textiles & garment industry update

7/23/2019 Textiles & Garment Industry Update

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ANZ INSIGHTS

COMMERCIAL BANKING ASIA

TEXTILE & GARMENT INDUSTRY

MARKET UPDATE

JULY 2012


2/12

> The Textile and Garment industry is dynamic and has witnessed multipie shifts throughout its history. Recent events in

China, the single largest producer and exporter of textile and clothing, have created a hint of change that may representthe early stages of another geographical shift for this industry.

> Any structural change in China has the potential to change the industrys shape, potentially creating opportunities forthose able to exploit them.

> Chinas textile and garment industry has built its current dominance on the lowest production costs in the world, but thisfoundation for success is being undermined by the countrys growing wealth. Labour, land and regulatory costs are onthe rise, pushing prices up and driving some customers to South East Asia and beyond.

> While there is some evidence of increased investment interest in other South Asian countries that provide cheap labour(particularly Vietnam and Indonesia), supply chain and scale benefits enjoyed in China will take years to replicate.

> Other emerging trends that are likely to drive the evolution of this industry are the increased use of a China plus onestrategy, often associated with the re-shoring of some production (most evident in America), in addition to manufacturingmoving inland into other Chinese provinces in search of cheaper labour.

Industry estimated to be worth USD4.4 trillion1

The global textile and clothing industry is estimated to be worth approximately US$ 4,395 bn with global trade totalling US$ 600 bn1.

The US market is the largest and continues to grow estimated at 5% per year. In combination, the US and EU nations account for

64% of global clothing consumption.

AN OVERVIEW

TEXTILESTextile manufacturing is capital intensive and therefore relatively slow to move and adjust

> Textile production is more capital intensive than clothing manufacturing and therefore tends to have higher exit

barriers and longer establishment lead times.

> The cost structure of the industry and the capital intensity of the manufacturing approach means that minimum

orders are relatively large. Manufacturers have limited ability to swiftly adjust production to consumer tastes.

> The capital intensity of textile manufacturing has risen significantly over the past 20 years, as has firm

concentration. However capital intensity is still generally much less than that of manufacturing as a whole.

GARMENTSGarment production traditionally has had a very high dependence on cheap labour

> Garment manufacturing is a classic labour intensive activity that, along with similarly labour intensive

manufacturing industries such as toys, travel goods and shoes, many low wage developing countries have

established a comparative advantage in, as exporters to the world market.

TEXTILES AND GARMENTS

AN INDUSTRY TRANSFORMATION IN THE MAKING

Source: WTO, D&B, Economist and ANZ Analysis

Note 1: Dun & Bradstreet


3/12

The industry has a history of dramatic geographical shifts

Driven by the importance of cheap labour to the competitiveness of industry participants, the search for low wages underpins a

history of dramatic geographic shifts in the primary production base for the Textile and Garment industry. Three such shifts have

occurred to date (see the timeline below) and recent events in China, the worlds largest producer and exporter of textile and

garments, have led to speculation that we are at the early stages of another. Will the shift from China to other South Asian countriesaccelerate?

CHASING CHEAP LABOUR A HISTORY OF SIGNIFICANT CHANGE

Shifts are buyer driven based on cost reduction strategy

Historically, this shifting globalisation of production has largely been buyer-driven by pressure from retailers such as Wal-Mart,

Sears and JC Penny, and fashion-oriented apparel companies like Liz Claiborne, Gap, and The Limited.

The cost-reduction strategies of these companies has shaped the industry they have retained design and marketing functions but

largely contracted out the production of their apparel to firms in low-wage countries. In effect these companies and those that

have mirrored them have became manufacturers without factories.

This globalisation of production has resulted in a complex set of commodity chains. Many of the largest clothing companies have

most of their products manufactured through arrangements with different independent suppliers, with no one supplier producing

more than a fraction of the companys output.

Most globalised industry in the world

These manufacturers, though concentrated in Asia, are scattered throughout the world, making the clothing industry one of the

most globalised of all manufacturing activities.

TIMELINE AND GEOGRAPHICAL SHIFTS

Three geographical shifts so far fourth shift underway?

