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According to the European Commission, “quantitative limits were reintroduced

on the ten most sensitive categories of products, with the aim of achieving fully liberalized trade by January 1st, 2008. This agreement reflects the difficult balance the EU had to strike between retailer, importer, producer and consumer interests.” But none of these categories included yarns and fabric design. Most of the categories included were garment and underwear finished products. Up to now, officials have not considered yarn and fabrics to be the most threatened areas.On the other hand, Chinese authorities have recently announced that this nation’s eco-nomy reached its 13th year high in 2007, surpassing the previous year by an incredi-ble 11.4% increase, thanks to the boom in the construction industry and, especially, to increased exports. However, there are still a few shadows in this growth rate, such as the overheating of the economy and dramatic inflation. In fact, such a situation counteracts the so-called dumping in exports denounced by many European entrepreneurs in almost every field. In a few years, dumping in China will belong to the past. Nevertheless, Chinese manufacturers are still alive and strong. Another major issue concerning the Chinese economy is that the Chinese Government raised interest rates six times in order to slow expansion. And, the worst is yet to come, if, as many analysts suggest, China will likely have to raise them again, if a sustainable level of growth in the economy is not reached.

To us Europeans, there are other symptoms that should interest us. Until now, China has basically been a poor importer and a huge exporter, as everybody knows. Things are changing: an imposing bourgeois class is on the rise and the consumption of high-end products is to follow. And this is the niche in which Europeans, especially Italians, excel.

Exporting to China: A major opportunity If we take a look at EU27 imports of Textiles and Clothing from China (both fabrics and garments alike-January-August 2007), it is striking to notice that China is first amongst other competitors with a 37% market share and a value of 18 billion euros. On the

Selling yarns and fabrics to China has always been thought to be out of reach. And

that is the way reality has proven to be in the recent years. Major concern from the

European authorities has been set on importing, rather than on exporting to that

country. Who could hope it to be otherwise? Being China such a huge market didn’t

mean it was big for European exporters as Chinese people were hardly able to feed

themselves, as it is well known.

Hugo Heusch, Barcelona (Spain)

Is China the new eldorado for European producers?

Chinese consumer is expected to reach 600 Million by 2020

China is over nine millons square kilometers big and home to over 1,3 billion inhabitants

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other hand, EU27 exports to the Asian giant amount to a shrinking rate of 2.3% (6.5% less than in 2006), a “light weight” of less than 187,000 tones (whereas China exports two million tons) and less than 800 million euros in value (see chart #1). The frightening meaning of these figures should be taken as an opportunity to grow, because performing better is within reach of our weavers and spinners. European tex-tile exporters only need the right combined strategy to, on the one hand, multiply the opportunities to sell to Chinese markets, and, on the other hand, invest in facilities such as logistics and distribution platforms in-situ (keep in mind that China has an area of over nine million square kilometers and is home to over 1.3 billion inhabitants), together with a more significant purchase order from Chinese manufacturers. Many would ask why there should be any increase, if Chinese manufac-turers are not interested in buying such high quality products, since they are exporting rather than consuming. This might be true today, but it won’t be true tomorrow.

Change of economic cycleIn such a scenario, Chinese exports of industrial goods, especially garments, seem to get closer and closer to a slowdown. This will give fresh breath to European manufacturers, if there are still any left! But it might make European wea-vers and spinners, who were up to now signifi-cantly less threatened by Chinese exports, pro-ne to despair. According to experts in China’s economy, such as Ms. Lisa Wang, a Consultant at InterChina Consulting, one of the world’s leading consulting firms in the Chinese market, “recently, the competition from Chinese com-panies is moving forward to goods of better technology and quality levels. This means that in the near future, even sectors that involve the use of certain technology such as machinery will face challenges from Chinese exports”. This is the reason why sooner or later in the Yarn & Fabrics district we will be facing a new situation that might bring every leading industrial Euro-pean manufacturer that is already in China or is willing to be there to increase investment in facilities in this Eastern country. While the know-how is almost reaching Eu-ropean levels, the current Chinese yarn and fabric production is likely to be aimed more at the domestic market, and what until now has been sold to Europe and other developed countries (mainly synthetic fibers and low cost yarns and fabrics) is likely to be relocated to other countries . So, it is essential to gear pro-duction at this special new market. It is time to turn our heads to China with a fresh new look, as Lisa Wang insists: “before, the goal of Western companies´ investment in China used to be to reduce costs, and production was aimed at export. Now, the Chinese mar-ket where high-end products can be sold is

