By Zhang Bin, Zhong Ang, Hu Yilin
Published: 2008-03-27

From Cover, issue no. 360, Mar 24, 2008
Translated by Ren Yie
Original article:

Once a leading export-industry in China, many textile businesses have recently been pushed to the brink of bankruptcy by rising costs and unfavorable government policies, according to a recent research by the industry's businesses federation.

The research conducted in March found that the industry had sunk into a dire state, with over two-thirds of the businesses making a mere 0.62% profit margin. It also suggested that if the ill-performing businesses went under, the livelihoods of 15 million workers would be in question. 

China National Textile and Apparel Council (CNTAC) conducted the research in six provinces – namely Jiangsu, Zhejiang, Shandong, Guangdong, Fujian and Hebei – which together produced 85% of China's textile exports.

The council said the findings would be submitted to the State Council soon to appeal for tax cuts in the hopes of alleviating cost pressures on the industry. 

Textile products contributed 150 billion dollars to China's trade surplus last year. However, with the yuan gaining 14% against dollar since the exchange rate reform began in 2005, the industry's competitive edge in the global market has been blunted. Meanwhile, the recent US sub-prime mortgage crisis has also caused slower demand.

On top of that, the Chinese government has employed tighter financing controls to curb inflation, and reduced export rebates to cut the trade surplus. All of the above have squeezed the survival space in the industry.

High Level Directive for Investigation
"One-third of the textile enterprises are on the brink of bankruptcy"—this statement has been widely circulated on the internet since early January. The news caught the attention of the Ministry of Commerce and it alerted the State Council, which in turn directed the Ministry and National Development and Reform Commission to launch an investigation.

CNTAC was then entrusted with the research. China Textile Economy Research Center (CTERC) director Sun Huaibin, one of the research team members, concluded: "At present, the textile industry is seriously polarized." 

He said businesses with their own brands, value added products, and larger production chains had higher endurance capacity; while small and medium enterprises were pressed the hardest.

Official data showed there were over 40,000 textile businesses that recorded a sales volume above five million yuan. However, CNTAC said there were hundreds of thousand small-sized textile companies scattered around the country.

According to data provided by Sun, 80% of profits generated by the industry last year belonged to one-third of the textile enterprises. He added these enterprises' profit margins were between 6% and 9% while the industry average was only 3.9%. 

Data from the National Bureau of Statistics showed the industry revenue and profits increased by 23.54% and 42.7% year-on-year respectively between January and November last year. Meanwhile, the profit margin upped by 0.53% year-on-year. 

However, Sun said the healthy figures were a result of polarization in the industry, where the growth depended on large companies while the small and medium companies were dying.  

A source from CNTAC echoed Sun's view, saying in the course of research in Guangdong province's Hu Men reigion, businesses surveyed had mentioned it was easier to recruit workers recently, indicating some textile workers were losing jobs.

Signs of Fatigue
The textile industries of certain provinces have begun showing signs of fatigue. In Shandong for instance, where textiles ranked as the second highest exports after electrical items, its February overall textile exports totaled 970 million dollars.

The value was a contraction of 1.1% compared to the corresponding period last year, and the garment exports were especially hit, with its value falling by 7.3%. 

The province's external trade official said the decline was mainly due to the fallout of the US sub-prime crisis, rising costs of production and domestic policy adjustments.

Based on the research estimation, garment companies registered over five billion yuan in losses due to yuan appreciation last year. About 30% of the companies surveyed said their profit margins dropped by a third, while 40% of them said profits fell between 10% and 30%.

Wang Peifeng, the manager of Shandong-based Sunvim Group – which has been the top money-making textile company in China for the past eight years – hoped to maintain a 5% profit margin this year. When times were good several years ago, Wang said the margins were between 8% and 10%.

Wang said yuan appreciation asides, most pressure came from cotton price surges. Last year alone, cotton prices went up by 2,000 yuan per ton due to taxes policy. The company needed 60,000 ton of cotton a year, thus leading to 120 million yuan in cost surges. 

In addition, the company with 17,000 workers has been challenged by rising labor cost. In 2007, average salary for the industry rose by 20%, and the monthly salary of normal ranking workers valued around 1,500 yuan.  

To absorb rising costs, Sunvim applied tighter controls over assets and fine-tuned its business operation. Its management said between 70% and 80% of its production capacity had been converted to making high-end and value-added products, since low-end products could hardly make profits. 

In Zhejiang, the province's leading Yong Tong Dyeing and Weaving Group in Shaoxing region faced similar predicaments as Sunvim. The province is China's number two textile exports base. 

The company's subsidiary, Yong Yong Group, announced price hikes for its products about two weeks ago. Its major clients are from abroad, especially fabric and fashion businesses in the Europe and US. 

"We are forced to raise the price, pressure from the rising costs of raw materials is too huge," said the company's foreign trade division officer, known as San. He added that prices of dye began to rise since the first half of last year and by the year's end, the accumulated price surge rate was about 30%.

Another employee from Yong Yong Group said the company made little profits, like their counterparts in the trade. However, he said as the market was overly saturated, no one dared to raise prices first, fearing that would lead to losing orders.

The EO learnt that the local trade association in Shaoxing region had agreed to control the number of textile enterprises. Its secretary, known as Chen, said no new investment on textile dyeing would be allowed in the region already packed with over 200 such companies.

Consequences of Government Policies
Textile enterprises under survey expressed fear of losing out in the global market, especially when facing steep rivalry from India and Vietnam. A company from Shandong said it had ceased production on 15% of its low-end products as its clients transferred orders placement to Vietnam.

At present, the industry is labor-intensive with a workforce over 20 million, of whom 13 million are migrant farmers-turned-workers.

The research pointed out that if two-thirds of the existing textile companies were to be closed, the remaining one-third could at the most absorb between 400,000 and 500,000 workers. Such massive job loses could destabilize the society.

Sources who took part in penning the final report said suggestions would be forwarded to the State Council for consideration, including calls for more export rebates, or at least to maintain the current rate. 

In 1998, the rebate rate was 15% when the industry was going through a rough time. Later, it was readjusted to 13% and last year, dropped to the lowest rate in history at 11%. There had been rumors that the rate would be cut by another 4%. 

Industry players also mentioned the import duty for cotton as a main concern. China applied quota-based tariffs on cotton imports and imposed sliding duties between 5% and 40% on out-of-quota imports. The country's demand for cotton is around 4.5 million tons per year but the import quota is set at 900,000 tons per year. 

The industry had asked the government many times in the past to cancel duties and value added taxes imposed on the imports of automatic winders and air-jet weaving machines. Industry players said the policy hindered technological progress needed by companies for more efficient production and cost cutting.

Sources from CNTAC said the government had not polled opinions from industry players when formulating policies in the past; and it hoped the recent administration reshuffle to reform the Ministry of Industry would help to fix this shortcoming.