China: Reasons to be cheerful or reasons to be dismal?

If China' as terrible a place to make clothes these days as many buyers say, why's so much clothing still coming out of the country? Its clothing exports to the West are growing faster than the rest of the world, and its prices seem to be hardly moving up at all. The answer, I think, is that there's a real risk China's real competitive edge is under threat. And that's not price, and it's too soon to tell hiw serious the threat is

Scarcely a single piece of hard data coming out of China, or the countries that buy apparel from it, gives any support at all to the extreme pessimism about its long term future as an apparel making centre that so many buyers are reported to be expressing. We seem to be in the world of a famous joke about a UK supermarket chain in the 1980s that totally dominated food buying in the London area: no-one shopped there, it was claimed, because their stores were too crowded with other shoppers.

China's share of the global apparel market keeps on rising, its prices aren't going up much faster than its rivals' – and there's scarcely a shred of real evidence for any of the bumptious talk from those rivals that they're taking sales from China.

Indeed, Turkey – whose manufacturers were among the loudest boasters of Chinese collapse a month or so back – is now seeing its sales so poor it's trying to slap penal import rates onto clothes coming from almost anywhere except Western Europe.

Most of that talk is best summed up in the optimism Central American boosters are showing. Garment exports from most Central American countries are healthily up on 2009. So are the number of people employed in the garment business. But both sales and employment are still down on 2007 and 2008 – and Central America's share of the rapidly growing global market for clothing is way down even on 2009. Most garment making countries, apart from China and Bangladesh, saw their apparel exports crash in late 2008 and 2009: in today's rapidly growing world trade, most countries' sales can be described as healthy because – as another British joke pithily puts it – when the tide's rising, even the corpses float higher.

Actually, most of the problems China's garment industry's supposed to be facing – like rising raw material costs and rising wages – are shared by all other garment makers (or, if they're not, they soon will be) – and most of those rivals have problems of their own which are every bit as great as those China's claimed to suffer from.

Indonesia's textile lobbyists, for example, say they'd be awash with new foreign-owned garment and textile plants – if only all their potential investors weren't turned off by Indonesia's chronic power supply problems. And there's a similar "if only…" tale of woe in every other major Asian garment exporting country. Almost without exception, China's Asian competitors are worried about fundamental, long-term, structural problems in their country. So there's one reason to be cheerful about China: making garments in most of its neighbours isn't getting any easier.

Now none of this is to deny that getting garments out of China on time right now is difficult, that prices almost certainly will start going up and many Chinese factories really are trying to turn business away.

Which takes us to why China dominates the world clothing industry right now and why smart buyers believe there's a real possibility its real competitive edge is being eroded.

China doesn't account for roughly half the clothes worn in the rich world because of low prices or low wages – and certainly not because it employs slave labour. China's significantly pricier than Bangladesh or Vietnam, for example, because its garment workers are paid more than many in Central America or the poorer parts of the Europe/Mediterranean area – and there's no serious suggestion of any use of child or forced labour (though, inevitably small-scale scandals pop up from time to time).

Most clothing buyers have been using China as their core sourcing location because it's reliable, almost as cheap as anywhere else they're likely to buy from, they can find practically any service or piece of trim they want there and because doing complicated things can be relatively painless.

Above all, as far as garment buyers are concerned, things work in China. If raw material needs to be imported, it typically gets into the country and to a factory relatively quickly and hassle-free. Goods move around the country on an efficient road system, any dishonesty on the part of officials is rarely visible to buyers, factories have reliable sources of energy and water, and production never gets disrupted by strikes or civil disorder.

Buyers are relaxed about paying a slight premium for a Chinese garment over the same garment from elsewhere in Asia because they've learned they can place an order in China in reasonable certainty that order will leave a port, at the price agreed, pretty much conforming to the specification, on more or less the day agreed.

But now they've got three broad sets of worry.

• First, there's always been a slight worry of serious disruption in China, so as China's share of the world clothing market grows, buyers are increasingly aware of the need to have an alternative source if anything goes wrong. Not because it's any likelier – but because the scope for serious commercial damage is so much greater than it was. That's why Japanese buyers are diversifying out of China
  
• Second, some buyers are worried China MIGHT see price inflation that's seriously faster than its rivals. More urgently, though, many just wish they could find China's advantages somewhere prices aren't likely to be going up.
  
• Third, and most importantly, they're concerned that the sudden widespread delivery and quality problems so widely reported in China during late 2010 might well be a symptom China's real strength – its manufacturers' reliability – can no longer be taken for more or less granted.
  

In short, the main reason to be dismal about China is the real possibility its garment makers have been hit by factors making China likely to be less reliable in the future. Those fears are spreading – and what happens in the month after workers return (or, for some factories, don't) from the Lunar New Year holiday will probably prove crucial in how buyers assess China for the next few years.

Reliability apart, many of the reasons buyers are being reported as giving for wanting to dump Chinese factories altogether are so wrong-headed we've got to assume the reporters got it wrong. The North American business leader who talked of "hyperinflation" there is clearly just fantasising – or, more precisely, trying to pitch his own company.

There's a great deal to be cheerful about in China. So our next few blogs will examine what's really happening in China, what's likely to be happening soon in China and what's happening in its rivals. In most cases, common sense will show that China's got many reasons to be cheerful. We'll also look at the reasons Chinese garment makers might have cause for being rather less cheerful, and try to find a measured conclusion.

By then, we might have a better idea of how China's reliability coped with the New Year closedown.