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Chapter One – Introduction
In the past three decades, China has frequently been at the heart of the business headlines, whether as a result of its significant trade balance figures, expanded international co-operation with countries in this (Chinese and south Asian) region or in highlighting the growing number of multinational companies (MNCs) attempting to take advantage of its huge domestic market (Dickie, 2006; Schwankert, 2006; Wen, 2006; Zhu, 2006). Some of the first MNC such as Motorola in 1987 took their first sales in China and in short measure moved to establish a presence in the Chinese market.
Within a short time, other major international competitors started to enter the fray. These firms entered the Chinese market on the basis of ‘trading technology for access.’ This was a clever ploy by the Chinese government to attract maximum foreign direct investment (FDI) and build a technology base within the Chinese market purely on the basis of the opportunity that the future Chinese market offered (Steinbock, 2003). At the same time as encouraging FDI, China recognized the need to export its goods abroad and the importance of competitiveness within its key industries. Of these key industries, the Textile and Apparel Manufacturing (TAM) industry plays a significant role.
The question arises: Why is the TAM industry in China of particular interest at this point? International trade in textiles and apparel has long been a very contentious issue in trade negotiations, especially amongst the signatories of the General Agreement on Tariffs and Trade (GATT) and subsequent World Trade Organization (WTO).
Textile and Apparel manufacturing industry is a labour oriented industry and offer entry level jobs to unskilled labour. An industry with natural comparative advantages for developing countries, the developed world has been seriously concerned with the impact that a non-protectionist environment would have on their domestic industries. Such concern led to the establishment of the Long-Term Cotton Agreement (LTA) in 1962 and later the Multi-Fibre Arrangement (MFA) introduced in 1974, which were very successful in restricting textile flows from developing countries, costing them somewhere around $20 billion each year (Trela and Whalley, 1990; Harrison et al., 1997).
In this respect, these arrangements played a significant role in undermining the competitiveness of the TAM industries in developing countries, especially countries such as China. However, in 1994 when the GATT was replaced by the WTO Agreement on Textiles and Clothing (ATC), which aimed to transition signatories to the WTO away from the quota system imposed on them (WTO, 2006a), the foundations for this anti-competitive position started to erode. Furthermore, with China joining the WTO in December 2001, followed by a session to all textile tariffs in 2005 (with the exception of the US until 2009), the global competitiveness of the TAM industry is likely to change significantly in the not too distant future. At the forefront of this debate will be the US, the world’s largest textile market, the UK, a significant market for textile production and consumption, and China, the new threat to competitiveness within these markets. Therefore, it appears current and worthwhile to examine the competitiveness of the Chinese TAM industry in relation to its US and UK counterparts.
1.1. Research Aim:-
With the former discussion in mind, this dissertation intends to address the following research aim:-
To examine how the Chinese Textile and Apparel Manufacturing industry might improve its export competitiveness to the US and UK markets.
1.2. Research Objectives:-
In order to address the research aim and research questions, the following research objectives have been set:
- To set out and discuss the multilateral trading system (MTS) that governs trade in textiles within China, the US and UK and its affect on the Textile and Apparel Manufacturing industry;
- To discuss the idea of competitiveness and its applicability to the Chinese Textile and Apparel Manufacturing industry.
- To present and justify the research methodology employed to assess the export competitiveness of Chinese textile manufacturers.
- To examine the export competitiveness of the Chinese textile industry in the US and UK market.
Chapter Two – Literature Review
This chapter aims to address the first two research questions: (1) To set out and discuss the multilateral trading system that governs trade in textiles amongst China, the US and UK and its affect on the TAM industry; (2) To discuss the notion of competitiveness and its applicability to the Chinese TAM industry. The following two sections and their sub-sections address each in turn.
2.1 The Multilateral Trading System:-
The multilateral trading system (MTS) as it is known today arose from the establishment of the General Agreement on Tariffs and Trade (GATT), which later became the World Trade Organization (WTO). Nonetheless, these two multilateral bodies – the GATT/WTO – were very different, adding important dimensions to the MTS through which trade is ‘governed’. These bodies and the decisions that are made through them have an overriding impact on trade and competitiveness in global markets, at least amongst the 149 member countries, of which China, the US and UK are members. In this section, some important background information relating to the GATT/WTO, as well as the Multi-Fibre Arrangement (MFA) that was so instrumental in determining the competitiveness of countries’ textile exports, is presented, before China’s relationship with these bodies is discussed.
2.1.1 The General Agreement on Tariffs and Trade (GATT):-
The General Agreement on Tariffs and Trade (GATT) was first signed in 1947. The agreement was designed to provide an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for resolving trade disputes. GATT membership now includes 149 countries. (http://www.ciesin.columbia.edu/TG/PI/TRADE/gatt.html). The GATT was never intended to be: “a charter for free trade” (Woolcock, 1999: 26). , it carried one core principle in the form of ‘non-discrimination’, which manifested itself through the notion of the ‘most favoured nation treatment’ and ‘national treatment’. These have been defined by Woolcock (1999: 26) as follows:
Most favoured nation treatment: the benefits of a trade agreement with any country’s most favoured trading partner are to be extended to all signatories of the agreement.
National treatment: once a good or service has been imported it is to be treated as national goods or services with regard to, for example, taxes, subsidies and all forms of regulatory policy.
Indeed, the GATT contained a large number of exceptions and loopholes that enabled countries, especially the more powerful and influential members, to avoid reciprocity by engaging in more preferential trade agreements with individual countries. GATT emerged in 1947 as somewhat of a compromise to encourage non-discriminatory trade measures. Organised into ‘rounds’ of trade negotiations, the early rounds between 1947 and 1961 focused on the reduction of industrial tariffs between countries. Whilst tariffs were reduced, these initial rounds were also known for their exclusion of agriculture, which continued until the Uruguay Round of 1994.
