Textiles and Apparel—Expanding Production Bases Overseas While Moving Up the Industry Chain

Abstract

The textiles and apparel industry has long been a crucial part of China’s national economy, driving the country’s early development and continuing to be an important industry that generates a trade surplus. The production of textile intermediate goods requires significant investments in capital and technology, while apparel production is labor-intensive. China boasts an extensive, comprehensive textiles and apparel industry chain that shows significant potential for technological advancements in upstream sectors, and it leads the global market in terms of apparel manufacturing efficiency. Given the current global landscape, we believe it is crucial for China to make a steady transition from quantity-oriented textile and apparel manufacturing to quality-oriented manufacturing to ensure its competitiveness in the global economy. This chapter provides a comprehensive analysis of the factors driving the development and transformation of the textile and apparel industry chain, and offers insights to the future.

Changes in the industry chain: Driven by the impact of deglobalization policies, the apparel manufacturing industry is undergoing industrial relocation. The industry may also face new green trade barriers in the future. In response, China is addressing these trade barriers. Although it is currently the world’s largest apparel exporter, China’s export share has declined since its peak in 2013, with countries such as Vietnam and Bangladesh gaining the lost market share. Throughout history, the textiles industry has undergone five strategic shifts, all driven by the pursuit of cost reduction. In the current phase of industrial transfer, garment manufacturers are expanding to South and Southeast Asia. This strategic relocation is primarily motivated by the attraction of lower labor costs and more favorable tax policies. In addition, China’s robust competitiveness in textile manufacturing exports has made it vulnerable to the “decentralization” policies of developed countries.

We believe US-China trade frictions have accelerated the process of industrial relocation. We also think that China’s textiles industry is facing significant environmental pressure. In response, over the past decade, China’s textiles industry has taken measures such as expanding overseas while also developing textile intermediates and establishing close relationships with Southeast Asian countries along the supply chain. China’s textiles industry has also made significant progress in sustainable transformation.

Retaining key segments in China and expanding along the value chain to drive development. In our view, investing resources to retain the entire apparel manufacturing industry with the sole purpose of “safeguarding the security of the entire industry chain” may not be economically feasible as the industry has been steadily eroded its comparative advantages. The current relocation phase differs significantly from previous ones, mainly due to China’s substantial economies of scale within the industry, which has resulted in only some segments relocating to other countries. We believe China may prioritize retaining the textile intermediates and apparel segments that serve domestic demand. As for the segments that would be relocated, we believe Chinese textile companies have distinct advantages in terms of brand relationships and are adaptable to the ongoing trend of relocating.

As the textiles and apparel industry chain transforms, we believe the main challenges will be a shortage of skilled labor and limited employment opportunities. Within these challenges, however, we see abundant opportunities arising from technological breakthroughs and digital upgrading in key segments. We expect high-value-added upstream segments such as high-performance fibers, functional fabrics, sustainable textiles, industrial textiles, and local brands to be retained in China. We also believe that digitalization and automation will mitigate the labor shortage, create new competitive advantages, and facilitate the cost-effective development of the textiles and apparel industry chain.

Authors of this chapter: LIN Jichuan, GUO Haiyan, ZENG Lingyi. Translator: FENG Xinyi. Editors: Kenneth HO, Robert PARKER, CHEN Jie, LIU Xinran.

17.1 The Status Quo of the Textiles and Apparel Industry Chain

17.1.1 Textiles and Apparel Industry Plays Essential Role in China’s Economy; Consistently Generated a Trade Surplus

Textiles and apparel industry fundamental in China’s national economy; growth has slowed in recent years. Following China’s accession to the World Trade Organization (WTO) in 2001, its textiles industry experienced rapid development, fueled by abundant labor and land resources. In 2021, domestic textiles firms within a designated scale recorded revenue of Rmb2.57trn. The textile, garment, footwear, and hat manufacturers generated revenue of Rmb1.48trn, accounting for 3% of total revenue of industrial firms within a designated scale. Nevertheless, the growth momentum of the textiles manufacturing industry has been gradually decelerating since 2017, dragged by factors such as economic slowdown, supply-side reforms, and relocation of production capacity.

Around 50% of Chinese textile manufacturing products are exported. This suggests that the textiles industry is still an important export-oriented industry with a trade surplus, although the proportion has declined. In 2021, China's textiles and apparel exports reached US$315.5bn, representing about 50% of production and accounting for 9.38% of China’s total exports. This resulted in a substantial trade surplus of US$287.8bn, accounting for 43% of China’s total trade surplus. However, both the export share and the trade surplus have declined in recent years.¹

17.1.2 Textile Manufacturing Industry in the Midstream of the Value Chain; Broad, Comprehensive Range of Segments vs. Other Countries

China’s textile manufacturing industry is in the midstream of the value chain. The production of textile intermediate goods requires significant investment in capital and technology, while apparel production is labor-intensive. The textiles and apparel value chain consists of several segments, including upstream raw materials, midstream manufacturers, downstream brands, and distributors. Within the midstream segment, textile manufacturing includes the production of yarn, fabric, and garments. As the industrial chain moves from upstream to downstream, the production model gradually transitions from capital-intensive to labor-intensive. For example, in Luthai Textile’s cost structure of the fabric segment, raw materials account for nearly 50% of its operating costs; while depreciation, energy, and manufacturing costs account for more than 30%; and labor costs account for 17%. In the ready-to-wear segment, however, raw materials account for about 53% of operating costs; depreciation, energy, and manufacturing about 12%; and labor costs more than 30%.

