Newsletter: April 2007  

Global Textile Trade 2007: The End of the China Price

For much of the 2000 - 2005 time frame, global apparel prices steadily eroded regardless of the fluctuation in raw material prices.  The main driver behind the price erosion was the ability of global retailers to negotiate a cut in the wholesale price of apparel from Chinese suppliers.  They would, in turn, use this negotiation to force other suppliers to match the Chinese price if they wanted to keep their business.  In the U.S., this tactic was used by Wal-Mart to steadily reduce the selling price of all its textile and apparel products.  Under these conditions, most of the leading U.S. brands outsourced all manufacturing either to China or one of its competitors, which led to the total collapse of the traditional U.S. textile and apparel firms.

Development of the "China Price" 
This annual procedure of price-cutting not only occurred in textiles and apparel but also in toys and most other manufacturing items.  These yearly negotiations led to the development of the "China Price".  It was not until mid-2005 that the Chinese exporter finally was not able to cut prices any longer. In late 2004 and early 2005 Chinese exporters were forced to absorb increased costs themselves. In addition, China's domestic textile market had evolved into a much freer market, leaving manufacturers clearly exposed to fluctuating fiber costs.  Amid these conditions, Chinese exporters were forced to tell sourcing companies "no" in regard to further price cuts.  Even the largest U.S. retailers faced an inability to obtain lower prices.

Rising Production Cost in China
As China's manufacturing and labor costs have risen, Chinese exporters have been heavily investing in modern equipment and establishing entire manufacturing cities, which allow the retailer ease in sourcing and a quick turnaround in both shipping and design.  This transformation has caused Chinese exporters to shift the lowest value-added products to cheaper labor markets such as Bangladesh, Vietnam, Cambodia, Pakistan and others.  Amid these conditions and a move to more upscale valued-added products, China's average domestic and export price of textiles and apparel are rising.  The "China Price" has ended, and with it has come some re-inflation of the supply chain, which has significantly improved the profit margins of the entire global industry.

Chinese Domestic Market
In regard to the domestic market, Chinese retail sales of textiles and apparel have been growing at an annual rate of over 20 percent for several years.  For much of the 2000 - 2004 time period, the rapid rise in domestic textile and apparel manufacturing led to an oversupply of products available for the domestic market.  With consumer brand identification low, manufacturers attempted to gain market share by only one way and that was to cut the price in a host of products.  By the end of 2005, domestic retail prices of all products had fallen over 2 or more percent during the year.  Apparel price declines matched this drop. 

Brand recognition in China is rapidly expanding, but apparel sales remain driven on price considerations. The change in 2005 to focus on the domestic market instead of exports led to very aggressive price-cutting. In the first half of 2006, average retail apparel prices suffered an over 2.5 percent year-on-year decline for a few months, but pricing conditions have generally been improving since then.

In November 2006, retail sales of textile producers rose 0.3 percent from October and 0.9 percent from a year ago. Apparel prices rose 0.5 percent from October and experienced a 0.2 percent year-on-year increase. This brings the most prolonged period of price deflation in retail prices experienced in modern China to an end. The ability to increase prices also has major ramifications for the profitability of the country’s textiles and apparel sector.  

Increase in Prices      The increase in prices has continued, with February 2007 apparel retail sales expanding .5 percent from the previous year.  This minor price inflation has significantly improved profit margins.  These conditions have also coincided with a government effort to force manufacturers to improve the quality of apparel at the retail level and to honor trademarks and copyrights of local brands. 

The increase in the average export price for textiles and apparel has even been more pronounced.  Total textile and apparel exports reached US$147.085 billion in 2006, which represented a 25.11 percent year-on-year increase.  A significant portion of this increase came from a sharp rise in the average export price.  China's Customs Department has now confirmed that the average export price of textile and apparel products increased 10.14 percent in 2006.

January import statistics for the U.S. and Japan suggest that prices have further increased in 2007.  In January, the quantity of U.S. textile and apparel imports from China rose 23.3 percent; however, in value terms, imports surged 54.8 percent from a year ago.  In cotton apparel, the average increase in import price was even stronger. 

In Japan, the average 2006 import price of cotton yarn rose 18.5 percent in yen terms, and cotton fabric prices increased 14.4 percent.  An increase in the average price of imported apparel ranged from 4.9 percent in men and boy's apparel to 8 percent in hosiery and baby apparel.

A healthy textile and apparel sector is emerging worldwide following an end of the "China Price".