Japan Prepares For More Cotton Consumption
August 22, 2013 It is no secret that our industry’s primary concern at the present time is the unabated number of contract defaults that are placing the entire global cotton trading system in jeopardy.
A second major concern is that the long-term world market share of cotton has been reduced to approximately 32% as a result of technological functionality and price competition with chemical fibers, as well as the pressure that the need for more food and feed crops is placing on the supply of arable land.
As we near the beginning of the 2013 Cotton International Global Summit in Singapore, it is the perfect time to analyze the “China-plus-one” effect we are witnessing in Southeast Asia (ASEAN), using Japan as examples.
China Plus One
In 2011, 96% of the apparel sold at retail in Japan was imported due to the decades-long decline of domestic manufactured apparel. Much of this imported apparel was produced by Japanese companies at manufacturing facilities overseas and by local partners under strict control to meet Japanese quality standards.
On a fiber-equivalent basis, virtually all of the retail apparel demand for cotton is sourced from abroad, with only 4% of manufacturing remaining in Japan, thus reducing Japanese raw cotton imports as little as 60,000 tons.
Japanese garment manufacturers relocated much their production to China due to its low operational costs, and now it is by far the country’s top supplier, accounting for 86% of Japan’s total apparel imports. However, due to a combination of rising labor costs, labor shortages, inflation, and currency appreciation, China is no longer one of Asia’s cheapest labor markets.
As a result, Japanese manufacturers are now shifting production bases to other Asian countries. According to the most recent statistics, imports from China are estimated at 82% in 2012, down 4% from 2011 (and down 10% from the record high in 2007). Other ASEAN countries (notably Indonesia and Vietnam) are up 17%, and Bangladesh is up 39%.
China will remain as the workshop of the world due to its capacity to produce at the scale, timing and quality levels required by large multinationals. However, there is a growing trend in Asian manufacturing to diversify risk by being less dependent on China – commonly referred to as the “China-plus-one” strategy.
Simply put, one should invest not only in China but in at least one other country. To illustrate the change, Japan has invested $85 billion in China in the past 15 years – including more than $6 billion in 2011. But during the last two years, Japan has invested more in ASEAN countries than in China.
The Implementation of ‘Abenomics’
After the newly elected government took office at the end of last year, Prime Minister Shinzo Abe has enacted a series of aggressive economic policies, dubbed “Abenomics.” Japan has finally started recovering and hopefully breaking out of the 15-year vicious cycle of deflation and strong Japanese yen – a true “chicken or the egg” situation. Among other things, the immediate economic result is a weaker yen.
At press time, the yen has appreciated about 15% from its low against the U.S. dollar. But during the last five years (2012 vs. 2007 annual average), the yen has risen 48% against dollar, 57% against the euro, 22% against the Chinese yuan, and as much as 79% against the Korean won.
Between “China-plus-one” and “Abenomics,” Japan’s manufacturing base should benefit tremendously. The currency rate has a huge impact on operational costs, and a normalized yen will bring some of the lost cotton consumption back to Japan.
GET THE NEWSLETTER TODAY!
