BEIJING AND GUANGZHOU – A serious global shopper goes to a Japanese Muji store in Hong Kong and buys a stylish cotton shirt for HK$150 (US$19). Muji is a Japanese designer of generic products with enormous fashion caches in London and Paris. The label on the shirt reads “made in China.” This means that the shirt was designed in Tokyo, made across the border in China’s Guangdong province for less than US$2, and then shipped to hip Muji stores in London, Paris – and Hong Kong. Most of the profit goes back to Japan.

In their privileged position as the factory of the world, China’s manufacturers have the matrix for anyone’s products, from Nike and Reebok to Max Mara and Muji. They can make a Muji better than Muji. So the next step is to get rid of the middleman. In the next few years the whole world will not only buy “made in China” clothes, but “designed by China” clothes – with all the profits going back to China.

A new Industrial Revolution

The Industrial Revolution started in Europe with mechanized sewing. Now there’s another Industrial Revolution on the march – on where the wealthy West imagines and consumes the clothes that China produces. But what’s left for everybody else?

China entered 2005 celebrating a textile Big Bang: the end of the Multi-Fiber Arrangement, with all quotas on textile imports lifted by the World Trade Organization (WTO). Textiles represent 6% of world trade. China’s current share of the US market is around 17%; it may soon rise to 50%. China’s current share of the European Union market is 18%; it may soon rise to 30%.

Globalization as applied to the textile industry is leading not to a North-South war, but to a South-South war. According to Denis Audet, an expert at the Organization for Economic Cooperation and Development (OECD) in Paris, “When the suppression of quotas was decided 10 years ago, nobody thought that China would develop so fast.” Only when China was admitted to the WTO in 2001 did a few enlightened minds start to see what was in store.

The big losers in the new game will be some countries in Africa, with their market share shrinking by as much as 70%, or countries that heavily benefited from the quota system, such as Tunisia, the Dominican Republic and Nepal. Rich countries have had enough time to “restructure” their textile industries toward the value-added niche – like deluxe pret-a-porter in Italy and haute couture in France. But what’s going to happen, for instance, to Madagascar, which imported European, Chinese or Indian textiles, manufactured in sweatshops and then re-exported the finished merchandise to the North?

Hundreds of thousands of jobs in poor countries may be lost. In both the United States and the European Union most garment companies will massively “de-localize.” Some vulnerable countries such as the Philippines have announced that their laws regulating the minimum salary would no longer be applicable to the textile industry. Pakistan’s garment industry earns more than 60% of the country’s export dollars; now Pakistani textile merchants fear at least 60% of the country’s 2 million textile workers will lose their jobs in the next few years.

A coalition of 96 textile federations from 54 countries, as well as scores of non-governmental organizations (NGOs) are targeting China. Vulnerable countries such as Bangladesh, which has 1.8 million textile workers, have demanded that the WTO study the impact of the end of the textile quota system. Bangladeshi textile merchants in Hong Kong estimate that American and European companies that currently buy from as many as 60 countries will be buying from less than 10 by 2010, and especially buying from China. In the wake of a meeting last week in Beijing between redoubtable Chinese Vice Premier Wu Yi and US Secretary of Commerce Donald Evans, both sides agreed that each would appoint a liaison officer especially for textiles. US President George W Bush wants to tax Chinese shirts, trousers, sheets and underwear. Beijing says this violates the WTO provisions.

But the fact is that China, with all its competitive advantages, is in a win-win situation. As well as Chinese subcontractors, the big winners in this game, at least in theory, will be Western clothing giants and perhaps worldwide consumers. The price of clothes in Europe – very high, especially because of a 20% value-added tax (VAT) – are bound to drop by as much as 15%. In the United States, after the last suppression of quotas, Chinese exports rose by a whopping 640%, and their price fell by 70%. Moreover, there is expectation of a boom of no less than 20,000 new suppliers in China – in addition to the current 5,000.

