Exploration and Thinking of China's Textile Industry 'Going Global'

China is currently the world's largest producer, exporter, and consumer of textiles and garments. In 2014, China's total fiber processing accounted for over 50% of the world's total, and its textile and garment exports accounted for nearly 37.4% of the world's total. In recent years, with changes in the domestic and international economic environment, China's textile industry has not only seen a slowdown in the growth rate of its production scale, export volume, and total investment, but also a significant decline in its share of major export markets, with some overseas orders even leaving China. To cope with these changes, more and more textile companies in China are investing in factories overseas, and Vietnam is becoming one of the important destinations for overseas investment by Chinese companies. By transferring new production capacity and leveraging the globalization of procurement, production, and sales, domestic companies have significantly improved their operating efficiency.

Dual factors have prompted the "going global" of China's textile industry.

In 2014, China's manufacturing industry's foreign direct investment reached 19.33 billion USD, far exceeding the amount of foreign direct investment attracted during the same period. By the end of 2014, the domestic textile industry had invested in and established more than 2600 textile and garment production, trade, and product design companies in over 100 countries and regions worldwide, most of which are located in Asia. From 2004 to the present, about 200 domestic garment companies have built production workshops in Southeast Asia.

Trade factors and cost factors are the main reasons driving domestic textile companies to invest overseas.

In terms of trade factors, some companies are trying to cope with certain trade protection measures from countries such as the US and Europe. For example, Shenzhou Knitting Group invested in a factory in Cambodia as early as 2005 to break through the restrictions on product "origin" and avoid potential anti-dumping or "special protection"; some companies are trying to circumvent trade barriers. For example, Tianhong Textile Group has started production in Turkey and Uruguay, organizing production and sales locally to save the high tariffs of 30% set by the customs of these two countries; some companies are trying to enjoy special trade policies. For example, in 2011, the EU announced the Generalized System of Preferences (GSP) for the world's least developed countries, and many Southeast Asian countries were included. Therefore, if exporting garments from China to Europe requires a 12% tariff, exporting from these countries can enjoy tax exemption, which has attracted many domestic textile companies to invest in factories in Southeast Asia.

In addition to trade factors, comprehensive costs have also become an important factor restricting companies' daily operations, including: Labor costs. Taking the average annual wage increase of manufacturing employees in Jiangsu, Zhejiang, and Fujian, the textile industry clusters, as an example, the data for these three places from 2010 to 2013 reached 18%, 16%, and 17%, respectively; in addition to the natural increase in wages, corporate welfare in welfare expenses has also increased significantly due to changes in the population employment structure (employees' food, accommodation, leisure and entertainment expenses). At the same time, the lag in vocational education has led to a shortage of skilled workers needed in the textile industry, resulting in rising labor costs and difficulties in recruitment. Land costs. Most textile companies in China are concentrated in the eastern provinces. With the increase in orders and the expansion of production capacity, the construction of new factories has become inevitable. However, land prices in China's eastern region are currently soaring, exceeding the capacity of enterprises. Raw material costs, mainly referring to cotton costs, account for the largest proportion of textile companies' production costs. Since 2011, in order to increase farmers' income, China has adopted large-scale purchases of domestic cotton and imposed quota restrictions and a 40% tariff on imported cotton, resulting in a serious shortage of high-quality cotton. Domestic cotton prices have been 30% higher than international market prices for three consecutive years, directly pushing up the production costs of Chinese textile companies. Other costs: Tax burden costs. According to rough calculations from textile companies, for an ordinary garment with a market price of less than 100 yuan, the tax burden, including national taxes, local education surcharges, social security, and water conservancy funds, is as high as 27.44%, excluding various administrative and business charges that companies often face; Environmental costs. Currently, China's energy conservation and emission reduction situation is becoming increasingly severe. The new "Environmental Protection Law" strengthens the environmental responsibility of enterprises and increases their environmental costs; Energy costs. The textile industry's production has a high demand for electricity, so electricity costs are also a key part of the company's cost accounting, and the current high electricity prices in China are an undeniable fact.
Vietnam is becoming an important destination for overseas investment by domestic textile companies.

In Southeast Asia, a region favored by domestic textile companies for investment, Vietnam, due to its own characteristics, is becoming an important destination for overseas investment by textile companies. Specifically, these include:

Abundant labor resources.

Vietnam's total population is currently about 90 million, with about 50 million people of working age, representing huge market potential. Moreover, the fact that there are more female than male workers in Vietnam meets the textile companies' preference for female employees. Although workers' wages in Vietnam have risen rapidly in the past few years, the average wage of 200 USD is still low compared to the wage level of 500-600 USD in China.

