China Apparel Outsourcing Report Essay

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Will “Made in China” last?

Apparel Outsourcing’s Moving Out of China

May 1, 2013

Contents Executive Summary 4 Background Introduction 4 Why are Most Things Made in China? 5 Lower Labor Cost 5 Fine craftsmanship 6 Speed of delivery 6 Other Factors 6 Labor-intensive Manufacturing Shifting Out of China 6 Increasing Labor Cost 6 Low Margin of Textile Industry 7 Lower demand due to the Influence of Slow Global Economy 8 Pressure against Chinese Exports 8 Local Factories Moving up the Value Chain 8 Other Potential Countries for Outsourcing 9 Vietnam 9 India 9 Indonesia 10 Cambodia 10 Bangladesh 10 Pakistan 11 ASEAN Bloc 11 Business Case Study 11 Nike Moves Apparel Manufacturing Out of China 11 Uniqlo Switch More Outsourcing to Southeast Asian Countries 12 Conclusions or Recommendations 12 Bibliography 14

Executive Summary
This report analyzes the Chinese apparel and textile outsourcing industry by examining China’s competitive positioning, by monitoring current and future industry trends, and by comparing the pros and cons of outsourcing with other potential destinations in Southeast Asia. The analysis details how China has been one of the most attractive destinations for apparel and textile outsourcing over the past few decades. China enjoys low labor costs because of its large labor supply, takes great pride in its time-honored fine craftsmanship, and provides fast delivery due to the close proximity of raw materials and end markets. Some other factors in China’s success include large manufacturing capacity, improved industrial infrastructure, and established legal and accounting services.
However, the landscape of outsourcing in China is changing. Labor costs are increasing, local factories are moving up the value chain, demand is lower because of slow growth in the global economy, local unemployment rates are high, and Chinese exports are facing pressure from markets across the world. These factors are negatively impacting margins in the industry, and this is driving companies to look for new destinations to manufacture and outsource apparel and textiles. This report also provides a competitive analysis of the potential destination countries in Southeast Asia such as Vietnam, India, Indonesia, Cambodia, Bangladesh, and Pakistan.
Background Introduction
With the increase of globalization in the past few decades, more and more apparel and textile companies in developed countries outsourced their manufacturing to companies in developing countries where the labor cost is comparatively lower. By finding opportunities in developing countries to pay lower wages, companies minimized a large portion of their costs and maximized their operating profits. Among the developing countries, China emerged to be one of the most attractive outsourcing destinations for labor-intensive manufacturers by the end of the 20th century.
According to World Development Indicators, from 1995 to 1999, the annual average labor cost was $729 in China, which equaled 1/40 of labor in the USA, 1/15 of labor in Korea, and 1/4 of labor in Thailand. From 1995 to 2005, Chinese exports increased by almost 4 times, and exports by foreign companies grew 22% per year. By 2005, Chinese exports reached 762 billion dollars, including 416.5 billion (54.7%) of manufactured exports. 82.2% of the manufactured exports were produced by companies utilizing foreign direct investment (FDI). In recent years, manufacturing companies involved in labor intensive industries have been impacted by increasing wage rates in China. Some companies have chosen to bypass China and move factories to cheaper locales in Southeast Asia, such as Vietnam and Indonesia.
Why are Most Things Made in China?
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China’s Advantages * -------------------------------------------------
Lower Labor Cost * -------------------------------------------------
Fine Craftsmanship *
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