Still Exposed! Fashion Materials in China

By Debra Tan 15 September, 2015

Tan on why exposure to China points to a paradigm shift in the business of fashion. Going circular is a must to survive

32% to 75% of hides, wool, cotton, chemical fibre & silk are either made in or passed through China as imports
China exposure (cotton & chem fibre) has been rising; these make up over 90% of textiles produced globally
51% of global chemical fibres produced comes from the Yangtze River Delta & face tighter Water Ten deadlines

Most of the time when we speak about fashion’s exposure to China, we are faced with “we have moved away from “Made in China”” to “the brands we have invested in tell me they have moved their production outside of China”. Then when we probe a little further … what about raw materials? The answers from investors become a little less certain.
We scoured the CSR/annual reports of top leading brands in sustainability which we wrote about last month here and here and found very little information about their raw material exposure. So we did our own deep dive….
Here are some interesting things we found:

32% – 75% exposure to China across key fashion materials

It is not just cotton, other fashion materials also have a high exposure to China. As shown in the chart below, China exposure as a % of global production ranges from a low of 32% of global hide production to a high of 75% of global raw silk production.
Although it is unclear exactly where our clothes, shoes and handbags can be traced back to, we can say 67% of chemical fibre, 43% of cotton lint, 39% of wool and 32% of hides that went into making them was either produced or passed through China as imports.
The materials shown in the chart below are commodities – at these levels ANY domestic movements caused by regulatory or physical (droughts) shifts by China as alluded to by the recent HSBC report “No Water, More Trade-offs” will affect the prices of these globally. Whether one is making anything in China becomes irrelevant – the entire apparel & footwear sector is exposed to water risks (be they regulatory, physical, pollution, reputational or economic) in China.

Whether one is making anything in China becomes irrelevant – the entire apparel & footwear sector is exposed to water risks

Fashion Apparel Raw Material Exposure to China

Cotton vs Synthetics – China exposure appears to be still rising

The drought in 2010/2011 caused fashion to shift to a year of rayon and nylon as cotton prices soared as the crop suffered. Synthetic prices also rose as a result and brands saw a significant downside to their real P&L (more here). HSBC warns that managing water in China may result in shifts in cotton output but at 66% of global chemical fibre production, swapping out of cotton is not going to help reduce exposure to China. But has the  trend of sourcing cotton and chemical fibres been falling? Has China lost market share in recent years?
A closer look at these substitutes’ historical trends in China revealed the contrary – China exposure has been rising – for both cotton and synthetics. Synthetics, unaffected by weather, enjoys a smoother rise than cotton with 2 blips thanks to droughts.

2000 2013 Global Industry Exposure to China

 Water Ten’s “comply or else” & tighter deadlines for the Yangtze River Delta

The Water Ten Plan released in May this year adds another layer of complexity to navigating China exposure. The Water Ten Plan wants businesses/factories to comply with the new industrial standards or shut down within the next 3 years. In the Yangtze River Delta, factories have a tighter deadline – more detail on this here.
We highlighted that textiles was the most targeted sector in an earlier review of the plan but a glance at the map below shows just how dire this is – 77% of chemical fibres are produced in the Yangtze River Delta. That is a shockingly high level of chemical fibres production facing “comply or else” by 2016/2017.
As if this is not bad enough, 86% of chemical fibres in China are produced in water scarce and water stressed regions in China. Either way you look at it, be it water scarcity or water pollution, the sector will be impacted.
2013 Chemical Fibre Output China Yandtze River Delta

>50% of global chemical fibres produced in the Yangtze River Delta

In case you are still not convinced, this means that over half the global chemical fibre output is subject to China’s Water Ten Plan. Moving cutting and sewing outside of China is not going to mitigate this level of exposure.

Can this amount of production be moved out of China within 2 years? Or should brands work with OEMs to help them meet the Water Ten …
… or should OEMs take collective action & demand higher prices?

2013 Global Chemical Fibers Output

Setting up factories outside of China with more relaxed regulations so that the industry can continue to not pay for pollution and sell cheap clothes could be a way out for fashion brands but can this amount of production be moved within 2 years?

