Competitive Strategies Of Chinese Textile Industry Economics Essay

The history of textile goes back to thirteen century when cloth was made at home by hand. A major revolution was witnessed in the 18th century, when machines were used to manufacture goods, production was done on a large scale in big mills and finished goods started getting exported. 19th century was the age of rising sophistication and increasing trade surpluses. However, the end of the 19th century marked the decline of textile industry in industrially advanced countries (Mary Bellis, 1984)

On one hand the exports of developed countries was declining, the developing countries like china, India, Egypt showed a tremendous growth in cotton and yarn consumption and apparel production after 1990’s. According to the American Textile

Manufacturers Institute (ATMI), the US textile companies were already facing

“extreme price pressures” from China, whose exports to the United States have

surged since joining the World Trade Organization two years ago.

The textile and clothing industries, in China is one the traditional industries which has strong international competitiveness and a certain degree of comparative advantage over other countries. It has a substantial competitive advantage in terms of low-cost exports to the developed countries and provides a stiff competition to other developing countries like India, Pakistan, and Bangladesh etc ( website, science articles). Prior to 1995 under Multi-Fibre Agreement there were quantitative restriction on trade by the developing countries via quota and thus their exports were limited. But in 2005, the textile and clothing industry was brought under GATT rules and the quota system was relaxed. This surged the textile exports from low cost countries like China to the other part of the world

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. To boost the export various competitive strategies were adopted by the Chinese which further enhanced their international competitiveness and comparative advantage over other countries (WTO website). For example, most of Chinese companies were government owned and were operated on routine losses as strategy to increase exports (See exhibit 1). According to the ATMI, in competing with China, they are not only competing with low wages, they are competing with companies that do not have to make a profit. While, other Asian countries have also cost advantages and they can capture the world’s markets (Ayub Meher, 2002). The focus of the dissertation would be to investigate the competitive strategies of the Chinese textile mills and the comparative advantage they have on India, mainly after relaxation of quotas.

Why China and India?

The driving factors to study China and India is the recent spur in the textile exports. In 1999, total world textile export was about US $206 billion and China the world leader with 16% share. This share of china has now grown up to 43% by the end of 2008. Similarly India has also witnessed double digit growth in production of textile and clothing apparel for last one decade. The growth rate in export of clothing apparel was as high as 49.2% for china and about 20% for India during the 2005-2008 periods (Euro stats, 2009).The tables exhibit 2 & 3 make the picture clearer.

There has been a drastic change in pattern of world exports after relaxation of quotas and the low cost countries like China have benefitted and exploited the situation to their uttermost.

Research objective

The main objective of report is examine through what competitive strategies Chinese textile industry achieved international competences mainly after relaxation of quota’s and the comparative advantage the Chinese mills posses over Indian textile mills. The report would also focus on challenges faced by the industry in present scenario and its possible future remedies.

Research question

The main research question that the report would focus on are summed up as follow

What are the major reasons for the dramatic change in world textile trade pattern after 1995?

Prior to 1995, under multi-fibre agreement there was restriction on exports by developing. After 1995, Agreement on trade and clothing was introduced which relaxed the quota in a systematic manner (See exhibit 4). After 2005, textile and clothing industries was brought under GATT rules in which the quota’s on textile exports by the developing countries was completely abolished. This part would study the impact of relaxation of quota system on the textile exports from the developing countries. However this will not be the essence of the report.

Through what competitive strategies have Chinese and Indian textile industry achieved international competitiveness and competence, specifically after relaxation of quota system?

This part would emphasise on the aspects and strategies like cost leaderships, supply chain management, vertical integration, government policies and incentives , import of technology and machinery used, entrepreneurial and managerial innovation etc that helped these mills to further enhance their international competitiveness after quota relaxation. There were many also special incentives given to textile sector after 2005 which would also be studied under this part.

What comparative advantage do the mills from China possess over the mills from India?

In this part the cross-case comparison between the Chinese and Indian mills would be drawn and factors bringing comparative advantage to Chinese mills would be critically examined and ascertained.

What are the challenges faced by the industry in the present scenario and what could be there possible future remedy?

This report would be concluded by bring out the challenges being faced by the Indian and Chinese textile mills as it expand globally and what could be their possible remedies to these challenges in long run

Literature review

Product life cycle model

According to this model by (Vernon, 1996) there are three stages for international product: a new product is developed in industrially advanced country, as the product matures, production is increased and soon the product and production standardize and the product is produced in developing countries.

