Facing The Double Impact Of Emigration And Foreign Demand, How Can China'S Textile And Garment Industry Chain Break Through?

Textile and garment industry is an industry that China joined the global value chain earlier. In recent years, it is faced with greater pressure of industry relocation and business development risk. How to deal with the policy and how to break through the encirclement of enterprises are worthy of high attention.

The number of confirmed cases of new coronal pneumonia in the world has exceeded 6 million. Some developed countries affected by the epidemic in Europe and the United States have started to return to work, but there is still a long way to go to contain the epidemic. At the same time, the third wave of the epidemic has hit emerging economies such as India, Russia, Brazil and other underdeveloped countries with weak prevention and control capabilities, and the number of infections and deaths is expected to rise significantly. After passing the first hurdle of domestic supply side shocks, China's economy is ushering in the second hurdle. The impact of overseas economic suspension, shrinking trade activities and rising unemployment will be fed back to China through the industrial chain.

The textile and garment industry carries a large number of employment, which plays an important role in ensuring the employment of residents, the main body of the market and the stability of the industrial chain supply chain. Clothing is an optional consumer goods which is strongly affected by the economic prosperity. Under the epidemic situation, global clothing consumption has fallen sharply and orders have been cancelled in large numbers, which has brought great impact on the development of textile and clothing industry. Our previous report "risk assessment of China's industrial chain under the epidemic situation" found that the foreign demand risk exposure of the textile and clothing industry is large. Recently, the Ministry of industry and information technology also pointed out that the textile industry, especially the small and medium-sized textile enterprises, has great difficulties in operation.

In recent years, China's textile industry is facing greater pressure to join the global textile industry. Under the double impact of emigration and foreign demand, how the status of textile and garment industry in the global industrial chain will change, what risks and pressures enterprises are facing in their business development, and how to deal with them in policy should be highly concerned.

Figure 1 clothing export drops sharply, and anti epidemic materials promote yarn fabric export to increase sharply

Source: wind, Jingdong digital technology

Vertical view: the pressure of industrial relocation has intensified in recent years

Since entering the new century, the development of China's textile and clothing industry has experienced three stages

From 2001 to 2010, the foreign trade demand after China's accession to the WTO has driven the rapid development of China's textile and garment industry and gradually become the global textile and garment 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.

Table 2 China's textile and garment production has gone through three stages in this century

Source: Jingdong

From 2011 to 2017, China's textile and garment industry entered the platform period. With the rise of factor cost, China's textile and garment industry began to migrate to the economy with low labor cost. During this period, the growth rate of yarn and chemical fiber production slowed down significantly compared with the previous decade, and the overall output of cloth and clothing showed a downward trend.

Since 2018, the output of the main products of the industry has increased negatively, and the signs of recession have been highlighted. On the one hand, the trade friction between China and the United States has made the textile and garment products worth tens of billions of dollars threatened by the tariff imposed by the United States, and the profits of enterprises are squeezed by the tariff; on the other hand, with the continuous introduction of environmental protection and production restriction policies, the production capacity is limited, and the compliance costs are rising sharply, and textile printing and dyeing with high pollution are the first to bear the brunt.

In this context, enterprises are more motivated than ever to reduce their dependence on China and move to areas with low tariffs and urgent demand for undertaking industrial development, such as Vietnam, Cambodia and Bangladesh. Among them, the production of finished clothing mainly turned to Vietnam, Bangladesh, Turkey, Morocco and other emerging economies. For example, US brands Nike and gap have only retained 23% and 21% of their production in China, while UNIQLO is implementing a plan to let Vietnam undertake 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.

Table 3 the proportion of textile and garment industry in the economy is declining

Source: CEIC, Jingdong digital technology

The contribution of textile and clothing industry in employment is far greater than that in economic benefits, and it has become a reservoir of employment for low and medium skilled labor. According to the statistics of Industrial Enterprises above Designated Size in 2018, the proportion of textile and garment industry in employees reached 8.4%, far higher than 4.3% of business income. Once the industry shrinks too fast and there is a wave of bankruptcies, the risk of unemployment returning to poverty will be greatly increased.

Horizontal view: export structure changes in competition

The textile and garment industry chain is long. The upstream involves the production of natural fibers (such as cotton, hemp, wool) and chemical fibers. The middle reaches include spinning, weaving, printing and dyeing, and the downstream includes the production of final products such as clothing, home textiles and industrial textiles.

