Taiwan Business: Textile Makers Move Upmarket
In addition to investments in China, Taiwan companies are making sophisticated, higher-value products at home.
Big changes are due to hit the worldwide textile industry on January 1, 2005 when the World Trade Organization terminates the quota system that has governed international trade in textile products since the early 1960s. The key beneficiaries, most analysts agree, will be China and India, the major producing countries, while Pakistan, Bangladesh, and Indonesia are expected to benefit to a lesser degree.
In Taiwan, lower-end production will find itself squeezed out of the market, no longer protected by virtue of holding a share of the quotas. Opinions differ on how drastic the impact as a whole will be on the Taiwan textile industry, which in 2003 was sixth in the world in exports (following China, Germany, Italy, the United States, and South Korea) with total shipments worth US$11.8 billion.
The pessimistic view is that Taiwan has only a few more years left in an industry that was its star performer a generation ago. "Higher labor costs will price Taiwan out of the market," says B. Lokesh, president of Asian Marl Co. Ltd., a textile trading company. "It's a big sword over our heads." Abolishing the quota system will make "China the big dragon," says Lokesh. "After January 1, China is expected to grab everything because of its cheaper production costs."
The Taiwan government will be unable to do anything to support the domestic industry because its hands are tied by its commitments to free trade under the World Trade Organization, notes another long-time textile trader, who asked not to be identified by name. In his opinion, the decision by large local manufacturers to invest in China was short-sighted. "They took their know-how to China and now Chinese companies have learned everything they need to know from Taiwanese companies," he says. By moving to China, "they dug their own graves and now they're just waiting to lie down in them."
Over the next few years, textile production will "drop a lot" in Taiwan, he predicts, but until 2008 functions such as financing, logistics, and marketing will remain on the island. "In 2008, China will allow foreigners to open trading companies," he notes. "After that, even the financing and commercializing that the government is trumpeting as a move toward high-end services will start to move to China."
Others, however, are more sanguine. William Lin, executive vice president of Nanya Plastics Corp., a major supplier of polyester resin to the textile industry, believes that what is occurring is a natural process toward less labor-intensive, more value-added production. He believes a substantial high-end textile industry will remain in Taiwan. Nor is Justin Huang, vice president of the Taiwan Textile Foundation (TTF), ready to throw in the towel. "While it is true that big volume business cannot be maintained in Taiwan since the production facilities are not as new as what is coming online in China, Taiwan is successfully moving toward more value-added production," he argues.
Besides, "not everything is moving," says Huang, since "no one wants to leave their home." In some cases, companies reluctantly decide to shift production across the Strait at the urging of their overseas customers, but high-end operations are likely to stay in Taiwan since the reliance on sophisticated technology rather than abundant labor enables them to remain competitive. Regardless of how well Taiwan moves up the technology ladder, jobs are going to be lost. Huang estimates that Taiwan's textile industry currently employs 230,000 people in 7,185 factories, but that this level is expected to drop by 20-25% in three years.
The historical background
Taiwan's textile industry traces its origins to 1949, when a number of textile mills relocated to Taiwan from China, particularly Shanghai, at the time of the Nationalist government's withdrawal from the mainland. In the 1960s, these companies started to export after high labor costs in Japan caused the locus of the industry to shift to Hong Kong, Taiwan, and South Korea. Following more than two decades of prosperity for the local industry, the NT dollar appreciated dramatically in 1987, and within a year much of the production was moving to such lower-cost countries as the Philippines, Indonesia, Malaysia, and Thailand.
Going offshore was not the only option, however. Much of the industry chose instead to automate their weaving and knitting operations and to invest in opening high-speed synthetic-fiber plants, mainly using technology from Europe and the United States. By the latter half of the 1990s, Taiwan had become one of the leading exporters of polyester fiber. At one point it was number one, but it has now fallen to second place behind China.
With the abolition of the quota system, China is expected to further consolidate its position as the world's leading textile supplier. At the end of 2003, polyester-fiber manufacturing capacity in China hit 14-million metric tons per year compared with 3.8 million in Taiwan. By the end of 2005, Chinese capacity is slated to reach 24 million tons while Taiwan's will remain the same. Virtually no new investment is being made in textile capacity in either Taiwan or South Korea. Instead, producers from both countries have been engaging in another round of investment in China (and to a lesser extent in Vietnam) in recent years, so as to have more facilities closer to where their customers are based.