China boasts an extensive and comprehensive textiles and apparel industry chain, exhibiting significant potential for technological advancements in upstream sectors. China currently leads the global market in terms of efficiency in apparel manufacturing. Figure 17.1 shows that China is active in all segments of the textiles and apparel value chain, from fiber to garment manufacturing, as well as being the country with the largest scale in each segment. Considering the top 5 firms in each country within each segment,² China lags Japan in terms of gross margin in the fiber and yarn segment. This discrepancy is primarily due to industry leaders such as Toray Industries and Teijin Limited, which focus on producing high-end fiber materials and expanding their presence into downstream yarns. The versatile nature of fiber materials allows them to be applied in diverse fields such as healthcare and aerospace, resulting in significant value added.

Fig. 17.1

Note (1) Data for each country is taken from the top–five firms in each country in textiles and textile products segments, which may differ from the actual situation; (2) the size of the bubble represents the scale. Source Bloomberg, corporate filings, CICC Research

Size and GM of firms in textile and apparel value chain, by country (2021).

In the fabric sector, the gap in profit margin between China and other countries persists, but is gradually narrowing. This is primarily due to pioneers in the textiles industry such as Germany and South Korea, which have retained manufacturing of fabrics with high gross margins. We believe this demonstrates the potential for manufacturing upgrading in China's textile industry. China leads the world in terms of scale and gross margin in garment manufacturing. We attribute the high gross margin to China’s leading efficiency in garment manufacturing thanks to the high quality and effective management of its labor force. For example, per-employee efficiency in China at Shenzhou International Group Holdings reached an impressive 8,000 + pieces/year in 2021, suggesting significant productivity. Moreover, Shenzhou's production bases in Vietnam and Cambodia are also efficient, generating 6,000 + and 4,000 + pieces/year, highlighting the firm’s overseas management capabilities.

17.2 Changes in the Textile and Apparel Industry Chain and Security Risks

17.2.1 Driven by Costs, the Apparel Manufacturing Industry is Undergoing Industrial Relocation; the Higher Trade Barriers Are Accelerating Relocation

Chinese garment manufacturers steadily relocating production bases to Southeast and South Asia. China is one of the world’s largest apparel exporters. However, China's share of global apparel exports fell 7.6ppt from its 2013 peak to 31.5% in 2020, according to the WTO.³ Meanwhile, Vietnam, Bangladesh, and India have gained the export share that China has lost, with their export shares accounting for 6%, 6%, and 3% of global apparel exports in 2020. Although the export share in such countries remains modest, the three have consistently gained export market share that China has lost (Fig. 17.2).

Fig. 17.2

Note The European Union officially came into existence in 1993, hence there is a lack of data prior to that period. Source WTO, UN Comtrade, CICC Research

Global apparel exports.

The textile industry has undergone five strategic shifts, all driven by the pursuit of cost reduction. When examining the history of textile manufacturing transfers,⁴ it is worth noting that large-scale textile manufacturing originated in England during the mid-eighteenth century. The advent of the First Industrial Revolution enabled mass production of textiles, propelling the textile industry into the era of mechanical spinning. Innovations such as flying shuttles notably improved the efficiency of the spinning processes. Toward the end of the nineteenth century, industrial textile demand for cotton had grown rapidly. Given its superior cotton resources and the world's largest and fastest growing consumer market, the US replaced Europe as the world’s textile manufacturing center. The US emerged as the driving force during the Second Industrial Revolution, fueled by advances in electrical power.

Major advances in textile manufacturing in the US that included modern ring spinning machines, automatic looms, and chemical fibers greatly increased productivity and improved the overall quality of textile production. In the mid-twentieth century, Japan undertook the relocation of the textiles industry by leveraging its established industrial bases and cost-effective labor. Moreover, Japan acquired numerous advanced technology patents from overseas and pursued innovative imitation, leading to the widespread adoption of synthetic fiber technology. In the 1970s, South Korea, the Taiwan region of China, and Hong Kong SAR undertook the relocation of the textiles industry driven by their expansive market demand and competitive labor costs. After joining the WTO in the early 2000s, the Chinese mainland established itself as a global manufacturing hub, capitalizing on its abundant labor resources. In recent years, however, apparel manufacturing has gradually shifted to South and Southeast Asian countries due to rising labor costs in China.