Table 4 overview of textile and garment industry chain

Source: Jingdong digital technology

China accounts for 40% of global textile and garment trade, which is higher than 24% of Global trade. Our calculation based on the United Nations COMTRADE database shows that from 2000 to 2014, the proportion of China's export in the global textile and clothing trade (hs50-hs63) increased from 13.5% to 41.0% year by year, and then gradually fell back to 35.8% in 2018. In 2019, affected by Sino US trade friction, China's export share may further decline; while the import share has been fluctuating around 5%.

Figure 5 China's share of global textile and garment trade first rose and then decreased

Source: UN COMTRADE, Jingdong digital technology

China's value chain status is gradually upgrading from low-end to high-end. We still use the proportion of China's import and export in the global related trade to analyze the changes of China in the global industrial chain. Although the labor-intensive and low value-added garment production has been relocated, the position of chemical fiber and fabric in the upper and middle reaches is relatively stable, and the proportion of high value-added capital goods such as textile machinery in Global trade is increasing.

Figure 6 in China's textile and garment industry, the higher the technology intensity, the faster the export growth

Source: Beijing East Technology Co., Ltd

clothing

Under the background of industrial relocation, the downstream labor-intensive and low value-added clothing production is slowly being squeezed out. In 2014, China's clothing exports accounted for 41% of the global clothing trade, which was a historical high, and then declined slowly to 34% in 2018. During 2010-18 years, the compound annual growth rate of clothing export was 2.3%, which was only better than natural raw materials in the textile and clothing industry chain.

As mentioned above, China is facing competition from Vietnam, Bangladesh, India, Indonesia, Turkey, Cambodia and other countries in the field of clothing, and these cheap labor resources replace China. Industrial transfer is a long-term process. In fact, as early as 2008, the General Administration of Customs had warned of the outward migration of textiles and garments to ASEAN and other surrounding areas. The WTO also pointed out that Bangladesh's clothing exports had tripled between 2008 and 2018. However, in terms of volume, in 2018, China's clothing export reached US $157.8 billion, still occupying the first place in the world with a share of 34.3%, while the shares of the above six countries in the same period were only 6.7% (Vietnam), 5.6% (Bangladesh), 3.7% (India), 3.6% (Turkey), 2.0% (Indonesia) and 1.8% (Cambodian Village), and the combined share was only 23.5%. Behind this is the scale advantage of China's manufacturing industry, which makes up for the disadvantage of rising labor costs to a certain extent. The small economic size and limited production capacity are the important factors that hinder other emerging markets from fully undertaking industrial transfer.

Figure 7 six emerging economies are partially replacing China's share of clothing exports

Source: UN COMTRADE, Jingdong digital technology

Chemical fiber and fabric

The position of chemical fiber and fabric in the middle and upper reaches of the world is rising. China is an important exporter of chemical fibers and fabrics. By 2018, the export of yarn fabrics will account for 30% of Global trade, and chemical fiber export will account for 40% of Global trade. In fact, China is one of the few economies with net exports of clothing, fabrics and chemical fibers; downstream producers such as Vietnam and Cambodia rely on imported fabrics.

According to UN COMTRADE, China's textile exports are not only large in scale, but also in a leading position in terms of growth. Compared with clothing, yarn, fabric and chemical fiber are more capital intensive and technology intensive, and less dependent on labor force. Therefore, the decline of labor factor advantage in China has a weak impact on these industries. However, it should be noted that other production related costs such as electricity price and cotton price in China are higher than those in foreign countries, so some fabric production still faces competition from other countries. In terms of yarn and fabric export, Germany (9.3%), Turkey (5.9%) and India (3.6%) have higher global market share; in terms of chemical fiber export, India (5.1%), Indonesia (3.9%) and Turkey (3.8%) have higher global market share.

Table 8 and 9 the proportion of China's yarn, fabric and chemical fiber import and export in Global trade

Source: UN COMTRADE, Jingdong digital technology

textile machinery

The export of capital goods in the textile and garment industry rose sharply. Since 2000, China has been a net importer of textile machinery in most years, and its import once accounted for 40% of global textile machinery trade. However, in recent years, the share of China's loom exports has been rising, accounting for 26.9% of global loom trade from 1.9% in 2000 to 26.9% in 2018. This shows that with the increase of technology intensity and R & D intensity, China's textile machinery has become internationally competitive. From the perspective of export share, China has entered the first echelon of textile machinery, and its share has exceeded that of traditional exporting countries such as Germany and Japan.