Origin

The modern form of textile manufacture using factories with machinery driven by artificial motive power dates

from the first revolution started in Britain in the late 18thcentury and was based on imported cotton.

Late 18th

century

First Shift From North America and Western Europe to Japan

Initially based on imported cotton & British spinning machinery and later (post world war II) based on its own

indigenously developed state of the art equipment, Japan became the most preferred destination.

1950s and

early 1960s

Second Shift Japan to Hong Kong, Taiwan and South Korea

The second shift was from Japan to Hong Kong, Taiwan and the Republic of Korea. These countries dominated textile

and clothing exports in the 1970s and early 1980s.

1970s and

early 1980s

Third Shift Hong Kong, Taiwan & South Korea to other South Asian countries

The third migration was a move to other developing countries in Asia. In the 1980s production moved principally to

mainland China, but also to Indonesia, Malaysia, the Philippines, Sri Lanka and Thailand.

1980s and

early 1990s

Fourth Shift ??? China to Vietnam, Indonesia and Cambodia??

Rising labour costs, appreciation in Chinese currency and increasing shipping costs may be pointing towards another

geographical shift as China potentially begins to lose its competitive advantage in this industry.

2012

1-2

TEXTILE&GARMENTINDUSTRY

Source: WTO, Economist and ANZ Analysis


4/12

Developing countries produce half the worlds textile exports and nearly three-quarters of the worlds clothing exports

The global Textiles and Garments industry forms an important component of world trade flows, particularly for some developing and

emerging countries where clothing accounts for a large proportion of total exports.

In 2010, world textiles exports were valued at $251bn and clothing at $351bn, representing 1.7% and 2.4% respectively of total world

merchandise trade. Today, developing countries produce half the worlds textile exports and nearly three-quarters of the worldsclothing exports.

Asia accounted for 56.6% of world textiles exports in 2010. While a net exporter, China is also a major importer of textiles

Trade patterns in Textiles and Garments are similar although variations do arise, largely driven by differences in capital and labour

intensity (textile manufacturing tends to be a capital-intensive, garment making labour-intensive).

Overall, Asia accounted for 56.6% of world textiles exports in 2010. The EU and the US are the biggest importers of textiles, followed

by China, which needs fabric for its large garments industry.

EU, USA & Japan are the leading importer of garments

For clothing, China is the biggest exporter, followed by the European Union (including intra-EU trade) with a 35% share of world

garments exports. Overall, Asia accounted for 57% of world clothing exports in 2010. The major importers of clothing are the EU and

the US, with Japan trailing in third place.

TODAYS TEXTILE AND GARMENT INDUSTRY

TEXTILE AND CLOTHING TRADE AT A GLANCE

78South & Central America

200142Total

ClothingTextiles

KEY COUNTRIES

In USD Bn Exports Exports

Intra Asia 65 41

Europe 24 65

North America 21 63

Africa 10 5

Middle East 9 8

CIS 5 11

78South & Central America

200142Total

ClothingTextiles

KEY COUNTRIES


Intra Asia 65 41

Europe 24 65

North America 21 63

Africa 10 5

Middle East 9 8

CIS 5 11

Significant intra region trade ~ 80% of total trade Largest exporter of textile and garments in the world Significant intra region trade ~ 81% of the total trade

EUROPE ASIA AMERICAS

22Middle East

11578Total

ClothingTextiles

KEY COUNTRIES


Intra Europe 58 98

Asia 5 5

Africa 5 1

CIS 4 5

North America 4 3

South & Central America 1 0

22Middle East

11578Total

ClothingTextiles

KEY COUNTRIES


Intra Europe 58 98

Asia 5 5

Africa 5 1

CIS 4 5

North America 4 3

South & Central America 1 0

1116Total

ClothingTextiles

KEY COUNTRIES


Intra Americas 12 10

Asia 2 0

Europe 1 0

Africa 0 0

Middle East 0 0

CIS 0 0

1116Total

ClothingTextiles

KEY COUNTRIES


Intra Americas 12 10

Asia 2 0

Europe 1 0

Africa 0 0

Middle East 0 0

CIS 0 0

-

$50

$100

$150

$200

$250

Textiles Garments

56%

57%

58%

59%

Exports % of global exports

-

$20

$40

$60

$80

$100

$120

$140

Textiles Garments

30%

31%

32%

33%

34%

35%


-

$3

$6

$9

$12

$15

$18

Textiles Garments

-

2%

4%

6%

8%


GLOBAL TEXTILE INDUSTRY -TRADE STATISTICS

Top 10 Textile Exporters

2010(Value)

