New competition in the textile industry

Published on Author howe

The Chinese textile industry took off in the early 2000’s due to the expiration of quotas on exports. However, rising wages are chipping away at China’s dominance in the production of textiles and clothing. China’s textile exports made up 25% of world textile exports in 2005, but this number has been in decline since. Factory wages have risen 18%-20% over the last three years. Additionally, the yuan has appreciated and the government has implemented tighter environmental regulation. These factors have pushed textile production out of China and into less developed southeast asian countries, such as Cambodia, Bangladesh, Vietnam, and Indonesia. In Cambodia, workers take home about $1.25 / hour, while wages in the most expensive parts of China have crept above $9 / hour. [The Prof: This almost certainly should not be “US$ per hour” but rather per day.]

There is not much China can do to hold on to its textile business. Wages will continue to rise, while wages in the less developed southeast asian countries should remain low for the foreseeable future. As Chinese industry overall continues to modernize and become more capital intensive, the importance of the textile industry will slowly diminish. Textile production by its nature is more dependent on cheap labor than modern capital.

Businessweek article

3 Responses to New competition in the textile industry

  1. With labor supply decreasing in China and standard of living increasing, maybe China’s textile business is not a source of sustainable competitive advantage. Further, with China’s desired image of being a high-tech contributing member of society, textiles do not communicate that image well. Moving into the future, what infrastructure has been developed for textiles that could be applied to more high-tech goods. For example, could textile infrastructure be converted to producing carbon fiber products to support a growing domestic auto industry?

  2. Minimum monthly wages in the more prosperous parts of China are RMB1,500 with a 6-day work-week. (Workers are supposed to be paid overtime – at factories that are set up as ongoing businesses they are paid, at fly-by-night operations, well, we read about them in Country Driving.) So at the upper end we’re looking at 1500/25 days/month = 元60/day or a bit under $10 per day, perhaps US$1.25 per hour. Of course the ratio between Cambodian and Chinese wages is what matters, and since this is a traded good we want to use export-related exchange rates, not PPP rates.

    Apple Computer has talked about bringing some assembly back to the US. Wage rates matter, but there’s maybe 4 hours of labor per unit for an iPhone, with the gain of a shorter logistic chain and lower inventory needs for an expensive finished product.

    Remember that the “problem” here is that jobs are so plentiful that wages are rising. That’s good news, there’s no need to “hold onto its textile business” because of the (relative) plethora of jobs available. Of course if you’re an entrepreneur you may have some regrets, but margins are really thin. And if you’re on the coast, your competition isn’t just Cambodia and Bangladesh, but also plants in Western China. The new road / rail network makes it possible to get goods in and out. Or in – remember that Chinese wear clothes, too, so “interior” plants are stealing local sales from coastal ones, while Cambodia is stealing export ones.

  3. Very interesting post Jonathan. It seems that the companies are going where they can find the cheapest labor. It may be a good sign that China’s conditions for some workers is getting much better, but the lose of an industry is never a good thing.