The Hindu Business Line : Growth of Chinese textile industry

CHINA and India have significant similarities. For both countries, the chief task at hand is how best to juxtapose economic development with social upliftment of the masses, who account for about 40 per cent of world's population.

While both the Asian economies have similar endowments, there is a stark difference in their performance. This has led to a debate among various sections of the society about the desirability and possibility of replicating the Chinese growth model in India.

Leveraging competitive advantages

Any attempt to link China's performance record with India's future performance needs to recognise the fact that a country's competitive advantages are influenced by its ability and willingness to reposition itself, realign its policies and adopt fresh strategies with a clear picture of the global developments at a given point of time.

An analysis of the growth of China's textile industry reveals some interesting points, which may be used by Indian planners in policy formulation.

Building capacities: The size-does-matter approach

The Chinese textile economy started its restructuring process in the early 1980s and focussed on building large-scale capacities in every segment. For example, the spinning capacity in China increased from 18 million spindles in 1980 to 55 million spindles in 2003. China's share in world installed capacity of modern shuttle-less looms increased from 6 per cent to 15 per cent (three-fold) over the same period.

A large part of the production has been channelled towards the export market. It is evident from the fact that the exports of textile and garments constitute about 50 per cent of the Asian giant's total output.

Thus, it may be surmised that the first-mover advantage had a significant role in the development of China's textile industry.

Speed: The multiplier force

Another factor that contributed to the success of the Chinese textile industry is the speed of reforms and restructuring, and the marauder approach to international trade in textiles and clothing, which has taken the industry to its zenith.

In 1980, when China embarked upon the economic reform process, virtually all the enterprises were owned by the state. Following the reforms, the industry landscape is strikingly different from what prevailed 20 years ago, in fact, even five years ago.

Meanwhile, China also dismantled 10 million old spindles and removed 1.2 million people during the restructuring process to avoid under-employment of resources. This led to significant increases in productivity and profitability.

For instance, industry profit increased from $44 million to $4 billion (56 per cent) in 1997-2002. At the same time, China's exports of textile and clothing increased from about $4 billion in 1980 to $63 billion in 2002, and is expected to cross $70 billion this financial year. As a result, its share in world trade in textile and clothing increased from 4.5 per cent in 1980 to about 18 per cent in 2002.

Choosing suitable policy mix

Choosing a policy mix that suits the national interest, rather than emanating from market dynamics, has also worked well for China. Textiles, being a low margin-industry, find it difficult to attract new investment from present as well as prospective investors. Realising this, China had gone all out to attract FDI into the sector, offering difficult-to-resist packages.

Similarly, China was fortunate in its currency management. It consciously devalued its currency by 50 per cent against the dollar in 1994 to make its product exports competitive in the international market and captured significant market share.

As a result, where textile exports from other developing countries suffered due to depreciation in the US dollar against their respective currencies, Chinese exports kept growing.

Therefore, neither an inward- nor an outward-looking approach, but just a hard-nosed business focus formed the hallmark of Chinese strategy in its journey from a merely large to a strong textile industry.

Incidentally, world trade in textiles and clothing recorded maximum growth between 1980 and 1990, increasing 8 per cent in this period. Gradually, growth in international trade in textiles and clothing receded to about 4 per cent over the next decade.

It was during the 1990s, when most South-East Asian developing countries started economic reforms, that they accorded high importance to the textile industry and its export potential.

Thus, the gains from volume growth in the last decade have been distributed among many more participants, leading to lower shares for each participant. China was the major beneficiary in increased trade in 1980-90. This is evident from the fact that China's export of textile and clothing increased at 17 per cent in 1980-90, and by just 11.5 per cent in 1990-2000. Is it a testimony of the belief that early birds catch worms!

Embracing WTO: The timing factor

Further, it is not only the first and fast approach that worked wonders for China but also the strategy of "delay and "go-slow," efficiently and selectively employed.

China joined the World Trade Organisation recently, when most quotas have been removed, and the rest will go in the next few years.

Though there are certain disadvantages associated with late entry, coming into the WTO at this stage has given China access to the markets of developed countries such as the EU and the US, which are more open than ever before.

This is evident from the fact that China virtually replaced the textile exports of India, Pakistan and other developing countries in the categories that were removed from the list of quota items in the US.

Supporting factors

Along with the above, supportive infrastructure and liberal labour laws, focussing on social security rather than job security, have also played an important role in growth of the Chinese textile industry, enabling it to adjust production according to the market dynamics.

From the above, we may surmise that the mere possession of natural and human strengths, in itself, does not create competitive advantages. Neither is the growth of an industry a one-stroke story.

A proper assessment of opportunities, a clear-cut road-map, vision and timely implementation of the decisions taken are some preconditions for the sector's healthy growth.

Thus the differentiating factor is the quality of governance. This is the first and foremost lesson for India. In a new global environment, the growth imperative for the Indian textile sector may not differ too much from China in terms of restructuring, modernising, building supportive institutions and infrastructure efforts.

However, there are stark differences in terms of availability of time and speed in carrying out necessary corrections as, like China did, India does not have the lead time of about 20 years to set its house in order.

Last, but not the least, growth of the Chinese textile industry offers another interesting lesson. Industry is like crocodile.

Put it in the bucket of restrictions and get a bonsai industry or allow it to grow in the ocean of a free and competitive global environment and get a crocodile worth its name.

(The author is Economist, Vardhman Group.)

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