Top 10 textile machinery exports

At the same time, the demand for textile machinery in downstream countries has increased greatly due to the relocation of garment production. According to the data of the General Administration of customs, China's textile machinery exports will reach 3.04 billion US dollars in 2019 (i.e. the commodities numbered 8444, 8445, 8446, 8447, 8448 and 8449 in the HS4 code). The top five export destinations are India, Vietnam, Bangladesh, Turkey and Indonesia, all of which are major garment producers. The imports of these five countries together account for 55% of China's textile machinery exports. This shows that China's position in the upstream of the industrial chain is gradually established.

Figure 11 the main export destinations of China's textile machinery happen to be the world's leading garment producers

Source: UN COMTRADE, Jingdong digital technology

The outbreak will impact retail and corporate balance sheets in the short term and may suspend the current direct investment activities related to industrial migration. However, in the long run, the persistence of comparative advantage and the pressure of tariff and other protectionism will accelerate the industrial transfer and make the industrial chain regionalized and polycentric. The shrinkage of labor resources and the rise of labor costs will make garment production leave China further, and affect the yarn fabric manufacturing in China to a certain extent. However, driven by low oil prices and economies of scale, the global share of China's chemical fiber industry is expected to continue to rise, while the accelerated relocation of the clothing industry may further promote the R & D and export of China's textile machinery.

The risk of textile and garment industry can not be ignored under the superposition of foreign demand and relocation

The main impact of overseas epidemic on textile and garment industry is export. For a global value chain hub like China, the epidemic situation has a two-way impact on the supply and demand of an industrial chain: on the one hand, China's imports are mainly intermediate products, and the upstream shutdown and supply interruption of overseas industrial chain may lead to the stagnation of production in the middle and lower reaches of China; on the other hand, the contraction of foreign demand will put pressure on China's export chain. As far as textile and clothing is concerned, China's export is far greater than its import, and there is basically no "neck sticking" technical barrier. Therefore, we should pay attention to the impact of foreign demand.

The impact of overseas epidemic situation on textile and garment industry export will rise sharply in the second quarter. In the first quarter, GDP in the United States fell by 4.8%, the European Union by 3.5%, South Korea by 1.4%, and Hong Kong, China by 8.9%. Due to the deterioration of overseas epidemic situation and the upgrading of prevention and control measures in the second quarter, the pressure of external demand faced by China's textile and garment industry has broken out in the second quarter. In fact, the main reason why China's exports were better than expected in April and may was the sharp increase in overseas demand for epidemic prevention materials and the rise in computer demand caused by home office work. In fact, the export of most categories showed negative growth. For example, the export of fabrics and fabrics rose sharply in April and may, reflecting the high export demand of anti epidemic materials such as masks and protective clothing.

Figure 12 the demand for overseas epidemic prevention materials promoted the high increase of textile export in April and may

Source: wind, Jingdong digital technology

The impact of the epidemic on the textile and clothing industry is greater than the overall economic activities. Clothing is an optional consumer goods with strong offline attributes. Under the influence of the epidemic, the reduction of residents' expenditure and the suspension of offline consumption activities have formed a double blow to clothing consumption. However, the total amount of online clothing retail sales decreased by 14.4% compared with the same period of last year, but the total retail sales volume of China's online clothing decreased by 14.4% compared with the same period last year. Overseas is even more pessimistic. The retail sales of textile, clothing and leather stores in the European Union decreased by 40% year-on-year in March, and that of the United States in April was 89.2% lower than that in April, a record decline. The cliff like decline in overseas demand has led to the cancellation of a large number of export orders in China, overstocking of already produced inventory and "no work to recover" for enterprises.

The impact of the epidemic on foreign demand runs through the whole textile and garment industry chain in China. We use the method of "risk assessment of China's industrial chain under the epidemic situation", and take the ratio of export delivery value and operating income as the measurement of industry export dependence. It is found that the export dependence of textile clothing is 22.4%, which is at a high level in the manufacturing industry. The export dependence of textile is 11.8%, which is in the middle reaches. However, it should be noted that textile is the upstream industry of clothing and apparel. The decline of overseas demand for clothing is bound to be reflected in the decline in the demand for yarn and fabric.

