992, and it became more and more important to Hong Kong in the next few years. In 1998, reexports shared 67.1 per cent of Hong Kong total exports.
10.3.1 Re-export by origin The important origins of Hong Kong denim product re-exports were the Chinese Mainland, China Taiwan, South Korea, Japan, the U.S. and Macao. From 1992 to 1998, these countries (areas) supplied around 95 per cent of Hong Kong re-exported denim products. (See Fig. 10.6 and 10.7) 4
Definition of a Hong Kong Re-export is a product which has previously been imported into Hong Kong and which is re-exported without having undergone in Hong Kong a manufacturing process which has changed permanently the shape, nature, form or utility of the product (TDC).
97
12000 10000 8000 6000
4000 2000 n Y
1
1992
CHINA PEP REP
JAPAN
CHINA SOUTH TAIWAN KOREA
1993 0 1994 0 1995 m 1996
1997
1998
USA
MACAO
1
10.6 Hong Kong denim products re-exports by origin Adapted from Hong Kong Census and Statistics Department (1 999)
...
10.7 Hong Kong denirn products re-exports by origin Adapted from Hong Kong Census and Statistics Department (1999) Among these suppliers, the Chinese Mainland was the most important origin, supplying 52.5 per cent of Hong Kong’s re-exported denim products in 1998. The Chinese Mainland supplied HK$ 3.2 billion worth of denim products for Hong Kong re-export in 1992. With an average growing rate of 15.8 per cent per year, the value became HK$ 5.7 billion in 1996. After 1996, the value reduced by 16.3 per cent per year and became H m 4 . 0 billion in 1998. The second most important supplier, China Taiwan, supplied 28.3 per cent of Hong Kong’s re-exports in 1998. It supplied HK$2.3 billion worth of denim products to Hong Kong for re-export in 1992, peaked in 1996 with HK$3.0 billion, but in 1998 the value Hong Kong re-exported from China Taiwan was down to HK$2.2 billion. 98
South Korea was the third most important source of Hong Kong denim product reexports. South Korea supplied HK$ 536 million worth of denim products to Hong Kong for re-export in 1998, accounting for 7.0 per cent of Hong Kong’s re-exports. Before 1996, South Korea supplied HI($900-1000 million worth of denim products to Hong Kong for reexport per year. The value fell sharply in 1997 and 1998. Japan and the U.S. supplied 3.9 and 2.0 per cent of Hong Kong re-exports respectively. Japan supplied HK$298 million to Hong Kong for re-export, while HK$ 153 million worth of was from the US.,in 1998. Macao supplied HK$ 70 million worth of denim products, accounting for 0.9 per cent of Hong Kong re-exports. The six countries (areas) above supplied about 95 per cent of Hong Kong reexported denim products for each year between 1992 and 1998.
Denim fabric re-exports by origin Hong Kong re-exported denim products were mainly sourced from surrounding countries (areas), such as China Taiwan, Mainland China, South Korea, Japan, Macao, India, and Indonesia. China Taiwan was the most important source for Hong Kong denim fabric re-exports. It supplied HK$ 3.0 billion worth of denim fabric to Hong Kong for re-export in 1996, which was the peak between 1992 and 1998. In 1998, HK$2.2 worth of denim fabric fiom China Taiwan, accounted for 38.9 per cent of Hong Kong denim fabric re-exports. Denim fabric from the Chinese Mainland peaked in 1995 with HK$ 2.4 billion worth, Mainland China supplied HK$2.0 billion, or 35.8 per cent of Hong Kong reexports to denim fabric in 1998, and was the second most important origin of Hong Kong re-exported denim fabric. (See Fig. 10.8) Hong Kong re-exported denim fabric from South Korea has decreased in the past few years. With an average annual decreasing rate of 8.1 per cent, denim fabric from South Korea fell from HK$ 1.0 billion in 1992 to HK$ 535 million in 1998, and then contributed 9.6 per cent of Hong Kong re-exported denim fabric.
10.8 Hong Kong denim fabric re-exports by origin Adapted from Hong Kong Census and Statistics Department (1999) 99
Japan supplied HK$291 million worth of denim fabric for export in 1998, about 5.4% of Hong Kong re-exported denim fabric. In additional to sourcing denim fabric from its neighbors, Hong Kong also sourced denim fabric from the U.S., Canada, and the United Kingdom. But their contribution to Hong Kong’s total re-exports was small. The average price of Hong Kong re-export denim fabric was around HK$ 6.3 to HK$ 8.1 per square metre between 1992 and 1998. The denim fabric from China Taiwan sold at HE§ 5.2 to HK$6.1 per square metre that from the Chinese Mainland sold at HK$ 9.0 to HK$ 11.1 per square metre. The denim fabrics from Japan, U.S., Canada, Norway and the United Kingdom were at a higher price (more than HK$ 17 per square metre). The denim fabrics &om South Korea, India and Indonesia were at a lower price (less than HK$ 10 per square metre).
Denim apparel re-exports by origin Almost the whole of the Hong Kong re-exported denim apparel was from the Chinese Mainland which thus played a dominant role. HK$ 3.3 billion worth of Hong Kong re-exported denim apparel was from Mainland China in 1996, which was the peak between 1992 and 1998. In 1998, HK$2.0 billion or 97.0 per cent of Hong Kong reexported denim apparel came from the Chinese Mainland. Another supplier of Hong Kong denim apparel re-exports was the U.S., which supplied HK$ 45 million worth of denim apparel, or 2.1 per cent of Hong Kong reexports in 1998. Italy and the Philippines supplied HK$l0.4 millions worth of denim apparel for Hong Kong re-export, and thus had a very small share of Hong Kong denim apparel re-exports. The price of denim apparel from the Chinese Mainland was around HK$36 to 47 per unit; compared with that &om U.S. (HK$ 160 per unit) and Italy (HK$ 350 per unit) it was relatively low. The denim apparel from the Philippines, Macao, Singapore and Indonesia were sold at HK$95,71,50 and 43 per unit in 1998 respectively.
10.3.2 Re-exports by destination The major destinations of Hong Kong re-exported denim products were Mainland China, Panama, Japan, Bangladesh, Philippines, Egypt, USA, Australia, Indonesia and Sri Lanka. The Chinese Mainland was the most important market of Hong Kong denim product re-exports, and imported HK$ 4.5 billion of denim products in 1998 accounting for 59.0 per cent of Hong Kong’s re-exports. Hong Kong re-exports to the Chinese Mainland peaked in 1997 with HK$ 6.0 billion or 60.4 per cent of Hong Kong total re-exports. Between 1992 and 1997, the denim products exported to the Chinese Mainland from other countries through Hong Kong increased by 8.4 per cent per year on average. However, the value fell by a quarter in 1998. The second most important Hong Kong re-export destination was Panama, who contributed 8.8 per cent of Hong Kong re-exports in 1998. HK$507 million worth of denim products were exported to Panama through Hong Kong in 1992 and, in the following years, with an average growing rate of 13.7 per cent a year, the value became HK$855 million in 1997. But it reduced to HK$670 million in 1998.
100
The third most important market for Hong Kong re-exports was Japan. HK$ 309 million worth of denim products were re-exported to Japan through Hong Kong in 1992, and the value peaked in 1994 with HK$ 483 million. In 1998, the value had reduced to HK$ 317 million, accounting for 4.2 per cent of Hong Kong total reexports of denim products. Bangladesh, the Philippines and Egypt were the other three important markets for Hong Kong's re-exports, and contributed 2.3,2.3 and 2.1
si
450 400 350 5 300 250 200 150 100 n 50
4000
Y
I c
2 .-
3000
-g
2000
a *
5,
E
1000
B
0
.g
0
0
10.9 Hong Kong denim apparel re-exports by origin Adapted from Hong Kong Census and Statistics Department (1999)
~
12000 10000 8000
6000 4000 2000 n
1.1992
m1993
01994
01995
m1996
mi997
mi998
10.10 Hong Kong denim products re-exports by destination Adapted from Hong Kong Census and Statistics Department (1999)
101
.. .
10.11 Hong Kong denim products re-exports by destination Adapted from Hong Kong Census and Statistics Department (1999) per cent of total re-exports respectively in 1998. These three Hong Kong re-export markets were growing fast between 1992 and 1998. Bangladesh's market increased fiom HK$94 million in 1992 to HK$ 178 million in 1998 an average growth of 14.8 per cent per year. The Philippines, with an average growing rate of 22.0 per cent per year fiom 1992 to 1998, imported HK$ 176 million worth of denim products fiom other countries through Hong Kong in 1998. Hong Kong re-exported HK$68 million worth of denim products to Egypt in 1992, but this grew at 2 1.3 per cent a year, and Hong Kong re- exported HK$l56 million worth of denim products to Egypt in 1998.