After 1961, the focus of exclusion moved from agriculture to textiles and clothing products, enabling selective import controls to be introduced in these areas. This has a significant bearing on the modern textiles industry that is the focus of this study. At first, import quotas were introduced on cotton products under the Long Term Cotton Agreement (LTA), which was later extended to include textiles and other clothing products in what became the Multi-Fibre Arrangement (MFA). The clear motivation at the time came from developed countries that wanted to protect their domestic textile and clothing industries from excessive foreign competition should cheap imports from developing countries threaten to establish a significant presence in their home markets.
The Uruguay Round (1986-94) was the most significant attempt by the international community through the GATT to both deepen and widen the MTS. Throughout the process, pressure from multinational companies (MNCs) in the developed countries led to the desire to deepen the GATT rules to include the protection of intellectual property rights (IPRs). A highly contentious issue at the time, developing countries resisted the push towards IPRs, as well as other issues such as the inclusion of rules of services. In the event, a compromise was agreed in which the developing countries accepted the inclusion of IPRs provided the MFA was brought to an end, halting the protection developing countries had been seeking across the textiles and clothing industries (Woolcock, 1999). The Uruguay Round was significant in the establishment of today’s MTS.
Multi-Fibre Arrangement (MFA):-
The LTA, established in 1982, was the precursor to the MFA, designed to set quotas on major importing countries of cotton textiles. In 1974, the LTA was extended to cover a much wider number of materials, encompassing textiles and clothing in general (Ernst et al., 2005). The aim of the LTA was to protect developed country markets from the damaging effect of more competitive (usually low cost) imports from developing countries, which had a natural (comparative) advantage in textile production. When Trela and Whalley (1990) conducted a study into the global effects of these trade restrictions on textiles and apparel as a result of developed country trade policy using a general equilibrium model based on 1986 data, they found that the annual gains by developed countries as a result of these barriers totalled some $23 billion each year.
Of these, the US market gained by some $12.3 billion per year and the EC around $2.2 billion. The MFA clearly restricted the competitiveness of developing country imports, heavily supporting relatively uncompetitive domestic markets within developed countries. A later study by Harrison et al. (1997) that also used a general equilibrium model, albeit to quantify the effects of the Uruguay Round, highlighted the impact of the removal of the MFA. In 1994, the MFA was replaced by a new agreement, the WTO Agreement on Textiles and Clothing (ATC), which aimed to transition signatories to the WTO away from the quota system that had been imposed on these industries (WTO, 2006a). The effect on China of the elimination of the MFA will be examined separately later.
2.1.3 The World Trade Organization (WTO):-
The WTO can be characterised as: “the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business” (WTO, 2006b). Formed in 1995 as a result of the Uruguay Round of the GATT, it has since widened to contain some 149 member countries.
The key functions of the WTO include administering trade agreements, acting as a forum for trade negotiations, handling trade disputes, monitoring national trade policies, providing technical assistance and training for developing countries and providing cooperation for other international organizations. Its main aim has been to facilitate the liberalization of trade amongst signatories. Upon its inception on 1 January 1995, it witnessed the creation of the ATC to replace the MFA. The ATC is discussed in the subsequent section.
2.1.4 Agreement on Textiles and Clothing (ATC):-
The goal of ATC is the elimination of all discriminatory trade policies reflecting textiles and clothing by 1 January 2005. It encompassed a number of key elements (WTO, 2006b):
(a) The product coverage, basically encompassing yarns, fabrics, made-up textile products and clothing;
(b) A programme for the progressive integration of these textile and clothing products into GATT 1994 rules;
(c) A liberalization process to progressively enlarge existing quotas (until they are removed) by increasing annual growth rates at each stage;
(d) A special safeguard mechanism to deal with new cases of serious damage or threat thereof to domestic producers during the transition period;
(e) Establishment of a Textiles Monitoring Body (“TMB”) to supervise the implementation of the Agreement and ensure that the rules are faithfully followed; and
(f) Other provisions, including rules on circumvention of the quotas, their administration, treatment of non-MFA restrictions, and commitments undertaken elsewhere under the WTO's agreements and procedures affecting this sector.
Performance of the ATC is monitored by the Textiles Monitoring Body of the WTO. However, not all of the WTO members are subject to the same quota restrictions in the short-term. According to Ernst et al., (2005), Canada, the EU and US also decided to maintain their quotas until January 2005. Furthermore, the US has received dispensation to not fully reduce its quotes until 2009.
2.1.5 Implications of Chinese Membership of the WTO on its TAM Industry:-
China joined the WTO on 11 December 2001, which immediately resulted in significant trade policy reforms, which have affected prices, output, employment, trade volumes, factor returns and household incomes. The new system for international textile trade will have a far- reaching impact on the international pattern. According to the needs of competitions, China’s textile industry has to change the economic growth mode; adjust the industrial structure and productive forces to narrow the gap between China and the outside world; and create a market environment for fair competition (Waiqiao Cheng 2006).
To understand the impact that membership has had on Chinese tariffs and non-tariff barriers, Ianchovichina and Martin (2004) employed a standard GTAP (Global Trade Analysis Project) model. The results highlighted that in preparation for membership of the WTO, China substantially cut both types of trade instrument. In terms of non-tariffs barriers they suggest that China reduced these by around 5 percent in 2001 from roughly 9.3 percent in the mid-1990s, whilst tariff barriers have decline from some 40.6 percent in 1992 to 12 percent in 2001. As part of its membership of the WTO and the ATC, China, along with all other signatories (with the exception of the US) had to eliminate all quotas that had been imposed on members from 1 January 2005.
“Among China’s trading partners the largest absolute gains accrue to North America and the Western Europe, with close to half of the gains coming from the elimination of the quotas they impose on China’s exports of textiles and clothing – and thus the elimination of the efficiency and rent transfers to China” (Ianchovichina and Martin, 2004: 20).
To improve the competitiveness it is very important to keep up with the international track and it has become the emergency of each enterprise. WTO help the enterprises realise the construction and development of imformationization in the following ways.
Firstly, they pay more attention to the information, human resources management; via network technology so as to reduce the cost and enhance the production efficiency; form their own windows of promotion, sales and communication with the clients via network technology so as to strengthen the contact with outside.
Secondly, they set up industry network platform. It form the industrial community and accelerate the communication among the enterprise; obtain the latest, rich industrial and commercial information and grasp the chances in time; establish cooperation relationship, and learn from each other.
