THE FLANARANT: Textile investments keep China's cutting edge

China accounts for between 65% and 80% of the world's spinning and weaving capacity - and its textile technology investment in 2010 was higher than at any time in the past decade. So while buyers can shift garment production to cheaper locations, the reality is that they'll still be sourcing their fabric and yarn from Chinese factories, as Mike Flanagan explains.

If there's one thing the world's garment and textile industry agrees on, it's that China's getting increasingly uncompetitive.

This isn't just the view of the industry outside China; hardly a day passes without another Hong Kong businessman predicting the imminent collapse of China's entire garment or textile business.

But if China is such a rotten place in which to do business, why were more than three-quarters of the world's textile investments there during 2010?

The numbers are extraordinary, and vary a bit between categories of investment. But last year the country accounted for 72% of the world's orders for modern spinning equipment, 84% of the world's orders for the most modern weaving looms, and three-quarters of the world's orders for efficient new knitting machines.

In fact, Chinese companies spent more on new textile equipment in 2010 than in any other year on record - which is hardly evidence that the country's textile makers are about to up sticks for the middle of Africa.

Furthermore, this is nothing new: between 65% and 75% of all new purchases of spinning and weaving equipment since the year 2000 have been delivered to mainland China.

All of which means that China's spinners and weavers have an extraordinarily competitive edge that seems to have been completely forgotten in the current hysteria about declining Chinese competitiveness.

In high-volume spinning and weaving, the cost of labour is relatively insignificant. Instead, businesses first of all get their competitive edge by having modern, efficient equipment - which can slash the cost of manufacture, especially if most competitors are still using kit from the 1980s (or sometimes even from the 1880s).

Spinning and weaving mills based in China have had something close to a monopoly for the past decade in acquiring such equipment. China's near-dominance in owning up-to-date spinning, weaving and knitting technology will give its mills an advantage for years to come - and there's no sign of mills in other countries coming anywhere close in upgrading themselves.

Government support
But why are all these hard-headed Chinese businessmen throwing so much money into manufacturing something that's supposed to be so uncompetitive? Probably because of Western and Chinese governments.

The second key factor in textile mill competitiveness is continuous production. A garment factory might run for just 10 hours a day, and doesn't pay workers when it's closed. A spinning or weaving mill is paying interest and depreciation on its expensive kit 24 hours a day, whether the factory's working or not. So it's important to keep that kit operating flat out.

The likelihood of that happening is higher in China than almost anywhere else in the world.

China's factories also benefit from almost continuous power supply. That's a luxury almost no other Asian country can offer.

Mills in Pakistan's Punjab have now got to a point where they can't believe government assurances about power availability. The lights go out randomly, whatever promises mill owners are offered - and businesses came to a halt. In Indonesia, demand for power is growing almost three times as fast as availability.

For all sorts of reasons, China's government is simply the most reliable major government in the developing world at ensuring power generation and transmission capacity will grow at the same pace as its economy.

Trading rules
But it's not just reliable power that gives investors confidence. Western governments help too.

Europe, the US and Japan have all recently changed parts of their trading rules in a way that actively encourages the use of Chinese spinning and weaving mills.

Since the beginning of this year, the EU has given the world's poorest countries duty-free access for garments made from raw materials originating anywhere in the world - which means Chinese yarns and fabric.

In early spring, Japan changed its rules to provide the poorest countries with duty-free access for knitwear using anyone's yarns (which inevitably means Chinese yarns). In 2010, the US agreed to allow Haiti almost unlimited duty-free access for garments using fabric and yarn from anywhere (which means Chinese raw materials).

And in late spring, the US Administration announced it wanted to extend duty-free access for African countries' garments made from other people's raw materials until 2022. Again, "other people's" in practice means Chinese.

Obviously, Western governments don't mean to subsidise - which is what they're doing when they exempt someone from import duty - China's spinning and weaving industry. Understandably, they want to help poorer countries. But scarcely anyone wants to invest in spinning and weaving plants in Bangladesh or Cambodia, even though there's immense interest in developing new garment plants there.

Under today's rules, new garment factories in any very poor country means more demand for China's spinners and weavers.

There are, of course, three other reasons for investor confidence:

• Much of China's oldest textile capacity isn't just inefficient; it's downright dangerous for its neighbours. China's government wants polluting, or energy-inefficient, factories to be closed - and, in China, what the government wants tends to be what businesses do.
• It's a near-certainty that China's garment retail will keep on showing fast growth for some years to come, and that the majority of garments bought in China will be made in China from fabric knitted or woven in China. On that basis, new spinning and weaving equipment in China looks like one of the safest investments around.
• Not least because most new local investment will substantially increase Chinese spinners' and weavers' efficiency. Most operating costs in the Chinese interior are substantially lower than in the coastal provinces where most of the past decades' development has been - though there is some evidence of poor labour productivity (output per textile worker in the first half of 2010 was 44% higher in eastern China than in the country's central and western provinces).

Domestic investment focus
This confidence might of course be misplaced. But there is one other, very odd, fact about the Chinese textile investment boom.

Over the past five years, Chinese businesses have been investing overseas as enthusiastically as Chinese tourists buying handbags in a Western discount mall.

Real estate in Africa, plantations in Brazil, port complexes in Sri Lanka; there's scarcely an overseas investment opportunity someone in China doesn't seem prepared to snap up.

But in spinning and weaving? Hardly a sniffle. Unlike Taiwanese and Korean businesses when they first began to believe factories at home were in danger of becoming uncompetitive, China's textile industry seems to be directing the overwhelming majority of its development activity to its home turf.

Generally, Chinese companies are equal opportunities investors. They put their investment where they think it will make most money. And if they all think that's China, isn't it just possible they might be right?