10.12 Hong Kong denim fabric re-exports by destination Adapted from Hong Kong Census and Statistics Department (1999)
102
U.S., Australia, Indonesia and Sri Lanka shared 1.8, 1.6, 1.4 and 1.1 per cent of Hong Kong re-exports respectively in 1998. With an average annual reducing rate of 7.3 per cent, the U.S. market fell from HK$ 280 million in 1992 to HK!§ 137 million in 1998. Indonesia was the fastest growing market for Hong Kong re-exports. Between 1992 and 1998, Hong Kong re-exports to Indonesia increased from HK$33 million in 1992 to HK$106 million in 1998 an average growing rate of 37.1 per cent each year. The above ten countries contributed 79 to 85 per cent of Hong Kong total reexports from 1992 to 1998. Denimfabric re-exports by destination Hong Kong denim fabric re-exports peaked in 1996 with a value of HK$7.2 billion. In 1997, the value fell to HK$7.1 billion, and 1998 was a poor year for Hong Kong denim fabric re-exports, since the value dropped by 22.2 per cent, to HK$ 5.5 billion. Even as value fell its contribution to the Hong Kong re-exports increased. It represented 72.7 per cent of Hong Kong denim product re-exports in 1998; in the other years of the investigation period, denim fabric re-exports were 64 to 71 per cent of Hong Kong denim products re-exports. (See Fig. 10.13) The Chinese Mainland was the most important market for Hong Kong denim fabric re-exports, and contributed 80.6 per cent of Hong Kong denim fabric re-exports in 1998. The market of Mainland China grew from HK$4.2 billion in 1992 to HK$ 6.0 billion in 1997. However, the market shrunk in 1998 and HK$4.5 billion worth of denim fabric was re-exported from Hong Kong to the Chinese Mainland. Bangladesh and the Philippines were the other two important markets for Hong Kong denim fabric re-exports, and accounted for 3.2 and 3 .O per cent of Hong Kong denim fabric re-exports respectively in 1998. Indonesia and Sri Lanka shared 1.9 and 1.5 per cent of Hong Kong denim fabric re-exports in 1998. Other markets included Morocco accounting for 0.8 per cent of Hong Kong denim fabric re-exports in 1998, Mauritius (0.7 per cent), Macao (0.7 per cent), Thailand (0.7 per cent), China Taiwan (0.6 per cent) and Panama (0.6 per cent). The markets in most of the above countries shrank between 1997 and 1998, and Hong Kong’s denim fabric re-exports declined in these years. The average price of Hong Kong denim fabric re-exports was HK$7.7 per square metre in 1998. The denim fabric supplied to the Chinese Mainland was at a lower price (HK$7.2 per square metre). Higher prices were obtained for denim fabric re-exported to Bangladesh, the Philippines, Sri Lanka and Macao (about HK$ 10 per square metre), to Morocco (more than HK$ 11.6 per square metre), to Indonesia, Mauritius, Thailand, Taiwan and Panama (more than HK$12 per square metre) in 1998. Denim apparel re-exports by destination The major markets for Hong Kong denim apparel re-exports were Panama, Japan, Egypt, the US.and Australia. Panama, contributed 30.6 per cent of the total Hong Kong denim apparel re-export market, and was the most important single market in 1998. HK$ 847 million worth of denim apparel was exported through Hong Kong to Panama in 1998, which was the peak of Hong Kong denim apparel re-exports to Panama in recent years. Japan was the second most important market for Hong Kong denim apparel reexports. From 1992 to 1994, the Japanese market increased from HK$478 million to
103
4000 >
I 90
-1
m v 9 2 l l a 3 m v 9 4 U v 9 5 m v 9 6 m v 9 7 m v 9 8 P92 +P93
+P94
+P95
+P96
-P97
-P98
10.13 Hong Kong denim apparel re-exports by destination Adapted from Hong Kong Census and Statistics Department (1999)
685 million, which was the peak in the investigation period. In 1998, Hong Kong reexported HK$ 303 million worth of denim apparel to Japan, accounting for 14.6 per cent of Hong Kong denim apparel re-exports. Egypt contributed 7.4 per cent of Hong Kong denim apparel re-exports in 1998. The re-exports grew from HK$ 64 million in 1992 to HK$ 227 million in 1997. In 1998, Hong Kong re-exported HK$l53 million worth of denim apparel to Egypt. About 6.3 per cent of Hong Kong denim apparel was re-exported to the US in 1998. The market in the US was not steady between 1992 and 1998. The values of Hong Kong re-exports to US in 1994 and 1998 were the lowest in the past seven years, being worth HK$ 145 million in 1994 and HK$ 130 million in 1998. The peak of Hong Kong re-exports to the U.S. appeared in 1996 with a value of HK$276 million. HK$ 113 million worth of denim apparel was re-exported to Australia in 1998, accounting for 5.4 per cent of Hong Kong denim apparel re-exports. Hong Kong denim apparel re-exports to Australia peaked in 1996 with a value of HK$ 187 million. Curacao, South Africa, Venezuela and Singapore contributed 2.1 to 2.5 per cent of Hong Kong denim apparel re-exported in 1998. The important market for denim fabric re-exports, Mainland China, contributed just 1.4 per cent to Hong Kong’s denim apparel re-exports in 1998. The average price of Hong Kong denim apparel re-exports was HK$37 to HK$44 per unit between 1992 and 1998. The denim apparel re-exported to Panama, Egypt, Curacao and Venezuela was around HK$ 30 per unit, to Japan and Singapore was HK$6O-odd per unit, and to USA was more than HK$80 per Unit. 10.4 IMPORTS
10.4.1 Introduction
The value of Hong Kong’s denim products imports was HK$8.2 billion in 1992, and 104
peaked in 1996 with HK$ 1 1.5 billion worth of denim products imported. The import value declined sharply from 1997 to 1998, by 20.6 per cent, and the import value fell to HK$ 8.2 billion. The major suppliers of Hong Kong denim products were Asian countries (area), such as the Chinese Mainland, China Taiwan, South Korea, Japan, India and Macao. The U.S.is a non-Asian source of Hong Kong denim product imports. (See Fig. 10.15 and 10.16) Mainland China was the most important supplier of Hong Kong denim products, and HK$ 3.4 billion worth of denim products came fiom there in 1992. The value became HK$6.2 billion in 1996, which was the peak. In the next two years, the value reduced. In spite of this reduction, China exported HK$ 4.5 billion worth of denim products to Hong Kong, and captured 54.9 per cent of Hong Kong’s total imports in 1998. The second most important supplier, China Taiwan, exported HK$ 2.3 billion worth of denim products in 1992 which grew at 2.7 per cent per year to HK$ 2.6 billion in 1997. However, China Taiwan exported HK$ 2.0 billion worth of denim products to Hong Kong in 1998 a reduction of 25.4%. China Taiwan contributed about a quarter of Hong Kong’s denim product imports in the investigation years. In 1992, the products exported from Taiwan accounted for 28.4 per cent of Hong Kong imports. In 1998, its share of Hong Kong imports was 23.8 per cent. South Korea was the third important supplier for Hong Kong. About 7.0 per cent of Hong Kong total imports were from South Korea. From 1992 to 1996, South Korea’s export value was kept at more than HK$ 1.0 billion. However, the export value fell in 1997 and 1998. In 1997, South Korea still exported HK$ 954 million worth of denim products to Hong Kong, but the fall in value accelerated and became HK$575 million in 1998. Japan exported 4.6 per cent of Hong Kong total imports in 1998, the US 2.0 per cent, India 1.2 per cent and Macao 1.2 per cent. These seven suppliers accounting for about 95 per cent of Hong Kong total imports each year between 1992 and 1998.
14000 12000 10000
8000 6000
4000 2000
0 Total Import
CHINA CHINA SOUTH PEO REP TAIWAN KOREA
JAPAN
USA
INDIA
MACAO
~
1 . 1 9 9 2 ~ 1 9 9 3 ~ 1 9 9 4 ~ 1 9.I996 95
b997.19981
10.14 Hong Kong denim products imports Adapted from Hong Kong Census and Statistics Department (1 999) 105
10.15 Hong Kong denim products imports Adapted from Hong Kong Census and Statistics Department (1999) 10.4.2 Denim fabric imports
Denim fabric imports contributed 28 to 34 per cent by value of Hong Kong’s total imports of denim products between 1992 and 1998. Hong Kong denim fabric imports peaked in 1996 with value HK$ 7.8 billion. In 1997 and 1998, Hong Kong’s denim fabric imports dropped by 6.9 and 22.9 per cent, and fell to H U 7 . 3 billion and HK$ 5.6 billion. (See Fig. 10.17) The important sources of Hong Kong imports of denim fabric were the Chinese Mainland, China Taiwan, South Korea, Japan, USA, India and Macao. They supplied more than 94 per cent of Hong Kong denim fabric imports in every year investigated. (See Fig. 10.17) From 1995, Mainland China was the most important supplier of Hong Kong denim fabric imports, and exported HK$2.1 billion worth of denim fabric to Hong Kong in 1998, accounting for 36.8 per cent of Hong Kong total imports. (See Fig. 10.17) Before 1995, China Taiwan was the most important supplier for the Hong Kong denim fabric imports market. Taiwan was the second most important supplier in 1998, exporting HK$ 2.0 billion worth of denim fabric, accounting for 34.6 per cent of Hong Kong’s imports. (See Fig. 10.17) South Korea was the third most important supplier to Hong Kong, accounting for 10.1 per cent of Hong Kong denim fabric imports in 1998, followed by Japan (6.6 per cent), USA (2.3 per cent), India (1.8 per cent) and Macao (1.8 per cent). (See Fig. 10.17) The average price of Hong Kong imported denim fabric was HK$6.4 to HK$7.7 per square metre. The price from the Chinese Mainland, it most important supplier, was HK$ 7.2 to HK$ 9.2 per square metre, which was higher than the average Hong Kong import price. The price of denim fabric from China Taiwan was HK$ 5.0 to HK$6.0 per square metre. The highest priced denim fabric was from the U.S., which sold at about HK$25 per square metre. Of the denim fabric from other countries, that
106
iz Y I
30
3
8000
25
6000
20
.g
-f
4000
'5
5
J r
-E
p
lo 5 0
2000 0
0
10.16 Hong Kong denim fabric imports Adapted from Hong Kong Census and Statistics Department (1999) tom Japan, sold at HK$ 21 per square metre in 1998, from India at HK$ 9.0 per square metre and from Macao at HK$13.30 per square metre. (See Fig. 10.17)
10.43 Denim apparel imports Denim apparel is an important part of Hong Kong denim product imports. About 66 to 72 per cent of Hong Kong import denim products were denim apparel between 1992 and 1998. Hong Kong imported HK$ 2.3 billion worth of denim apparel in 1992. The import value peaked in 1996 with HK$ 3.6 billion. Hong Kong imports then fell sharply in the next two years, and Hong Kong imported HK$ 3.1 billion worth of denim apparel in 1997, and HK$2.6 billion in 1998. (See Fig. 10.18) China was the most important source of Hong Kong's imported denim apparel. About 94 per cent of all Hong Kong's imports of denim apparel were from the Chinese Mainland between 1992 and 1998. (See Fig. 10.18) Other suppliers included Italy, the U.S., the Philippines; Italy contributed 2.0 per cent of Hong Kong import denim apparel, the US. 1.4 per cent, and the Philippines 0.6 per cent in 1998. (See Fig. 10.18) The average price of Hong Kong's imported denim apparel was HK$ 31 to 37 HK$ per unit in the investigation period. The lowest price for denim apparel was from the Chinese Mainland, which was at about HK$30 per unit. The prices from Panama and South Korea, and Singapore were at HK$ 40 to HK$ 80 per unit. The highest price of denim apparel was from Italy, more than HK$300 per unit. (See Fig. 10.18) Alongside the low price denim apparel from the Chinese Mainland, a big slice of highly priced denim apparel from Italy and USA was imported. The denim apparel fiom Italy and the U.S. was famous for their design, brands, and quality. Hong Kong domestic consumers have a high consumptive capacity, and the denim apparel from the two important famous apparel producers have a significant market share in Hong Kong's domestic market. (See Fig. 10.18) 107
I
4000
1
I
450
I
10.17 Hong Kong denim apparel imports Adapted from Hong Kong Census and Statistics Department (1999)
SUMMARY As the second most important supplier to the U.S. market and the fourth largest nonEU supplier in the EU market, Hong Kong has played an important role in international denim markets. However, among the Hong Kong exports of denim products, more and more products are re-exported, which means the more products export from Hong Kong have not undergone a manufacturing process in Hong Kong. The Hong Kong trading (import or export) sector is thus important to Hong Kong in keeping its market share in the world market. Hong Kong's domestic exports have declined from 1995, and reexports have declined from 1996. As the labor and land costs in Hong Kong are high, it became a high cost manufacturing area and many manufacturing producers shifted their manufacturing factories to offshore. The domestic production capacity reduced, causing the domestic exports to fall. In the re-export sector, the launch of the US rules of origin for imported textile and apparel products influenced Hong Kong denim apparel re-exports from the Chinese Mainland. As Hong Kong was the most important area through which Chinese textile products were re-exported, the rules restricted a big part of China's denim apparel exports to the U S . via Hong Kong. In 1997 and 1998, the Asian financial crisis occurred, and many Asian countries devalued their currency. The steady currency of China and Hong Kong brought huge pressures on denim products exports, as their price in the international market became higher than that from the countries which had devalued. The unfavorable balance of the Hong Kong denim product trade expanded in recent years. Hong Kong became a denim product importer, rather than an exporter, and is losing the important position in world denim manufacturing which it had in the last few decades.
