The China and Hong Kong Denim Industry (Woodhead Publishing Series in Textiles)

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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x

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I

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1

....

-

--._-._.--.I_.-.-

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Cotton Production System -----r

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._ - -. _ -

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State Farms

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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%

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3.4 Denim products exported to ED in 1997

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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)

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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

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10000

8000 6000 4000

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1.1992

CHINA PEPREP

CHINA SOUTH TANAN

01993 01994 01995 Dl996 01997 D l 9 9 8

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1

3.9 Hong Kong denim product re-exports by origin

20

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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

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11995 13 1996

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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

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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

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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

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4.7 EU denim apparel imports

33

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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

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office of

........... .............

......-...... ............

Foreign

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./

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Jobber

Agency

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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

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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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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.

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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