Globecot and its joint venture partner, CN Cotton, are introducing a series of reports that will review the current conditions of China´s textile operations and how the industry is rapidly attempting to adjust business practices in order to be profitable again. China´s textile industry is clearly in a crisis mode as the industry attempts to adjust to a dramatically changed environment. For years, the industry grew at a record pace with the expansion feeding on increased sales despite narrowing profit margins. The Chinese government effort to switch economic leadership from export-driven to domestic consumption has clearly targeted the industry.

Two watershed events are shaping the crisis now gripping the industry -- the reduction in export tax rebates and the rapid appreciation of the Chinese yuan against the U.S. dollar. These two circumstances have eroded the profitability of the middle-tier and smaller textile operations. A recent series of interviews with some of these industries located in the southeastern coastal areas found several interesting observations. The first was that many of the middle-tier and smaller companies that originally had exclusively focused on exports are withdrawing from the business, with their percentage of output now moving to export down significantly from a year ago. In some areas, companies can no longer accept new export orders due to the lack of profitability. In Fujian Province, which has experienced rapid growth in its textile industry in recent years, many of the newer export-oriented businesses have been forced to change their focus to the domestic market. For those still involved in export business, they will no longer accept U.S. dollar-invoiced orders.

In the larger textile areas of Jiangsu and the Shanghai, companies have adapted by implementing the following procedures: first, most export orders are now invoiced in non-USD currencies; second, increased emphasis is now being placed on developing orders in non-USD markets such as the Middle East (shipments to these markets are being invoiced in euros); and third, businesses are trying to move into non-apparel products such as made-ups, etc. and are using all types of fibers. A major effort is being made to switch to the domestic market. Retail sales of apparel and textile products are expanding over 20 percent annually, which is allowing the market to absorb a significant amount of new product.

For larger textile operations that enjoy greater efficiency and better cash flow, the route to improved profitability is being led by a push to raise prices. A new mentality appears to be developing. Companies take their costs into consideration with each order; prices are adjusted to ensure profitability. If the buyer refuses to accept the price, then orders are not accepted. Two years ago, many of the larger enterprises moved to seek a larger share of their offtake in the domestic market, which has provided a cushion against the dramatic impact of the rising yuan.

In future reports, we will look at the impact of the current crisis on the remaining state-owned sector and the process of speeding the merger and integration process.

Source：Globecotnews