Chinese clothes makers: got it sewn up
More customisation increases pricing power
The garment industry epitomised globalisation in the 20th century. Millennial tastes, higher labour costs and trade tensions are challenging the model. But like a double-stitched seam, there is little danger it will unravel.
China made 36 per cent of the world’s garments in 2016, according to the World Trade Organization. The supply of younger workers to the industry is set to decline by more than a quarter in the next 10 years, according to Nomura.
Companies such as Crystal International, which listed in Hong Kong last October, have responded by moving production elsewhere. Two-fifths of Crystal’s production is already in Vietnam, the third-cheapest country in the region. Labour costs are only a fifth of the costs of goods sold. Offshoring production reduces the risk of trade spats. It sometimes even supports Beijing’s foreign policies.
Consumer demand for more frequent design changes requires faster production schedules, despite smaller sales volumes per design. That is challenging for manufacturers. But more customisation ties customers to them more closely and increases pricing power. Crystal’s top five customers, among them Uniqlo owner Fast Retailing, accounted for 61 per cent of revenue in the first half of 2017.
Apparel tariffs worldwide averaged 17.5 per cent in 2016, nearly double the average on all other sectors. Investors worry about the prospect of further escalation, in view of the rhetoric from the US. Yet Asian countries import nine-tenths of their clothes from their neighbours. Euromonitor expects China to overtake the US as the largest apparel and footwear market this year.
Crystal trades at a price-to-earnings ratio a quarter below that of rival Shenzhou, whose shares have beaten benchmark indices handsomely over the past five years. Until such time when robots can stitch clothes together cheaper than humans, both companies will prosper.