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 Overcapacity - a constant reminder that the boom years of
the 1990's -- now has a strangle hold on growth in the first
decade of the New Millennium. Textile producers throughout the
world had enjoyed unprecedented profits, only to see that now
turn into unprecedented red ink. What happened? Where did all
the business go? And why are entire industries shutting down in
countries that just a few years ago seemed destined to become
major textile centers for years to come? The answer lies with
technology -- but it also lies with convoluted government
policy.
So why is there so much capacity? Ironically, a
government-sponsored program -- called the Multifiber
Arrangement (MFA) -- which was designed to protect the textile
industries in Europe, the U.S. and Canada has had the surprising
effect of scattering trade all over the globe and helped to
build production in countries that otherwise would not be the
case were it not for quota.
Under the MFA, buyers in the U.S. and Europe searched the globe
for quota-free suppliers. In effect, a global hunt was underway
to find new sources of supply. Governments in Third World
countries on the other hand searched for ways of building their
economies and provide jobs for their people. Apparel production
proved to be a relatively easy way of employing large numbers of
people.
Ultimately, many countries were in the global textile business
only because they were either not subject to quotas or had amble
unused quota available not because they were particularly
efficient producers. Now with the end of the MFA, smaller, less
efficient suppliers are being slowly squeezed out by the
behemoths of China and India.
In turn, as the supply base bulked up over the past couple of
decades culminating with huge capacity in the 1990's, a classic
oversupply problem has developed as global demand for textiles
has slumped badly since 2000. Too many sellers are chasing too
few buyers. How this oversupply problem is sorted out will be
key to understanding how the industry will evolve.
The global textile industry today is vastly different from the
global industry of just twenty years ago. Whereas twenty years
ago, Europe and the United States dominated the global
production and trade in textiles and apparel, today most of the
world's production and trade is in Asia or more specifically in
China. This shift in production from the developed world to the
developing world is truly striking. For example, twenty years
ago, the polyester industries in Europe and the United States
were locked in a competition to see which industry was the
largest in the world. Today, however, China's polyester industry
is larger than the industries in Europe and the United States
combined. In fact, China consumes nearly one-third of the
world's cotton and man-made fiber -- a claim that neither Europe
nor the U.S. could ever make.
At the same time, the productivity of all manufacturers in the
textile supply chain has improved exponentially. In part, this
improved productivity came about in the developed world as
companies struggled with new competition in the developing
world. Cash-poor, but labor-rich, developing countries in Asia
found they could produce quality textiles and apparel for a
fraction of the cost to produce the same goods in the developed
world. Producers in the developed world, straddled with higher
labor and production costs, turned to technology to help lower
costs and improve competitiveness in global markets.
Despite claims made by many textile leaders in the developed
world, technology has not proven to be the “silver bullet”
solution for firms in the U.S. or Europe to compete against
their Asian counterparts. Simply put, technology alone has not
been enough, as low cost Asian producers have also invested more
and more in new plants and equipment further causing more
competition in the marketplace -- this on top of a distinct
advantage in terms of labor costs. For developing countries, the
combination of low labor costs and technology improvements has
been a winning combination that developed countries cannot
compete against.
The MFA leaves a legacy of government policy that has left its
indelible mark on the global trade. Under the rules established
as part of the World Trade Organization (WTO), all bilateral
textile and apparel quotas implemented under the MFA were
abolished in 2005. Although initially, the end of the MFA was
heralded by exporting nations, both large and small, today a
number of smaller suppliers have realized that they are being
squeezed out of the market because their main advantage -- quota
availability is now gone.
At the same time, over the past twenty years, an ever-expanding
quota system not only fueled export growth, but also provided
key exporters with access to overseas markets. Yet, overall
market growth in the U.S. and Europe is not much greater than
population growth (about 1 percent), so as imports from the
developing world grew, domestic manufactures, unable to compete,
retreated leaving gaps in the market for low cost imports to
fill.
Today, however, this has changed as now the top exporting
countries are sustaining their growth at the expense of other
less competitive suppliers. Domestic producers in the U.S. and
Europe have been driven into niches leaving the broad commodity
business to imports. Nevertheless, there is not enough net
growth in the world to provide growth for a wide number of
suppliers. With the quota system eliminated, the supply
situation will collapse around a relatively few suppliers
 such
as China and India as the least competitive producers drop out
of the market.
What will be the probable landscape for the global textile
industry in the future? It will boil down to winners and losers.
Who will be the likely winners over the next few years? China
will be the dominant supplier of textiles and apparel over the
next 10 to 15 years, with countries such as India and Pakistan
also commanding a significant portion of the world textile
trade. Fiber consumption in these countries will continue to
rise as the export-oriented textile industries continue to
expand. Who will be the likely losers? The likely losers will be
companies in Europe and the U.S. In turn, fiber consumption will
suffer in each of these markets as domestic industries continue
to shrink. Also, smaller suppliers in Southeast Asia and the
Caribbean will lose out over time, as they will be increasingly
unable to compete on a global scale.
Needless to say, the future is not a certainty. In time, even
China will have to compete with newly emerging suppliers such as
Vietnam and Cambodia. And then there's Africa.
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