Current round of industrial relocation driven by low labor costs, favorable industrial policies in South and Southeast Asian countries. South and Southeast Asian countries boast ample labor resources, with the combined population of 11 Southeast Asian countries and seven South Asian countries reaching 2.5bn in 2021—roughly 32% of the global population.⁵

Most South and Southeast Asian countries’ manufacturing industries are still enjoying a demographic dividend. For example, Vietnam and Cambodia had 69% and 64% of the population aged 15–64 in 2021, up 7ppt and 9ppt from 2000. In addition, South and Southeast Asian countries enjoy cost advantages due to more favorable tax policies. Figure 17.3 shows that the corporate income tax rate in the Chinese mainland is 25%, while the Vietnamese government offers a preferential tax rate of 10% for foreign companies that meet certain conditions. Foreign firms operating in Vietnam are also eligible for a tax holiday for the first four years, followed by a nine-year period with a 50% reduction in taxes. The Cambodian government offers preferential policies to attract foreign companies to establish factories in Cambodia, such as a tax holidays for up to six years once the companies start making profits. Vietnam and Cambodia benefit from zero tariffs on textile and apparel exports to Japan, and the tariff on Vietnamese textile and apparel exports to the EU is being gradually reduced to zero, subject to renewal on an annual basis. Apparel products from China, Vietnam, and Cambodia have comparable export tax rates for exports to the US. However, certain Chinese products may be at risk of additional tariffs.⁶

Fig. 17.3

Note (1) The utility cost data is based on 2019 dataset; while other data is based on 2021 dataset; (2) only the tariff policies for apparel exports are compared; Harmonized System (HS)Code 61 refers to articles of apparel and clothing accessories, knitted or crocheted, HS code 62 refers to articles of apparel and clothing accessories, not knitted or crocheted

Vietnam and Cambodia have advantages of low production costs and favorable trade policies.

Source Wind, Ministry of Commerce, Ministry of Human Resources and Social Security, Textnet, WTO, Japan Customs, TARIC, US International Trade Commission, National Bureau of Statistics of China, PWC Worldwide Tax Summaries, Tax Guide for Chinese Residents' Investment in Vietnam, Tax Guide on Chinese Residents' Investment in Cambodia, China Textile Go Global Union, Vietnam News Agency, CICC Research.

Given US-China trade frictions and other events, higher trade barrier policies are catalysts for relocation of textiles industry chain. The US relies heavily on China for finished textile products. In 2021, the US imported around 25% of its apparel and 43% of its footwear from China. However, this share has been declining in recent years, resulting in countries such as Vietnam, India, and Bangladesh taking the orders that previously went to China. Imports of apparel from China to the US that were included in the fourth round of US tariff increases in September 2019 were subject to an additional 7.5% tariff. Thus, there has been a noticeable decline in US imports from China of textile finished products. UN Comtrade reports that over 2018–2021, the share of apparel and clothing accessories imported from China to the US fell 1ppt, 3ppt, 3ppt, and 2ppt, and the share of footwear, boots, footwear with outer soles, and similar products imported from China to the US fell by 3ppt, 3ppt, 7ppt, and 0ppt. The orders that China has lost have rapidly shifted and relocated to Southeast and South Asian countries. Over 2018–2021, the share of apparel and clothing accessories imported from Vietnam, Cambodia, Bangladesh, and India to the US rose by 3ppt, 2ppt, 2ppt and 1ppt, while the share of footwear, boots, footwear with outer soles, and similar parts imported from Vietnam, Cambodia, and Bangladesh increased by 6ppt, 2ppt, and 1ppt.⁷

17.2.2 China’s Textiles Industry Faces Significant Environmental Pressure; Vulnerable to New Trade Barriers

Textiles and apparel industry faces challenges related to energy consumption, carbon emissions, wastewater discharge. Textile Apparel Weekly reports that energy consumption in the textiles industry reached 107mnt of standard coal in 2019 – 2.2% of China's total energy consumption and 4.0% of the manufacturing sector. Among the 31 manufacturing industries, the textiles industry ranked No.6, the chemical fiber manufacturing industry was No.15, and the textiles and apparel industry was No.22 for carbon emissions.⁸ About 80% of textile wastewater comes from the printing and dyeing segment, while a notable volume of industrial wastewater is generated during the singeing the desizing process. Textile industry wastewater has a high concentration of organic pollutants, the water is darkly colored, and has an elevated alkalinity. The Ministry of Ecology and Environment⁹ reports that textiles industry wastewater, ammonia nitrogen, and chemical oxygen demand (COD) emissions in the wastewater, accounted for 6%, 9%, and 14% of total industrial emissions, ranking No. 4, No. 3, and No. 1 among all industrial enterprises in 2020.

We think it is unlikely that China will relocate heavy-pollution textile processes to other regions; introduction of carbon tariffs may create new trade barriers. These factors underscore the need for a green transformation. Countries in South and Southeast Asia face challenges in textile processing due to their underdeveloped utilities infrastructure. Countries in these regions must rely on generators and well water, incurring additional costs to mitigate water and power shortages. Moreover, countries such as Vietnam and Cambodia have implemented stricter environmental protection standards. Based on the National Technical Regulation on Industrial Effluent in Vietnam and the Industrial Wastewater Discharge Standard in Cambodia, the discharge standards for public wastewater treatment systems are more stringent than China's indirect discharge standards.