Long-term, continuous, and preferential investment attraction policies.

The Vietnamese government has made significant concessions in terms of corporate income tax and land rent, such as the "four exemptions and nine halvings" policy (previously "three exemptions and seven halvings"), which means that foreign companies, as long as they meet the two conditions of having a total number of employees of 5,000 and an investment scale exceeding 300 million USD, can be exempt from corporate income tax for three years from the first profitable year and have their corporate income tax halved for the following nine years. This preferential condition far exceeds the "two exemptions and three halvings" treatment currently given to foreign-invested enterprises in China. Moreover, Chinese companies in Vietnam do not need to pay other taxes such as urban construction tax and education tax, greatly reducing the tax burden.

Special locational advantages.

Vietnam joined the World Trade Organization (WTO) at the end of 2006. It is a member of the China-ASEAN Free Trade Area and is currently engaged in negotiations on the Free Trade Agreement (FTA) and the Trans-Pacific Strategic Economic Partnership Agreement (TPP). In early October 2015, 12 countries, including the United States, Japan, and Vietnam, reached a basic agreement on the TPP, agreeing to engage in free trade. This means that Vietnam will implement zero tariffs on textile and garment exports to the United States in the future, which will inevitably stimulate the increase in Vietnam's textile production capacity and gross profit margin. Therefore, many domestic textile companies have proactively deployed in Vietnam to prepare for future policy benefits.

Other factors.

For example, the water price in China is 3.5 yuan per ton, while in Vietnam it is 2.4 yuan, reducing costs by 31%. The electricity price in China is 0.65 yuan per kilowatt-hour, while in Vietnam it is 0.39 yuan, reducing costs by 40%. The land cost in Vietnam is only about 20% of that in China, and companies can also import better quality American and Australian cotton at a price 3000-4000 yuan per ton cheaper than in China. In addition, compared with other Southeast Asian countries such as Bangladesh, Cambodia, and Indonesia, Vietnam has a relatively stable domestic political environment, a more determined government attitude towards encouraging openness and attracting foreign investment, increasingly improved infrastructure and legal system construction, and a relatively weak local textile industry and relatively high labor quality, which are also important reasons for attracting Chinese textile companies to invest in factories.

Exploration of domestic textile companies' operations in Vietnam

Currently, Vietnam has attracted textile companies from various countries, including China, South Korea, Japan, and France. Although the number of foreign companies is relatively small, they account for 60% of Vietnam's annual textile and garment exports, with Chinese companies making a significant contribution. Dong Nai Province is the area in Vietnam that attracts the most foreign investment and has the fastest industrial development. By the end of the first quarter of 2015, its 31 industrial parks had over 1000 foreign direct investment projects, attracting approximately US\$17.7 billion in foreign investment. Several leading domestic textile companies, such as Tianhong, Bailong, and Shenzhou, have established factories there. The production and operation of these Chinese companies in Vietnam have the following important characteristics:

The production lines of the Vietnamese subsidiaries represent new production capacity for domestic textile companies. Currently, textile companies implementing the "going global" strategy have not reduced their original domestic production capacity. On the one hand, the outward transfer of new production capacity is, to some extent, to meet the needs of overseas customers. For example, Shenzhou International Group is an original equipment manufacturer (OEM) of knitted garments, whose main customers include well-known brands such as Adidas, Nike, and Uniqlo. In recent years, these brands have gradually split orders previously entirely supplied by mainland China into half for mainland China and half for overseas. To maintain long-term cooperation with major customers, companies have been forced to transfer new production capacity along with orders; on the other hand, the outward transfer of new production capacity has not reduced dependence on the Chinese market. Many Chinese textile companies that have invested in Vietnam, such as Tianhong Group, sell most of their cotton yarn back to China, reflecting the potential for improvement in the mainland consumer market.

The overall technological level of Vietnamese subsidiaries is higher than that of their domestic parent companies. Most Chinese textile companies investing in Vietnam are listed on the A-share market in China, are financially strong, and have ample funds, so they mainly use greenfield investment. In terms of investment scale and design capacity, they far surpass their South Korean and Japanese counterparts. On the other hand, because the Vietnamese government implements zero tariffs on key machinery products and equipment and materials imported for projects serving the production of key machinery products, Chinese companies have imported the most advanced equipment and production lines from Europe, improving mechanization to reduce the impact of Vietnam's relatively low labor skills on production.