We doubt it. In fact recent conversations with manufacturers/ industry associations in China point to “highly unlikely”.  Surely it is time for serious “collective action” by brands to work with Chinese manufacturers to help them meet the new regulations?
Otherwise, left on their own & faced with tough regulations, the currently fragmented chemical fibre producers in the Yangtze River Delta may look to “collective action” on their own to ensure their survival. With 51% of the global market, price setting power for synthetics will thus inevitably shift from brands to OEMs. Imagine what that would do to the fashion industry.

A better way forward – work with Chinese OEMs to meet new regulations & close the loop

So surely a better way forward for brands would be to work with China to improve wastewater treatment in the sector and push for ways to go circular. We note that H&M Conscious Foundation has recently announced a €1 million grant to pioneering ideas closing the loop for fashion. We applaud this initiative – it is definitely a step in the right direction.

it remains to be seen how serious brands are at scaling up these innovations

But it remains to be seen how serious brands are at scaling up these innovations. This grant compared to the US$1.7 trillion fashion industry is still a mere scratch. Given the sky high exposure to China from 43% in cotton to 67% in chemical fibres (which together accounted for over 93% of global textiles produced in 2014 according to the recently published GLASA report), can brands afford to look the other way?

 These levels of raw material exposure demand a paradigm shift – from linear to circular

The impact on the entire fashion industry’s bottom line is clearly material.  In fact, “material” would be an understatement. These levels demand a paradigm shift – from linear to circular. Are consumers willing to pay more? Chinese consumers apparently are according to a recent Chinese study. Perhaps this could be helped along with the millions of advertising dollars spent by the fashion industry directed towards “sustainable” lasting fashion instead of towards “throw-away” fashion.

Do not follow the path of Eastman Kodak in failing to see a digital future…
…the future is circular in textiles

Or perhaps the right question here is not what brands can gain in promoting circular innovations but what will happen to them if they don’t? Do not follow the path of Eastman Kodak who did not seriously commit to innovations outside of film to embrace a digital future thereby resulting in bankruptcy.
The future is circular in textiles and going circular is what China wants; and China is home to a vast amount of key fashion materials. Something has to give – someone has to pay for pollution – moving to Africa to pollute there in order to maintain profitability cannot be the solution.
Maybe it is time to accept the reality of more expensive clothes. A serious rethink of some of the existing business models within the fashion industry is in order.

Further Reading

  • Trade-offs Could Help China Manage Water – Tough trade-offs may be on the horizon for China as it balances water, food & energy security. HSBC’s Wai-Shin Chan warns how cotton & coal maybe headed for a clash in the long term as they compete for limited water resources provincially & nationally
  • China Water-nomics – Will China’s economic development be hampered by limited water resources?  The very existence of the Three Red Lines signals that China can’t keep developing the way it has. Read on for why GDP will be capped at 5.7% given China’s water-nomics
  • 2015 GLASA Awards: Key Takeaways – The Global Leadership Award in Sustainable Apparel (GLASA) was launched to inspire bold & courageous sustainability leadership in the apparel sector. China Water Risk was a finalist this year, for which the theme was water. CWR’s McGregor & Hu share their takeaways
  • 2015 World Water Week: Key Takeaways – What’s water’s role in sustainable development? How can we ensure water for all? China Water Risk’s McGregor on this, how Asia is fairing, the Sustainable Development Goals & more from World Water Week 2015
  • Incorporating Environment Into Business -Companies are incorporating environmental performance into business, so suppliers need to follow suit or risk losing customers. The Business Environmental Performance Initiative (BEPI) can help both parties as BEPI’s Micilotta explains

Textiles & China

  • Where Are The Top Fashion Brands? – Given tighter regulations for textiles in China, we review the environmental initiatives of 10 top fashion brands from fast fashion to luxury. Are they looking beyond CSR to make their business model sustainable?
  • Water Ten & Fashion: 8 Reasons to Leap or Fall – China Water Risks’ Hu shares 8 reasons why China’s Water Ten is actually an ultimatum for textiles to leap or fall. They need to decide which soon, as there is only two to three years before the paradigm shift
  • Dirty Thirsty Wars – Fashion Blindsided – CLSA report titled “Dirty Thirsty Fashion: Blindsided by China’s water wars”, examines how China’s water risks could blindside the US$1.7 trillion global fashion industry. Is this the end of fast fashion? Debra Tan expands
  • China’s Economy: Linear to Circular – China is the 3rd country globally to enact polices to move towards a circular economy. See how & why China needs to make this transition; which industries are affected, what is the role of industrial parks?
Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
Read more from Debra Tan →