In Vietnam, for example, the COD limit is set at ≤ 150 mg/L, while in Cambodia, it is ≤ 100 mg/L. Vietnam and other countries have consistently called for suspending projects that generate significant amounts of pollution. As such, large companies primarily provide support functions to meet the integration needs of upstream and downstream sectors. The EU’s Carbon Border Adjustment Mechanism (implemented March 2021) states that all developing countries are subject to carbon tariffs, with the exception of the least developed countries and small island developing states. Relevant studies show that developed countries will benefit once carbon tariffs are imposed, while textiles industries in developing countries will be negatively impacted.¹⁰

17.2.3 Chinese Government and Textile Firms Responding to Safety Risks; Production of Textile Intermediates Not Relocated; Green Transformation Has Paid off

Chinese textile companies have to some degree embraced and led relocation of apparel manufacturing. The China National Textile and Apparel Council (CNTAC)¹¹ reports that as of 2019, foreign investment in China's textiles industry has encompassed the entire industry chain from fiber to apparel, exceeding US$10bn in the form of greenfield investment, equity acquisition, asset acquisition, and joint ventures. For example, foreign companies contribute around 60% to the export value of Vietnam’s textiles industry,¹² with China accounting for around 24% of the total foreign investment.¹³ China's leading textile manufacturers have been investing in Southeast Asia since 2004. We believe that the garment manufacturing industry in Southeast Asia also faces relocation pressures. Nevertheless, Chinese textile companies have spent almost 20 years establishing localized management capabilities and talent overseas. This positions the firms to adapt to potential relocation as well as guiding and leading the process.

China's textile manufacturers have expanded their overseas investment destinations to more than 100 countries and regions globally.¹⁴ Such destinations include key areas such as Southeast Asia and Africa and aim at exporting production capacity. The industry has extended its reach to Europe, the US, and Australia to gain knowledge in design, technology, and other relevant areas, while also establishing connections with consumers. We believe that by pursuing such strategies, the industry can adapt to long-term changes within the industry chain.

Production of China’s textile intermediate goods has not been relocated; relocation of production capacity in garment manufacturing resulted in growth of intermediate goods. China still enjoys strong competitive advantages due to the low proportion of labor costs in the yarns, fabrics, and accessories segments, as well as the industry’s high standards for supporting segments within the industry chain. Thus, China’s textile intermediate goods segment has not been relocated. Over 2010–2020, the proportion of China's textiles exports to total global exports rose to 47.0% from 30.4%, while the export share of other economies declined (Fig. 17.4).

Fig. 17.4

Note The European Union officially came into existence in 1993, hence there is a lack of data prior to that period. Source WTO, UN Comtrade, CICC Research

Global textile exports.

China’s international competitiveness in the higher value-added segments of fibers, yarns, and fabrics has consistently improved YoY. In contrast, Southeast Asian countries such as Vietnam continue to focus on basic sewing and processing. It is evident that as the export share of garment manufacturing relocates to Southeast Asia, the demand for China’s textile intermediates in South and Southeast Asia is increasing accordingly. India and Vietnam still must import about 50% of their fibers, yarns, and fabrics from China, and their dependence on China for textile intermediates is increasing (Fig. 17.5). China, Vietnam, and other Southeast Asian countries have developed a complementarity relationship wherein China produces textile intermediates and the other countries produce garments. In some segments, this relationship resembles a spillover rather than a simple relocation of production capacity.¹⁵

Fig. 17.5

Note (1) The trade specialization index compares the net flow of goods (exports minus imports) to the total flow of goods (exports plus imports); (2) data of fibers and yarns is from HS codes 50–55, fabrics from HS codes 56–60, apparel from HS code 61–62, other textile products (curtains, masks, etc.) from HS code 63; (3) OBM refers to Original Brand Manufacturer; ODM refers to original design manufacturer; OEM refers to original equipment manufacturer; CMT refers to cut, make, and trim. Source UN Comtrade, China Textile Go Global Union, CICC Research

China has significant advantages in textile intermediate products.

Policy-driven transformation, elimination of obsolete capacity effective in the green transformation. In response to environmental concerns, China's policies have long imposed requirements on enterprises in the textile industry, including entry regulations, cleaner production practices, energy consumption standards, emission quotas, and wastewater treatment and recycling measures. For example, the number of printing and dyeing enterprises above a designated size in China has continued to shrink to 1,584 in 2021 from 1,922 in 2012. The output of printed and dyed fabrics has also been steadily declining over 2011–2020.¹⁶ The green transformation of the textile industry has achieved positive results thanks to related policies. The CNTAC reports that the energy consumption structure of the textile industry continued to improve over 2015–2020, with the proportion of secondary energy reaching 72.5%.