108
The Chinese Mainland, U.S.,and EU were the three most important Hong Kong domestic export markets. Re-exports of de&m products via Hong Kong were mainly from the Chinese Mainland and Taiwan, South Korea, and Japan, and to the Chinese Mainland, Panama, Japan, Bangladesh, US, and Australia. In the US and EU markets, denim products from Hong Kong belonged to the lower class. The price of domestic denim products of Hong Kong made for export was much higher than the denim product re-exported via Hong Kong. The re-export markets for Hong Kong worldwide. The source was concentrated in the Asian countries. The denim products Hong Kong imported were mainly from Asian countries, such as Mainland China, Chinese Taiwan, South Korea,and Japan. As Hong Kong still has a manufacturing capacity, denim fabric was an important part of Hong Kong imports. While a big part of imported denim apparel came from Italy and U.S.,denim fabric was mostly imported from surrounding countries.
REFERENCES 1. 2. 3.
TDC, H.K., Profiles of Hong Kong Major Manufacturing Industries: Hong Kong's Clothing Industry.1999, Hong Kong TDC. TDC, H.K., Profiles of Hong Kong Major Manufacturing Industries: Hong Kong's Textile Industry. 1999, Hong Kong TDC. Council, H.K.T.D., Hong Kong's Clothing Industry.1998, Hong Kong Trade Development Council.
109
11 Industrial Environment
11.1 THE HONG KONG ECONOMY
Hong Kong began its "miracle" economic growth in the 1970s [l]. From 1965 to 1975, the GDP grew at an average 6.0 per cent per year; between 1975 and 1985, the growth rate was on average 8.5 per cent and between 1985 and 1995, the growth rate was 6.5 per cent [15]. The Hong Kong economy has been developed as an industrialized metropolitan economy in past decades. Its economic success is listed below:
Scoreboard for the Economic Success of Hona K o n ~ f 2 ] General The world's freest economy The world's most service-oriented economy The world's 2nd highest per capita holding of foreign exchange Asia's 2nd least corrupted economy Asia's 2nd largest source of foreign direct investment The world's 3rd most competitive economy The world's 9th largest trading economy (5th if EU regarded as one entity) The world's 10th largest exporter of services Merchandise Trade The world's largest exporter of clocks The world's largest exporter of toys and games The world's largest exporter of calculators The world's largest exporter of radios The world's largest exporter of electric, hair-dressinghand-drying apparatus The world's largest exporter of imitation jewellery The world's largest exporter of travel goods & handbags The world's largest exporter of umbrellas & sunshades The world's largest exporter of artificial flowers The world's largest exporter of textiles The world's largest exporter of telephone sets 110
The world's 2nd largest exporter of electric food grinders, mixers &juicers The world's 2nd largest exporter of watches The world's 2nd largest exporter of footwear The world's 2nd largest exporter of clothing The world's 3rd largest exporter of fur clothing The world's 6th largest exporter of precious jewellery 0 Finance Asia's highest concentration of fund managers Asia's largest number of authorized insurance companies Asia's largest venture capital center Asia's 4th largest loan syndication center The world's 4th largest gold bullion market The world's 7th largest foreign exchange market The world's 9th largest banking center for external financial transactions The world's loth largest stock market 0 Communications and Media The world's first major city to have a fully digitized telephone network Asia's busiest international telephone traf7cic Asia's highest rate of telephone penetration Asia's highest connection to optical fiber cables The world's highest per capita advertising expenditure The world's largest film producer (in terms of per capita production) The world's 2nd highest usage rate of facsimile The world's 4th largest printing center Transportation The world's busiest airport in terms of international cargoes The world's 2nd busiest container port The world's 4th busiest speedpost administration in terms of traffic volume The world's 5th busiest airport in terms of international passengers The exchange rate was kept at a fixed rate of HK$7.80 to US$l.OO after a linked exchange rate system was introduced on October 17, 1983. Linking with one of the strongest currencies in the world helped Hong Kong to stabilize its economic development. However, in the period 1997 to 1998, when an Asian crisis loomed, the linked exchange rate penalised the export of Hong Kong manufactured products when faced by the devaluation of other countries. Hong Kong's interest rates move mostly in line with the US under the linked exchange rate system [3]. Since the late 1970's, the Hong Kong economic structure has transformed f?om a manufacturing-based economy to one that is mainly services-based. The biggest sector in Hong Kong's economy was manufacturing (accounting for 23.7 per cent of GDP) in 1980, but became one of the smallest sectors (6.2 per cent) in 1998 [4]. The biggest sector of the Hong Kong economy is now financing, insurance, real estate and business services, which account for 25.6 per cent of the Hong Kong GDP [4]. Hong Kong has become the world's most service dependent economy, with services contributing to 85.2 per cent of GDP in 1997. In the same year, the contribution from manufacturing dwindled down to 6.5 per cent [16].
111
GDP by major economic activities 1980
Others 12.40%
Wholesale, retail and irnporUexporttrades, restaurants, hotels
Financing, insurance, real estate and business services 23.00%
Community, social and personal services 12.1OYO
7.4Ooh
GDP by major economic activities 1997 Financing, insurance, real estate and business services
Others Manufacturing
14.*%
26.5%
6.5%
and irnportlexport trades, restaurants, hotels
Community, social and personal services
26.1%
17.4%
11.1 Service industry vs. manufacturing industry The tax structure of Hong Kong is simple. The corporate tax rate is the lowest of any industrial country or developing country in the Asia and Pacific region. Although the fiscal reserves fell in the years 1998 and early 1999, Hong Kong still has a strong fiscal reserve. Hong Kong is now the world's 4th largest holder of foreign currency reserves, after Japan, the Chinese mainland and Taiwan [3]. The regional crisis that boomed in mid-1997 eroded confidence in Hong Kong's exchange rate and prompted a series of speculative attacks. The service industry, especially the financial industry, was heavily struck by the Asian turmoil. The wavering exchange rate led to sharply increased interest rates, weakened domestic demand, and clouded growth prospects for the following years. In 1998 and 1999, the unemployment rate was above 6 per cent, which was a record for the last few decades, and GDP grew negatively till the middle of 1999 [3]. The inflation in Hong Kong was kept low in past decades when its economy was developing at a high speed. Inflation declined in the1990s (figure 11.2), and became negative in 1999. The deflationary pressure was felt in most items of consumer goods. The prices of clothing and footwear showed the most significant decrease, followed by durable goods, private housing and food. The deflationary pressure can partly be attributed to declining import prices and the substantial price discounts of recent months [3]. 112
Hong Kong Composite CPI 14 12
8
10 8
C
i
n
6 4
2
0
I
1989 1990 1991
1992 1993 1994 1995 1996 1997 1998
I
1 1.2 Hong Kong Composite Consumption Price Index Source: Hong Kong Census and Statistical Department [S] A REER index based on unit labor costs in the Hong Kong's and trading partners' manufacturing sectors depreciated steadily during 1982 to 1997 and was researched by economists in the International Monetary Fund [6]. This study indicated that the productivity of Hong Kong's manufacturing sector has grown in that period. In the past decades, Hong Kong manufacturers have improved their competitiveness. 11.2 MANUFACTURING COSTS
Labor costs Hong Kong owns a pool of hard working labor, which has often been regarded as a unique Chinese quality which proved an asset in its rapid industrialization, especially in the labor intensive manufacturing industries [11. From the 197Os, when the Hong Kong economy began its "miracle" growth, the labor costs increased quickly. Between 1974 and 1980, the wages for workers increased 103 percent in the six years [7]. From 1982 to 1990, the wage index for all Hong Kong workers grew at 13 per cent per year on average [7, 1978/88,1980/90]. In the five years between 1993 and 1998, the average wage increase was 8 per cent per year on average [7,1999]. In 1996, the labor costs in the Hong Kong textile industry were US$4.9 per hour, higher than those paid by textile and clothing producers in other developing countries. The rate was 2.4 times that in Turkey, 3.2 times that in Mexico, 8.4 times that in Mainland China, 9.4 times that in Indonesia, 10.9 times that in Sri Lanka, and, 11.4 times that in Pakistan.Hong Kong had lost it advantage of low labor costs [8]. From the workers point of view, they would obviously like to work in a sector with high rates of pay. In the 1970s, the wage for a textiles worker was higher than the overall average wage, and the wage for garments workers was a little lower than the average wage [7]. In the 1990s, the Hong Kong economy became more and more service dependent. The salaries in the service sectors increased, but declined in the manufacturing sectors, including the textile and garment sectors [7, 19991. The gap between the salaries for the service and manufacturing sectors increased, and younger 113
workers didn't like to work in the textile and garments sectors at the lower salary, and shifted to service sectors. The elder workers also worried about their future, that they wouldn't be able to find a new job after leaving the textile industry. Thus, few workers want to join the textile business currently. In the 1980s, scholars suggested that Hong Kong's economic success hinged on its ability to maintain a high degree of competitiveness in its export trade [9].
Fuel and wastage costs Fuel costs in Hong Kong are very high. The price of fuel in Hong Kong is the second highest in the world after the United Kingdom [lo]. The Hong Kong oil market is monopolized by a few foreign oil companies, such as Shell, Mobil, Cax and Mefi. There is no Hong Kong domestic oil company working in this business. These few companies determine the price of oil in the Hong Kong market. On the other hand, Hong Kong applies high import taxes to oil products, and this is an important income to the Hong Kong government. Some years ago, a waste discharge fee was introduced by the Hong Kong government. In the long term, the fee charged to the enterprises & households was unable balance the costs of government spending on the waste treatment. So the government is planning to increase the fee above the previous level. This will have an impact on the denim industry. The above two factors greatly affect the denim industry's overheads, and the trend of increasing overhead costs pressures the industry to move their factories to lower costs countries (areas) and reduce the industry's competitive advantage of low costs. 11.3 INFRASTRUCTURE
Hong Kong has a well-developed physical infrastructure, including its second busiest container seaport, busiest airport, and telecommunications system.[111. Beside the well-developed physical infrastructure, Hong Kong has a sound legal system that has played a vital role in Hong Kong's past success. The rule of law begins with individuals and their right to seek the protection of the courts, in which justice is administered by impartial judges. It protects the fieedom of individuals to manage their affairs without fear of arbitrary interference by the Government or the improper influence of the rich and powerfd. Its starting point is the individual but it encompasses the whole of society. The existing Basic Law provides for the continuation of the rule of law and the judicial system beyond 1 July, 1997 with no fundamental changes, and will continue to be essential for Hong Kong's future. The common law and all the laws previously in force in Hong Kong, except for any that contravene the Basic Law, are maintained; the judicial system continues to operate fairly and independently as before [17]. Under the sound legal system, Hong Kong is an open market in which no concessions are offered to any investor or industry or company, but also no limitation on business forms. Foreign investment is not offered incentives, but the government makes efforts to improve investor protection. No duties are imposed on imported goods, except for a small number; no special legislation encourages export incentives. No specific incentives are offered to invest in other countries [I 11, and entry barriers for industry are really low.
