Analysis of competitiveness of Chinese textile in EU market - Essay Example

Economic Dissertation 2 Analysis of competitiveness of Chinese textile in EU market. The paper analyses the strength of the Chinese Textile and Apparel industry in the Global market and the competitiveness of the industry particularly in the EU market. The emphasis is on the strategic advantage of domestic structure of the Chinese textile industry, and the economic conditions which induces the growth with competition from the emergence of textile industry in other parts of the world. There is growing competition in the entry into the EU market; which is one of the main areas of expansion after USA. The impact of the international competitiveness has on the state and the social setup in the domestic market. The timely involvement of China’s with joining WTO and the favourable impact of the quotas, to strengthen the economic scene. The emphasis is also on the close link between the Chinese economy and the population, to form the spine of the economic development in China. The focus is also on the efforts made by the Chinese textile industry on the global scene, with emphasis on expanding quality production and competitive penetration in the world market. Content: The content presents the aims and the objectives of the paper, which focuses on the strategic and economic advantage of China in achieving a position of significant importance on the world platform in the Textile and Apparel Industry with special emphasis on it’s competitiveness in the EU market.. The understanding of these state-societal arrangements and international competitiveness requires detailed industry specific analysis. Hart, argues that a country does not need to be competitive in all industries, “some industries are economically strategic in the sense that their failure to be competitive makes it impossible for a country to be competitive in others in which participation is necessary to obtain access to generic technology” (Devine, 1994) The role of this industry as an important traditional pillar industry of China is very strong and it can be evaluated under these specific categories representing the economic position: Chapter1:Introduction; Chapter2: Literature Review; Chapter 3: Methodology; Chapter 4: Discussion; Chapter 5: Conclusions and results ; Reference, Bibliography Appendices. Chapter 2: Literature Review: The entry of China in the world market since 2005, with the quota-benefits is instrumental in her rising position as an important player in the world market with cutting edge of competitiveness and higher standards. Clark observes in his study of international competitiveness the need for the management and organization to work in harmony. “Management and organization is the focal point of Clark’s study. It is the force of international competitiveness that creates incentive for change. A government can create temporary incentives but can do little to get domestic firms optimize their objective functions in the long run” (Tiwari,1988). The study conducted by Caves indicates that producers behaviour and resource allocation are altered by trade changes, rate of adjustment of the structure of the manufacturing Industries to import competition and the amount of the sunk capital are highly correlated, marketing opportunity at a global scale enhances the plant-scale economies, and the product differentiation changes the effect of import competition. (Tiwari, 1988)Collis advocates a different approach saying “that an appropriate industrial policy corrects market imperfections and creates congenial environment for successful business. To adopt suitable industrial policy, it is essential to clearly define industry’s role, understand company’s strategies in the light of shifting comparative advantage and the changing structure of the global industries, identify market failures and implement coherent policies to minimize the pitfalls.”(Tiwari, 1988) Kalt finds that the industries trade performance is weakened by domestic environmental regulations. Non-environmental economic regulations, on the other hand do not seem to be a cause of comparative disadvantage. Kester on the other hand makes not of some characteristic such as growth, profitability, risk, and size and industry classification on the basis of market basis value. (Tiwari, 1988) The important role of the international competitiveness has significant impact on the growth and the sustenance of the Chinese Textile and Apparel industry in the world market and playing a major contributor in the EU market in the years to come. The international competitiveness is determined by “the variation in the state-societal arrangements which is best explained in the changes in the international competitiveness since World War II among the five major industrial countries-the United States, Japan, Germany, France, and Britain’. State-societal arrangements influence international competitiveness through their impact on the creation and diffusion of innovation. International competitiveness at the level of economy is measured by a combination of trade balance, world export share, rate of growth of productivity and real wages, and price elasticity of imports. The author insists that an understanding of the relationship between the state-societal arrangements and international competition requires detailed industry specific analysis. Furthermore he argues that that while a country does not need to be competitive in all industries , ‘ some industries are economically strategic in the sense that their failure to be competitive makes it impossible for a country to be competitive in others in which participation is necessary to obtain access to generic technology’ (Devine, 1994) The performance of China’s textile and clothing industry can be measured in the international competitiveness based on the countries strategic advantage in the industrial field when evaluated in terms of workers relation and middle management, strategic advantage in the area of location, labour, land, natural resources and local population size. These basic advantages have to be boosted by sustained industrial growth as “clusters” which is a group of interconnected firms, suppliers, related industries, and institutions that arise in a particular location. The four “clusters” which influence the success of industry to an advantageous position are: “Firm Strategy, Structure and Rivalry which points out that the world is dominated by dynamic conditions, and it is direct competition that impels firms to work for increases in productivity and innovation. Demand Conditions which emphasizes that the more demanding the customers in an economy, the greater the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality, etc. Related