Textile Wars: Will ‘Made In Italy’ Replace ‘Made In China’?
China’s textile industry is a world beater, accounting for over 60 % of world chemical and synthetic fibre production. Cotton production is lower, but still large, at over 20 % of the global total, ranking only behind India in 2016. The trend, however, is downwards as China is caught between rising domestic costs, persistent technical and distribution advantages elsewhere
A recent decision by a European clothing manufacturer to source its wool supply in Italy, rather than China, is a sign of changing times, but the implications of this wider trend for China are pretty stark. Although it is just one story, and given the scale of the industry worldwide, could never be more than a straw in the wind, it nevertheless represents the kind of granular detail of widely telegraphed changes in China’s economy. And it’s bad news.
This is not necessarily a new trend. Even in textiles, it has long been clear that China is no longer the prime destination for new investment. About a year ago, for example, stories appeared about Chinese investment in cotton processing in South Carolina in the U.S. This particular story, however, showed how low U.S. energy costs were making it worthwhile to locate processing equipment in the U.S.. There were one or two other factors involved in the decision, such as tariffs on raw cotton imported into China, and no tariffs on processed fabrics etc., but nevertheless, the story highlighted a welcome further integration of Chinese investment into global supply chains, and signalled a hoped-for rebalancing, offering good employment in exactly the parts of the U.S. that were thought vulnerable to Trump’s protectionist appeal.
Come November and Trump won South Carolina anyway. But the detail of that story was really about energy costs and raw materials. Labor costs are higher in South Carolina than in China, but no longer so much higher as to discourage the investment altogether. Equally, this investment was part of a pattern of off-shoring from China’s textile industries, although the biggest movement has been towards South East Asia, and very much in search of lower labour costs.
The more recent story in Italy however, is different in that it represents sourcing decisions by European clothing companies. In other words, the cost of factors is no longer simply driving investment decisions by Chinese producers, but seeing those producers undercut when competing for specific production orders.
Again, there is more to it than simple costs. Italian fabric producers are closer to market, so not only is transport cheaper, but timelines between orders and sales are shortened, and in the fast-paced world of high fashion, this matters. But the cost pressures are only going one way. Aggregate producer price inflation (PPI) was measured in January at 6.9 % year-on-year, a five-year high. And labour costs are rising at a eye-watering 12 % approximately.
A further detail hinted at in the Reuters’s article is that quality is also a factor. When cost differences are significant, quality may be less important, but if overall costs are comparable, quality should be decisive in sourcing decisions. If Chinese producers still have a reputation for relatively low-quality textiles, then as the labour cost picture worsens they will likely have nothing left to offer.
Climbing up the Value Chain?
This story is confined to the textile industry, so we should be careful of inferring any wider meaning, but it is one instance where the evidence suggests China’s aspirations do not meet the reality it confronts. At a macro level, China has for years aspired to move up the value chain, to capture more of the higher skilled components of the global supply chain. In keeping with this, China was content for low-value textile industry to relocate to South East Asia in search of cheaper labour. But now, as China’s own costs rise still further, they find themselves competing against long established, higher quality production centres like Italy, and losing out.
While this is, therefore, good news for Italy and bad news for China’s textile industry, it might hint at wider trouble ahead for China. Textile manufacturing, being one of the very first industries to industrialize in the mill towns of Lancashire, England, serves as a sort of industrial bellwether. If China cannot climb the value chain in textiles, with its huge presence in the global textile industry and enormous domestic market for clothing–even increasingly for high-fashion–then this ought to raise wider concerns about their ability to climb the value chain at all.