The phenomenon of "overall industrial chain transfer" of domestic textile companies investing in Vietnam is obvious. For example, shortly after Bailong Oriental invested in and built a factory in Vietnam, downstream fabric and textile companies such as Shenzhou International, Shandong Lutai, and Taiwan Guoping also successively transferred there. This phenomenon is mainly based on two reasons: firstly, Vietnam's textile industry is not strong overall, and the layout of the entire industrial chain is unbalanced, mainly focusing on garment manufacturing, and there are insufficient local companies that can provide industrial supporting facilities for Chinese companies; secondly, the United States strongly advocates the "yarn-forward" principle of origin in the TPP, which requires that textile and garment products entering the US market with zero tariffs must have their raw materials, from yarn to fabric, and processing, from cutting to sewing, completed within TPP member countries. This has also become an important factor for a large number of Chinese textile companies to transfer to Vietnam. Currently, Tianhong Group has invested in and built a large industrial park covering 3,300 hectares in Guangning Province, northern Vietnam. The park's main planned industries include fiber, spinning, weaving, dyeing, and machinery manufacturing. Yage Group also plans to invest in a Vietnamese industrial park project worth billions of yuan, transferring fabric production capacity to the park. In the future, a complete industrial chain built entirely by Chinese companies will be formed within these industrial parks, meeting the requirements of the TPP and greatly improving the overall profitability of China's textile industry.

Attaching importance to localized operations is a common practice among Vietnamese subsidiaries. Research has found that the localization level of Chinese textile companies in Vietnam is very high, and the vast majority of employees are recruited locally. Moderately increasing the proportion of Vietnamese employees in management has also become a common practice among Chinese companies. For example, at Tianhong Renze Company, Vietnamese employees can be seen from production workshop team leaders to company management members, and the company's management efficiency has also been greatly improved. In addition, Chinese companies offer slightly higher salaries than local companies, and the company also provides local employees with staff dormitories, canteens, and free medical care, so Vietnamese employees generally value this job.
Some Thoughts on the "Going Global" Strategy of China's Textile Industry

Some media outlets have previously considered the textile and garment industry to have low technological content, limited innovation space, and poor profitability, representing a "sunset industry." However, the fact that the chairman of Uniqlo has repeatedly been ranked as Japan's richest person and the founder of ZARA has become a newly minted world's richest person reveals that there is still huge room for improvement in the profitability of China's textile industry. To achieve the transformation of China's textile industry from a large textile country to a strong textile country, we should quickly use new concepts, technologies, and models to transform the domestic textile industry, using "transfer" to promote "transformation" and thus improve industry competitiveness.

(1) Grasping Economic Development Laws and Making Early and Sufficient Preparations

Reviewing the development history of developed countries such as Europe, America, and Japan, it is not difficult to find that cost-driven industrial transfer is a normal economic phenomenon. With the increasing emphasis on high-tech industries in various regions of China, the survival space of traditional labor-intensive industries such as the textile and garment industry is shrinking. Therefore, effectively allocating resources and expanding markets through industrial transfer, selectively transferring production and processing links to areas with lower costs or closer to the end market, and parent companies increasing investment in new product design, research and development, and marketing, climbing to both ends of the "smile curve," is an effective way to promote industrial upgrading.

Although some textile companies that invested overseas in the early stages have established successful cases for their domestic counterparts and accumulated valuable experience, the probability of failure in outward industrial transfer is still high if sufficient preparations are lacking and enterprise risk control is ignored. The preparations that enterprises need to make for "going global" mainly include: due diligence and feasibility analysis of the target investment country. This includes not only factors such as labor productivity, industrial chain supporting facilities, and water and electricity costs, but also a full understanding of local laws, regulations, cultural customs, and political environment, in order to make a comprehensive judgment. For example, Zhejiang Cole Group invested 218 million yuan to establish a production base in South Carolina, USA. Although the local labor costs are more than three times that of China, this can be compensated for by finding ways to reduce costs in cotton raw materials and cotton textile power consumption, and by utilizing the developed logistics industry locally, it can also greatly reduce cotton storage costs; talent reserves for overseas investment. Having a group of high-quality personnel who are proficient in foreign languages, have strong business skills, and understand management is an important guarantee for enterprises to "go global." In particular, management skills are very important in daily communication and coordination with the host country's government departments and the parent company's decision-making arrangements.

On the other hand, not all domestic companies are suitable for "going global." For example, Weiqiao Textile Group, China's largest cotton textile company, has always insisted on keeping its production base in the Lubu Plain, and has achieved high profit margins over the years through effective means such as industrial chain integration and employee incentives.