Thirdly, Chinese enterprises not only obtain the overseas industry information, but also open contacting offices overseas, building double channels between enterprises and the world, both on line and off line. In this way, it enables Chinese enterprises understand the operation styles of international enterprises and change their notions; develop the overseas markets and become stronger and stronger in international competition
Fortunately, textile exports will lead export expansion in China, considering increasing its presence in world textile markets. Indeed, China is now the largest exporter of textiles in the world (Nordas, 2004).
2.2 Defining Competitiveness:-
For the purposes of this dissertation, competitiveness is defined in terms of productivity (Porter, 1990). As Krugman (1994) states: “competitiveness has different meanings for the firm and for the national economy…A nation’s competitiveness is the degree to which it can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously expanding the real incomes of its citizens. Competitiveness at the national level is based on superior productivity performance”. However, as Porter (1990) states: “Firms, not nations, compete in international markets”. Therefore, it is important to understand competitive advantage at the firm / industry and national level.
2.2.1 National and Industry Competitiveness:-
Government and industry across the globe is concerned with the notion of competitiveness; why one nation succeeds whilst another one fails when competing internationally. The aim to explain why particular industries prospered over others in international trade was called ‘comparative advantage’, which was a refinement of Adam Smith’s notion of ‘absolute advantage’. Absolute advantage suggested that nations would export those items in which it was the world’s low-cost producer; hence having an absolute advantage over all other nations. Comparative advantage simply recognized that market forces were involved, which would determine those industries where a nation’s resources would be allocated based on their relative productivity.
Here, a nation may import a good where it has an absolute advantage if could be even more productive elsewhere. This theory was developed towards an assumption where all nations have equivalent technology but different factor endowments such as land, labour, natural resources and capital. As a result, nations will be strongest in international markets when exporting goods from industries with advantages in particular factors of production and importing goods from those where they have a comparative factor disadvantage (Ohlin, 1933; Dornbusch et al., 1977; Jones and Kenen, 1984). On this basis, a country such as Korea and China, with abundant supplies of low-cost labour would perform best in international markets such as apparel and electronic assemblies, which require labour-intensive production. Equally, Sweden has historically performed strongly in the steel industry because it has natural deposit of iron ore with very low quantities of phosphorous impurities, enabling it to produce particularly high quality steel (Harkness, 1983; Sveikauskas, 1983; Leamer, 1984).
Technological change has resulted in considerable differentiation amongst products and the industries that serve them, as well as having a significant impact on economic of scale. Furthermore, globalisation has change the nature of industries and markets, where firms and products compete in global markets, typically with highly integrated global supply chains in which multiple factor endowments are brought together across multiple nations to serve global markets.
This has meant that many factor advantages have become fleeting: an advantage today can quickly be eroded tomorrow by an industry or firm around the world that achieves technology leadership or one in which the costs of production are somehow subsidized by governments (Porter, 1990). A number of potential explanations have emerged to try and rectify the limitations of comparative advantage, including the generation of economies of scale (Graham, 1923), technology leadership (Wells, 1972), Vernon’s (1966) product cycle theory and the emergence of the MNC (Hood and Young, 1979; Dunning, 1981; Caves, 1982; Dunning, 1987). However, all of these have their own strong limitations.
2.2.2 National Competitive Advantage:-
On the basis that a nation can affect the competitive advantage to be achieved and sustained at the level of an individual industry, it is important to understand how a nation achieves competitive advantage. First, industries and industry segments achieve and sustain competitive advantage in different ways. As a result, the sources of such advantage must be investigated at the level of individual industries or industry segment; how certain firms in a given industry are able to differentiate themselves significantly or achieve cost advantages compared with firms in competing nations.
Second, since firms compete in global markets their value chains may cross many countries outside their home country, which will also have an impact on their competitiveness. Therefore, it is important to understand why a particular nation’s home base is particularly attractive or advantageous for competing within a given industry. After all, it is at this home base where the firms strategy is set, its core product developed and key skills are acquired and nurtured. Third, international competitiveness is not a static process. Industries, firms and products must undergo a continual process of improvement, innovation and renewal to stay ahead of competitors and meet customer needs.
A nation must be successful in creating an environment in which innovation, improvement and the development of human capital meets the demands of changing global competitive conditions. Finally, industries that comprise firms that achieve and sustain global competitive advantage are usually those whom recognize a market need and pursue is aggressively. It is therefore important to understand how a nation helps create an environment in which firms react in this way (Porter, 1990). Porter’s (1990) research highlight a number of key determinants of national competitive advantage, which included (1) factor conditions, (2) demand conditions, (3) related and supporting industries, and (4) firm strategy, structure, and rivalry, as well as government action in influencing these. The complete system explaining this process has been called Porter’s ‘diamond’.
The researcher here focuses on Porters Diamond model because the research undertaken uses Porter’s diamond model to discuss Chinese competitiveness in the Textile and Apparel manufacturing industry in analysis and discussion conducted later.
Porter (1990: 71) described these determinants of national advantage as:
Factor conditions: The nation’s position in factors of production, such as skilled labour or infrastructure, necessary to compete in a given industry.
Factors of production may include, for example, labour, land, natural resources, capital and infrastructure. Labour and knowledge resources reflect the quality, skills, mobility and costs of individuals within an economy, which will be determined by levels and availability of education and training, its stocks of scientific, technical and market knowledge, as well as comparable standards of living that govern wage rates. Capital resources refer to a nation’s unique configuration of capital in terms of its amount and costs, which will affect the nation’s ability to save and the structure of its capital markets.
Based on the traditional theory of trade, comparative advantage, a nation will trade those goods and services in which it is relatively well endowed in terms of factors of production. For more advanced nations and industries it is likely that many of these factors of production will not be inherent to that nation but will have to be developed over time. In this respect, factors of production can be divided into basic factors – natural resources, climate, location, unskilled and semi-skilled labour and debt capital – and advanced factors – highly educated personnel, university research institutes, modern digital data communications infrastructure – of which the later are the most significant in helping a nation and its firms to achieve higher-order competitive advantages to include differentiated products and proprietary technologies.