The industry has also shown improved energy utilization efficiency as the total energy consumption per Rmn10,000 of output value declined 25.5% and the amount of water consumed per Rmb10,000 gross industrial output value declined 11.9% over 2015–2020. The Ministry of Ecology and Environment reports that wastewater emissions, COD emissions, and ammonia nitrogen emissions from China’s textile industry declined 37%, 76%, and 90% over 2011–2020. Large companies such as Shenzhou International Group Holdings and Huafu Fashion have expanded into the recycled fiber segment and adopted environmentally friendly processes. They have also embraced green energy solutions such as photovoltaics.¹⁷ We believe these initiatives have the potential to be further extended to small and medium-sized enterprises.

17.3 Evolution and Outlook of the Textiles and Apparel Industry Chain

17.3.1 Relocation of Garment Manufacturing is Unavoidable; Continuing to Promote Retention of Textile Intermediates, Garment Manufacturing for Domestic Demand

Relocation of garment manufacturing overseas is expected. We believe that firms should leverage economies of scale to retain key segments of the industry. The current relocation in the apparel industry is a natural, cost-driven transition. In our view, it is not economically viable to devote resources to preserving industries that are gradually losing their competitive advantages merely to maintain the integrity of the entire industry chain. The pursuit of absolute control of the industry chain would impede the global division of labor and result in significant sacrifices in terms of efficiency and resource utilization, in our view. To navigate the trend in relocation of mature production capacity effectively, we believe it is imperative to allocate additional resources towards comprehensive industry chain upgrades. This strategic approach would allow for relative control over the textiles and apparel industry chain in the most cost-effective manner.¹⁸ Nevertheless, previous relocations have often resulted in the collective relocation of the entire industry chain. However, we believe that China's significant economies of scale in various aspects of supply–demand dynamics will result in a different outcome in this round of relocation. Rather than a complete industry-wide relocation, we envision a scenario in which only certain segments of the textiles and apparel industry are relocated, while key segments are retained in China.

Fully developed industrial system and industrial clusters on the supply side yield numerous hidden cost advantages, facilitate retention of textile intermediate segment in China. Unlike the garment segment, which has lower demand for supporting supply chains, the textile intermediates segment depends on robust heavy industries such as energy and chemicals. For example, Vietnam, which has attracted the most market attention, has an industrial structure dominated by light industry. Thus, its infrastructure – e.g., railways and electricity – is inadequate. The country’s chemical fiber industry is also underdeveloped, and the water and electricity supplies necessary for fabric production are unstable. Inadequate support facilities such as accessory factories and pollution discharge systems worsen the situation. Vietnam's weak foundation in heavy industries has become an impediment to development of its light industry, making it difficult for the country to escape the “structural power” imposed by other economies.

This situation involves Vietnam’s reliance on upstream technologies from Japan, South Korea, and China, as well as downstream exports to Europe and the US.¹⁹ We believe that the limited strength of heavy industry in countries such as Vietnam is a fundamental reason why Southeast Asian countries have become more dependent on China's textile intermediates following the relocation of the garment industry. While China can continue to promote retention of the textile intermediates segment, it faces a potential risk in the form of trade barriers. ASEAN and China maintain free trade,²⁰ with over 90% of goods and around 7,000 products enjoying zero tariff treatment. Thus, we believe that any disruption to this free trade arrangement would result in additional tariff costs for China's textile intermediate exports.

Another notable benefit derived from large-scale supply is the advantage of industrial clusters. These clusters facilitate the vertical division of labor and the sharing of intermediate inputs among enterprises, thereby enhancing R&D as well as innovation capabilities through knowledge spillover effects. This in turn fosters an increase in both the variety and quantity of intermediate goods, increasing the added value of such goods.²¹ Furthermore, industrial clusters reduce search costs and strengthen transaction efficiency through inter-firm dealings.²² With more than 30 years of development, China's textiles and garment manufacturing industry has established its presence across the upstream and downstream of the value chain, as well as the ancillary sectors. The majority of intermediate goods can be readily supplied by domestic manufacturers, while several world-class industrial clusters have also emerged.

The CNTAC reports that as of 2020, China had 216 textile industry clusters concentrated in the Yangtze River Delta, Pearl River Delta, Bohai Rim, and Haixi regions, with concentration highest in five coastal provinces – Zhejiang, Jiangsu, Guangdong, Shandong, and Fujian. The number of enterprises above a designated size in these clusters, the revenue of their main businesses, and their profits accounted for 41%, 43%, and 45% of all such enterprises in China's textile industry as of 2020. We believe that a comprehensive industrial system and large-scale industrial clusters effectively embody economies of scale on the supply side. An ultra-large scale supply chain network combines production efficiency with flexibility, thereby diluting fixed costs and costs for technological upgrading, rapid response, and transaction. We believe that these hidden cost advantages will gradually emerge as wages, land prices, and other factor costs rise in countries undertaking industry relocation. Thus, they will serve as an additional advantage for China in retaining the textile intermediate segment.