This may be the reason for the shift of textile trade from developed countries to developing countries like India and China. Textile goods were developed in industrially advanced countries, with time its production increased and it production and product itself got standard. Now when its technology is easily available it is being produced in developing countries.

Investment development path (IDP)

This theory brings out the relationship between foreign investment and economic development. In stage1, an economy is at low economic development stage and experience very low inward or outward investment. As the economy grows in stage2, it attracts more inward investment. In stage3, the inward investment becomes much higher than outward investment. In last stage outward investment become very high with production being shift to countries with low economic development.

As per this model, developing countries are in stage two and three and are witnessing more inward investment from the west countries who are in stage four.

Classical theory

According to this theory a country has absolute advantage in producing some commodities which it prefers to produce to maximize it overall growth. Even Government promotes production of such commodities like textile and clothing in India and China. For example in India the textile sector get interest and capital subsidy through TUF scheme in order to promote export of textile and clothing apparel.

Stage of development of textile industry

According to Walter, 1984 there are six stages of development of textile industry by which a national textile could be ranked. These six stages are as follows

Embryonic stage: this is very early stage of textile production in a country where mostly goods are made for domestic use and to attain self sufficiency

Export of native apparel: as the market matures, it get access to global market and its start to export its native product to get global recognition

Increase in production and export: with the new global market, the demand for the fabric increases due to which there is drastic increase in production and goods are exported

Increase in sophistication and trade surplus: in this stage there is increase in use and import of modern technology and machine and world class fabric and apparel are produced that are exported leading to huge trade surpluses for the economy

Full maturity: in this stage scope for expansion and technological improvement dies down. An industry in a country reaches its saturation point

Decline: In this stage the cost of producing textile fabric become too high, there is significant decline in production which is shifted to other low cost countries.

As per this model the countries like china and India are in stage four where there increase in sophistication and modernization large scale production is being carried out and most of which are exported leading to huge trade surpluses. While the countries like US has attained full maturity as there is no scope for expansion while the countries like UK has reached declining stage and most of their production has been shifted to low cost countries.

Cost theory and strategy

According to Barney, 2006 a cost leadership business strategy focuses on gaining advantages by reducing its costs to below those of all its competitors. There are mainly six sources from which this cost advantage can be derived by the firm. These are summed up as follow:

Economies of scale: with the large volume of production, economies of scale exist for the firm which lower the cost up to certain level of output. So cost could be reduced by increasing the volume of production

Diseconomies of scale: but after certain level of production, a firm get exposed to overcrowding and managerial conflicts which degenerate diseconomies in an organisation and increase the cost. So basically the cost curve is U-shaped, it is minimum at certain level of output.

Learning curve economies: during the early stages a firm is engage in ‘forward pricing’ where the product is priced below the actual cost. This is also another reason for the low cost of a product

Low cost access to productive-inputs: productive inputs include aspects like capital, labour, raw material and land etc. The firm which has low cost access to one or more of these productive inputs is more likely to produce low cost product than its competitors and rivals.

Technological advantage: the machines, computers and other technologies etc that a firm uses effect their cost. In some industries like textile these physical technology difference between the firm can create requisite cost difference giving better technological firm a comparative advantage over other.

Policy choice: this mainly relates to kind of products and services that a firm wishes to produce and sell. Such choices have an impact on their relative cost position.

This model would help to ascertain the source of low cost of Chinese and Indian mills. With removal of quota, large scale production is being carried out bringing economies of scale. Since the both the country are in early stage of learning curves, this may add to their low cost also. China and Indian mills have a low cost access to almost all product inputs like labour, land and raw material which further help them to bring the cost. With relaxation in import of technology world class machineries are being imported from European which helps in producing low cost goods. Thus almost there is presence of every source of low cost in Chinese and Indian textile industry gives them a cost competitive advantage over the mills in west.

According to American institute of textile paper, 2002 China was perceived to be the biggest threat to the textile and apparel industry. Relaxation of quota would increase the Chinese share in textile import to US by 71% and will leave as many as 6, 30,000 sale force jobless (See exhibit 5&6). The Chinese underpriced the rest of world in 22 out 26 apparel category (See exhibit 7). According to the paper (Matthias Knappe, 2004) after the relaxation of quantitative restriction on exports, the competition will intensify, the developed economies like that of Europe, north America and Japan would show a slow a growth rates and new markets are emerging in higher-income South-East Asian countries as well as in the high- and middle-income groups in the larger developing countries. These emerging markets will become important targets for future apparel producers. According to, ‘Change in the pattern of world textile trade paper (Ayub mehar, 2002) found that ‘ The US companies face some of their fiercest competition from government-owned Chinese companies that routinely lose money. According to the ATMI, in competing with China, they are not only competing with low wages, they are competing with companies that do not have to make a profit. While, other Asian countries have also cost advantages and they can capture the world’s markets’. The international journal of business and management (2006) has drawn the following model of Chinese textile industry promotion