Demand conditions: The nature of home demand for the industry’s product or service.
Broadly, home demand conditions confer potential economies of scale for a firm within their home market, but it also shapes the development of an industry. Three attributes are particularly important: (1) the composition of home demand; (2) the size and pattern of growth of home demand; and (3) the mechanisms through which home demand is transmitted into markets abroad. Home demand composition reflects the nature of home buyer needs and how firms understand and respond to these needs.
An industry will achieve a competitive advantage over its foreign rivals if it responds to these needs faster. . Having a large home demand for a product or services can act as a competitive advantage by leading to economies of scale and learning, as well as encouraging a nation to invest in the infrastructure necessary for that industry to develop. Indeed, substantial investments in R&D and facilities will require a large domestic demand to encourage the influx of capital.
However, large home demand is not enough in itself. Ideally, there needs to be a large number of potential buyers so that power rests with suppliers, but also considerable competition amongst firms within the industry to avoid complacency. The rate of home demand growth it important because this encourages firms to innovate faster, train employees and invest in the development of new products and facilities. Finally, a firm must be able to convert its home market demand advantage into an advantage abroad. Here, a firm will benefit if it has connections with MNCs in its domestic market or its part of the supply chain for large international buyers. Alternately, cost advantages or differentiated products may help to encourage demand pull from overseas suppliers.
Related and supporting industries: The presence or absence in the nation of supplier industries and related industries those are internationally competitive.
In terms of supplier industries that are internationally competitive, this provides firms within a number of competitive advantages. First, firms may achieve a more efficient, rapid, early, and perhaps even preferential access to what may be the most cost-effective inputs. However, access to these inputs alone is insufficient. These inputs must be used effectively. The firm must establish close working relationships with firms within the supplier industries in order to capture information on new methods and opportunities.
There may even be the opportunity for joint problem solving. Ideally, these suppliers will also be competitive globally, encouraging them to continuously innovate and upgrade rather than becoming captive to serving domestic needs only, and as a result, potentially lazy in their development. A number of these arguments can be put forward for the advantages to be achieved by having world-class related industries. In particular, firms can coordinate and share many of the activities within their value chain, including information and technical interchange. Their proximity and cultural similarity also provide these firm linkages with advantages over their foreign rivals.
Firm strategy, structure, and rivalry: The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry.
The strategy and structure of a firm have a profound effect of the competitiveness of an industry in global markets. Management practices and approaches will impact on the training of employees, the orientation of leadership, the style of management (whether hierarchical or group based, authoritative or empowering, etc…), the relationships that are established with employees, management and consumers, as well as the approach taken towards internationalisation.
In this respect, China is a particularly interesting example, known for its rigid hierarchical administrative system (Vanhonacker, 2004) and the importance of guanxi, deep personal relationships that are vital for conducting business (Stuttard, 1999). In terms of firm rivalry, this is vital to ensure that firms do not become complacent in their domestic market, which will inevitability decrease their competitiveness abroad.
Clearly, government plays a prominent role in the competitive advantage of a nation and its industries through its policies towards trade, the economy, education, the shaping of demand, trade instruments and the like. At the same time, it should be noted that these determinants of national competitiveness do not operate in a static environment but are dynamic in nature. For example, without domestic rivalry, it is unlikely that firms will fully take advantage of their domestic demand as a means to innovate and upgrade, instead behaving in a typical and uncompetitive, monopolistic fashion.
Chapter Three – Research Methodology
This chapter presents and justifies the research methodology employed to assess the export competitiveness of Chinese textile manufacturers exporting to the US and UK markets. The study will be based on primary and secondary research.
3.1 Primary Research: - Primary data is data that does not already exist for the purpose of the research undertaken. It has to be collected via field research.
Some advantages of primary research are:-
- specific to the firm and industry
- Up to date information
- Specific to the purpose.
However, there are also some disadvantages which are as follows:-
- Can be difficult to collect and take long time to collect
- May provide mis- leading results if the sample is not large enough or chosen with care; or if questionnaire questions are not worded properly.
- Chances of bias.
This dissertation follows the questionnaire method for primary research. The researcher has chosen 10 managers from the Chinese textile and apparel industry, 5 managers from U.K multinational retailers and 5 managers from U.S multinational retailers to conduct the questionnaires. The reason behind choosing 10 managers from the Chinese textile and apparel industry while selecting a smaller number of U.K and U.S managers (5 each) , is because this dissertation aims to examine the competitiveness of the Chinese textile and apparel industry and the other two countries (U.K and U.S) are guiding them in doing so. Therefore this dissertation focuses more towards Chinese textile and apparel industry. Also due to time constraints and nature of research the numbers of manager chosen is optimum.
The researcher has taken into account those industries in China which are exporting their goods to U.K and U.S markets. The researcher focuses on major U.K and U.S. retailers which are importing their textile goods from China, namely J.C. Penny, Gap Plc, Next plc, Marks and Spencer, Banana Republic etc.
Questionnaire method of primary research has been employed for the purpose of the research. One of the main reasons for adopting questionnaires is because of different geographical locations. The research undertaken is based on the textile market of three different continents and it is not physically possible or feasible for the researcher to conduct personal interviews. Moreover, due to the different time zones and the ambiguity associated with the availability of managers, the researcher can not conduct telephonic interviews.
Therefore this method is the best suited for the research undertaken. The researcher utilises personal links with the managers of Chinese textile and apparel industries who export their goods to well known multinational Textile and garment companies in U.S and U.K. Further these Chinese managers have personal links with Fabric managers, Sourcing managers, Fabric Technologists, General Manager (Imports) etc of multinational textile companies situated in the UK and US . Thus these Chinese managers have approached managers in the UK and US known to them, for the completion of the questionnaires.
3.1.1 Quantitative and Qualitative research:-
Quantitative methods are those which focus on numbers and frequencies rather than on meaning and experience. Quantitative methods provide information which is easy to analyse statistically and fairly reliable. Quantitative methods are associated with the scientific and experimental approach and are criticised for not providing an in depth description.
