Tuesday, June 13, 2023

IV. If not, will there be a Reckoning for China textile and apparel like there was for the US Auto Industry?

Article Abstract: Textile and Apparel business in China is suffering badly. Some or all of the following factors can be held responsible: 1. Political relations and the continuing Tariffs; 2. China’s reputation for cheap and poor quality product which is, at least partially, justified by evidence; 3. Sluggish domestic demand due to the lockdown and poor economy in China; 4. Due to some or all of the above, significant resourcing to alternative countries such as Vietnam.

In this article, we suggest that the only long-term solution for China is to rebuild its reputation for quality product and fashion innovation, just as Japan did in the 1950’s using the lessons of W. Edwards Deming’s teachings as a platform. Combined with this, China factories need to build their own brands which a. don’t scream Cheap and b. stand up to other international brands in style and quality.

But, China factory owners are resisting change, starting to panic and are lost for any solution except to find someone who may sell their product for commission. But, what would they be selling other than “Cheap China?”

Finally, we predict that, if some factories don’t lead the way to a new direction for China, the Chinese textile industry will crash and burn or, at best, be relegated to the mass market in such outlets as TJ Maxx and Walmart. Part of this is due to the bifurcation and consolidation of the US retail economy: The middle level department store base is disappearing, leaving only either competition for the mass market at rock-bottom prices or premium and luxury brands sold DTC or on platforms like Net-A-Porter and FarFetch. In addition, many new and innovative brands are appearing almost daily. The only Chinese online alternatives to those platforms are SHEIN and TEMU, which are by nature cheap and poor quality, and the innovative Chinese brands are rarely seen by overseas customers.

The Chinese textile industry will have to have a Reckoning, just as the American auto industry did in the 1970s and 1980s (as described by David Halberstam in his Pulitzer Prize-winning 1986 book): The world has changed; the way you did things and the things you got away with in the past are gone. If you don’t face the reality of the world today, you will also be gone.

IV. If not, will there be a Reckoning for China textile and apparel like there was for the US Auto Industry?

What is a “Reckoning?”

According to Collins Dictionary, it is “if someone talks about the day of reckoning, they mean a day or time in the future when people will be forced to deal with an unpleasant situation which they have avoided until now.” 

It is the same consequence the US Auto Industry faced in the 1970’s, according to the great book by David Halberstam of the same name.

What happened then? 

As Halberstam describes in his opening chapter, “Maxwell’s Warning,” in 1973 Charley Maxwell tried to warn the automakers in Detroit that a sea change in oil prices was coming, thus their gas-guzzling big cars would be uneconomical compared to Japanese cars and German cars. He had concluded that the world “had changed and was going to continue to change.”  Not only did they not heed his warning, but he never got and audience with or the attention of the decision makers. In Halberstam’s words, “he had not even gotten across the moat. Detroit was Detroit, and more than most business centers, it was a city that listened only to its own voice.” 

It was a serious case of denial that has brought down many iconic businesses in the US even until today, such as Sears and ToysRUs. Halberstam tells us, “They believed that tomorrow would be like today because it had always been like today and because they wanted (emphasis mine) it to be like today.” 

This attitude resulted in an unprecedented loss of market for US domestic auto industry, and a great growth story for foreign brands, led by the Japanese. Let’s make a corollary here with the situation in 2023 for Chinese manufacturers, especially the textile industry. To begin, let’s read the ending paragraph of Halberstam’s book (substitute Chinese for American). He speaks of the emergence of immigrants, especially Asian immigrants, who saw the possibility of a regenerative life in the US, as opposed to native Americans who took it for granted:

“The other respect in which America was ill prepared for the new world economy was in terms of expectations. No country, including America, was likely ever to be as rich as America had been from 1945 to 1975 (my comment: China?), and other nations were following the Japanese into middle-class existence, which meant that life for most Americans has bound to become leaner. But in the middle of 1986 there seemed little awareness of this, let alone concern about it. Few were discussing how best to adjust the nation to an age of somewhat diminished expectations, or how to marshal its abundant resources for survival in a harsh, unforgiving new world, or how to spread the inevitable sacrifices equitably.” 

These are the results of the Reckoning that America faced in the 1980’s and they are terrible. Take a look at the following numbers:

Since foreign-owned auto companies relocated most of their US production to the US itself, and approximately 25% of the domestic auto production comes from NAFTA partners, it has not been a total loss for the American economy. That said, it is still a very sad story for the once-dominant American auto industry and one China can learn from.

What will be the number for Chinese textile manufacturers in 5 years? The world moves much more quickly than it did in the 20th century, so it is not necessary to wait 50 years, or even 20, for results.

Does this mean that Chinese manufacturers have to open factories in the US or NAFTA or other FTA partners in the Western Hemisphere? Maybe. This type of action would be in line with what I suggested earlier: doing something different than what had been done before because you recognize that the situation is changed and will never be the same again; therefore you need to radically change your strategy. Mostly it involves following the example of brands like Toyota, Samsung, LG etc. that have not only dominated the US market but have made their foreign origin a non-factor. This includes hiring capable people in the US who understand and can restore companies’ and consumers faith in Chinese product. 

And what about the Chinese Currency? There was a time when China was called a currency manipulator because it intentionally pegged its currency to the USD to promote exports. The bet then was that the currency would materially strengthen against the USD if it were freed. I wonder what would happen if the RMB were left to free float today? Maybe just the opposite, which would be a further disaster for China. Would you buy in?

The most important lesson to be learned is that which this article is about. Since there is no Deming to teach and inspire us, Chinese factories need to look to his teachings and the results from those that followed them, like the Japanese to lead to a sea change that lays the groundwork for success in the future. This would be a productive change for China.

Again, two main lessons from Deming are: 1. Quality control to a standard of zero defects; 2. Adopt the PDCA philosophy and methodology, which signals a paradigm shift to make what the customer wants, as opposed to selling what you have. It means a change in philosophy, but, as said earlier, not one that is non-existent in China and Chinese culture. 

It actually means a spiritual and actual return to China’s Golden Age of innovation. There are still companies in China, like Zhangxiaoquan (knives and cutlery of the finest quality) and Jingdezhen (beautiful cups) that have uncompromising quality standards and command a commensurate price. If this means they don’t reach the pinnacle of volume, they are happy to accept. This should be the paradigm of all Chinese producers who want to grow their business in a sustainable manner.

The last word should be the distinction that Lotus is fond of making, which applies to the Japanese auto companies in the 1970’s and 1980’s, and maybe still today: Between entrepreneurs and businessmen.

When the Japanese started to make an impact on the US market, some 20 years after Deming went there, they were entrepreneurs, marketing according to the PDCA system. They tested the market, revised their product and service accordingly, and continued to refine their offering until today.

We hope that system can be widely adopted in China, which would indicate a sea change in mindset. From our knowledge of many factories, the current owners, spawned from the Deng Xiao Ping era and China’s record growth, are “old school” and cannot pivot; it will have to be their sons and daughters, maybe even their sons and daughters, who understand and implement the change in a widespread fashion. This is the game changer we are looking for.

Problem is, by that time the situation will continue to erode and textile and apparel manufacturers will find themselves with a permanent loss of market share, just as the American auto manufacturers have; or worse, with the same fate as Sears and ToysRUs.

What we need and what we are looking for are a few souls to start the fire. 

Then, in the future, the Great Reckoning can be called the Great Awakening.



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