114
The advanced hfktructure strengths make up for the weakness of Hong Kong domestic natural resources, high costs of land rent, etc. Furthermore, Hong Kong has an internationally recognized legal system, favorable corporate tax rates and an open market, which were untouched after its return to China, providing a sound foundation for the development of a garments cluster. The well-developed infrastructure is one of important elements in the Hong Kong gannent cluster's competitiveness. 11.4 INSTITUTIONS
On the institutional side, the government has established several organizations in an effort to promote Hong Kong's manufacturing and service industries, including the Hong Kong Productivity Council, the Hong Kong Trade Development Council, the Industry Department, the Hong Kong Export Credit Insurance Corporation, and the Business and Services Promotion Unit [l 13. These institutions operated effectively and efficiently, to provide a service on enlarging trading space, vocational training, technological improvement, and productivity enhancement. It is praiseworthy that the government and these institutes have built a set of public information networks to encourage information flow. For the textiles and garment sectors, some relative information resources in Hong Kong are listed in Table 11.1. There are also several Hong Kong universities that are committed to textiles and garments development in different areas. The Institute of Textiles and Clothing in the Hong Kong Polytechnic University has maintained an exclusive role in the provision of textile and clothing education in the tertiary education sector. In addition to academic education at technician, technologist, and executive levels for the industries, the Institute also assists the industries by undertaking research and consultancy services. The Hong Kong University of Science and Technology (HKUST) is responsible for a 3D Garment Program and HKTAIGA (A communication infrastructure for Hong Kong textile and apparel industry global application). Three universities, the Hong Kong University of Science and Technology (HKUST), the Chinese University of Hong Kong (CUHK) and the Hong Kong Polytechnic University (POLYU), have cooperated to develop an Internet based system for souring and trading of fabrics. The City University of Hong Kong has developed a multimedia document and workflow management system to help industry improve productivity. The Chinese University of Hong Kong (CUHK) has developed an image database management system for textiles and clothing. 11.5 FOREIGN TRADE SYSTEMS
The trading sector that has been developed since the middle of the nineteenth century has played a vital role in Hong Kong's economic history. Traditional intermediaries are complemented by Hong Kong firms, which match sources of supply with sources of demand on a global basis, and with trading volume of such magnitude handled by Hong Kong companies; Hong Kong has become a leading sourcing center of the Asia Pacific region. More than one in five employed people in Hong Kong are engaged in the import and export trade, a sector whose contribution to GDP is over 18 per cent [121. 115
TahIll 1 Texti·1es an d.garments information sources in Hong Kong e GIC TDC ID HKTAIGA HKCAINS IGS 2000 Prima Vision Gerber TP-CSS
Hong Kong Government Information Center http://www.info.gov.hk/ Hong Kong Trade Development Council. http://www.tdc.org.hk/ Hong Kong Industry Department http://www.info.gov.hk/idl Communication infrastructure for Hong Kong textile & apparel industry global application. Developed by the Industrial Engineering and Engineering Management Department ofHKUST. http://hktaiga.ust.hk/ Hong Kong Clothing Accessory Information Network System. Developed by the Industrial Engineering and Engineering Management Department of HKUST and the Clothing Industrv Training Authoritv (CIT A) Integrated garment system, IPC Information Processing Consultants Ltd. Color CAD systems for the garment and apparel industry. Prima design system Ltd. http://www.prima.com.hk/prima/main.htm Product data management. Gerber Garment Technology. http://www.ggt.coml Three principle client/server solution garment system module. Three principles computer service Co. Ltd. HK
·Hong K ong TahIe 112 co Ig re 1ate d research prot ects In . Ma .or texti·1e an d1thin
ASD (for textiles and garments)
HKCAINS HKTAIGA HKfab CityMerchant Montage
Part of Area of Strategy Development, focused on textiles and garments. Developed by Institution of Textiles and Clothing Department of Hong Kong Polytechnic University (One important aspect is a knowledge based information site for the denim industry) http://www.asd.polvu.edu.hk Hong Kong Accessory Information Network System. Developed by the Industrial Engineering and Engineering Management Department ofHKUST and the Clothing Industrv Training Authoritv iCITA) Communication infrastructure for Hong Kong textile & apparel industry global application. Developed by the Industrial Engineering and Engineering Management Department of HKUST. http://hktaiga.ust.hk/ An Internet based system for sourcing and trading of fabrics. Developed by HKUST, CUHK and HK POLYU. Multimedia document and workflow management system. Developed by MADLab, Dept. ofCS, City University HK http://icg.cityu.edu.hk/madlab/citvmerchant/ Image Database Management System. Hong Kong Chinese University. http://www.cse.cuhk.edu.hk/-viplab/
Because of the strong help from the government, Hong Kong trade jobber enjoyed a large trading space, as Hong Kong is a member of the WTO and a free port. The Hong Kong import & export trading sector is active in sourcing garments. Three type of sourcing activities occur, namely sourcing goods produced in Hong Kong, sourcing goods from around the region for re-exports, and sourcing goods from one country to be shipped directly to a third country without touching Hong Kong ground [12]. The import business of Hong Kong trading firms is mainly generated by their distributing capabilities under the identity of agents or dealers [12]. Given Hong Kong's strategic location, advanced physical infrastructure, and well-established legal framework, trading through Hong Kong always provides convenience and certainty. Moreover, traders tend to agglomerate in a city.
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The Hong Kong Trade Development Council (TDC), an agency of the Hong Kong government, is the statutory organization set up to promote Hong Kong's trade in goods and services. The agency has done much to develop and diversify markets for Hong Kong companies, with special reference to the needs of small and mediumsized enterprises (SMEs), enhancing the image and competitiveness of Hong Kong's products and services in world markets, strengthening Hong Kong's role as Asia's premier business and services hub, improving Hong Kong's image as an open market and good business partner, standing for free trade and the rule of law in global commerce. As Hong Kong has a large number of trading firms and has acquired a comparative advantage in playing the middleman's role in international trade, such an advantage is expected to feed upon itself [121.
11.6 GOVERNMENT POLICIES The government in Hong Kong has traditionally adopted a policy of nonintervention toward the regulation of private business and industry, and has actively promoted a free-enterprise, free-trade economy. In his first Policy Address, the Chief Executive of the Hong Kong SAR reiterated that Hong Kong's development strategy would continue to be based on the principles of a free-market economy, prudent fiscal policy, and maintaining a sound legal system [113. In the policy address by the Chief Executive in 1998, he reiterated that the government would work on enhancing Hong Kong's economic vitality and promoting sustained economic growth; raising the quality of education, starting from basic education; leading the Civil Service in an open government and together building--a stable, free, democratic, equitable and compassionate society, a decent society with a level playing field and fair competition under the rule of law; a world class cultural, educational, and scientific research center; a society proud of it national identity and cultural heritage. Furthermore, he announced [13], on the basis of the recommendations from the Commission, that to realize this vision, Hong Kong needed to become: a leading city in the worldfor the development and application of information technology; a world class design and fashion centre; ... a leading international supplier of high value-addedproducts and components in the areas where Hong Kong already excels; a regional centre for supplying profissional and technological talents and services; and a marketplacefor technology transfer between the Mainland and the rest of the world. The tax structure in Hong Kong is simple, and the profit tax and salary tax rates are to remain unchanged despite a fiscal deficit. Moreover, to increase the attractiveness of Hong Kong as a business centre, the re-export declaration charges have been slashed by half, and merchant shipping registration fees have been reduced 1141. In response to the sluggish economic performance, the government put forward several measures to prop up the economy in late May 1998. In an effort to improve 117
the liquidity of the banking sector, the Hong Kong Mortgage Corporation has streamlined the purchase program for residential mortgages [141. In June 1998, the government further announced another package of economic relief measures aimed at easing the credit crunch, stabilizing property prices and easing costs of families and businesses. These measures include exempting interest income earned locally from profits tax,and raising the size of the Credit Guarantee Scheme (CGS) in order to help small and medium enterprises (SMEs) to obtain loans from lending institutions [141. According to the United Nations' World Investment Report, Hong Kong ranked the second largest source of outward foreign direct investment in Asia in 1998. Total investment outflows from Hong Kong stood at US$18.8 billion in that year. Apart from the Chinese mainland, other Southeast Asia developing countries are major recipients of capital from Hong Kong. In terms of cumulative amounts on approval, Hong Kong is the largest investor in the Chinese mainland, and is among the leading investors in Indonesia, Taiwan, Thailand, Vietnam and the Philippines [3]. Hong Kong has continued to be the world's leading exporter of garments in 1999 [3]. However, a general pick-up in demand in Asian economies and a rebound in exports to the mainland supported a significant upturn in Hong Kong exports. Domestic consumer spending also increased. These factors encouraged the Hong Kong economy to be resuscitated [3]. Hong Kong remains a favorable business center for overseas investors despite its short-term economic weakness. It is also a regional center with the world's busiest ai ort in terms of international cargoes, the world's 2"d busiest container port, Asia's 2"';plargest stock market, and Asia's 3'd foreign exchange market in terns of turnover.
REFERENCES 1.
2. 3.
4. 5.
6.
7. 8. 9.
Tony Fu-Lai Yu., Entrepreneurship and Economic Development in Hong Kong. 1997, London and New York: Routledge, London and New York. 2. Hong Kong Trade Development Council., Hong Kong into 21st Century: Scoreboard for Economic Success of Hong Kong, . 2000, http://www.tdctrade.com/ TDC, T.H.K., Hong Kong and China Economy: Economic & Trade Information on Hong Kong.2000 Hong Kong TDC. Hong Kong Trade Development Council., Hong Kong and China Economy: Economic & Trade Information on Hong Kong, . 2000, Hong Kong http://www.tdctrade.com Hong Kong. Census and Statistics Department, Annual report on the consumer price index. 1998, Hong Kong: Hong Kong: The Section. 6 Anon., People's Republic of China--Hang Kong Special Administrative Region: Recent Economic Developments, April 1998, International Monetary Fund: Washington, D.C. p. 56. Hong Kong. Census and Statistics Department., Hong Kong social and economic trends. 1980, Hong Kong: Hong Kong : Govt. Printer The Editorial Board of the Almanac of China's Textile Industry, Almanac of China's Textile Industry. 1996, Beijing, China: Textile Press of China. 266267. Sung, Y.-w., Flexibility and Hong Kong's competitiveness. Hong Kong Economic Journal Monthly, 1987. February, (No. 119 (text in Chinese)). 118
10. 11. 12. 13. 14. 15. 16.
17.