Qualitative methods are ways of collecting data which are concerned with describing meaning, rather than with drawing statistical inferences. They provide a more in depth and rich description.
The research at hand focuses on gathering qualitative data rather than quantitative data. The questionnaire seeks qualitative results on the basis of the experience of managers so that this dissertation fulfils its aim. The questionnaire designed is more subjective in nature and it aims to get the views of managers and what they feel on the basis of their experience in the current scenario focusing on the export competitiveness of China’s TAM industry in relation to two developed countries, the US and UK.
3.1.2 Inductive and Deductive Approach:-
Inductive research approach collects data, analyses the data, and then forms a theory on it. This method has been constructed to be more scientific. Whereas in deductive approach is reverse of the inductive approach. In deductive approach a theory is made first and then it is tested. The Research approach for this dissertation is a deductive approach instead of an inductive approach. Deductive research is a study, which is based on concepts, and theoretical structure is developed and then tested by an empirical observation. In this dissertation a theory on competitiveness is framed on the basis Porter’s diamond and literature review. Consequently the theory is tested by the results of the questionnaire.
3.2 Secondary Research:-
Secondary data are that already exist in some form, collecting secondary data is sometimes known as desk research.
Some advantages of secondary research are:-
- The lower cost of research;
- The enhanced speed to gain access to information;
- The potential high quality of data;
- The opportunity to carry out longitudinal analysis;
- The opportunity to perform cross-cultural analysis; and
- More available resources to focus on data analysis.
Some disadvantages of secondary research are:-
- Data can be out of date
- Not specific to user’s needs
Secondary data will be collected from books, journals, industry reports and magazines, company and annual reports. The study will be focusing on the export competitiveness of China’s Textile and apparel industry in relation to two developed countries, the US and UK.
3.3 Framework for Analysis:-
The framework applied to analyse the competitiveness of the Chinese Textile and apparel industry as an exporter into the US and UK market is based on the questionnaires, answered by managers from Chinese, U.K and U.S textile and apparel industry and Porter’s diamond (1990). This includes an analysis of factor conditions, demand conditions, related and supporting industries, as well as firm strategy, structure and rivalry. Government policies are also an essential element of this. Furthermore, an examination of some of the critical success factors (CSF) central to the Chinese industry and the industries ability to respond to these is discussed. In the chapter that follows, the relative national competitiveness of these three countries is discussed at industry-level competitiveness.
Chapter Four – Analysis and Discussion
This chapter aims to address the research aim directly by providing analysis and discussion on how the Chinese TAM industry might improve its export competitiveness to the US and UK markets. In so doing, the chapter contains four main sections. First, the national competitiveness of the Chinese, US and UK are discussed on the basis of secondary research and compared to provide the context within which the Chinese TAM must compete. Next, the Chinese TAM industry is discussed in terms of Porter’s (1990) diamond with the help of results collected from questionnaire: its factor conditions, demand conditions, supporting and related industries, as well as firm rivalry, structure and strategies.
This highlights the competitive elements upon which the industry must be built if it is to be competitive internationally. Third, the actual competitiveness of the Chinese Textile and Apparel Manufacturing industry with respect to the US and UK (EU) markets is discussed, to suggest how successful the industry has been in these markets. Finally, this analysis and the results of questionnaire are applied to improving the export competitiveness of the Chinese TAM industry in US and UK markets.
4.1 National Competitiveness:-
Porter (1990) highlights that the relative competitiveness of the economies of the US, UK and China are important to an understanding of industry-level competitiveness. After all, decisions regarding national economic policy will have a significant impact at the industry level. As such, this section discusses the competitiveness of the Chinese, US and UK economy, as well as providing some comparison to highlight the key drivers of competitiveness in China.
4.1.1 Chinese Competitiveness:-
When one considers national competitiveness, few countries have become so competitive internationally, in such a short space of time, as China.
Much of this strength is evident in the state of the Chinese economy, which in the first quarter of 2006 again beat expectations, growing by some 10.2 percent. China’s huge global trade surplus highlights its competitiveness internationally, reaching $23.3 billion in the first quarter of 2006, whilst export growth continues to increase.
Nonetheless, within the current investment- and export-led paradigm, the competitive prospects for China are far reaching. Whilst many might expect these to be focused on the developed countries of the Western world, Chinese firms have demonstrated considerable capacity to expand their global reach into the developing nations of Latin America, Africa, East Asia and the Middle East (Ali, 2006).
Rather, China has become competitively dominant in a number of these markets through a more stealthy approach. Whilst such internationalisation has involved the influx of heavy machinery, transportation and electronic commodities, which have caused havoc amongst local producers trying to compete, the low cost and reasonable quality of these products have meant that there has been relatively little backlash from the countries involved
The key message is that China has managed to become globally competitive by pursuing markedly different strategies from many other nations, especially those within the developed world. This will be discussed further later.
4.1.2 US Competitiveness
According to the 2004 competitiveness of nations ranking published by the Institute of Management Development in Switzerland, the US continues to be ranked the most competitive nation in the world for the fifth year running. According to Garelli (2004):
“The US has the largest and most buoyant economy in the world. As the most competitive nation in the world, it is still expected to lead the recovery. The odds are a good bet in this respect, with sound GDP growth of 3.1% for 2003. This intense economic activity has however triggered an even bigger balance of trade deficit, which is now reaching a record level of $581.6 billion. Nevertheless, it may not be as dramatic as it appears. Over the past 10 years, the US has always run a deficit in its trade balance, although not in such proportions. The reasons behind it today may be different” (18).
Indeed, many US-based multinational corporations (MNCs) have invested considerable funds abroad as a means of gaining access to more cost-effective sources of labour and raw materials, reducing their operating costs and increasing their productivity in the process. As such, a significant proportion of these imports have been produced by US MNCs in developing countries that become end products in the US domestic market. In this respect, a nation’s trade deficit may increase whilst its competitive position remains the same. (Garelli, 2004).