(2) Dialectical Understanding of Trade Rules and Actively Responding to Changes in the Situation

In today's world of highly developed economic globalization, a country's industries can only improve their position in the global value chain by fully participating in international division of labor, cooperation, and competition, and by accelerating the internationalization of enterprises. Currently, China's textile industry is facing "double pressure" from both domestic challenges such as surging costs, financing difficulties, and slowing exports, and from international challenges such as order diversion from developing countries and high tariff barriers in European and American markets. Therefore, accelerating the "going global" of capable enterprises and achieving industrial outward transfer should become a consensus within China's textile industry. Encouraging leading enterprises in the industry to strengthen cooperation with host country governments in the construction of industrial parks, avoiding single-handed efforts, will help to drive the "going global" of domestic SMEs that undertake industrial supporting roles, forming a group effect and scale effect, to improve the success rate of industrial outward transfer. This is also the successful experience summed up by Taiwanese enterprises in outward transfer. Up to now, several strong enterprises such as Yuemei Group (Nigeria), Tianhong Group (Vietnam), and Hongdou Group (Cambodia) have established multiple textile industrial parks overseas, which has reduced the risks for other domestic textile enterprises to implement the "going global" strategy.

In the process of industrial outward transfer, enterprises should also promptly grasp market information and dialectically understand international trade rules. For example, the entry into force of the TPP agreement will bring about trade diversion effects to China in the short term. Due to tariff reductions and rules of origin, the United States and Japan will in the future be more inclined to import from TPP member countries, resulting in losses from trade diversion to China. At the same time, the TPP agreement not only raises the standards for intellectual property rights, but also adds labor and environmental clauses, and links them to trade. These may in the future become avenues for developed countries to impose trade sanctions on developing countries that are not TPP members. However, it should also be seen that the high standards and new rules of TPP represent the direction of economic globalization. Only by preparing in advance and actively responding can domestic enterprises avoid falling behind in future competition. By integrating domestic and foreign design, research and development, brands, and channel resources, they can gradually climb to the high end of the global value chain and achieve a reasonable global layout of production and sales.

(3) Seizing the opportunity of technological revolution and promoting transformation through transfer

Today, as the Chinese economy enters a new normal, the new round of technological revolution represented by information technology has provided opportunities for the transformation of traditional manufacturing industries. The development of China's textile industry should keep pace with the times, seizing the opportunity of global industrial transfer and relying on new concepts, new materials, and new technologies to drive industrial upgrading.

Currently, the concept of "Internet +" is profoundly impacting various categories of manufacturing. It expands the scope of innovation entities from individual enterprises to industrial alliances composed of multiple enterprises. It can achieve machine replacement of humans through digital control, while also significantly improving labor efficiency. Many domestic textile enterprises have been hesitant to completely replace their production equipment with more efficient machinery due to concerns about the remaining useful life of existing equipment and the cost of investment recovery. Now, industrial outward transfer provides a good opportunity. Textile enterprises transferring to developing countries can import more advanced production equipment at lower tariff prices, build intelligent manufacturing production lines and digital factories step by step, integrate various links in the industrial chain to achieve intelligent management, not only alleviating the impact of the shortage of technical personnel in the host country on production, but also adapting to the development trend of downstream fast-moving consumer goods brands, meeting the needs of customers for personalized, differentiated small-batch orders, and expanding the potential consumer market.

The concept of "green manufacturing" also affects the future direction of development of the domestic textile industry. In the past, the textile industry was often regarded as a representative of "high energy consumption and high pollution", and many enterprises were reluctant to invest too much in environmental protection in order to increase profits. From January 1, 2016, the new version of the Environmental Protection Law came into effect, raising environmental protection requirements and increasing penalties for enterprises that illegally discharge pollutants. In fact, attaching importance to environmental protection and achieving green manufacturing is becoming a consensus among governments worldwide. For example, the Vietnamese government, whose economic development level is still not as good as China's, has put forward a rigid requirement for all foreign enterprises, namely that the wastewater treatment system must reach Class A standards, otherwise the project application will not be approved. Therefore, encouraging enterprises to "go global" to force domestic industry transformation is gradually becoming a reality. On the other hand, adopting advanced energy-saving equipment and technologies, reducing the amount of pollutants emitted, and reducing water and energy consumption in production, integrating green manufacturing throughout the entire production process will also help increase the added value of textile products, break through non-tariff barriers set by the EU based on environmental standards, and ultimately improve the profitability of enterprises.