Anon., How to break the monopolize oil market in Hong Kong, in Hong Kong New Newspaper. 2000: Hong Kong. Anon., People's Republic of China-Hong Kong Special Administrative Region: Recent Economic Developments, . 1998, International Monetary Fund: Hong Kong. p. 1-92.. Hong Kong Trade Development Council., Profiles of Hong Kong Major Services Industries: Import and Export Trade, . 2000, Hong Kong Trade Development Council. http://www.tdc.org.hmain/si/spimex.htm Tung, C.H., Policy Address of the Hong Kong S A R Government, . 1998, Hong Kong Government: Hong Kong. Hong Kong Trade Development Council., Hong Kong & China Economies: Economic & Trade Information on Hong Kong, . 2000, Hong Kong TDC. http://www.tdc.org.hk Michael J. Enright ,Edith E. Scott , David Dodwell, Hong Kong Advantage, 1997, Oxford University press, Oxford New York Hong Kong Census & Statistical Department, NationaZ Accounts and Imvard Investment: Gross Domestic Product at Current Prices by Economic Activity, 2000. http://www.info.gov.hk/censtatd/endhkstat/hkidnataccounthat account index.htm1 ELSIE LEUNG, The legal System in Hong Kong, Hong Kong Department of Justice, 1999. http ://www.info .gov.Wjustice/systedl/index.htm
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12 SWOT Analysis for the Hong Kong Denim Industry
12.1 STRENGTHS
After comparing the clothing manufacturing sectors in several countries, Hong Kong was viewed a place where you can get anything you want-any garment, in any material (cotton, wool, synthetics, fur, leather) at a competitive price, acceptable quality and delivered on time [l]. Hong Kong's textile and garment industry has been dominated by small- and medium-scale enterprises. Certain types of product, such as woven garments, involve a series of processes that are labour intensive. The small garment firms in Hong Kong, which did not possess any automation equipment, fitted into this kind of production and were able to provide a wide range of styles at low cost [2]. For small firms, efficient communication and quick response to external change is possible. It is generally agreed that the industry has been able to produce small quantities of high quality garments at short notice [3]. Firms were ready to adjust their production according to changing requirements of international markets [4]. To maintain such competitive edges, manufacturers in the industry tended not to expand their production capacities. Furthermore, manufacturers in the industry avoided longterm commitments (the payback period of the enterprise was always less than five yeas) ~41. Subcontracting activities are common in Hong Kong's textile and garment industry. After receiving orders from local trading firms, or directly from overseas buyers, many manufacturers subcontract a part of production processing to other factories [4]. 12.2 WEAKNESSES
Most textile and garment firms in Hong Kong do not aim at creating new fashions. Instead, they focus on garments which consumers demand most. Few enterprises regarded their products as unique either in the Hong Kong or overseas markets [4, pp931. Most garment manufactures imitate others products; some simply copied exactly from other manufacturers and some copied with some modifications. 120
Table 12.1 SWOT analysis of Hong Kong denim industry 0
0
0
0
0
0
0
0
0 0
0
0
0
0
0 0 0
0
0
0
Strengths Experience of international market success Knowledge of international and national rules and regulations governing clothing exports Managing production processes to keep costs low and profit margins high Expert at co-ordination of multi-country production systems Good at filling large volume orders of fairly sophisticatedapparel in a short time (QR) Knowledge of consumer market trends in US, Western Europe and Japan Strong in manufacturing of denim apparel Small and flexible firms that are very adept at learning from market leaders Entrepreneurialdynamism International form of legal system Open and fiee market economy Weaknesses Weak at new material innovation Growing disadvantages in supplying US market 0 QR inventory management -small lots shipment 0 Unwilling to accept unsold inventory Rejuvenating industry’s leadership - fewer managers and young people working in HK denim industry Dominant role of small enterprises- short term outlook and lack of R&D capacity Paternalistic corporate culture Nmow range of export markets Weak in technology development, utilization and commercialization Weak R&D culture and technological capabilities Reliance on price oriented strategies and competition in price-sensitive market segments Shortage of quality scientists and engineers
0
0
0
0
0
0
0
0
0
0
Opportunities Prolonged denim 0 widely accepted and versatile Emerging Asian denim market 0 Possess factories in the countries 0 Size and culture fit of HK designers and manufacturers HK as emerging fashion center in Asia 0 Become fashion leader in Asia Lack of well-known Asian labels 0 Develop leading brand names of Asia 0 Regional fashion distribution network Casualisation in clothing trend
Threats Emergence of Mainland denim companies 0 Overseas retailers may side-step HK 0 HK operations in China - breeding ground for Mainland entrepreneurs 0 More familiar with Mainland clothing market New competitors in the Americas - Mexico and parts of Caribbean 0 Lowtariffstatus 0 Close to the market - QR New competitors in East Europe 0 Close to the market 0 Lowtariffstatus 2005 ATC quotas - phase out 0 Eliminate HK’s protected access to US and EU markets Concentration in US clothing retail market 0 Increasing bargaining power 0 Lower manufacturer’s margin 0 Increased manufacturer’s service 0 Reduced order size and delivery time
To catch up with world fashions, the manufactures usually adopt new designs by paying license fees to frrst-class designers all over the world [4]. In garment production, Hong Kong manufacturers have been late adopters of technology, and didn’t want to commit to large investment. A survey in 1989 revealed that most textile and garment firms, large or small, still used outdated equipment and procedures. Many techniques depended on manual labour [4]. The level of Hong Kong firm’s technology has historically been lower than that of parent firms or overseas competitors [5]. Similarly, a manpower survey conducted by the Hong Kong Training Council revealed that the textile and garment industry largely employed low-
121
skilled workers [6].The industry was also found not to have experience in innovation at the design, processing, or production stages of manufacturing [5]. Innovations in textile and garment production through R&D were seldom undertaken in Hong Kong and the manufkcturers were rarely interested in them [4]. The denim industry in Hong Kong is facing increasing difficulties due to changes in the operating conditions in Hong Kong. The operating environment is locally and internationally perceived as one of the industry's greatest weaknesses. Operating costs in Hong Kong have been rising rapidly in recent years, increasing pressure on domestic manufacturers. Hong Kong's costs of electricity and oil are among the highest of the major textiles producing countries, and the operating costs for Hong Kong's retail sector are heavily dependent on the cost of retail space, which in prime locations are higher than in Tokyo or New York [7]. The Hong Kong government introduced strict rules to control pollution in the 199Os, and there are basic and sewage charges levied. The water costs for Hong Kong manufacturers are really high, effectively wiping away a big part of the net profits of the denim industry [7]. The Hong Kong denim industry also experienced increasing difficulty in finding workers. Young entrants to the workforce today have many attractive alternatives in the service sector and other industries, as Hong Kong denim manufacturers are unable to offer the degree of wage increase necessary to compete in the labour market. The existing workforce is overage and internally not competitive [7].
12.3 OPPORTUNITIES A big opportunity for the Hong Kong denim industry is the potential market in the Chinese Mainland. China's economy has developed quickly, and is emerging as a giant in the world. The consumptive power of the Chinese people has increased much in the last two decade, as an open window, western lifestyle spread into China. Denim is a popular category, liked by the young, and Hong Kong denim producers are close to the Mainland and familiar with the business environment there. There are many successful examples of Hong Kong enterprises being very successfbl in the Mainland, such as Jeanswest, Bossini, and Giordano. Entering the 2 1st century, Hong Kong will link with the Mainland more closely, and this will help the Hong Kong denim business to expand in the Mainland. Not just China, but other Asian developing countries, such as India and Pakistan, are also potential markets. These countries not only have huge populations, but their economies are registering strong growth. These factors will lead to increased spending on clothing. 12.4 THREATS
Immigration fi-om the mainland in the 1950s and 1960s brought a pool of low wage labour, and this was undoubtedly a major factor contributing to the dramatic growth of garment manufacturing in Hong Kong. This advantage has gradually been eroded over time. Rising labour and production costs in recent years have reduced the competitiveness of denim products made in Hong Kong. On the other hand, China has an ample supply of cheap labour, and Hong Kong garment manufacturers have 122
relocated their production to China [4]. The labor cost in the 1996 was US$ 4.9 per hour in the Hong Kong textile sector, and compared with the costs of producers in developing countries of US$ 2.02 per hour in Turkey, US$ 0.58 per hour in China, US$0.56 per hour in India, and US$0.43 per hour in Pakistan, it was very high. Further, other denim export countries have expanded and improved their capabilities in past years. Moreover, as the developed markets are putting a higher value on short lead times and responsiveness, supply sources closer to the consumer's market are became more competitive 171. The Hong Kong share of the US and EU market was challenged fiercely by developing countries such as Mexico, Tunisia and Turkey. A threat to the Hong Kong denim industry also comes from the changing consumer interests in clothing products. In recent years, denim jeans have been challenged by khaki twill slacks and other casual wear products. On the other hand, consumers in the older age brackets, who tend to spend less on clothing, will form a larger proportion of the population, and the elderly are not the core consumers group. Such consumer challenges have significant implications for the denim industry. As Table 8.3 shows, the Hong Kong denim industry has a number of strengths in its manufacturing management, export-orientation and flexible small enterprises. But, the industry is weak at design and new product development, and is facing serious threats in its important traditional US and West European markets due to trade regionalism and retail concentration. Hong Kong denim manufacturers are facing stronger and stronger competition from Mainland China, Mexico, East European countries, South East Asian countries and other developing countries such as India and Pakistan.On the other hand, the industry has very good opportunities provided by casualisation trends in the developed countries and the emerging middle class consumer markets in Asian countries. In summary, the Hong Kong denim industry is relatively healthy with many important strengths, but it also exhibits a significant number of weakness. Importantly, some characteristics that proved successful in the past are gradually become constraints on further growth. To gain sustainable competitive advantages in the new millennium, the Hong Kong clothing industry has to defend itself fiom the competition from developing countries and avoid the threats fiom trade regionalism and retail concentration in the Western countries. To achieve this goal, the industry needs to capitalize on the opportunities by fully utilizing its own strengths in manufkcturing knowledge and management and overcome its weakness (i.e. develop as new strengths) in design, product development and marketing [8]. REFERENCES 1.
2. 3.
4.
Morawetz, D., W h y the Emperor's Clothes are not Made in Colombia: A Case Study in Latin American and East Asia Manufactured Exports. 1981, Oxford University Press. Thefiture of Hong Kong's garment industry. Economic Reporter, 1988. September (lo), p.5 (text in Chinese). Hong Kong Government Industry Department, Techn-Economic and Market Research Study on Hong Kong's Electronics Industry 1988-89. 1991, Hong Kong: Hong Kong Government Printer. Tony Fu-Lai Yu., Entreprensurship and Economic Development in Hong Kong. 1997, London and New York: Routledge, London and New York. 2.
123
5.
6.
7. 8.
Hong Kong Economic Survey Ltd., Building Prosperity: A Five Part Economic Strategyfor Hong Kong's Future, Hong Kong: Building Hong Kong's Prosperity Society, 1989 Hong Kong. Tuan, T.B.L.a.C., Industrial evolution and changes in trade environment: a case study of consumer electronics and textile/garrnent industries in Hong Kong, in Research in Asia Economic Studies, M.C. Dutta,Editor. 1988, London: JAI press. Kurt Salmon Associates, 1995 Techn-Economic and Market Research Study on Hong Kong's Textiles and Clothing Industries. Vol. 1. 1996, Hong Kong: Hong Kong Government Industry Department. Yi, L and Newton-E., Design and Fashion Innovation: A Competitive Strategy for Hong Kong Clothing Indushy. 30(7) 46-50, 1999.
