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Doing Business in Textiles and Clothing with China

Published: 20 Apr 2009 23:04:34 PST

--What You Need to Know

By Don Shen

In the global textile and clothing market, China has been a major player for almost two decades. Since becoming a member of the World Trade Organization, China's textile and clothing manufacturing and sales have increased dramatically, largely due to increased business from the West. In order to inform foreign businesses about current practices in trade with Chinese textile and clothing companies, a study was conducted examining major changes in China's textile and clothing industries over the last two decades.

Specifically, this study intended to provide an overview of China's textile and clothing industries to foreign companies interested in doing business in China. Interviews were conducted in the greater Beijing and Shanghai regions with government officials representing different regional levels (country, province, region, and city), owners or general managers of import/export companies, state-owned manufacturers, joint -venture enterprises, foreign direct investors, and private enterprises.

Know Your Business Partners

Before 1992, under the planned economic system, state-owned enterprises enjoyed preferential treatment by the Chinese government. However, with the transition to a market economy, most state-owned enterprises have not only lost government protection, but are facing a huge financial burden: the obligation to support an increasing number of retired and laid-off employees. On the other hand, because of past support, many state-owned enterprises have a solid foundation in technology and equipment, enabling them to offer quality products. At the same time,their managerial systems and market adaptability tend to be dated.

Joint-venture enterprises were the first group of enterprises to emerge after economic reform in China. Originally, most of these companies were state-owned enterprises. When these companies changed ownership from state-owned to joint venture with incoming foreign investment, money was paid to the government by the foreign investor to settle their obligations (e.g., provide support for retired and laid-off employees). By doing so, joint-venture companies were able to have a fresh start without any long-term financial burden related to their former state-owned enterprises. As a result, joint-venture companies are in a more advantageous situation than state-owned enterprises because they possess a good technical and production foundation developed when they were state-owned companies and, at the same time, more capital and support from their more recent foreign investors allowing them to be more flexible, efficient, and competitive.

For foreign direct investor companies (referred to as FDIs), the advantages of doing business in China are somewhere in between joint-venture companies and state-owned enterprises. The government requires all company types to follow the local business laws and regulations, which includes paying employees' monthly salary, retirement benefits, social security benefits, and health insurance. Also, state-owned enterprises and joint-venture companies have some advantages left from their lives as state-owned enterprises (e.g., more display space and lower rent at trade shows), while the FDIs have no such advantages from the government. Also, FDIs may face an unfamiliar business, cultural, and social environment, thus encountering many obstacles to doing business in China. However, since many FDIs have the best and latest equipment and technology, and they often share marketing concepts, managerial models, and business operational traditions with other foreign companies, doing business with other foreign companies comes more naturally. Compared to the above three types of enterprises, private enterprises are facing the least number of problems because they often have plenty of orders to keep their production running and have the lowest production cost making them the most common type of Chinese company with which foreign businesses interface. Since textile and clothing industries do not require much technology, investment in equipment is not a big factor. Private enterprises hire people on a more temporary basis without paying benefits, bringing down their operating costs. However, since most of their employees are temporary workers from rural agricultural areas and because retirement and social security plans are not transferable in China, a monthly cash salary is more important for temporary workers than are benefits. Also, since the economic reform in China, private enterprises have been allowed to compete with other types of enterprises to bid for the quotas they need. Companies should develop different strategies when doing business with Chinese textile and clothing companies. In addition, when choosing business partners in China, companies need to consider their different strengths and weaknesses as well as advantages and disadvantages. Practicing the same business strategy across all Chinese business partners is unlikely to work well.

Finding Textile and Clothing Manufacturers in China: Where to Go

In the last ten years, Chinese textile and clothing industries have become concentrated along the east coast of China in five provinces, ShanDong Province, JiangSu Province, ZheJiang Province, FuJian Province, and GuangDong Province, and the city of Shanghai. These areas serve as China's textile and clothing centers and make up more than 80 percent of Chinese textile and clothing production and trade.

Recently, the origins of workers in Chinese textile and clothing industries have shifted from China's east coast (five provinces and one city) to China's midwest region. Workers from midwestern regions are migrating and taking jobs with the manufacturers along the east coast. This shift is mainly caused by the increase of local labor costs along east coast. U.S. companies should be mindful of both the benefit brought by this shift (e.g., possible lower production cost), as well as potential problems (e.g., inexperienced employees and unguaranteed product quality).

One interesting phenomenon in China is the development of Industrial Clusters. This model is very common in ZheJiang Province. A cluster of small textile and clothing manufacturers and supporting companies, which are often private enterprises, are located close to each other and form a production chain. For example, one manufacturer only produces greige goods; another manufacturer, located just across the street, only does dying and printing; another one nearby makes clothing. Those small-size private manufacturers rely on each other and form an Industrial Cluster, which makes every manufacturer more competitive because they are close to each other and can complete the whole production process. For example, a fabric dyeing and finishing mill can find a textile mill next door that can provide the greige goods, which can save shipping and insurance expenses and shorten lead time.

Another new format is the Textile Industry Park. While most Industrial Clusters are formed by small-size private enterprises, Textile Industry Parks are usually a group of manufacturers with a better systematic structure, more advanced methods, better developed management, and an overall operation on a larger scale. There are several of these kinds of parks near the cities of Nantong, Wuxi, and Changzhou.

Quotas Do Not Matter

What is the most effective strategy to limit China's textile and clothing export to the global market? Many people believe it should be trade restrictions. That's why the United States hurried into several rounds of negotiations in 2005 to put safeguards back onto several product categories, hoping to slow down the flood of Chinese textile and clothing products into the U.S. market. However, the interviews show that most Chinese textile and clothing enterprises are not worried about trade restrictions. Over the years, China's textile and clothing industries have become adept at dealing with different forms of trade restrictions in the global market through different strategies. This has forced them to develop ways to either avoid trade restriction or obtain more quotas. China's textile and clothing products will increasingly enter the global market regardless of the kind of trade restriction applied. Therefore, quotas or any other form of trade restriction may not be a big concern for U.S. companies when they do business with China.

So what is the biggest challenge for China's textile and clothing industries? Many Chinese companies have been frustrated with the constant changes in the trading environment. Such changes make forecasting and long lead-time business harder. The changes include both bad and good changes, such as the government policy on exporting taxes, minimum wages, energy prices, and currency exchange rates. A stable trading environment is what most Chinese textile and clothing companies hope for, even if some part of the trading environment is not ideal for them.

In China, Quantity Is Giving Way to Quality

China's textile and clothing companies, faced with increasing production costs, are starting to lose their economic advantage to such countries as Vietnam and Cambodia; thus, Chinese companies are beginning to change their focus from quantity to quality. If foreign companies need to produce complicated, high-quality goods, China remains a good choice. However, in situations where quantity at a very low cost is the primary goal, Southeast Asian countries may be the most economical choice.

With this new attention to quality, there has been a dramatic increase in the creation of Chinese labels featuring the work of Chinese designers. This trend opens up new opportunities for foreign companies to partner with Chinese designers and manufacturers in the development of new lines that cater to both Western and Chinese buyers.

This study provides first-hand information and the latest findings about China's textile and clothing industries to the world using a variety of resources and perspectives. The findings from this study can help non-Chinese importers, distributors, and retailers better understand how to select and where to look for a business partner in China. Knowing about what their Chinese partners' fears and worries are will enable foreign companies to better develop strategies to tackle those fears.

Source form China Textile Magazine

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