Many of those customers are fellow Taiwan-invested companies, as the bulk of the textile production in China is the hands of foreign investors, including Taiwanese-owned operations. Du Yuzhou, president of China's National Textile Industrial Council, made a similar point last year while visiting the Birmingham textile machinery show in the United Kingdom. Referring to concerns expressed internationally about the China threat, he noted that while 70-80% of Japan's textile imports now come from China, two-thirds of that amount is produced in Japanese-invested plants.
At this stage of development, China and Taiwan are chiefly engaged in two different segments of the textile business, differentiated by levels of quality. "There's not that much competition at present between China and Taiwan in terms of textiles," says Nanya's Lin. "More sophisticated Taiwanese production is even being sold in China, as well as in important markets like Japan." But he notes that as China's industry progresses up the quality scale, Taiwan companies will be continuously pushed to upgrade to even higher value-added products.
The ability of high-wage countries such as Germany, Italy, and the United States to remain major textile exporters shows that production cost is not everything. Japan, too, has continued to be a prime supplier of top-level fabric and yarn filaments. The experience of those countries, however, does not necessarily provide a model for Taiwan. This country's textile manufacturing structure is quite different from that of highly developed nations such as Germany and the United States, which are particularly strong in the profitable sector of industrial textiles. That category includes textiles for such applications as construction, automobiles, household appliances, and electronics. Taiwan's traditional orientation, on the other hand, has been in textiles for making apparel.
The third major category of textiles consists of products for household use, including carpets, draperies, bedding, and towels. In Taiwan, 80% of output goes to apparel, 10-15% to household use, and only the small remainder to industrial use. To remedy this shortcoming, the China Textile Institute in Tucheng, Taipei County has recruited more than 300 engineers to engage in research and development of industrial textiles. The R&D results will be transferred to local manufacturers to help them upgrade.
Promoting functional textiles
While Wal-Mart, Kmart, and J.C. Penney load up on cheap products made in China, Taiwan and South Korea are increasingly developing markets for "functional" textiles -- sophisticated fabrics with, for example, protective properties against moisture, dirt, or viruses -- and the garments made from those fabrics. According to the TTF's Huang, Taiwan's capability in functional textiles was demonstrated during the SARS outbreak last year when the Taipei City Government and the TTF successfully cooperated to develop hospital gowns for protection against spread of the respiratory disease.
The reputation for strong quality that Taiwan has accumulated over many years remains another plus. Lokesh points out that it will take China several years to attain a similar reputation for quality and reliability. Right now, a name-brand jacket might cost US$90 to manufacture in Taiwan and US$86 in China, says Lokesh. "Who is going to go for the China-made jacket given the small difference in price?" he asks.
It is precisely this quality differential, says Huang, that brought Nike's top management to Taiwan last year. Concerned about whether Taiwan was willing to make an ongoing commitment to the textile industry, the visitors wanted to know whether the Taiwan government was planning to continue to invest funds for upgrading textile technology. The answer, says Huang, was "of course." Expanding on Nike's interest in Taiwan, he mentioned that for the football World Cup held in Japan and South Korea last year, "a lot of the fabrics for the Nike-sponsored uniforms were made in Taiwan by Everest Textiles in Tainan."
In terms of apparel, Taiwan stands little chance of making headway in Europe or the United States because of the entrenched position of the leading brands, but its companies are doing very well in China, says Huang. "The local brands that you see on ZhongXiao East Road are now increasingly popular in China." Tainan Enterprise's "Tony Wear," for example, is number two for menswear in China in sales.
Nanya's Lin agrees with Huang's positive assessment of Taiwan's quality. He notes that for the company's microfiber yarn, "We can charge 50% more than our competitors because of our reputation for quality as well as customer service." This year, the Formosa Plastics Group, of which Nanya is a part, expects to reach US$30 billion in sales and more than US$3 billion in profits -- up more than 50% over 2003.
Looking only at the polyester-fiber business, Lin foresees US$300 million in 2004 sales for Nanya just in the Taiwan domestic market, compared with US$240 million in 2003. "While production volume is increasing, value is increasing more," he says. "This is a good sign that we are successfully moving to higher-value production."