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13 Strategy for the Hong Kong Textile and Clothing Industry
13.1 HONG KONG TEXTILE AND APPAREL INDUSTRIES Hong Kong textile and apparel industry was set up in 1950s. Many textile manufacturers moved fiom Shanghai China in 1950s and received investment fiom English banks and foreign banks. After half century developing, Hong Kong textile and apparel exports played an important role in world textile and apparel trading. Hong Kong textile and apparel industry exported 380 millions dollar in 1963 or 4.1% of world total export. After ten years, Hong Kong's market share in the world was 5.8%. In 1996, the export value was 36.13 billions dollar and accounted for 11.5% world export as one of the leader of exporter of textile and apparel [ 13. In the later of 1990s, the sectors contributed 24.9 percent ($20.4 billion) of value-added of Hong Kong manufacturing industries and accounted for 41.6% Hong Kong domestic export or 5.8% of Hong Kong total exports [2 p.6-4bl as Hong Kong's top industrial employer and exporter in 1997. Furthermore, the Hong Kong textile and apparel industry, having survived the Asian financial turmoil, remains its strength as a leader in the world's textiles and clothing trade. It has secured a moderate growth of 1.6% in 1998 regardless of the overall contraction of the manufacturing sector in the 1990s. ~31. The garments industry is one of Hong Kong major export earners, accounting for 39.7% of total domestic exports in 1998 [4]. The steadily of the Hong Kong textile and clothing industry in the turmoil seems own to a cluster existing which we will discuss below. Table 13.1 Hong Kong textile and apparel industries' market share in world exports Hong Kong textile and apparel industries' market share in world exports 1963 1973 1996 Hong Kong export value (billion dollars) 0.38 2.09 36.13 World (billion dollars) 9.28 35.84 313.54 Market share (%) 4.09% 5.83% 1132% Source: Textiles and Apparel in the Global Economy page 185,189 and 194
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13.2 HONG KONG GARMENTS CLUSTER
13.2.1 Cluster In the way of stage-wise progression, strategy develop history can be divided four steps. First came Financial Planning (1950s and earlier), then Long Range Planning (1960s), then Strategic Planning (1970s), then Strategic Management (1980s), and Globalize & Regional Strategy (1990 Michael Porter) [ 5 ] . The tools of Strategy in its developing steps were Learning Curves (late 1960s), The Growth-share Matrix (late 1960s), Strategic Business (1970), The Industry Attractiveness-Business Strength Matrix (early 1970s), Profit Impact of Marketing Strategies (mid- 1970s), Life Cycle Analysis (1970s), Scenario Analysis (1970s), Five Forces (1980), Net Present Value (early 1980s), Value Chain (mid-1980s) and Cluster (1990s) [5] [6]. After entering 1990s, the hot topic in management strategy was globalization. Quickly developing information and telecommunications technology drove companies to be competitive in global economy. Input factors such as labor force, managerial skills, financial capital, technology and etc. are eminently transportable across borders. The globalization minifies the disadvantage for the firms on high labor costs and storage of natural source in competition. People regarded that globalization as the current most important strategy for company or industry. Although, the globalization can just mini@the disadvantage for the firms, it cannot create advantage per se in the competition. There are quite indications that firms concentrated in some location, close linked with special suppliers and f m s that had related skill, same input and so on, usually own advantage in competition. It is apparent that clothing industry in Abruzzo (Italy) and Lombardy (Italy), textile and clothing industry in California (USA), fashion and textiles industry in Quebec (Canada) and etc. gave the evidences. Michael Porter introduced a new concept "cluster" in his book "The Competitive Advantage of Nation" in 1990. The cluster concept represented a new way of thinking about national, state, and city economies, and pointed new roles for companies, governments, and other institutions striving to enhance competitiveness [7]. And now, economists and market analysts look cluster analysis as the standard way in analyze regional economies [S] [9]. In cluster theory, competitive advantage is determined by productivity instead of factors of production (labor, capital, or economy scale). "A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities"[lO]. As Porter pointed, a health cluster is the age long source of the company or industry competitiveness [l 13. Cluster also is a bridge that links firm management and regional or national economy together. Five elements constitute a successful cluster, they are: (1) Advanced infrastructure exists in the geographic area. (2) A set of supplier firms provides the highest quality and most cost-effective components and services to the industry. (3) The cluster must be comprised of numerous individual firms competing with each other to continually improve products, reduce costs, and sharpen corporate strategies that keep them competing for market leadership. (4) A strong global market for the firm's goods or services and sophisticated and demanding local customers must exist to maintain the pressure for innovation. (5) Government removes obstacles away fiom the growth and upgrading of industries, and cooperates with institutions (for example, university, 126
standards agencies, and trade associations) to provide supporting on training, education, research, information, and etc. The five aspects link companies and institutions with efficiency, effectiveness and flexibility, promote both competition and cooperation. Cluster effects regional firms' competition by increasing the productivity, driving innovation and stimulating new business formation creation. Cluster motivates and measures productivity improvement through firms better accessing to employees and suppliers, better alternative to vertical integration, easy finding specialized information, and linking complementary forms in existing cluster. Secondly, cluster increases the firms'ability to innovation through sheer pressure (competitive pressure, peer pressure, and constant comparison), more opportunities innovation adoption, and better match with buyer's requirements. Finally, new suppliers, easy perception of gaps in products and services, few barriers and more resources in cluster, promote new business formation [lo]. A cluster could be born due to historical circumstances in a location, arise from sophisticated local demand, prior existence of supplier industries, related industries, or seed provided by previous cluster [7p.2371. The innovation in local company and chance also are root for cluster birth. Cluster development often becomes specialized suppliers emerge; information accumulates; local institutions develop specialized training, research, infimtructure and appropriate regulations; and cluster visibility and prestige grows [7 p.2401. A successful cluster may prosper at least for decades, however, cluster atrophy and decline can also be found. Internal rigidities are important reason for the cluster decline, which diminish productivity and innovation. External threats, technological discontinuities and buyer needs changing, are the most two important factors result in cluster decline [7 p. 2441. 13.2.2 Hong Kong existing garments cluster A team in Harvard Business School, leading by Michael Porter, surveyed Clusters in thirty-five countries (areas) in the world, included Hong Kong. The results indicated that there were ten clusters in Hong Kong including garments, air cargo, civil engineering, electronics, filmmaking, fhnd management, sea cargo, telecommunications services, tourism, and trading clusters [12]. The Hong Kong garments cluster also was mentioned in the book "Hong Kong Advantage" [20]. The numbers of dynamic 'clusters' were the source of Hong Kong economic energy, which related to each other, drew upon common skill bases or inputs, and reinforce each other's competitive positions through dynamic interaction. However, in above references, Hong Kong garments cluster just was in a name or summarizes. In the following sector, we would argue the existing Hong Kong garments cluster in detail. Inji-astructure In the view of a cluster, Hong Kong has well-developed physical infrastructure strengths in many areas, including its busiest container seaport, third busiest airport, and telecommunications system. And the corporations in Hong Kong are taxed at a low fixed rate with no surcharges. This corporate tax rate is the lowest of any industrial country or developing country in the Asia and Pacific region [131.
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13.1 Hong Kong existing garments cluster Further more, entry barriers for industry were really low in Hong Kong. Hong Kong is an open market that no concessions are offered to any investment or industries or for companies, but also no limitation on business forms. The foreign investment was not enacted incentive, but the government made efforts to improve investor protection. No duties are imposed on imported goods, except a small number of goods; no special legislation encourages export incentives. No specific incentives are offered to invest in other countries [131. The sound legal system has played a vital role in Hong Kong's past success. The rule of law begins with individuals and their right to seek the protection of the courts, in which justice is administered by impartial judges. It protects the freedom of individuals to manage their affairs without fear of arbitrary interference by the Government or the improper influence of the rich and powerful. Its starting point is the individual but it encompasses the whole of society. The existing Basic Law provides for the continuation of the rule of law and the judicial system beyond 1 July 128
of 1997 with no fundamental changes, and will continue to be essential for Hong Kong's future. The common law and all the laws previously in force in Hong Kong, except for any that contravene the Basic Law, are maintained; the judicial system continues to operate fairly and independently as before [ 141. The advanced infrastructure strengths made up the weaknesses of Hong Kong domestic nature sources, high costs in land rent and etc. Future more, Hong Kong's has internationally recognized legal system, favorable corporate tax rates and open market, which were untouched after return to China, providing a sound foundation for the garments cluster developing. The well-developed infrastructure is one of important elements to Hong Kong garments cluster's competitiveness.
Government and institutions The government in Hong Kong has traditionally adopted a policy of nonintervention toward the regulation of private business and industry, and has actively promoted a free-enterprise, free-trade economy. In his first Policy Address, the Chief Executive of the Hong Kong S A R reiterated that Hong Kong's development strategy would continue to be based on the principles of a free-market economy, prudent fiscal policy, and maintaining a sound legal system [131. In the policy address by the Chief Executive in 1998, he reiterated that the government would work on enhancing Hong Kong's economic vitality and promote sustained economic growth; raising the quality of education, starting from basic education; leading the Civil Service in an open government and together build--a stable, free, democratic, equitable and compassionate society; a decent society with a level playing field and fair competition under the rule of law; a world class cultural, educational, and scientific research center; a society proud of it national identity and cultural heritage. Further more, he announced [15], on the basis of the recommendations from the Commission, that to realize this vision, Hong Kong need to become:
0
a leading city in the worldfor the development and application of information technology; a world class design andfashion centre; ... a leading international supplier of high value-addedproducts and components in the areas where Hong Kong already excels today; a regional centre for supplying professional and technological talents and services; and a marketplace for technology transfir between Mainland and the rest of the world.
On the institutional side, the government has established several organizations in an effort to promote Hong Kong's manufacturing and services industries, including the Hong Kong Productivity Council, the Hong Kong Trade Development Council, the Industry Department, the Hong Kong Export Credit Insurance Corporation, and the Business and Services Promotion Units [13] operated effectively and efficiently, to provide service on trading space enlarging, vocational trading, technology improving and productivity enhancing. One thing need sing praises that the government and institutes has built a set of public information network to encourage information flowing. To textiles and garments sectors, there was some relative information resources in Hong Kong as listed in Table 13.2.