Share inGlobal Trade

In USD Bn


2010(Value)


In USD Bn

1.7%4

2.8%

3.1%

3.6%

3.9%

4.4%

4.9%

5.1%

30.7%

31.1%

7

8

9

10

11

12

13

77

78

Indonesia

Japan

Pakistan

Turkey

Taiwan

South Korea

United States

India

China

Europe

4

5

5

5

6

7

7

23

29

100

Indonesia

Europe

China

United States

Japan

Turkey

Vietnam

Mexico

Bangladesh

South Korea

1.6%

25.1%

11.6%

8.8%

2.7%

2.5%

2.3%

1.9%

1.9%

1.8%

1.2%

1.2%

1.3%

1.9%

3.1%

3.2%

3.6%

4.5%

34.5%

43.9%

4

4

5

7

11

11

13

16

121

154

Thailand

Mexico

United States

Indonesia

Vietnam

India

Turkey

Bangladesh

Europe

China

3

4

5

5

7

8

17

27

82

252

Turkey

Europe

United States

Japan

China

Canada

Russia

Switzerland

Australia

South Korea

0.8%

71.8%

22.3%

7.3%

4.8%

2.3%

2.0%

1.4%

1.3%

1.2%

GLOBAL TEXTILE INDUSTRY -TRADE STATISTICS


2010(Value)


In USD Bn


2010(Value)


In USD Bn


Source: WTO, 2010


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CHINA IS THE MARKET LEADER LOOSING ITS SHINE?

China dominates textile and apparel manufacturing and for years has exported deflation to the benefit of western consumers

Over the past two decades or so, China has gained a dominant position in textile and apparel manufacturing at the expense of

manufacturers in more developed countries those based in nations such as U.S. and Canada in particular have suffered a long

period of decline. To consumers in Europe and North America however, the dominance of China as an exporter of low cost but

competitive quality goods as meant lower inflation, lower costs of living and higher living standards.

Long the manufacturing base for the developed world, Chinese businesses are now being squeezed from many angles. Costs,

particularly wages, are rising quickly while the appreciation of the Yuan has reduced profitability. Though shipping costs are well off

their highs, factor in the impact of rising oil prices on freight costs, and China appears to be fast loosing its competitive advantage.

Squeezed from many angles, China may be loosing its competitive advantage. China retains many advantages however

There is some evidence of increased interest in moving production to other Asian countries. It is a long time since China offered

merely wage arbitrage, however it far exceeds its competition in providing supply chain and scale benefits, has a huge domestic

market and is increasingly investing in productivity. For many of these reasons, China remains a preferred destination for Textile and

Garment production. The seeds of change, though, may be in the air.

CHINESE CHALLENGES I: CURRENCY APPRECIATION

Yuan appreciated by almost 8% in the last 3 years

The Yuan has appreciated by almost 8% in the last three years with Chinese goods becoming more expensive in international

markets as a result. Currency exposure is an important consideration for the Chinese industry. Despite the size of its domestic market

it remains highly dependent on export demand. In addition, the industry is fragmented; comprised of many small and medium sized

manufacturers that together lack significant bargaining. The tolerance range for currency appreciation is not wide.

As a rule of thumb, it has been suggested that for every 1% appreciation of the RMB, textile industry profits decrease by between 2% and 6%

A recent report published by the China Banking Research Centre suggested that a rapid appreciation of the RMB, paired with a

deteriorating external environment, would pose an enormous challenge for Chinas export enterprises. The report suggested that

less than 30% of export enterprises can withstand a 4% appreciation or more while in the textiles, apparel, shoes and hats space only

44.5% can withstand a 2% appreciation; 6% would test all players.

As a rule of thumb, it has been suggested that for every 1% appreciation of the RMB, textile industry profits decrease by between 2%

and 6%.