Supporting Industries indicates that spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes a continuous exchange of ideas and innovations and Factor Conditions indicates that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labour, capital and infrastructure. "Non-key" factors or general use factors, such as unskilled labour and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable”(Porter,1990) The Diamond Model of Michael Porter for the Competitive Advantage of Nations offers a model that can help understand the competitive position of the nation. Traditionally, the five factors determine the comparative advantage. The role of the government in Porter’s Diamond Model is “acting as a catalyst and challenger; it is to encourage or even push companies to raise their aspirations and move to higher levels of competitive performance” They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti trust regulation. The Competitive Porter introduced this model in his book: The Competitive Advantage of Nations, after having done research in ten leading trading nations. The book was the first theory of competitiveness based on the causes of the productivity with which companies compete instead of traditional comparative advantages such as natural resources and pools of labour. This is considered very effective for government economic strategists and is also highly recommended for corporate strategist taking an interest in the macro-economic environment of corporations. (Porter,1990) The analysis made by Lizette Smook in her ‘The Competitiveness of the Chinese Textile Apparel Manufacturing Industry’ points out to the fact that even though China is a developing economy, she has made proactive strides in the world market. Since 1986, she has actively engaged her economic activities to meet world standard, through involvement and engagement in negotiations to join General Agreement on Tariffs and Trade (GATT) and has succeeded in joining World Trade Organization (WTO) in 2002. In accordance with the WTO policy, there have been substantial changes in policies as reduction in import tariffs, phasing out of qualitative restrictions, and pruning of the negative list of import. As the leading exporter of the textile and clothing, the country and the community are continuously putting their effort into assessing the world trade situation beyond the quotas regime, when Multi-Fibre Arrangement (MFA) will be fully integrated into the general WTO rules and regulations.(Smook, 2005). The globalization, of China, in the phasing-out quota, will produce new challenges in the competitiveness, since quotas imposed were generally based on historical exports to those countries and bilateral relationships. Countries for which quotas provided a shield against their low competitive ability will lose out, and countries like China can only go forward through greater competitiveness. China joined the WTO late, at a stage when the 10- year quota phase-out (MFA) was already in progress and as a result, a number of textile and apparel items were quota free overnight. And simultaneously, with joining the WTO, the Chinese Government was actively engaged in new political and economic reform. Large investment in the manufacturing industry increased exports, and the start of the phasing-out of State Owned Enterprises (SOE’s) increased unemployment. This resulted in the increase in production and exports. Overall Chinese textile and apparel imports to the US alone grew by 117% in 2002, and another 75% by August 2003 in some quota categories (Heagreaves, 2004) (Smook, 2005) Since 2002, China’s joining the WTO, the research indicates substantial role played by Chinese textile and Apparel industry, in which the changing role of the state plays a major role in the overall assessment of the growth. The re-allocation of the resources is another factor contributing to the growth and the expansion of the market share in EU. The prevailing dominance of SOE contributes to the comparative advantage over foreign competition.(Smook, 2005) Amien Chen has forcefully presented his case in his paper Comparative Economic Studies, which talks about ‘China’s Economic Growth with WTO Accession: Is it sustainable?’ this research emphasizes the pillars of growth and development of this industry. It also emphasizes China’s competitiveness and comparative advantage over other countries based on location, land and population. The Comparative Advantage of the Chinese Textile and Apparel Industry has a very promising projection of substantial growth by 2020, if it could resolve some hard issues like Factor Price reform, Ownership reform of SOE’s, Government reform (fiscal and monetary), Unemployment, surplus labour, Rural-urban migration and rural-urban income divide, Lack of safety net, health, pensions, housing etc., Incomplete legal system, Large amounts of non-performing loans (NPLs) and credit constraints for SMEs, Environmental degradation and AIDS incidence and challenge of containing SARS it affects productive capacity and export markets. (Smook, 2005) In spite of this comparative advantage the inefficiency of labour and lack of creativity and technical innovation has had a slowdown effect on the economy, and particularly on the textile industry. “The industry has suffered from just about every affliction one could mention: stockpiled output, idle equipment/surplus capacity, unplanned development, outmoded technology, deteriorating physical plant, a crushing tax burden, redundant workers, poor management, an unreasonable price structure, the heavy burden of providing wages, wasted investment funds, lack of financial profitability and persistent shortages of raw materials, power, capital and foreign exchange.” (Moore, 2002) There are more than 100,000 factories engaged in some aspect of textile production, with much growth in the recent years attributed to garment sewing. And, China maintains her position as the larges textile manufacturing nation in the world, with fair share of control over EU market. It has been said that “there are more sewing machines in China than people in United States. The government of China proudly proclaims that China produces some 20 billion garments a year or roughly three garments for every person on earth.” (Moore, 2002) Michael Porters contribution on the strategy and the management in the present global context has very significant impact. His first book Competitive Strategy: Techniques for Analyzing Industries and Competitors is a book without which the conflict of strategy cannot be confronted and reckoned with “Theres a fundamental distinction between strategy and operational effectiveness. Strategy is about making choices, trade-offs; its about deliberately choosing to be different. Operational effectiveness is about things that you really shouldnt have to make choices on; its about whats good for everybody and about what every business should be doing”.