Table 13 the risk exposure of textile and garment industry to external demand is considerable

Source: wind, Jingdong digital technology

Under the impact of external demand, the business pressure of textile and garment enterprises will rise significantly. From the statistical data of Industrial Enterprises above Designated Size, the profit margin of textile and garment industry has declined in recent years, among which the profit rate of textile industry has decreased more rapidly due to environmental factors; the decline of economic benefits also leads to the increase of leverage ratio, especially the asset liability ratio of 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 case of production suspension, the book capital of textile and garment industry companies can only maintain a fixed expenditure of 2.16 years, ranking at the bottom of all industries. Affected by the decline in economic benefits, the investment in fixed assets of the whole industry in the first quarter decreased by 38% year-on-year, while the textile, chemical fiber and clothing decreased 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 and medium-sized enterprises. According to the survey and estimation of China Textile Industry Federation, there are about 76000 enterprises in 28 key textile industry clusters in China, of which about 4000 are enterprises above the scale, and the rest 72000 are enterprises under the scale with annual income less than 20 million yuan. However, these enterprises have fragile balance sheets and their survival pressure has increased sharply under the continuous impact of the epidemic situation at home and abroad.

Chart 14, 15 and 16: deterioration of financial performance of textile and garment industry

Source: wind, Jingdong digital technology

Under the continuous impact of domestic and international epidemic situation, the employment pressure caused by enterprise shutdown and bankruptcy deserves high attention. According to the 2020 government work report, since this year, the employment pressure has increased significantly, and the difficulties of enterprises, especially small and medium-sized enterprises, have become prominent. Stabilizing employment and ensuring people's livelihood have become the focus of the whole year. By the end of 2018, there were 3.318 million employees in the textile industry above Designated Size, and 3.356 million employees in the textile and clothing industry. However, by February 2020, the above-mentioned numbers had dropped to 2.638 million and 2.49 million respectively, resulting in continuous loss of jobs. According to the survey of China Textile Industry Federation, we estimate that enterprises under the scale of textile and garment 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 has made it difficult for enterprises to stop work and workers to return to work, which has made many enterprises under the scale in trouble. However, the impact of external demand from late March is expected to continue for one or two quarters or even longer. In the face of a long-term sharp decline in demand, small and micro enterprises tend to shut down enterprises directly, leading to an increase in unemployment.

From the perspective of development trend, China has developed into a global textile and garment manufacturing center with the opportunity of China's accession to the WTO. However, industrial relocation, environmental pressure and Sino US economic and trade frictions have led to a gradual slowdown in the development of the textile and clothing industry in recent years, and even showed signs of recession in the past two years.

From the perspective of industrial structure, textile and clothing industry shows the trend of industrial upgrading in adversity. The proportion of China's textile and clothing in the global trade has declined, which is mainly reflected in low added value and labor-intensive products, namely clothing. In the middle and upper reaches of the industry, China's chemical fiber and fabric self-sufficiency capacity has been improved, and the export of capital goods such as textile machinery has also increased significantly. China's position in the upstream of the industrial chain is gradually strengthened.

Under the impact of the epidemic situation, the main risk of textile and clothing industry is the shrinking of external demand. The impact of overseas epidemic on China's export will rise sharply in the second quarter, while the impact of textile and clothing is often greater than the overall economy, and will run through the entire industrial chain. There are many small and medium-sized enterprises in the textile and garment industry, so we should pay attention to the business pressure of textile and garment enterprises and the employment pressure caused by it.

Under the double impact of emigration and foreign demand, the textile and garment industry should take joint action at the two levels of industry itself and policy support to turn crisis into opportunity

At the industry level, enterprises with conditions should make efforts to save themselves in the short term, for example, by changing production of anti epidemic materials to meet the demand gap at home and abroad and relieve the pressure of cash flow. In the face of downsizing and downsizing, enterprises should realize efficiency through the transformation of digital industry. We should increase the share of intermediate products in the international capital market through R & D.

At the policy level, actively implement the policy deployment of the "government work report" to help the industry tide over difficulties. According to the 2020 government work report, we should do everything possible to stabilize and expand employment, and strengthen employment support for key industries and key groups. Specifically, with the help of a more relaxed monetary environment and a more active fiscal policy, we can implement measures such as expanding and extending tax reduction, fee reduction and debt service, so as to ensure the survival of competitive enterprises with tight capital chain, and help enterprises with high R & D density to maintain normal R & D activities. For those who are facing unemployment pressure, consumption vouchers or cash coupons can be issued and re employment skills training can be carried out.

(the author is Shen Jianguang, vice president of Jingdong group, chief economist and President of the Research Institute of Jingdong digital technology; Zhu Taihui is the research director of Jingdong Research Institute of digital science; Xu Tianchen is a senior researcher of Jingdong Institute of Mathematics)