Paramount economies of scale lie in the market size on the demand side, driven by rigid demand for local brands and locally manufactured goods. China is the largest global consumer market for footwear and apparel, accounting for 25% of the global market share. This impressive figure is supported by a population of 1.4bn. In 2021, China’s per capita spending on footwear and apparel reached US$303, suggesting significant upside potential of 2–3 × vs. developed economies such as the US, Western Europe, South Korea, and Japan, where per capita spending was US$1,097, US$678, US$581, and US$524. In terms of brands, driven by China's robust economic strength and growing national confidence, consumer preferences have fueled the rapid rise of domestic brands. Baidu's 2021 Guochao Pride Search Big Data Report stated that the amount of attention paid to Chinese brands increased to 75% in 2021 from 45% in 2016, tripling the attention paid to overseas brands. The report also highlights a 56% increase in attention specifically directed towards domestic apparel brands from 2016 to 2021. According to Euromonitor,²³ among the top 20 footwear and apparel brands in China in 2021, the market share of domestic brands rose 0.3ppt YoY, while that of overseas brands fell 0.4ppt YoY, suggesting rising public recognition of domestic brands.

We believe that the rise of domestic brands will increase demand for local manufacturing. For example, 99% of Li Ning's suppliers came from the Chinese mainland in 2021. China's textiles and apparel industry has distinct advantages in international competition due to its initial size and high growth potential in the domestic market, even in extreme scenarios. As a result, we think that factors such as end-market demand, transportation costs, and fragmented supply chains make it difficult for companies – especially domestic companies – to relocate their apparel manufacturing processes entirely outside of China. For example, according to the US National Council of Textile Organizations (NCTO), the output value of apparel manufacturing in the US reached US$10.4bn in 2021. The US is also one of the top 20 apparel exporters globally, strongly suggesting that domestic demand would help retain part of the apparel industry within the country.

17.3.2 Chinese Textile Companies Enjoy Advantages in Brand Relationships That Are Unlikely to Be Disrupted by Industrial Relocation

Relocation of industries does not necessarily mean relocation of companies. We think the concentration of suppliers is the prevailing trend, and Chinese textile companies are increasingly collaborating with brands. Downstream brand customers are focusing on quality rather than quantity of textile manufacturers when selecting textile suppliers as they are influenced by the emergence of fast fashion, growing demand for functional sports products, and the industry's shift to rapid response following COVID-19. The number of original equipment manufacturers (OEMs) for Nike's apparel has significantly declined, while the combined market share of its top five suppliers has consistently risen to stabilize at around 50% over the past three years. Similarly, Adidas witnessed a decline in the number of its athletic footwear and apparel OEMs to 234 in 2021 (vs. 340 in 2014). OEMs at Puma declined to 134 in 2021 from 203 in 2014.

As brand customers reduce their supplier base, demand for stronger cooperation and interaction across the upstream and downstream sectors increases. Notably, brands often require suppliers to engage in targeted fabric development, fostering a positive cycle in which manufacturing and brands align more closely. Thus, we believe that it is crucial to emphasize that the relocation of industries does not necessarily mean a rise in the number of companies from other countries. Chinese firms have built strong and trusted relationships with prominent international brands. For example, garment manufacturers on the Chinese mainland – e.g., Shenzhou International Group Holdings – have maintained partnerships with leading international brands such as Uniqlo, Nike, and Adidas for around 20 years. We believe that potential remains for increased collaboration between Chinese mainland firms and leading overseas brands in terms of output and duration in footwear manufacturing. Thus, we believe that such collaboration is unlikely to be disrupted by industrial relocation. In recent years, we have seen brands pushing Chinese apparel manufacturers to expand their global presence in countries such as Vietnam, Indonesia, and Egypt.

17.3.3 Main Challenge in Industry Chain Transformation is Structural Contradiction Between Shortage of Labor Resources and Lack of Employment Opportunities

Near term, labor efficiency in the garment manufacturing industry has peaked, accompanied by steady YoY increase in labor costs. Due to the delicate nature of apparel products, full automation of certain processes remains challenging, resulting in continued reliance on hand sewing in the apparel manufacturing sector. This manual labor component contributes significantly to overall labor costs. However, we believe it is crucial to note that the labor efficiency curve in apparel manufacturing has already reached its apex. For example, Shenzhou International Group Holdings achieved a per capita production output of almost 7,000 pieces of apparel in 2021, but this only reflects a modest 2% increase in the efficiency rate.

Wages of textile workers in Jiangsu province rose more than 10% YoY in 2020 to Rmb63,800, leading to high operating costs for textile firms. Moreover, the age structure of textile workers is imbalanced, with a small proportion of younger workers, and the average age of textile workers exceeding 35, mainly as younger people believe that the textiles industry is low paying and requires overtime. The proportion of highly skilled workers is also low, with around 83% of the workforce having no more than a high school education and 70% of workers lacking certificates of qualification.