getting bigger. Costs are increasing, so the advantage of relocating to China is being reduced. A Western company should consider the opportunity of the Chinese market for its products, rather than just going to China for cost purposes. However, in some sectors, such as fashion… foreign companies will not be able to compete with domestic companies in low- to mid-range sectors, so they should target the high-end sector.”

The sector Ms. Wang has in mind is the high-end Chinese consumers of high-quality products, such as the increasing medium/high and high classes. Instead of producing low-cost textiles in China, it is more reasonable to develop a growing market will reach over 400 Million people by 2012, the largest market in the world for European production according to statistics gathered by InterChina Consul-ting. It is definitely a perfect target.

Italians to move aheadLet us take a look at Italian high-end producers such as the well-known producer of wonderful yarns in cashmere and alpaca, LaneCardate from Cossato in Biella. According to Sales Manager Chiara Bianchi, European producers seem to be expecting something to happen as confusion and misunderstanding are at realm: there is an “increase in competition - confusion in our referral market (RTW producers) but spe-cially for the final consumer that doesn’t have clear information about quality (for ex: a 100% cashmere sweater can be bought at a retail price ranging from 70 euros to 600 euros) – the result is that the final customer gets confused.” But with this new extravagant Chinese elite, things could be changing: the best strategy for European producers in every market is to “keep the standard high. Higher quality, higher price, higher service.” Ms. Bianchi doesn’t be-lieve that investing in China is a good strategy,

but there is something extremely important that she considers true and has to be kept in mind: “Chinese exporting capabilities will not increase in quantity, but will increase in quality and service.” However, the most accurate and balanced opinion probably belongs to Mr. Paolo Zegna, heir of a respected family tradition of weavers and spinners and, at the same time, President of Sistema Moda Italia, the Italian Textile Asso-ciation of fine textiles, and President of Milano Unica, the international trade fair for high-quality fabrics. He is also head of Ermenegildo Zegna, a brand that needs no introduction. In his opinion, the Italian Textile Industry has go-ne through several changes due to the increa-se in Chinese exports and exports from other countries, and all of the changes have been extremely significant: “China and developing countries have not been the sole cause of the difficulties our industry has had to face in the recent past, but certainly they have been one of the reasons; however, it would be incorrect to entirely attribute our difficulties to them. The Italian Textile Industry in the last five to six years has faced the post September 11th, 2001 situation, a fall in spending in the EU, the strengthening of the Euro against the US$ and the Yen and the increase in the sales of products from countries with low labor costs in the markets in which we have always had a great presence. Because of all these factors, in the last two to three years the entire clo-thes and textile industry in Italy has lost about 15,000 companies and 100,000 employees.” On this note, Lisa Wang’s opinion highlig-

hts the situation: “European companies have been forced to either relocate their production to Asian companies (mostly in China, but also in India, Vietnam, etc.) in order to take advan-tage of cheap labor in emerging countries or to move to the high-end sector so as to cap-ture the niche market where Chinese goods cannot yet compete in quality or design.” Nevertheless Paolo Zegna asserts that Italian producers still have the possibility to counte-ract the situation: “one fact is quite evident: the low end of our production is, in the short-term, inexorably lost! We can and must ask the Italian government and European Union to help companies that still focus on such production, avoid ruin and request as-

Lisa Wang

C.C

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“Chinese exportingcapabilities will notincrease in quantity, butwill increase in qualityand service”