4.1.3 UK Competitiveness
Between 2000 and 2004, the UK has fluctuated in its global competitiveness although overall has slowly lost some of its competitiveness, sinking from 15 to 22 place in the rankings. Much of this can be attributed to a strong economy, rising living standards and wage levels, which has made the manufacturing industry in general a poor competitor globally (Garelli, 2004). As such, it is no longer globally competitive across many of its former manufacturing strongholds.
In this respect, the UK is similar to the US in that it has many home-based MNCs that have invested heavily in economies from which these goods are now imported. As such, whilst the UK does not command the competitiveness of the US, investment abroad has enabled the economy to remain somewhat competitive globally.
4.1.3 A Comparison
Despite some fluctuation China (as was the case some 5 years earlier in 2000) was ranked just two places behind the UK in 24th position, highlighting the extent to which is has developed globally from a competitive standpoint. The country has quickly become the world’s home for manufacturing and most attractive location for foreign direct investment (FDI). Clearly, one of the key areas of comparison has been that of trade, especially relating to the US and China.
The reality appears to be a combination of factors, including the revealed comparative advantage (RCA), the exchange rate, labour costs, FDI, cultural factors and export-promoting policies. RCA compares a country’s growth rate in world trade in relation to the growth rate of world exports in which a rate in excess of 1 implies the country is competitive globally. The results show that China scored above 2 for the period between 1980 and 2000, reaching 3.66 between 2000 and 2003.
This compares to a rate of less than 1 for the US between 1980 and 1995, only exceeding 1 slightly between 1995 and 2000 to then reach negative numbers (some – 0.49) between 2000 and 2003. The UK also scored very low during this period in comparison to China. Furthermore, China has pegged its exchange rate such that the currency has become undervalued. This has enabled the country to become particularly competitive in export products with heavy weights, such as leather goods, wood products, machinery and equipment.
Labour costs have also been substantially lower over the long term in China and are substantially lower relative to the US and UK. This can be attributed not only to China’s lower purchasing power parity (PPP) exchange rate or unit value comparisons, but also an enormous rural population and an increasing volume of mobile urban workers. Whilst wage levels have certainly increased in export-led areas of China, the supply of low-cost labour is expected to remain for some time.
China has managed to improve the quality of its goods over time relative to the US and UK, despite remaining somewhat behind industries in these countries. Nonetheless, progress has been such as to encourage MNCs in countries such as the US and UK, as well as many others, to invest in China. Finally, when China made the jump to open up its borders it pursued policies that supported its export-orientation, including free trade zones, special tax concessions and retention of earned foreign exchange, amongst other things.
4.2 Understanding China’s Competitiveness in the Textile and Apparel Manufacturing Industry
This section provides an analysis of the factor conditions, demand conditions, related and supporting industries, as well as firm strategy, structure and rivalry on the basis of results from questionnaire and that affect the competitiveness of the Chinese TAM industry.
4.2.1 Factor Conditions
Nordas (2004) and others (e.g. Pomeranz, 2004) highlight that the factor conditions for the TAM industry are very specific:
“The clothing industry is labour-intensive and it offers entry-level jobs for unskilled labour in developed as well as developing countries. Job creation in the sector has been particularly strong for women in poor countries, who previously had no income opportunities other than the household or the informal sector. Moreover, it is a sector where relatively modern technology can be adopted even in poor countries at relatively low investment costs.
At the same time, the textile and clothing industry has high-value added segments where design, research and development (R&D) are important competitive factors. The high end of the fashion industry uses human capital intensively in design and marketing. The same applies to market segments such as sportswear where both design and material technology are important. Finally, R&D is important in industrial textiles where, again, material technology is an important competitive factor” (1).
In accordance with the above theory 80% of U.S and 86 % of U.K respondents said that ‘they outsource their fabric from china because they get required quality product at very low price and the main reason behind it is low cost labour’.
Currently, skill levels are weak, which suggests that in the short-term, at least, China will continue to focus on the labour-intensive, entry-level side of the TAM industry.
74% of the Chinese respondents said that ‘We are investing more on training and development of our employees to improve their skills. Also various Quality circle programs are running in our industries to improve the quality level of product. Moreover, most of the companies are providing black belt and six sigma trainings to their managers to develop their managerial skills’.
Whilst the industry benefits from considerable investment and capital resources, which can be used to fund more advanced technology that will enable the Chinese TAM industry to enter the more lucrative high quality, high fashion sectors, the development of an infrastructure to support this will take some time. Furthermore, China suffers generally from a poor information and administrative infrastructure, which must be developed before the TAM industry has the factor conditions it needs to compete across all sectors of the TAM market globally. Chinese government is continuously trying to make improvement in those areas. In answer to the question, “How is the Chinese government improving its infrastructure to improve its flow of trade and hence competitiveness in global market?”, 69% of Chinese respondents said that government is investing every year a huge budget on improving infrastructure and communication systems. They are further reducing import tariffs on importing new technologies from other countries. Moreover, the central government pays subsidies to the state-owned textiles industry every year in low-cost loans, financial subsidies, workers welfare payments, bad debt re-financing etc.
4.2.2 Demand Conditions
Whilst China exports a considerable volume of its textiles and apparel products, there must be sufficient domestic demand to foster the development of the industry. In the case of China:
“Consumers spend a smaller share of their income on clothing than in the past, although consumers shop more frequently and buy a larger number of clothing items than before. The response from producers to the challenge of slow growth in total demand is to build on consumers' love of variety and provide new fashions and a broad variety of sizes, colours, designs etc. at a frequent rate” (Nordas, 2004: 20).
56% of U.S and 45% of U.K respondents said that ‘the Chinese TAM industry may improve their marketing strategies to market their (Chinese) own brands and they should improve competitiveness of their product in china as well’.
From the above discussion we can conclude that china itself is a big market and to improve their competitiveness in U.K and U.S market they can first improve their brand strategies of their own product in China and then they can launch it to world market.
4.2.3 Related and Supporting Industries
It is expected that the global TAM industry will start to converge on a few countries that will supply most of the goods for the rest of the world’s markets. In fact, it is predicted that the major textile and apparel purchasers will reduce the number of countries from which they source their products by as much as half. As a result, it is expected that the related and supporting industries of the major global players in the TAM market will be provided with additional advantages leading to increased global market share (Mayer, 2005).
