Margins squeeze bites into China textiles

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One in six Chinese textile companies lost money last year even though prices for the country’s clothing exports increased 8 per cent, according to the chairman of the China National Textile and Apparel Council.

At an industry conference in the southern province of Guangdong, where much of the textile industry is concentrated, Du Yuzhou said 17 per cent of the 44,200 textile companies tracked by the council lost money over the first 11 months of last year. This was in spite of companies benefiting from a fifth ­consecutive year-on-year rise in export prices for textiles.

While the number of lossmaking companies will be about the same as recorded in 2006, data compiled by the council show profit margins are being crunched by rising labour costs and a weaker dollar.

“We have to absorb higher costs and lower profits,” Mr Du said. “We should come up with solutions, not just complaints.”

The profit margin for the industry averaged 3.9 per cent but that masked pain among China’s weaker textile companies. Mr Du said the bottom two-thirds of companies recorded an average margin of just 0.74 per cent. “The industry is relentless at weeding out the weak,” he said.

In spite of the tougher operating environment, China’s textile sector shows no sign of slowing, with exports growing by 19 per cent last year to $175.6bn (€115.7bn, £88.4bn).

Council statistics show the average price for China’s textile exports, which began rising in 2003 after repeated year-on-year declines, increased 7.9 per cent last year. According to import price indices compiled by the US government, the average cost for all goods made in China began to climb only in late 2005 and early 2006.

With China’s own consumer price index hitting an 11-year high of 7.1 per cent in January, exports could exacerbate inflationary pressures in the US, European Union and Japan.

However, cost pressures in China do not mean western retailers will pay higher prices.

“It’s very difficult to raise prices,” said John Cheh, chief executive of Esquel, a privately held Hong Kong company that makes more than 60m shirts a year for international labels including Nike and Gap. “We show [clients] the numbers and say: ‘Hey, we are losing money on your orders.’ ”

The industry’s sales momentum continued into January, contributing to China’s trade surplus of $19.5bn for the month, up 23 per cent year-on-year.

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