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There were also many Hong Kong universities commit the textiles and garments development in different areas (See Table 13.3). The Institute of Textiles and Clothing in the Hong Kong Polytechnic University has maintained the exclusive role in the provision of textile and clothing education in the tertiary education sector. In addition to academic education in technician, technologist, and executive levels for the industries, the Institute also assists the industries by undertaking research and consultancy services. The Hong Kong University of Science and Technology (HKUST) respond for 3D Garment Program and HKTAIGA (A communication infrastructure for Hong Kong textile and apparel industry global application). Three universities, the Hong Kong University of Science and Technology (HKUST), Chinese University of Hong Kong (CUHK) and the Hong Kong Polytechnic University (pOLYU), cooperated to develop an Internet based system for souring and trading of fabrics. City University of Hong Kong developed multimedia document and workflow management system to help industry improve productivity. The Chinese University of Hong Kong (CUHK) developed an image database management system for textiles and clothing. Suppliers Hong Kong just with more than 1,100 hundreds square kilometres areas has poor nature source. The major raw material for textile and garment industry was oil, natural gas or other natural fiber, which was scarce in Hong Kong. In the aspect of suppliers, advantage from the local dyeing, weaving, knitting, and accessories industry supplied strong supporting to the Hong Kong garments cluster. Benefited from its favorable taxed rate, free economy and open market, firms could source material, machinery, and accessories from other countries to make up the shortage in domestic. Many financial institutions and management consultants located in Hong Kong, from local and international, provided professional service on financial and management to the Hong Kong garments cluster. 'Hong K ong ' information sources ill Table 13 2 Texn'1es and garments reIatrve
GIC TDC ID HKTAIGA HKCAINS IGS2000 Prima Vision Gerber TP-CSS
Hong Kong Government Information Center http://www.info.gov.hk/ Hong Kong Trade Development Council. http://www.tdc.org.hk/ Hong Kong Industry Department http://www.info.gov.hk/id/ Communication infrastructure for Hong Kong textile & apparel industry global application. Developed by the Industrial Engineering and Engineering Management Department ofHKUST. http://hktaiga.ust.hk/ Hong Kong Accessory Information Network System. Developed by the Industrial Engineering and Engineering Management Department of HKUST and the Clothing Industry Training Authority (CITA) Integrated garment system, !PC information processing Consultants ltd. Color CAD systems for the garment and apparel industry. Prima design system Ltd. http://www.prima.com.hk/primalmain.htm Product data management. Gerber Garment Technology. http://www.ggt.com/ Three principle client/server solution garment system module. Three principles computer service Co. Ltd. HK
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Table 13.3 M ASD (for textiles and garments)
HKCAINS HKTAIGA HKfab CityMerchant Montage
jor textile and clothing related research projects in Hong Kong Part of Area of Strategy Development, focused on textiles and garments. Developed by Institution of Textiles and Clothing Department of Hong Kong Polytechnic University http: ffwww.asd.polyU.edu.& Hong Kong Accessory Information Network System. Developed by the Industrial Engineering and Engineering Management Department of HKUST and the Clothing Industry Training Authority (CITA) Communicationinfrastructure for Hong Kong textile & apparel industry global application. Developed by the Industrial Engineering and Engineering Management Department of HKUST. http:flhktaiga.ust.lW An Internet based system for souring and trading of fabrics. Developed by HKUST, CUHK and HK POLW. Multimedia document and workflow management system. Developed by MADLab, Dept. of CS, City University HK http:/f icg.cityu.edu.hk/madlab/citymerchand Image Database Management System. Hong Kong Chinese University. http:ffwww .cse.cuhk.edu.hk/-viplabf
Enterprises In the garments cluster, enterprises complementary products and to companies related by skills, technologies, or common inputs, including fur firms, leather b s , toy firms, tie firms, which were had competitive advantage in the international or regional market. Others such as scarf firms, footwear fums, gloves firms, hat h s , and packaging firms also were famous. The existed complementary products and to companies provide potential source to innovation, better access to skilled labor, and accessories suppliers. Channel and customers Hong Kong has more than 6 million populations with high purchase power in the Asian-Pacific area. In the nearest decade, with an efficient network of information, mass media, and high technology have together created a global communication system, Hong Kong has become a important city in the world, especially in SouthEastern Pacific Area. The Hong Kong domestic consumers pay a lot of attention of their appearance. They have good test on clothing and are sophisticate, which was an important consumer group. Meanwhile, the Hong Kong garments industry focused on the international market rather than just on the domestic. The US and Europe were the two most important markets to the Hong Kong garment industry. The trading sector has been developed since the middle of the nineteenth, played a vitally role in the Hong Kong economy developing history even today. Traditional intermediaries are complemented by Hong Kong firms, which match sources of supply with source of demand on a global basis. By the strong help from the government, Hong Kong trade jobber enjoyed a large trading space, as Hong Kong is a member of WTO and being a free port. The Hong Kong garments industry in the cluster had competitive advantage in the international competition for long time, which based on a well-developed infrastructure, close linked with companies or products related by skills, technologies, or common inputs, got special supply from Hong Kong advanced financial service and management consultants, and supported by Hong Kong government and institutions. However, it would not be optimistic after we studied the SWOT (Strength, Weakness, Opporhmity, and Threat) showed in chapter 12. The employment of the 131
Hong Kong textiles and clothing industries was peaked in the 1980, which more than 390,000 people worked in 14,000 enterprises. However, the numbers employed in Hong Kong textile and clothing manufacturing have declined rapidly over the past decade, the same as Western Europe, United States and Japan. In 1997, there were just about 5,500 establishments in the Hong Kong textiles and garment sectors, providing jobs for almost 100,000 people [2]. The core business style of the Hong Kong garment firms were OEM, which was more difficult in current competition that the costs, especially the labor costs in really high in Hong Kong now. Although the current Hong Kong textiles and clothing industries had strengths in flexibility in production, knowledge of international and national trading rule, greater sensitivity to the diverse demands of customers, expert in coordination of multicountry production systems, adept at learning fiom market leaders, and entrepreneurial dynamism, the industries were weak at designing, R&D culture and technological capabilities, producing clothing made of synthetic fibers and latest fabrics and etc. Meanwhile, the industries faced threats fiom other low labor costs manufacturers, the market concentration in US and EU, and changing quota system. Hong Kong textiles and clothing industries should grasp the opportunities, which from new clothing consumption trends, emerging Asian clothing market, and etc., to solid and explore it competitiveness in the next century. There is an urgent need to study how the industry can sustain and enhance its competitiveness. 13.3 TEXTILE AND CLOTHING INDUSTRY DEVELOPING STAGES MODEL Peter Kilduff, developed a model to describe the rule of the textile industry developing stages after he surveyed many countries' textile industry developing history [16]. The model divided the textile industry development into eight stages, which was based on six-factor judgments, including production, international trade, product capacity, industry structure, industry strategy and national economy/govemment policy, listed in Table 13. 4. The first stage is maintaining period, which was the beginning period of one national textile and clothing industry development. Majority of the work in textile was still done by hand in cottage industry used natural fiber. In the same time that little product imported and exported. The economy of the country was always agricultural orient and the domestic market was in small size with low purchase power. The second stage is takeoff period, also was called as primitive industrial period. In the period, the production increased quickly, the clothing export and fabric import grew, the industry strategy was to enlarge the clothing industry to process big order from other countries. The economy of the country still was in agriculture-orient and market still small. The third stage is rapid development period, when the clothing export continues growing; meanwhile, the textiles self-supply capacity also growing. The textile industry vertical integrated, especially in down-stream integrated and more products were produced. The business style mainly was process orientation, and competitive advantage in large order processing. In the period, beginning industrialization and urban economy appeared in the nation, however, the domestic textile products market still small.
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More kinds products and developed manmade f M r production
4th (Merging period)
Export shrink but import increased
Ckhing and textiles export increased
Clothinghextiles importhiport increased
I
8th (Creative linnovaton period) kksioned produds
I
v
IFashion products
Brand, high-fashion, High value-added 7th (Creative highquality and high-tec products export or integrationperiod) products production import increased
6th (Flexible and low integration period) Production reduced
primitive industrialeconomy Vertical merge and urbanliatin
ICreatve innovation
Gbbalbation
Fashion-oriented, designed products and level of service offered
Agricultural economy
Agriwkural orient
Most advanced lmanutaduring Itechnology
Most advanced products manufacturing
High industrialiedeconomy
Large domestic makt
Market size grew and owned a group of middle-calssconsume
I
Industrydivision Imore ISpedalKed beveloped industrialeconomy1Strong demand
Deeply horizontaland Vertical integrated Mature industrialized economy Strong demand
Horizontal or Original design and vertical brands products integrated and marketing reduced
Burgeoning industrialized economy
Enlarge quickly
Small size
Small size, Low purchase power
Small size, Low purchase power
National Economy/ Government policy Domestic Marke
Fast industrialiedeconomy Process middleHorizontal and and urban polulationgrew class products and vertical merge quickly
Process in bulk
Process in bulk
Improve products quality and relocated Horizontal or production and High value-added vertical investment products integrated
Improve products value-added and
Down stream integration
Enlarge clothing industry
Horizontal merge
Industry Structure
Clthing/textile importlexport increased
Production Capacity Cottage industry
Strategy
. Industry
Maintaining was their Little import or export goal Small
5th (Transitional (Transformational High-teclfashion, and Clothin import ) periid) industraltextiles product increased
Used
development period)
More man-made fiber
Simple products used naturalfiber
2nd (Takeoff period)
3rd (Rapid
Simple products used naturalfiber
Products
1st (Maintaining period)
Stages
International trading
Table 13.4 Textile and clothing industry developing stages model Textile and Clothing Industry Developing Stages Model
The fourth stage is integration period, when the industry growing trends slow, clothing export got the peak and textiles import increased fast. The industry horizontal and vertical integrated and worked on improving product quality. The business focused on processing middle-class products and owned advantage in basic mass textiles and clothing business. Meanwhile, the national economy fast industrialized; the urban population grew quickly. The domestic market enlarged quickly. The fifth stage is transitional (transformational) period, when the industry became mature. The production of clothing, fabric and yarn was reducing; products developed to high quality, high tech, and fashion; the mass production shift to other low cost areas; clothing export declined; man-made fiber played more and more important role in the industry. High quality, fashion fabric, and clothing import grew. The industry strategies were product development, innovative design, brand building, and marketing. The industry structure trended optimized after horizontal and vertical integration. The economy was burgeoning industrialized. The market grew and owned a group of middle-class consumers. The advantage of the industry depended on manmade fiber and its products. The Sixth stage is flexible and low integration period, when the production of clothing, yarn, and fabric was downturn; the and the index of the economy may be negative; the export or import of textiles and clothing were high; the strategy of the industry were focused on fashion-oriented, design, and level of service offered. The industry produced brand product or original designed products. The integration of the industry became low not matter in horizontal or vertical. The economy was high industrialized; and the scale of the domestic market was large and free competition. The advantage of the industry was in high fashion or high tech products. The seventh stage is creative integration period. In the period, the economy was maturity with low growing rate. The products were high fashion, quality, high tech or brand products, mass production sift to other countries mostly, except some firms owned special technical and commercial skills. The industry strategies were production innovation, advanced technology, design, marketing skill, quick respond and high quality service proving. Middle enterprises were the industry main component, produced core item products with global operating. High quality, fashion products obtain in the domestic market. Distribution channels integrated with other sectors, for example, retailing combined with information technology, consultation, and high tech development to provide high quality service to consumers. The eighth stage is that innovation and marketing operating separate fiom production and distribution. Brand exploring is the core business to the merchandising company. The core business of the industry would be innovation and marketing. Based on Kilduft's model, the Hong Kong textile and clothing industry was at the fifth stage [16], developed fiom advanced in high quality product processing to high fashion and high tech products producing. Now, the Hong Kong clothing industry works on establishing its up market image through design, workmanship and quality. To sustain or enhance the competitiveness of the Hong Kong clothing industry, the Hong Kong existing garments cluster should be upgraded to a fashion cluster to get advantage in the new millennium.
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13.2 Cluster root (birth), growth and decline
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13.4 HONG KONG FASHION CLUSTER DEVELOPMENT The fashion cluster should be more plenteous than the existing garments cluster. A fashion item is seen as a culture product, which are influenced by accepted aesthetic criteria and evaluated by the aesthetic taste habits of consumer. A fashion cluster should be supported by the Hong Kong unique culture. Wide culture convection is necessary to promote unique culture take shape and spread the culture accepted by more people. A fashion cluster also required hi-tech supporting, which provide new material, new tool communicate with consumer (Internet), new machinery, new design technology, and so on. Other kind service, such as technical design service, also necessary that design new style yarn, fiber, fabric, and texture. Testhnspection service provides insurance for the product quality, and more importantly, accurately tests the physical performance of the fashion item. Fashion designers will play a vital in the fashion cluster. The fashion designers dictated fashion by introducing new styles, often extreme, exclusive and original, for fashion followers, manufacturers and the general public. A term of fashion designer is one of a key supporting of the fashion cluster. Another type of designers, function designer, are also necessary in the fashion cluster. Modern consumers require more comfortable garment then ever, function designer major designer functional fiber, fabric and clothing that meet the consumer demand. Academic research, including fundamental and interdisciplinary study should be intensified to promote innovation creating. A fashion cluster conglomerated by well-developed infrastructure, free and fair competitive environment, supplier, competing and cooperating enterprise, fluent distribution channel, and consumer. Innovation would be motivated in the fashion cluster. The fashion cluster will sustain or enhance the competitiveness for the Hong Kong industries, not just only the clothing industry, but also for the other industry in the fashion cluster. It will be the energy source of the Hong Kong economy in the new millennium.