According to this model textile industry is affected by some internal and external variable. Internal variable are the controllable variables and competitive advantage of the industry depends not only on internal variables but also on external variables

Research methodology

For research, qualitative study will be carried out (Merriam 1998: yin 1989). Looking over the landscape of qualitative procedures shows perspectives ranging from postmodern thinking (Denzin & Lincoin, 2000), to ideological perspectives (Lather, 1991), to philosophical stances (Schwandt, 2000) to systematic procedural guideline (creswell, 1998). All perspectives could be found in this unfolding model of inquiry called ‘qualitative research which tends to provide intimate details and in depth information about the particular case. It is excellent way to apply theories at micro and macro level. It helps in collection of data which is precise, descriptive, narrative and informative.

Research will conduct based on both primary and secondary data. Published data such as business journals, magazines, industry sources, WTO and Euro stats, business periodicals, annual reports, news releases and other article and publication will be used as the source of secondary data. Use of both primary and secondary data would enable cross checking as well as cross comparison of data. It would also help in verifying the findings of the primary data. Secondary data used will be from reliable sources and up-to-date. Library data base will also to build theoretical framework on which the research question is based.

Proposed research strategy

Qualitative report will be carried out by using multiple case study (Yin 1994) and interview approach. In this approach multiple case studies will be used. Case study approach helps in developing analytic and skills to solve the complex issue in question and also give chance to apply new knowledge and skill at the same time. It allow the possibility of studying an organisation and its environment in a natural setting and obtain rich insight into complex process (Yin, 1994).For this purpose, three case studies, one of US (western) mill, Chinese mill and Indian mill will be conducted to draw out the possible strategies adopted by the mills from developing countries to gain international competitiveness. Data protocol of the case studies will be divided into two parts, one would focus on the trade before removal of quota to ascertain the change in world trade pattern and second part would focus on strategies adopted by developing country after this change. For first part aspects like the firm’s turnover, export, import of raw material, machines, labour employed, supply chain, product differentiation and expansion of these firms before ATC, during 1995-2005 and after removal of ATC (2005) will be examined and periodical comparison would be made to see the change in trade pattern. Second part would focus on financial year 2008-09 of these firms in which aspects like investment level, cost structure, ownership pattern, experience of enterprise, quantum turnover, exports, supply chain, raw material and technology being used, product differentiation, government aid, banking and finance facility, innovation and R&D etc to draw out the source of competitive advantage of developing countries over west. Also the cross-case comparisons will be made to bring out the comparative advantage China posses over the Indian mills. Empirical data from these case studies would be used o analyses the competitive strategies used by Chinese and Indian firms. The findings of the case studies would be verified by conducting the structured face-to-face interview of at least three managers from US, China and India respectively. Using case studies findings for the interview would also ensure only relevant question to case would be asked to the mangers. The interview conducted would be structured due to investigate nature of the research and to draw the comparison between the Chinese, Indian and western mills. It would also make sure that only relevant information is asked and thereof is used for the report. Face to face interview would make sure that respondent properly understood the questions. It would also help in clarifying various doubts during the interview and would ensure that any kind of discomfort, distress that the respondent faces is detected through his body language. The interviewer by looking at the facial expression of the respondent can easily understand what he really want to say. Whilst structure interview may constrain the scope of information but it will give the research a greater reliability to compare and conclude. The following diagram would present a clearer picture of the expected research strategy.

Adapted from Yin (1994), P.49

Research Project Schedule

1/5/10

21/5/10

10/6/10

30/6/10

20/7/10

9/8/10

29/8/10

Tasks

Background Reading/Literature Review

Preparation of First Outline Draft

Collecting Data

Analysing Data

Finalization of Outline and Literature Review

Writing Data Analysis

Writing Research Methodology

Writing Discussion and Conclusion

Completing First Draft

Revision of Chapters

Binding

Bibliography

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MERRIAM, S. B. (1998). Qualitative research and case study applications in education. San Francisco, Jossey-Bass Publishers.

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Competitive Advantage of Chinese and Indian Textile and Clothing Industry by science articles (February, 2010)

Jay B. Barney & W.S Hesterly (2006) :Strategic Management and competitive advantage concept and case, pg 116-142

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