In answer to the question,’ what are the areas where the Chinese textile and apparel industry should concentrate on to improve its export in U.S market?’ a sourcing manager from Calvin Clothing replied that ‘As most retailers prefer to outsource their requirements from a single supplier as it saves their time and money. Therefore, China needs to widen and integrate the mixed products basket of textiles and clothing items as it would be incremental to the exports. In addition, they should be more fashion oriented.’
Certainly, as it stands, the larger domestic manufacturers have focused on clustering in key TAM areas, such as Guangdong, the Pearl River Delta, Shanghai, and others, around which the many related and supporting industries, including accessories, trims and components have located (Yeung and Mok, 2004).
4.2.4 Firm Strategy, Structure and Rivalry
WTO accession was perceived to have a ground breaking effect on the TAM industry in China, enabling it to command a monopoly in world markets. However, as Field and Leach (2004) suggest in their research, lifting the quotas that have been imposed on China will not immediately provide them will such a monopoly.
95 % of U.S and 98% of U.K respondents said that they do not want any import restrictions as it adversely affect their business.
China may take advantage, as major retailers in U.K and U.S do not want any restrictions on imports. So if china fulfils their entire requirement then it can be a lucrative destination for importers worldwide.
Also a number of other countries, including India, Vietnam, Cambodia, Mauritius and Myanmar have been able to establish themselves as suppliers within the global TAM industry. As a result, China should acknowledge its core competencies and focus more on making strategies to compete with their other south Asian competitors.
For the purposes of a discussion of firm strategy, structure and rivalry, an end to quotas will serve to open up the domestic market to increasing opportunities for trade, which is expected to increase levels of competition amongst incumbents. In time, such competition inevitably leads to falling prices, more efficient means of production, and higher quality goods that are exported to markets including the UK and US. The provision of higher quality at lower cost only goes to strengthen the competitive position of China globally within the industry.
The above discussion has interesting implications for China. On the one hand, China is expected to be a dominant force in the global TAM industry and as the discussion to follow demonstrates, has made considerable strides in this regards. However, clearly the country is only starting to develop the building blocks upon which such competitive dominance can be established. For example, in its factor conditions, it is yet to develop the infrastructure required to support the industry across the more profitable sectors. In terms of demand conditions, there still remain considerable gaps in the industries ability to foster demand and serve existing demand at the right price and quality level. Nonetheless, and perhaps most importantly in the short-term development of the industry, China has been successful in establishing industrial clustering around the TAM industry to foster the development of major players and sufficient related and supporting industries, as well as encourage a competitive environment for firms following its successful trade negotiations with the WTO, US and EU.
4.3 Textile and Apparel Competitiveness:-
This section aims to discuss the success of China in exports, helping to highlight its actual competitiveness at this point in time.
4.3.1 China and the US:-
In 1995, China represented 14 percent of US imports of textiles and 15 percent of apparel imports. By 2002, little appears to have changed in this regard. China still represented 14 percent of US textile imports although has increased just 1 percent to 16 in apparel imports (Mehta, 2004; EIU, 2005).
First, China was by far the dominant player in both textile and apparel imports to the US during these periods.
Growth in U.S. Clothing and Textile Imports, 1990-2006
(U.S. $ Billions)
Source: U.S. Department of Commerce, Office of Textile and Apparel (OTEXA)
Second, and most significantly in terms of its long-term implications, Chinese imports were being controlled by a quotas system. The need for such as system, despite China’s accession to the WTO highlights the threat of Chinese imports and the extent of its competitiveness as viewed by the US.
The importance of the quotas is evident in the level at which trade negotiations relating to the TAM industry between China and the US take place. US President made a trip to Beijing to restricted textile and apparel imports for a further period in order to provide the US will some breathing room and the President with some abatement of pressure from domestic lobbyists. After all, textiles and apparel trade with China is already argued to have cost the US some 400,000 jobs since 2001 alone, whilst further reductions in quotas could have an enormous impact on US competitiveness in the industry globally, with many US textile and apparel MNCs having large investment in countries including Bangladesh, Sri Lanka, Cambodia, and others
4.3.2 China and the EU / UK:-
In 1995, China represented 9 percent of EU imports of textiles and 14 percent of apparel imports. By 2002, both the levels of textile and apparel imports have grown. In terms of textile imports to the EU, these grew by two percent to 11 percent, whilst apparel imports reached a staggering 20 percent, a growth of some 6 percent. On the negative side, Chinese imports of textiles and apparel have been very competitive into the EU because the EU has not had an adequate monitoring system that checked these import levels. As such, countries have been unaware when the important quota was reached, enabling China to flood the market with an excessive (or at least, unplanned) volume of cheap imports. As a result:
“By August 80m Chinese-made bras, sweaters and other apparel had piled up at European ports as the 2005 quotas for these items had already been filled. It took another round of negotiations, in early September, to release these goods to irate EU retailers, who were panicking over the thought of a Christmas season with empty shelves” (EIU, 2005).
The question arises: Will the EU allow such levels of imports in the future or will they be more careful in controlling the relative competitiveness of these imports. This question is particularly pertinent when examining the major textile and apparel importers into the EU. In terms of textiles imports, these include Turkey, India, Bangladesh, Pakistan, the Korean Republic and Czech Republic. In terms of apparel imports, these include Turkey, Romania, Tunisia, India, Morocco and Poland. It can clearly be seen that a number of these key imports are expected to become a part of the EU in the near future. This being the case, it is likely that the EU will protect its home market and accession countries, enabling them to establish a strong competitive base within the EU zone. Overall, it is unlikely that this will have a large effect on Chinese competitiveness in the TAM industry although it will no doubt slow its progress.
4.4 Improving Export Competitiveness
As Ross (2005) suggests, the Chinese TAM industry is ‘bursting at the seams’, waiting in anticipation for the abatement of quotas. Certainly, there is no question that at this point the Chinese TAM industry is the most competitive globally in those sectors that utilize unskilled, low-cost labour. Whilst the end of quotas would arguably result in a considerable increase in market share for the Chinese TAM industry, the underlying structure of this competitiveness is far from complete.