13.5 STRATEGY To realize the vision outlined above, a clear strategy needs to be developed to establish the essential infrastructure for Hong Kong becoming a world class design and fashion center. In studying the new economics of competition, Porter (1998) argued that the enduring competitive advantages in global economy lie increasingly in local things, which distant rivals cannot match, including knowledge, relationships and motivation [lo]. Modern economic map of the world is considered dominated by clusters, which is defined as geographic concentrations of interconnected companies and institutions that achieve unusual competitive success in a particular field. For countries or regions moving from a middle-income to an advanced economy, it is essential to develop well-functioning clusters. To promote cluster formation, government needs to work with private sector to reinforce and build on existing and emerging clusters. Successful new clusters often grow out of established ones.
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13.3 Hong Kong fashion cluster Further, Porter pointed out that there is no such thing as low-tech industry, only low-tech companies that fail to use world-class technology and practices to enhance productivity and innovation [lo]. Textile and clothing industry is very important to Hong Kong economy, has been traditionally considered as sunset industry labeled with low-tech. However, a number of successful clusters in fashion industries have created sustainable competitive advantages for their hosting countries such as Italian
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textile fashion cluster (clothing, scarves and accessories), Italian leather fashion cluster (leather goods, footwear, apparel and accessories) and French fashion industry. Hong Kong has developed the critical mass of a large number of small-medium firms in textile and clothing industry and other associated fashion industries over the last few decades. These f m s have achieved a strong position in the knowledge, relationships and entrepreneur dynamism in textile and clothing manufacturing, export, design and marketing apparel products, together with associated fashion industries such as toys, watches and clocks. Hong Kong is emerging into a fashion center in Asia [17]. Therefore, there is sound potential to develop these existing industries as a world first class cluster in design and fashion of textile, apparel and other fashion goods. As Porter and other researchers suggested [18, 191, productivity, not exports or natural resources, determines the competitiveness and prosperity of any state or nation. Birth and growth of clusters are highly dependent on their productivity growth that is largely determined by the local competition and innovation. For clusters of fashion industries consisting of many small and midsize companies, there is a strong need for collective bodies to assume scale-sensitive functions such as technology innovation, university-based testing facilities, training and research programs, collecting cluster-related information, offering forums on common managerial problems and investigating solutions to environmental issues. This is especially true for Hong Kong fashion industries as the industries consist of dominated small and medium enterprises with weak R&D culture and low technological capabilities. Particularly, the fashion mandxturing industries are facing great threats in their traditional markets and the best opportunity is to become a world class fashion leader targeting the emerging Asian markets. Therefore, Design and Fashion Innovation (DFI) is a key strategy for the competitiveness and prosperity of Hong Kong clothing industry.
13.5.1 Development of R&D infrastructure for the DFI In view of the strengths and weakness of the industry and its threats and opportunities that the industry is facing, there are four major areas of research and development are essential for the DFI, as show in Figure 13.4. The four areas include design innovation, technology innovation, management innovation and information innovation. Design innovation is the key area for a design and fashion center, which consists of two major aspects: fashion design and functional design, as shown in Figure 13.5. Traditionally, fashion design focus on the visual effects in consideration of fabric pattern, color and the style of clothing. Another important dimension of design is the functional performance of clothing in consideration of comfort, safety, ergonomics, protection and survival. In the areas of functional design, substantial scientific research needs to be carried out. Design innovation needs strong support from technology innovation, which covers innovations in textile processing technology, clothing manufacturing, and evaluation technology, as shown in Figure 13.6. Technology innovation afso includes product innovations from fiber, yam, fabric to garment or non-apparel end-of-use products, to which material-fiber technology and engineering design technology need to be integrated to develop advanced materials for design innovation.
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13.4 Research and development for Hong Kong fashion industry
(b) Technology Innovation
(a) Design Innovation
4
-
Textile processingtecfinokgy
ashion design c\esthebc appeal
w Fundional design -comfort, safely ergonomic, protection and survival
afatnic imoMtion
13.5 Design innovations
13.6 Technology innovations
(d) Information Innovation
c) Management Innovation Regionalstrategy 0
Enterprise strategic management Marketing markets
0
&Industrial markets Productstrategy Quality management
-
0 PIS Produd e GIS Geography
Human Resources
--.-13.7Management innovation
13.8 Information innovation
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Management innovation, shown in Figure 13.7, is another extremely important aspect for Hong Kong fashion industry, especially in areas of marketing and branding. Sound research needs to be carry out for development of regional strategy, enterprise strategic management, product strategy, marketing and branding strategy with fidl understand the latest trends in consumer markets and industrial markets. Strategies on quality and human resources also need to be developed to gain sustainable competitive advantages. Finally to increase the productivity of the fashion clusters, it is extremely important to develop and apply information technology in the fashion industries, including intelligent computer aided design, computer aided manufacturing, management information system, decision supporting information system, product based information system and geographic information system, as shown in Figure 5. These information technologies provide innovative and efficient support for the innovations in design, technology and management. For instance, product information system is able to provide the fundamental information and knowledge in industrial markets, consumer markets, technology and fashion on specific product lines for individual firms to make intelligent decisions in developing product strategies, marketing strategies and business strategies. More specifically, the development of R&D infl-astructure for design and fashion innovation should consider the following major hctions: 1. Provide technology, information and research support for fashion design, product development and fabric innovation. Intelligent computer aided design (ICAD) systems need to be developed for fashion design, fabric pattern design, clothing comfort and functional design, clothing wear appearance retention design and consumer purchase and consumption simulation. For instance, the recent development on mathematical simulation of the heat and moisture transfer of a clothed human body can be further developed as a tool to design clothing for the survival and thermal comfort of human beings under various combinations of physical activities and environmental conditions (see Figure 5). ICAD is able to help individual firms to design products from selection of textile fibres to garment style with good estimation of the wear performance of clothing on visual appeal, comfort, appearance retention and even the degree of satisfaction of target consumers before the product is made. Meanwhile, knowledge bases need to be developed on the features and history of traditional Chinese fashion, global national fashion, contemporary fashion designers and trends. On the basis of the knowledge bases, intelligent fashion design system can be developed. 2. Develop and apply information technology for textile and clothing manufacturers to manage inbound logistics, production, outbound logistics, marketing, trading and retailing of textile and apparel products, especially develop Chinese language based software for the operations in the Mainland of Hong Kong firms. Software developments include computer aided manufacturing (CAM) for textile and clothing manufacturing, and management information system (MIS) for quality, operation control, financial and marketing management, and electronic commerce (EDI). 3. Carry out mid-stream research and development in the areas of textile processing technology, clothing manufacturing and apparel product 140
4.
5.
6.
7.
development to assist local textile and clothing manufacturers to move rapidly into higher value added and higher quality markets. Conduct extensive marketing and industry research on the major markets from consumer trends, global industry development, new technology developments, trading and marketing trends to provide the critical information for local firms to make intelligent business decisions. Management decision supporting systems ( M D S S ) need to be developed for the different categories of products and markets, industrial sectors, cultural and national geographic distributions and international trading regulations and pattern. Provide the essential infk-structural support such as consumer research, testing facility and product evaluation for local firms, especially in the areas of clothing comfort and functional perfomance using advanced environmental simulation technology to carry out psychological and physiological test for new product development. Promote co-operation with the Mainland universities and research institutions to assist upgrading the technology level of production facilities of Hong Kong firms in the Pearl River Delta area, specifically in the areas of Chinese language based CAD, CAM and MIS, and textile technology innovations. Provide a forum and place for technology transfer and technological entrepreneur dynamism. Provide training on how to start new enterprises in consideration of product features, competitive analysis, market segmentation, positioning, financial planning, operational planning and human resources planning, business plan preparation and how to seek venture capitals. Provide service to technological entrepreneurs in fashion industry as a technology transfer centre in preparing business plan and introducing venture capital sources. Develop and attract a large number of potential technological entrepreneurs and projects that are ready for commercialisation to establish a comprehensive database on technology innovations in textile and clothing fashion industries. Liaise with various venture capital sources from government, banks and private sectors and provide a marketplace for evaluation and comparison of various potential technological projects to venture into business enterprises.
13.5.2 Implementation of the DFI strategy To adopt the DFI strategy and develop appropriate R&D structure, there are a number of issues to be addressed by both government and private sectors: 1. As small and medium size firms dominate the industry, strong support from
government is needed to carry out the R&D activities in the four areas outlined. Public funded institutions such as universities or research institutes should take the responsibility to develop the necessary R&D infrastructure for the DFI. 2. Mechanisms need to be established to ensure that the R&D activities are focused to support the local industry and advanced technology and products are transferred to local firms efficiently and effectively.
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3. Technological entrepreneurial dynamism needs to be developed to capitalise the research outcomes from the four areas: design innovation, technology innovation, management innovation and infomation innovation. 4. Industrial culture and conventions need to be changed; especially innovative business strategies in marketing, technology and product innovations should be encouraged. 5 . Mechanisms need to be established to develop, attract and retain high calibre managers, scientists and engineers in textile fashion field. If these issues can be addressed successllly, the DFI strategy can be implemented, which is to able to create a number of advantages for Hong Kong clothing industry as follows. Hong Kong can develop into a marketing and product innovation centre, which
has enormous marketing and technology power to sustain its competitive position in the region and in the world. Hong Kong clothing manufacturers are able to upgrade technology level and R&D capacity to increase their productivity. HK firms can avoid relying on price oriented strategies and competing in price sensitive market segments. As a marketing and product innovation centre, Hong Kong can avoid direct competition with Mainland firms. Instead, Hong Kong and the Mainland become mutual beneficial partners, where Hong Kong will become a leading centre in design, technology and product innovation, and marketing of fashion products with targeting to Asian and world consumer markets. Meanwhile, the Mainland can continue to act as a manufacturing base and utilise Hong Kong as a gateway to access overseas markets, even after the ATC quotas phase out in 2005. Without enough marketing and technological innovation power, Hong Kong firms will face stiff competitions from Mainland fms, especially after year 2005. Hong Kong firms can steer clear of the intense competition and threats from East European countries, Mexico, South East Asian countries and other developing countries in the traditional export markets such as EEC and US. With strong marketing and technology innovation power, the fums can diversify their products and business to higher value added markets, particularly the emerging Asian middle class markets. It could be expected that, if the DFI strategy were adopted, the competitive position of Hong Kong clothing industry would be changed fundamentally. The sunset industry image would be transformed into a world class design and fashion cluster that has sustainable competitive advantages through continuous learning and innovation in marketing, design and technology.
SUMMARY The Hong Kong clothing industry is evidently facing a number of threats and challenges: the intensive competition in its traditional export markets f?om developing countries, the phase out of ATC quotas in 2005, trade regionalisms in Europe and North America, retail concentration in the West and casualisation in consumer trends. To combat these threats, the industry needs to develop long term strategies to position 142
itself as a regiondworld leader in design and fashion innovation in the highly competitive world clothing markets. An effective approach is to adopt Design and Fashion Innovation as a competitive strategy. The Hong Kong clothing industry is able to obtain sustainable competitiveness by positioning itself as a marketing and product innovation centre, which can be achieved through world class innovations in design, technology, management and idormation with joint effort from the public and private sectors. As a marketing and product innovation centre, Hong Kong can avoid direct competition with Mainland firms and steer clear of the intense competition and threats from East European countries, Mexico, South East Asian countries and other developing countries in its traditional export markets such as the EEC and the US. With strong marketing and technology innovation power, the firms can diversifl their products and business to higher value added markets, particularly the emerging Asian middle class markets.
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