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At present, exchange rates are forecast to remain steady in the near future

0.140

0.144

0.148

0.152

0.156

0.160

Mar

09

Jul

09

Nov

09

Mar

10

Jul

10

Nov

10

Mar

11

Jul

11

Nov

11

Mar

12

CNY / USD last 3 years CNY / USD forecast

Source: WTO, Economist, Bloomberg and ANZ Analysis

0.155

0.160

0.165

0.170

0.175

0.180

Sep

12

Dec

12

Mar

13

Jun

13

Sep

13

Dec

13

2014 2015 2016


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CHINESE CHALLENGES II: RISING LABOUR COST

Twenty-one local governments have recently hiked their minimum wages: labour costs have risen by almost 20% a year for each of the

past 4 years

Wage inflation in China has raised questions over the countrys future as the preferred outsourcing destination for multinationals in

search of cheap labour. Factories have historically clustered in coastal provinces and, it is in these areas where costs have been

climbing relentlessly.

Labour is the key driver of this increase though taxes, land prices, and stricter regulation have all had an impact. Unlike in other

countries, cities and provinces in China set their own minimum wages. Twenty-one local governments have recently hiked their

minimum wage, some by double digits.

Labour costs have on an average surged by 20% a year for the past four years. Chinas coastal provinces are losing their power to

attract workers out of the hinterland and are also facing issues in retaining workers.

As reported by The Economist Magazine1, Joerg Wuttke, a veteran industrialist with the EU Chamber of Commerce in China, predicts

that the cost to manufacture in China could soar twofold or even threefold by 2020.

Should this trend continue Chinas position as the worlds most preferred outsourcing destination will be under threat

Also, AlixPartners, a consultancy, offers this intriguing extrapolation: if Chinas currency and shipping costs were to rise by 5%

annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make

them in China and ship them there.1

While it is probably not realistic to expect that China will cost as much as the US by 2015, China is not getting any cheaper. As the

gap narrows more companies will look seriously at alternatives.

Source: http://www.businessweek.com/articles/2012-03-07/china-boosts-the-minimum-wage

Note 1: The Economist, Manufacturing: The end of cheap China, 10th March 2012



7/12

AS CHEAP CHINA PROGRESSIVELY DISAPPEARS, WHAT WILL REPLACE IT? DOES SOUTH EASTASIA OFFER CHEAPER ALTERNATIVES?

Firms making clothes and shoes have already started to shift to other low cost nations

Small and high-tech companies appear to be weighing the pros and cons of moving out of China. None-the-less, a number of firms

especially those making clothes and shoes have relocated their business and moved to Bangladesh, Cambodia, Indonesia or Vietnam.

Nike is a prime example. Nike used to make most of their trainers in China, but many of its big suppliers have moved elsewhere andin 2010 Vietnam became the companys biggest production base worldwide. Unless a new way of making shoes and clothing

without manual labour emerges (ie with the use of technology), these businesses will move again in the future; Myanmar looks

tempting, provided that reforms there continue.

China faces intense competition from very low cost nations in Africa as well as from Vietnam, Malaysia, Bangladesh, Pakistan and the

Philippines. However, China offers many advantages not currently available in other countries labour may be cheap but other

factors make China hard to leave:

Many benefits available in China still outweigh rising costs and thus China remains as an attractive destination

1. Booming domestic market.

2. Increasing productivity.

3. Sophisticated supply chain.

4. Large and flexible labour pool to meet seasonal demand.

An alternative to leaving China, is to seek lower costs elsewhere on the mainland. While many labour intensive businesses are now

moving from coastal regions to relatively less expensive inland China, inland infrastructure remains significantly behind its coastal

equivalents on par with other South East Asian countries. Additional moving costs are very significant and logistics networks are

under developed currently coastal supply chains are unrivalled.

Moving inland in China, China plus one strategy and re-shoring are other initiatives followed by companies

So what options exist for a firm that decides it is not yet time to leave coastal China? Many firms are adopting a China plus one

strategy, usually putting an additional production base in a lower-cost country in Asia. This idea is in fact now being extended to the

repatriation of some manufacturing facilities to rich countries. Diversification is one driver - a string of natural disasters in recent

years has shown that lean supply chains can snap all too easily.