First, China has to examine its national competitiveness as a means of facilitating its wider global competitiveness. In particular, the discussion has highlighted that domestic demand in China is still relatively low whilst infrastructural arrangements required to support factor conditions are still widely lacking. This presents the Chinese TAM industry will a number of challenges if it is to improve its export competitiveness. First, it must improve the marketing of its own products within the domestic market in order to increase latent demand and encourage a more consumer-driven culture.
Since overseas demand cannot be guaranteed, nor can the actions of foreign governments, China must establish its own, more stable market for its products. This will ensure the long-term security of its export competitiveness in major markets such as the US and UK (EU). Second, the Government must play a key role in helping to reduce the bureaucratic, administrative structure that underpins industry in China, as well as providing the logistics and telecommunications infrastructures that will facilitate the flow of trade.
Clearly, the Chinese government has support the TAM industry through measures aimed at encouraging industrial clustering. However, without these other infrastructures, the Chinese TAM industry may structure to react rapidly enough to changing demand within the US and UK markets, reducing its relative competitiveness compared with more agile, local supplies, such as Turkey to the UK market.
Second, China needs to focus on those critical success factors (CSFs) that provide it will its competitiveness. These are more specific that national factors. In the case of China, its competitive advantage in textile and apparel exports clearly resides within low-cost, high-volume goods. As such, it should focus on product quality, cost innovation and leadership, and agile production capacity. According to research by Smook (2005) into the competitiveness of the Chinese TAM industry, a number of CSFs have to be addressed it the industry is to be successful globally: First, some 65 percent of respondents believed that technology was very important. They perceived that competitors in South East Asia would soon overtake
China if improvements in innovation and upgrading of manufacturing process were not made. A further 55 percent of respondents highlighted the importance of information flow and 60 percent on-time delivery. This is a potential problem for China considering its weak logistical and information infrastructure. Another 49 percent of respondents highlighted the importance of training employees and yet they agreed that skill levels were poor and management proficiency within the industry was not much better. The research by Smook (2005) further suggests that whilst the Chinese TAM industry current has an advantage over other nations in terms of its export competitiveness to the US and UK markets, it must focus on improving these areas of product quality, cost innovation and leadership, and agile production capacity if it is to succeed in the long-term.
Third, the Chinese TAM industry could improve its export competitiveness to the US and UK markets by focusing more on training in order to produce the skilled labour that would allow these manufacturers to enter the more lucrative high-quality, high-fashion sectors that are particularly important in the US and UK markets. As the research by Smook (2005) suggests, there will always be another nation that manages to find cheap costs of production and undercut the market. However, as China becomes more developed and living standards rise, such low-cost labour will not last forever, even if it will remain for some time. It therefore makes competitive sense for a developing economy such as China to focus on trading-up into those sectors with higher margins. This could represent a key future source of competitiveness for the dominant players within the Chinese TAM industry.
This dissertation has aimed to examine how the Chinese TAM industry might improve its export competitiveness to the US and UK markets. In so doing, it addressed four research objectives: (1) To set out and discuss the multilateral trading system (MTS) that governs trade in textiles within China, the US and UK and its affect on the TAM industry; (2) To discuss the notion of competitiveness and its applicability to the Chinese TAM industry; (3) To present and justify the research methodology employed to assess the export competitiveness of Chinese textile manufacturers; and (4) To examine the export competitiveness of the Chinese textile industry in the US and UK market.
The dissertation highlighted the considerable changes that are occurring in the global textiles market, which have been in motion for some 20 years or more. In particular, these relate to the ending of the restriction of trade in textiles and apparel as brought about by nations increasing membership to the WTO. However, China’s membership represented somewhat of an exception in this regard. The enormous potential for the Chinese TAM industry to flood the world market with low cost, reasonable quality goods has ensured that quotas have been negotiated and re-negotiated with particular respect to the US and UK (EU) markets.
The aim has been to enable US and UK textile and apparel MNCs and domestic retailers time to adapt to these changes, whilst minimizing in the short-term the inevitable damage that a completely free-trade zone would have on US and UK markets. The reactions of the US and EU towards China would suggest that the Chinese TAM industry is extremely competitive with respect to the US and UK markets. In many respects, the figures suggest that this is the case, especially in the EU marketplace where quotas have been less strictly applied. Nonetheless, a closer examination of the underpinning elements of competitiveness suggests that the conditions for the long-term export competitiveness of Chinese textiles and apparel are not yet in place.
The analysis suggests that the Chinese TAM industry is suffering from an infrastructural deficit in terms of its ability to transport goods on-time and receive real-time and accurate market information. The industry also suffers from a dependence on low-cost, unskilled labour. However, with rising living standards within China and the greater mechanisation of the industry, this presents the Chinese TAM industry will increasing long-term threats from other low-cost providers abroad. In order to increase its export competitiveness to the US and UK markets, it was suggested that the Chinese TAM industry focus on three areas: First, China has to examine its national competitiveness as a means of facilitating its wider global competitiveness, improving the marketing of its domestic products, increasing latent demand for textile and apparel goods, and making key investments in logistical and telecommunications infrastructures.
Second, the Chinese TAM industry needs to focus on those critical success factors (CSFs) that provide it with its competitiveness, including product quality, cost innovation and leadership, and agile production capacity. This will require greater levels of training amongst employees and management, as well as investments in the efficiency of the industry’s supply chain and scientific and technological base. Third, the Chinese TAM industry could benefit by focusing more on training in order to produce the skilled labour that would allow these manufacturers to enter the more lucrative high-quality, high-fashion sectors that are particularly important in the US and UK markets.
It should be noted that despite the wealth of information on competitiveness and the global textile and apparel industry, the dissertation would have benefited considerably from interviews with importers of Chinese textile and apparel goods within the US and UK markets. Furthermore, the dissertation relies heavily on Porter’s (1990) framework of national competitive advantage, despite some of the fair criticisms laid on this framework by Grant (1991). Nonetheless, it can be argued that as a general framework for understanding international competitiveness it has yet to be surpassed in the academic literature.