Textile and apparel is an industry that joined the global value chain relatively early in China. In recent years, it has faced greater pressure from industrial relocation and business development risks. How policies respond and how companies break through deserve great attention.
The number of confirmed cases of COVID-19 worldwide has exceeded 6 million. Some developed countries in Europe and the United States that have been hit by the epidemic have started to resume work, but they are still far from containing the epidemic. At the same time, the third wave of the epidemic has hit emerging economies such as India, Russia, and Brazil, and countries with weak prevention and control capabilities. In less developed countries, the number of infections and deaths is expected to rise significantly. After passing the first hurdle of domestic supply-side shock, the Chinese economy is now facing the second hurdle. The impact of overseas economic suspension, shrinking trade activities, and rising unemployment will be fed back to the country through the industrial chain.
The textile and garment industry provides a large number of jobs and plays an important role in ensuring the employment of residents, market entities, and the stability of the industrial and supply chains. Clothing is an optional consumer product that is strongly affected by economic prosperity. Global clothing consumption has fallen sharply under the epidemic, and orders have been canceled in large numbers, which has had a huge impact on external demand for the development of the textile and clothing industry. Our previous report “Risk Assessment of China’s Industrial Chain under the Pandemic” found that the textile and apparel industry has a greater exposure to external demand risks. Recently, the Ministry of Industry and Information Technology also pointed out that the textile industry, especially small and medium-sized textile enterprises, faces great difficulties in operating.
More importantly, textiles and clothing are the earliest industries that China has joined the global value chain. In recent years, it has also faced greater pressure from industrial relocation. Under the dual impact of relocation and external demand, how the position of the textile and apparel industry in the global industrial chain will change, what risks and pressures enterprises face in business development, and how policies should respond, deserve great attention.
Chart 1 Clothing exports dropped sharply, and epidemic prevention materials promoted a sudden increase in yarn and fabric exports:
Source: Wind, JD.com Digital Technology
Longitudinal view: The pressure for industrial relocation has intensified in recent years
Since entering the new century, the development of China’s textile and apparel industry has gone through three stages:
During the period from 2001 to 2010, the foreign trade demand after “joining the WTO” drove the accelerated development of China’s textile and apparel industry, gradually becoming a global Textile and apparel manufacturing center. From 2001 to 2010, China’s cloth production increased from 29 billion meters to 90.7 billion meters, yarn production increased from 7.61 million tons to 37.33 million tons, and chemical fiber production increased from 8.41 million tons to 48.86 million tons, all ranking first in the world.
Chart 2 China’s textile and apparel production has gone through three stages in this century:
Source: Wind, JD Digital Technology
Around 2011 to 2017, China’s textile and apparel industry entered a platform period. As factor costs rise, China’s textile and apparel industry begins to migrate to economies with lower labor costs. During this period, the growth rate of yarn and chemical fiber production slowed down significantly compared with the previous decade, and the overall production of cloth and clothing showed a downward trend.
Since 2018, the output of the industry’s main products has experienced negative growth, and signs of recession have become prominent. On the one hand, the trade friction between China and the United States has caused textile and apparel products worth tens of billions of dollars to be threatened by additional tariffs imposed by the United States, and corporate profits have been squeezed by tariffs; on the other hand, environmental protection and production restriction policies have been continuously introduced, production capacity has been restricted, and compliance costs have increased significantly. With the increase in pollution, textile printing and dyeing with higher pollution is the first to bear the brunt.
In this context, companies are more motivated than ever to reduce their dependence on China and move to areas with lower tariffs and an urgent need to undertake industrial development, such as Vietnam, Cambodia, and Bangladesh. Among them, the production of finished garments is mainly shifted to emerging economies such as Vietnam, Bangladesh, and Turkey and Morocco. For example, American brands NIKE and GAP retain only 23% and 21% of their production in China, while UNIQLO is implementing a plan to let Vietnam assume 40% of its production. Affected by this, the proportion of textile and garment enterprises in the operating income of industrial enterprises above designated size has almost halved, from 7.5% in 2003 to 4.3% in 2018.
Chart 3 The proportion of the textile and clothing industry in the economy continues to decline
Source: CEIC, JD Digital Technology
The textile and garment industry’s contribution to employment is far greater than its contribution to economic benefits, and it has become a reservoir for employment of low- and medium-skilled labor. Statistics from industrial enterprises above designated size in 2018 show that the textile and clothing industry accounted for 8.4% of employees, which is much higher than the 4.3% of operating income. Once the industry shrinks too quickly and a wave of bankruptcies occurs, the risk of unemployment and return to poverty will inevitably increase significantly.
Horizontal view: Export structure changes in competition
The textile and clothing industry chain is long, upstream Involving the production of natural fibers (such as cotton, linen, wool) and chemical fibers, the midstream includes spinning, weaving, printing and dyeing and other processing steps, and the downstream includes the production of final products such as clothing, home textiles, and industrial textiles.