We believe the textile industry will play an essential role in ensuring employment stability over the long term. That said, the process of relocating the industry chain and upgrading automated production lines presents structural obstacles to job opportunities. China's textiles industry directly employs more than 20mn people and is intertwined with multiple industries,²⁴ thereby generating a significant number of jobs and having the potential to increase employment in other industries as well. In the medium-to-long term, we expect the garment manufacturing industry to transform and upgrade by adopting artificial intelligence and smart manufacturing practices, or perhaps relocating to new regions. Such changes likely pose challenges to structural employment – especially in terms of layoffs of older employees and those who have limited skills.

17.3.4 Expanding Into High Value-Added Products and Digitalization to Improve Manufacturing Efficiency and Drive the Development of the Industry Chain

History suggests that China must pursue upgrades across the entire industry chain, expand into key products that have high added value. Given the diminishing cost advantages and the impact of deglobalization policies, it is no longer feasible or economically viable to retain the entire textiles and apparel industry chain – particularly the garment manufacturing segment – in China. We believe that the most effective approach entails establishing controllable supply chains in key segments and processes.²⁵ On the surface, textile manufacturing processes appears rigid and well-established, making it susceptible to homogeneous competition. That said, we believe various production processes and technologies for intermediate textile products can be breakthrough points for vertical upgrading, and such processes and technologies are also key segments and processes. For example, in the fiber preparation processes, it is possible to modify existing fibers to create differentiated, high-performance, and sustainable fibers.

Similarly, spinning processes such as vortex spinning produce yarns are exceptionally fluffy, while Siro spinning enables the production of lighter and thinner yarns. The weaving process facilitates production of ultra-thin, ultra-dense, multi-layered, three-dimensional, and irregular fabrics. Furthermore, the dyeing and finishing process can provide fabrics with various functions such as antibacterial, insect-proof, windproof and waterproof, ultraviolet (UV) resistance, and antistatic. Under the guidance of industrial policies, and throughout history, countries that have relocated the textile industry chain have seen significant structural improvements in high-value-added industries. Such advancements have been facilitated by manufacturing upgrades in materials, processes, and design, as well as the inherent industrial advantages derived from rich natural resources (Fig. 17.6).

Fig. 17.6

Source Junli, Z. and Fangfang, W. Comparison of Textile Industry Upgrading and Implications for China. Journal of Wuhan Textile University, 2016, 29(5), CICC Research

Major countries that have undergone the relocation of the textile industry and their backgrounds of industrial upgrading.

We expect high value-added upstream processes – including production of high-performance and functional fabrics, sustainable textiles, industrial textiles, local brands – to remain in China. However, the specific direction of their development will depend on factors such as industrial policies. It is worth noting that the 14th Five-Year Plan for the Development of the Textile Industry highlights certain challenges that China faces in areas such as new fiber material technologies (e.g., carbon fiber, para-aramid, and biodegradable fibers), sustainable manufacturing (e.g., dyeing in non-aqueous medium), and advanced fabrics and equipment (e.g., high-performance fibers and high-speed digital textile printing machines). Moreover, China is pursuing domestic substitution in terms of capital and talent. For example, significant breakthroughs have been achieved in chemical raw materials for a range of high-end textile and apparel products. China has developed bio-based polyamide (PA 56) and overcome technological bottlenecks in bio-based pentadiamine technology. The country has also established a complete industry chain for the production of polylactic acid. Even without technology spillover from developed countries, we are confident that China has ample talent and financial resources to drive technology upgrading.

Promote digitization and automation to address labor shortages and improve transaction efficiency. If we compare the background of previous industrial relocations with the current one, we see a significant difference: The Fourth Industrial Revolution is characterized by the integration of technology and industry. The new generation of digital, information, and intelligent technologies is facilitating upgrading of the entire textile manufacturing chain, including the improvement of the underlying technological infrastructure (e.g., labor shortages in garment manufacturing can be overcome by automating production). As a result, it changes the traditional conception of comparative advantage and narrows the historical window for latecomers to catch up.²⁶ This revolution includes development of advanced digital trading platforms that transcend regional and industry boundaries, leading to improved transaction efficiency within the supply chain. When it comes to digitalization and automation, several viable paths are possible. To illustrate low-cost and high-efficiency upgrades, we will look at Huafu Top Dyed Melange Yarn and Shein as examples.

Effective management and maintenance of equipment in the spinning segment, as well as overcoming data fragmentation across different workshops, places significant demands on the workforce. One approach to addressing this challenge is to build intelligent production lines and factories, with the required investment estimated at around Rmb500mn to Rmb1bn.²⁷ Color-spun yarn manufacturer Huafu Top Dyed Melange Yarn has adopted a data-driven approach by leveraging Internet of Things (IoT) and the Manufacturing Execution System (MES) to streamline its manufacturing process. In terms of digitalization, the firm’s first step is to visualize and digitize internal production machines to facilitate monitoring, management, and feedback during production. The second step focuses on providing cost-effective digital transformation solutions to small and medium-sized factories. With an investment of only around Rmb300,000–400,000, these factories can integrate their production capacity and take advantage of economies of scale within the supply chain network.²⁸