One of the more interesting recent developments in apparel manufacturing has been a return of some of the business to

manufacturing plants based in America. Some designers and retailers find that their orders are not of sufficient size to interest major

offshore plants, or their need for fast delivery makes it impossible to use overseas manufacturers.

As wages continue to rise in emerging nations and shipping costs remain sensitive to fuel price spikes, some portion of clothing

manufacturing will continue to re-shore. Growing productivity from better manufacturing technology will add to this trend.

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8/12

Median inventory days peaked in FY2011 particularly for Asian companies due to ongoing financial turmoil in Europe the largest importer

of textile & garment in the world

Asian companies dominate the textile industry with 65.5% of companies in the sample are domiciled in Asia

Working capital performance have been relatively stable during the last 4 years except for 2011 where significant movement was felt for

both Global as well as Asian companies

Notes

> Statistics shown are sourced from Capital IQ database for companies that have revenues between USD 15m to USD 150m per year based on the latest financial report.

> The sample size considered for the analysis includes 800 Global companies out of t hat 527 are Asian companies.

> The Asian geographical split is based on country of domicile.

BENCHMARKING THE MAJOR PLAYERS:

RECEIVABLE DAYS

GLOBAL COMPANIES ASIAN COMPANIES

36 3740 38 36

62 6368 67

60

97 99107 104

97

FY2007 FY2008 FY2009 FY2010 FY2011

1st Quartile Median 3rd Quartile

2528 26 27 26

44 4647

4439

6670 70 71

59

FY2007 FY2008 FY2009 FY2010 FY2011


INVENTORY DAYS

62 59 56 57 59

101 102 98 99 104

153 157 156 156163

FY2007 FY2008 FY2009 FY2010 FY2011


55 55 51 52 52

91 9384 84

95

132 137

123128

140

FY2007 FY2008 FY2009 FY2010 FY2011


PAYABLE DAYS

72 70

78 7769

38 4044 43 43

18 1822 21 21

FY2007 FY2008 FY2009 FY2010 FY2011


5458 60

60 58

2832

36 36 36

12 1316 15 14

FY2007 FY2008 FY2009 FY2010 FY2011



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Conclusions

> As the industry evolves, infrastructure improves, supply chains develop, those players with flexible strategies, including moving

further inland and/or pursuing a China plus one strategy stand to benefit.

> Despite competition from cheaper South East Asia locations, China maintains a significant advantage due to the size of the

domestic market, supply chain concentration and scale benefits accumulated over 30 years.

> RMB appreciation coupled with rising labour, materials, land and regulatory costs will make it increasingly important for China

based players to seek alternative competitive advantages in order to differentiate themselves in the global marketplace.

> Although working capital has been relatively stable over the last five years, inventory days peaked in FY2011 and credit appears

to have been tightening as suppliers demand quicker payments. Prudent WC management and access to financing will become

an increasingly important driver of profitability and success, especially if the European financial crisis worsens.> Smaller firms are more at risk from current market dynamics including RMB appreciation, China plus one, credit tightening and

access to financing which inherently favour, players with scale.

7-8

BENCHMARKING


Working capital performance have been relatively stable during the last 5 years for both Global as well as Asian companies

CASH CONVERSION CYCLE

GLOBAL COMPANIES ASIAN COMPANIES

58 56 54 54 60

108 109 105 104 102

168 170 167 164171

FY2007 FY2008 FY2009 FY2010 FY2011


61 56 54 56 60

104 10594 98 95

159153

140148

155

FY2007 FY2008 FY2009 FY2010 FY2011


NWC / SALES

15.7% 15.5% 15.2% 15.4% 15.9%

26.4% 26.8% 26.6% 26.2% 25.4%

39.3% 39.7%40.0%

39.5% 39.0%

FY2007 FY2008 FY2009 FY2010 FY2011


15.5% 15.0% 14.4% 14.8% 15.6%

26.0% 26.5%23.6% 23.8% 23.9%

38.1% 37.6%34.1% 35.3%

38.0%

FY2007 FY2008 FY2009 FY2010 FY2011



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textiles & garment industry update

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