Chart 4 Overview of the textile and apparel industry chain:
<img w��Affected by environmental factors, the profit margin of the textile industry has fallen faster; the decline in economic benefits has also led to an increase in the leverage ratio. In particular, the asset-liability ratio of the textile industry has increased from 51.7% in 2016 to 57.2% in 2019. Our cash expenditure pressure on A-share listed private enterprises also shows that in the event of production suspension, the book funds of textile and garment industry companies can only maintain fixed expenditures for 2.16 years, ranking last among all industries. Affected by the decline in economic efficiency, the completion of fixed asset investment in the entire industry in the first quarter fell by 38% year-on-year, with textiles, chemical fibers, and clothing decreasing by 37.1%, 45.8%, and 19.2% respectively.
In addition, a major feature of the textile and clothing industry is the concentration of private enterprises and the large number of small, medium and micro enterprises. Based on survey estimates by the China National Textile and Apparel Industry Federation, we believe that there are approximately 76,000 enterprises in the 28 key textile industry clusters across the country, of which approximately 4,000 are above-scale enterprises and the remaining 72,000 are below-scale enterprises with an annual income of less than 20 million yuan. Enterprises, whose balance sheets are fragile, face a sharp increase in survival pressure under the continued impact of domestic and foreign epidemics.
Charts 14, 15 and 16 The financial performance of the textile and apparel industry has deteriorated:
Source: Wind, JD Digital Technology
The employment pressure caused by the suspension of production and closure of enterprises under the continued impact of domestic and foreign epidemics deserves great attention. The 2020 “Government Work Report” pointed out that employment pressure has increased significantly since the beginning of this year, and the difficulties of enterprises, especially small, medium and micro enterprises, have become prominent. Stabilizing employment and protecting people’s livelihood has become the focus throughout the year. At the end of 2018, there were 3.318 million people employed in the textile industry above designated size, and 3.356 million people employed in the textile and clothing and apparel industries. By February 2020, the above numbers had dropped to 2.638 million and 2.49 million respectively, and jobs continued to be lost. We estimate based on a survey by the China Textile and Apparel Industry Federation that enterprises below designated size in the textile and apparel industry employ at least 2.89 million people, so the total employment scale is still no less than 8 million. The domestic epidemic from January to March caused companies to suspend operations and made it difficult for workers to return to work, which has put many companies below designated size in difficulty. The impact on external demand that started in late March is expected to last for one or two quarters or even longer. Faced with a long period of severe shrinkage in demand, small and micro businesses tend to shut down their businesses directly, leading to rising unemployment.
From the perspective of development trends, China has taken advantage of the opportunity of “joining the WTO” to develop into a global textile and apparel manufacturing center. However, industrial relocation, environmental protection pressure, and Sino-US economic and trade frictions have caused the development of the textile and apparel industry to gradually slow down in recent years. There have even been signs of recession in the past two years.
From the perspective of industrial structure, the textile and clothing industry has shown a trend of industrial upgrading in the face of adversity. The decline in China’s textile and apparel share in global trade is mainly reflected in low value-added, labor-intensive products, namely clothing. In the middle and upper reaches of the industry, China’s self-sufficiency in chemical fiber and fabrics has improved, and the export of capital goods such as textile machinery has also increased significantly. China’s position in the upper reaches of the industrial chain is gradually strengthening.
Under the impact of the epidemic, the main risk for the textile and apparel industry is shrinking external demand. The impact of overseas epidemics on China’s exports will rise sharply in the second quarter, while the impact on textiles and clothing is often greater than the overall economy and will penetrate the entire industrial chain. There are many small, medium and micro enterprises in the textile and garment industry. We should pay attention to the operating pressure of textile and garment enterprises and the resulting employment pressure.
Under the dual impact of relocation and external demand, the textile and apparel industry should take joint actions at both the industry itself and policy support levels to turn crisis into opportunity:
At the industry level, if conditions permit Enterprises should work hard to save themselves in the short term, for example by switching production of anti-epidemic supplies to meet domestic and international demand gaps and ease cash flow pressure. In the face of industrial relocation, downstream companies should reduce costs and increase efficiency through digital transformation and intelligent reshaping. Midstream and upstream companies should further occupy the international market for intermediate goods and capital goods by increasing research and development.
At the policy level, we actively implement the policy deployment of the “Government Work Report” to help the industry tide over difficulties. The 2020 “Government Work Report” pointed out that every effort should be made to stabilize and expand employment, and to strengthen employment support for key industries and key groups. Specifically, we can use a looser monetary environment and a more active fiscal policy to implement measures such as expanding and extending tax cuts and fee reductions, and repaying principal and interest, so as to ensure the survival of competitive companies with tight capital chains and help them survive. Companies with high R&D intensity maintain normal R&D activities. For those facing unemployment pressure, consumer vouchers or cash vouchers can be issued in a targeted manner, and reemployment skills training can be carried out. </p