(Hammonds, 2001) Porter’s (1990) Competitive Advantage of Nations (CAN) was heralded on publication as a book which could build a bridge between the theoretical literatures in strategic management and international economics, and provide the basis for improved national policies on ‘competitiveness’. It emphasized that sustained prosperity may be achieved without a nation becoming ‘innovation-driven’, strong ‘diamonds’ are not in place in the home bases of many internationally successful industries and inward foreign Developing countries in particular are inadvertently encouraged to pursue policies which might be harmful direct investment does not indicate a lack of ‘competitiveness’ or low national productivity. (Davies and Ellis,2000) “The Chinese textile and apparel industry has grown rapidly over the past two decades. As a result, China is now the world’s largest exporter of apparel and textile products. This achievement is attributable mainly to China’s policy of economic reform after opening up to the outside world, coupled with the country’s low labour costs. Today the activities of enterprises are more market oriented, and various forms of ownership are flourishing”.(Textile Intelligence, 2002) The industry’s future development will depend on the domestic economic situation and on international conditions. China’s entry to the World Trade Organisation (WTO) in late 2001 has created an opportunity for further export growth. One immediate consequence is that quotas restricting Chinese exports to US and EU markets will be phased-out and finally eliminated at the end of 2004 under the Agreement on Textiles and Clothing (ATC). However, all WTO members will benefit from the quota phase-out, which means that China will face intensified competition in international markets. (Textile Intelligence, 2002). The textile manufacturing sector also includes companies engaged in various treatments for fiber and textile products such as textile dying, coating, and waterproofing. Finished textile products include apparel, leather and fur products, curtains and draperies, canvas sheeting, and other fabric items. The industry covers both standard manufacturing operations and contract manufactures that make clothing and other products from materials owned by others “On average, exports of apparel from China increased 546 percent from January 2004 to January 2005, the group claims. The increase comes after quotas on the import of Chinese textiles were lifted under negotiated free-trade agreements”. .(Dolbeck, 2005) For the apparel segment of the industry, diversification by brand, channel, and product line is key to consistent earnings growth. China has become a significant G-3 trading partner, a major destination of foreign direct investment, an economy largely driven by domestic demand, an important driver of global growth, a significant force in world commodity markets, a growing factor in world financial markets, a critical link in global production networks and increasingly and integrator of East Asian supply chain. With abundant resources, labour and heavy investment, the textile and apparel industry is growing fast in the entire supply chain. (Cheh,2005) The World Trade Organization and international denim trading is the first market report that focuses on analyzing the international denim trading market and its key players. Discussing the important implications of Chinas entry into the World Trade Organization for the denim industry and analyzing the denim trade in the major markets and the key players including USA, EEC, Japan, Hong Kong and China. Included are extensive and systematic primary data research; geographic distributions of denim trade; detailed description and analysis of major markets; comprehensive analysis of industry and it competitiveness and the impact of the World Trade Organization (LI,Yeung, Newton & Yao, 2003) “China’s textile and apparel industry, says Sun Ruizhe , Director of the Council’s Office for Promoting Social Responsibility, employs nearly twenty million workers in several thousand enterprises, affecting the livelihoods of 100 million rural people. But soaring exports of cheap textiles have caused trade frictions between China and other nations, especially EU member states where employment standards are high.” (Qian,2006) Du Yuzhou said Chinas textile industry would put emphasis on industrial upgrade depending not on expanding market share with quantity, but on adapting to the market through improving quality, increasing its original technologies and brands and establishing rapid response system. Therefore it would guide large textile companies to the establishment of research centres and the increase of independent patent products and exclusive technologies. The small and medium-sized companies would continue to do a better job in works such as industrial innovation. In a word, the goal is to turn companies attention to industrial upgrade and brands development. (Peoples Daily Online, 2005) “Profits of Chinas textile and apparel industry will grow 35 percent year-on-year to 112.5 billion yuan (US$14.8 billion) in 2007, China National Textile and Apparel Council (CNTAC) announced on Tuesday. The CNTAC predicted the total output of the industry would rise 20 percent on last year to 3.02 trillion yuan (US$397.4 billion) this year. The council predicted that yarn production would rise 20 percent; fabric production would increase 12 percent, chemical fibre up 13 percent and clothing up 14 percent in the second half. It also forecast foreign sales of textiles and apparel would amount to 170.5 billion yuan” (US$22.4 billion) this year, up 16 percent on last year. (Xinhua News Agency, 2007) CTAC has employed industry experts, former entrepreneurs and young professionals with a diversity of skills and specialties. They capitalize on their hands-on industry experience, profound understanding of the transitional economy and modern analytical tools to provide "China-specific" and "industry-specific" solutions to both international and domestic clients.(CTAC, 2007) The Literature Review has a wide range of selection of books, journal articles, Reviews, Reports and statistics which have been obtained from varied primary and secondary sources, reflecting on the rising trend of the Textile and Apparel Industry in China. The position she maintains with regard to world and international market with special reference to EU market. The domestic and strategic strength and the government support to maintain and develop the infrastructure for higher competitiveness in the international market. Read More