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sistance so that the whole sector can aim its production higher, but we must be aware that we cannot defend the undefenda-ble. Italian weavers have demonstrated that they are competitive in terms of their creative skills, innovation and services in the mid- and high-market brackets. In our work, we should continue to stress these elements in order to place even more emphasis on the differences among the finest Italian products.” However, his opinion on investing in facilities in China is mixed: “there is not one recipe valid for all companies. Every company must find its own, best solution, but it is necessary to keep in mind that the Chinese market is becoming more and more important.” It has become the third largest importer for Italian firms! He firmly believes that relocation to China has to be done at one’s own risk. “Relocation can be

an opportunity for some companies, but it is never an easy choice. To enter into a very di-fferent social and cultural environment like the Chinese one needs not only financial capacities but also suitable professional skills to properly manage the business These capacities and ski-lls often are not inside the company and it is not easy to find them on the market.”

A logical recipeLisa Wang insists that high-end segments are the best solution for European producers: “the best strategy would be to become specialized in higher-end segments by using R&D capacity, as China still has a low level in this aspect. Diffe-rentiating from Chinese goods in terms of qua-lity, functionality and design will certainly help companies position their products on a safer ground and allow them to set higher prices. Currently, this kind of higher-end product even has a market in China, as the number of the Chinese middle class and rich people is expec-ted to go from 100 million in 2007 to 500-600 million by 2020.” There is still a struggle ahead for both European and Chinese weavers alike, when it comes to achieving a better situation in the Chinese market. “In general terms, the do-mestic market is significant. The exported go-ods sector is usually of a low to medium level, whereas in the Chinese market, consumption is targeted at all levels: low, medium and high.At the moment, China is dealing with the fact that foreign buyers put a lot of pressure on the

price of goods produced in China. However, the overall increase in costs in China (land, utilities, labor, etc.) will force production to be relocated from the coastal areas of China to inland China and also to other low-cost coun-tries such as India, Vietnam, Indonesia, etc. This is especially evident in the textile sector. The trend, which is very much in line with the Chinese government’s policy of developing its domestic technology level and brands, is that China will be less interested in foreign investments for low value added sectors such as those we mentioned above.”

An unclear futureEuropeans should definitely start considering both the Chinese market and competition from China in every market as a priority. This is a contest that is played on both arenas, as Lisa Wang reasserts: “Chinese products are still very competitive in Western markets, due to good resource management, labor productivity, etc., despite the fact that costs are increasing now.

The main problem is the restrictions of Western companies. Limitations on Chinese exports cu-rrently come from Western governments´ trade barriers such as anti-dumping, tariffs, etc.” Paolo Zegna replies from his viewpoint that Chinese authorities are getting ready for the fight: “The Chinese five-year plan (2007-2011) foresees over 3 million people employed, an increase of 10% production per year, greater attention paid to quality and an increase in Chi-nese brands, plus an intensification in contacts with the international distribution network. It is anyhow true that a lot of the additional production in China is also an answer to the constant increase in local spending. These trends will probably be followed very shortly by similar trends in other countries, such as India, Vietnam and, I imagine, Bangladesh. This is the main reason why the Italian industry must focus on a gradual but continuous shift towards su-perior quality products.” Let us see what the next years bring to this amazing sector.

Europeans should definitelystart considering bothChinese market andcompetition from China inevery market as a priority

Chart #1. EU 27 imports of Textiles & Clothing from China and exports to China in euros (January-August 2007)

Imports: 18 billion euros

Exports: 800 million euros

Chart #2. Imports of Textiles & Clothing from EU 27 & China (2006-2007) in Thousands tons

2006: 199

2007: 186 (-6.5%)

From EU 27

2006: 1,815

2007: 2,258 (+24.4%)

From China

2006: 714

2007: 794 (+11.2%)

From EU 27

2006: 15,152

2007: 18,406 (+8.2%)

From China

Imports of Textiles & Clothing from EU 27 & China (2006-2007) in Million euros