Is Garment Production Shifting Away from China?
CEIC WorldTrend Data Talk - October 5, 2015 There is controversy over whether China, which has been regarded as the “World’s Factory” in recent decades, is losing its competitiveness. Some of the reasons cited include the increasing production costs in China and the prosperous growth of manufacturing industries elsewhere, especially those producing low-cost ready-made garments in poorer developing regions such as South Asia and Africa. Some large clothing retailers with global coverage have shifted a large amount of their production to Bangladesh and have concomitantly, gradually reduced their use of Chinese factories. The real GDP per capita of China in 2014 was more than 16 times that in 1980, so there is no doubt that China has become richer in recent decades. China has been producing labour-intensive products and selling them to the rest of the world since the 1970's, and increasingly so in successive decades, gaining market share. Trade volume as a share of GDP kept increasing to a peak of 64.8% in 2006. However, it then declined steadily to 41.5% in 2014, close to the figure in 1994. Apart from the shock caused by the financial crisis in 2007-08, one reason behind the decline is that after years of the economy sky-rocketing, the wages of Chinese garment workers have doubled, resulting in higher costs of production. Meanwhile, in Bangladesh, wages for garment labour are among the lowest in the world. Bangladesh benefits from a large labour force and high population density and hence, a high labour density (see chart below). Labour density is presented as the amount of labour available in the population per square kilometre and is calculated as follows: However, with decades of experience, the Chinese labour force has stepped up on productivity and skill level to compete in other industries as well, when compared to Bangladesh. Therefore, garment manufacturing, which is a low-skilled, labour-intensive industry, seems more suitable for Bangladesh today. Indeed, as labour productivity and technology improved, China gradually shifted the focus of its manufacturing from garments to electronics, which require specific knowledge and reliable energy supplies. The portion of high-technology manufactured exports in China increased from 6.4% in 1992 to 27% in 2013 and Chinese factories now receive a variety of orders from the global leaders in the field. So is garment manufacturing really moving out from China to less developed South Asian countries, or even Sub-Saharan Africa? The answer can be derived by casting light on the obstacles these developing countries must tackle, in order to be qualified to join the race with China, which is still the dominant player in garment manufacturing. Bangladesh serves as a good example of South Asian economies with manufacturing potential, as ready-made garments comprise almost 70% of its total exports (as of June 2015). First, the productivity of labour in Bangladesh is lower than that in China, with slower growth as well. The literacy rate in Bangladesh is only 58.8% whereas in China it reached 95.1% in 2010. As a result workers in Bangladesh are much less productive and less efficient than Chinese workers. Apart from low productivity, political instability, unreliable energy utilities and an inadequate logistics infrastructure are also challenges for Bangladesh and other South Asian countries. Only 77.9% of the population in South Asia has access to electricity, while the figure for China is 100%, according to the World Bank (WB). Furthermore, the logistic performance index (a WB measure of the quality of trade- and transport-related infrastructure – including ports, railroads, roads, and information technology; 1=low to 5=high) was 3.5 for China in 2014, while for South Asia it was just 2.6. After all, China has been undergoing economic reform for decades, and as a consequence it is now equipped with advanced infrastructure including its railways and electricity grids. As long as the current stable political environment in China remains while rising educational levels of nationals continues, it remains to be seen if China’s dominant position in garment manufacturing can be replaced. By Orange Tang - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog