Textile industry China

Textile is one of China's largest industries; it contributes US$ 420 billion to the national GDP. Exports of China's textile industry were valued at US$178 billion in 2007 and contributed US$150 billion to China's trade surplus. Impressive numbers but China's textile industry is actually facing a crisis that could dramatically change its 'texture", no pun intended. The industry is highly fragmented: 40,000 companies with annual sales above ~ USD 0.5 million and another hundred thousand smaller players which all are facing the same challenges: - Recent appreciation of the Chinese RMB of some 15% percent against USD and reduction of VAT rebates have directly affected already thin bottom line profitability. - Rising competition from lower cost countries (specifically Bangladesh, India, and Vietnam). - Risk hedging of 'large Wal-Mart buyers' splitting orders between countries instead of going "China only". More short term purchasing contracts. - A cotton shortage of 3.6 million tons has lead to substantial increasing raw material prices - Higher minimum wages as a result of China's new labor law KAE's views on the textile industry's future in China • Bloody consolidation across the industry • Larger players going public • Smaller players vanishing • Chinese companies moving abroad to manufacture • Chinese companies acquiring Western textile brands • Chinese companies acquiring Western retail outlets to control distribution a la Zara • Increasing local demand • Moving towards mechanized manufacturing, higher tech • Increase in demand for more innovative textile materials There are some possible short term fixtures China can apply such as reinstating Value Added Tax rebates, import duty exemption of special textile machinery and the usage of more astute financial tools to hedge exchange rates or conclude deals on Euro basis. But time is of the essence -- a recent survey conducted by the Chinese Government shows that two-thirds of China's textile companies are having an average operating margin of only 0.6%. If these companies fail, it will affect some 15 million jobs -- not good news after the Olympic hype.

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YouTube | August 22, 2008

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