On the trade front, Shein plays a role similar to that of Li & Fung, one of the first companies established by Chinese merchants to engage directly in foreign trade. Shein does this by integrating the production capabilities of numerous small factories and connecting them to downstream customers. But unlike the Li & Fung model (characterized by slow turnover and high costs), Shein has embraced digitalization to streamline its operations. Shein has implemented multiple supply-side information systems to quantify design and printing processes, material selection, and worker production. This approach has enabled an efficient operating model focused on small but multiple batches of orders with short delivery periods. Shein can fulfill orders as small as 100 garments and connect directly with end-market consumers, providing them with ready-to-wear garments in only 7–15 days. As a result, Shein has achieved lower inventory levels, a wider range of stock-keeping units (SKUs), and an array of low-cost products. By leveraging its large user base, Shein has taken advantage of its supply chain and created a flywheel effect for its business.

17.4 Thoughts and Implications

17.4.1 Seizing Opportunities From Domestic Industrial Upgrading to Promote Industry Chain Development in Central and Western China

Central and western China play a vital role in meeting domestic demand and stimulating employment. In terms of labor costs, wages in the textile industry in representative central and western provinces such as Henan and Ningxia are higher than those in Vietnam and Cambodia, but are lower than the wages in Jiangsu. As a result, stopping the trend of labor-intensive industries relocating overseas is proving challenging. Nevertheless, central and western China maintains some comparative advantages over the coastal areas in terms of meeting domestic demand and retaining key segments. We expect governments in central and western China to continue to improve the supporting industrial capacity and introducing preferential tax policies, and to take advantage of the market economy to further take over part of the textile manufacturing industry chain to meet domestic demand. We expect the transfer of such segments to central and western China to partly alleviate the problems of high labor wages and heavy environmental pressure in the eastern provinces and regions, create some jobs after the transfer of industries, and attract some workers to return to their hometowns.

Technological innovation and talent cultivation are imperative. We emphasize the significance of government guidance in directing firms towards prioritizing the development of key value-added products, including fibers and fabrics. Encouraging the development of high-performance, multi-functional, and versatile textiles is crucial, as is fostering breakthroughs in key technologies. We also believe that it is essential to support the acceleration of digital transformation in the industry, particularly in the apparel sector. This involves establishing seamless connections between the foundational production infrastructure and the advanced digital trading platforms. In addition, we think that the government should establish a robust vocational education system to expedite the training of high-tech talent capable of adapting to the evolving needs of industrial upgrading.

Prioritize energy conservation, emissions reduction, and technology upgrading. We believe the government should support the measures that businesses take to improve energy consumption efficiency and minimize pollutant emissions throughout the chemical fiber, printing, and dyeing industries. This can be achieved by implementing technologies such as heat energy recycling technology and digital printing technology from source processes. We also believe that enterprises should accelerate adoption of green manufacturing practices, including the recycling and production of bio-based fibers, as well as implementation of water- and energy-saving processes in printing and dyeing operations.

Building quality brands and promoting culture are key objectives. We believe the government should foster integration of traditional Chinese culture and contemporary design aesthetics within domestic brands, while harnessing digitalization and direct-to-consumer (DTC) strategies to meet consumer demands and improve marketing effectiveness. We also think it is crucial for the government to encourage large firms to expand into international markets, bolstering their global influence through fashion weeks and exhibitions. In addition, we think manufacturers in the industry should establish a sustainable brand value development system, accelerate the recruitment and training of high-end design talent, and cultivate a diverse range of international and regional brands with their own characteristics.

17.4.2 Embracing Relocation, Exporting Production Capacity, and Connecting International Brands to Globalize

Seizing opportunities presented by relocation of the apparel industry. We believe it is essential to avoid overly aggressive retention policies in mature industries, as this can result in inefficient resource allocation and a decline in national welfare. Instead, we propose that firms embrace the relocation in labor-intensive industries, accelerate digitalization, and assert control over key segments of the industry chain through vertical upgrading.

Promote division of labor and cooperation to export experience. In our view, China should seize the opportunities offered by the Belt and Road Initiative and the tariff benefits offered by the Regional Comprehensive Economic Partnership (RCEP) agreement. This can be achieved by accelerating joint construction of industrial parks and promoting cooperation in Southeast Asia and Africa, thus establishing notable international capacity cooperation projects. In this way, China can create a network of mutually beneficial relationships that facilitate technological expansion between China and these countries. China can also leverage its strengths in overseas management capabilities and brand relationships to make strategic investments abroad and effectively export its experience. This approach allows China to embark on a global journey by deploying capital, technology and management talent.

It is essential for manufacturers to establish connections with international brands to foster leading manufacturers in the industry. Under the trend of brand supply chain concentration and streamlining, we think China should capitalize on its strengths in domestic demand and manufacturing to forge partnerships with prominent international brands—particularly in the footwear manufacturing sector—with the aim of nurturing a cadre of accomplished manufacturers in the industry.