In Depth: China’s Pandemic-Driven Textile Export Boom Probably Won’t Last

After years of textile manufacturing moving away from China as costs cut into slim profit margins, export orders are booming this year amid the Covid-19 pandemic.

China’s largest home textile manufacturer Sunvim Group Co. Ltd. has been picking up orders which coronavirus-hit workforces in India and Pakistan have been unable to fulfill. “We are running at full capacity now, orders are backed up until March next year,” a mid-level manager at Sunvim told Caixin.

Similar busy scenes are being played out in textile factories across the country’s southern manufacturing belt. As the global supply chain is disrupted by outbreaks and the measures to contain them across South and Southeast Asia, factories in China — where the virus has more or less been brought under control — are experiencing a windfall of orders.

Official data shows the country’s home textiles industry saw 5.28% year-on-year revenue growth from July to September. Profits spiked 20.14% year-on-year during the period, with September’s profits up over 100% from 2019.

However industry analysts and businesses believe this is just a flash in the pan, as the long term factors underlying the industry’s exodus — a shortage of workers and high labor and rent costs — mean the future for low-end manufacturing for export remains bleak.

Windfall from Covid-19

Orders fled back to China as the Covid-19 pandemic forced factories overseas to delay deliveries or even shutter, said Liu Yanfei, a departmental vice president of China Textile Commerce Association (CTCA). With established supply chains and manufacturing capacity, China was the natural destination for textile orders which had previously gone to countries with lower labor costs, Liu added.

This trend is continuing through the fourth quarter, as European buyers have placed more orders with Chinese textile firms to maintain supply into the new season.

A manager at Shanghai Shuixing Home Textile Co. Ltd. said the textile-maker began to approach their production capacity in the second half of October. The company, which has over 2,700 brick and mortar stores as well as mall counters across China, normally sees orders peak in the fourth quarter, the manager said. “Together with China’s Double 11 shopping bonanza in November, we cannot take all the orders flowing in,” they said.

Several textiles industry insiders told Caixin that the trend begun back in May, and has gathered momentum in recent months as winter has come to the Northern hemisphere and Christmas is approaching.

Data from CTCA shows that demand in the U.S., European Union and Japan has returned to 80% to 90% of pre-virus levels.

However, not all Chinese manufacturers have been able to take full advantage of this wave of demand.

Fewer workers, higher costs

“(We) ran short of orders in the first half of this year, and became understaffed in the second half,” said Liu Minghong, who owns a jeans factory in Xintang town, Guangzhou. Before the virus emerged early this year, Liu’s factory could make 300,000 pairs of jeans a month, but it’s now only able to produce half that number as about two-fifths of his workforce hasn’t returned after the disease hit demand early in the year.

The dilemma Liu faces is not uncommon in Xintang, the world’s biggest jeans manufacturing hub with over 3,000 factories. When its factories are at full capacity, Xintang can produce as many as 1 billion pairs of jeans annually.

Several factory managers estimated some 1,000 jeans factories have shuttered this year, cutting the town’s total capacity by one-third. “It is hard to get seasoned workers back after they leave,” local factory owner Sun Yue told Caixin. “And people born in the 1990s aren’t willing to take the jobs.” The dwindling labor force means that workers who are still on the job are working far more, managers indicated.

As costs of labor and raw materials have risen in China, manufacturers haven’t seen much profit growth despite the jump in orders.

A Covid-19 outbreak in the cotton-producing Xinjiang Uygur autonomous region has pushed up prices, which rose 10% year-on-year in October, data from CTCA showed. Rumors of a potential ban on Australian imports also had an effect.

A shortage of logistical capacity amid a general export boom also cut into textile-makers’ margins. Data from container tracking service provider Container xChange indicates ports in Shanghai this month faced a shortage of 40-foot containers, not seen since January 2019.

The service provider’s weekly Container Availability Index for the Shanghai region fell to 0.01 this month. A number above 0.5 indicates a surplus while a number below 0.5 suggests a deficit of such containers.

This has significantly increase shipping costs, a shipping agent said. Shipping fees used to be around $800 in the pre-virus era, representing just 1% of the average goods value in a 40-foot container. But now it has doubled to over $1,000 in some cases, greatly cutting into profit margins, said the agent.

The Shanghai Containerized Freight Index from the Shanghai Shipping Exchange — which measures prices on a range of freight routes— rose to a record high of 2,311.7 on Friday, up 182% year-on-year.

Irreversible trend

“In China, there is no low-end manufacturing chain catering to exports, at least in the jeans manufacturing sector,” Xintang factory owner Sun said. Over the past few years, many companies have relocated their plants to places with lower costs and closer to the export market, or now only focus on China’s domestic market, Sun added.

Labor costs in other parts of Asia are one-quarter of China’s, said Liu Jianbo, who runs a garment company in the southern city of Guangzhou. Another major momentum behind the trend of moving manufacturing out of China is the price of ground rent, Liu told Caixin. “Generally, it is hard for factories to survive in Guangzhou, given the spiking rental and labor costs.”

The trade war has also accelerated the move out of China. Over 90% of the garment imports from China to the U.S. are charged extra duties, a report by consulting firm Fung Business Intelligence suggested. By contrast, countries like Myanmar enjoy tariff-free exports to the U.S., which attracts businesses with low profit margins.

China and Vietnam will continue to be the biggest players in world textile production, even as they’re increasingly challenged by other developing Asian countries with lower manufacturing costs, according the Fung Business Intelligence report. China’s manufacturing industry should focus on high value-added products going forward, otherwise its share of the world’s garment exports will further decline, the report said.

Qu Yunxu also contributed to the story

Contact reporter Lu Yutong (yutonglu@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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