Have yuan will travel

Everybody wants to know what’s going to happen in Guangdong province – the heart of China’s world factory of garments and sports shoes. Speaking to the official China Central Television (CCTV), Leng Xiaoming, the executive vice mayor of the city of Dongguan, said that local salaries are expected to rise 10% in 2005. The average monthly salary in Guangdong’s textile industry is still only 700 yuan ($84). China’s labor law establishes a minimum wage, decent work hours and overtime pay, but most companies ignore it. NGOs such as the Hong Kong Christian Industrial Committee stress that working 14-hour days, seven days a week, for as little as 1,000 yuan ($121) is the norm in the industry – something that perhaps conveys the true meaning of a “flexible workforce.”

A sign of things to come may be what will happen in Shenzhen – the ersatz Hong Kong across the border, a special economic zone fueled by money and sex, which now boasts the largest annual gross domestic product (GDP) per capita in China ($6,510). Production costs and land costs are constantly rising in Shenzhen. For hundreds of companies, the solution is de-localizing – going west to neighboring provinces such as Gang or Hunan or going to far west Xinjiang, as Beijing has been encouraging these companies to do for five years now. Critics in Guangzhou say that many Guangdong industrial bosses – and many are investors from Hong Kong and Taiwan – are using the threat of de-localizing – threatening to move them the inhospitable west – in order force people to accept 14-hours-a-day, seven-days-a-week, no-overtime-pay workload.

Others, such as Dongguan’s Lumen Thai – the top clothing company listed on the Hong Kong Stock Exchange, with factories in four countries – are concentrating on China instead. Lumen Thai sold its business in Mexico. It is consciously moving up market. Its clients are assigned their own teams of designers, merchandisers and sales representatives, and production design tests are carried out on-site in Dongguan. Lumen Thai is a graphic example that production in China can be more efficient than anywhere else.

The figures prove it. An average Chinese worker in the garment industry earns more than double an Indian and four times more than a Bangladeshi textile worker. The Chinese may earn more, but his productivity is also higher. He adds $5,000 a year in value to what he produces, compared with the $2,600 by the Indian and the $900 by the Bangladeshi. This is because Chinese businesses have invested more in manufacturing equipment and also in transportation that increases worker efficiency.

Last month, in a gesture of goodwill, Beijing decided to impose export taxes on low-end production. This is above all a clever strategy to force Chinese manufacturers to raise their game and compete globally in design and fashion, as well as the basics. At the WTO in Geneva, trade experts know all about it. As with everything in China, once a clear directive comes from above, a whole industry moves accordingly with inexorable force. Beijing imposed export tariffs on 148 types of clothing, ranging from 0.2 yuan ($0.024) to 0.3 yuan for each piece. Officially at least, major Chinese textile producers support the tax. They also insist they would rather enter the global textile market gradually. This roughly translates into “give us a little bit of time and we will also swamp you with our new cool designs.”

Gao Yong, vice chairman of the China National Federation of Textile Industry, explains why a major boom of Chinese textile exports is not likely to happen soon: “Although China’s textile industry is extremely productive, domestic needs should be the first concern. After China’s reform and opening-up, people’s living conditions greatly improved, and there has been a huge increase in textile demands. Now two thirds of our textile products are for the domestic market.”

It will be a very long march. An average Chinese consumer, at least for now, buys only half a shirt a year. This will change – and fast – as the Chinese middle class grows stronger and digs deeper into its pockets in its quest for quality (see Part I of this report, The Great Wall of shopping, January 14).

The swoosh and the foxtail

A sign of things to come is offered by Feng Ling, 38, fashion designer and owner of Tianzi, a boutique in the ultra-trendy 798 Factory in Beijing. Feng’s clothes are influenced by rock and pop, Chanel and Vivien Westwood, but they are absolutely Chinese – such as very elegant linen tunics imprinted with a phrase from a Mao Zedong poem that can fetch as much as 1,200 yuan ($146). Before designing her own clothing, Feng used to buy clothes at Beijing’s notorious Xiushui, or Silk Market, a knock-off mecca that was bulldozed only a few days ago. According to local traders, this was to eliminate competition to another planned shopping mall. Feng considers the zhongshanzhuang (Sun Yat-sen’s uniform) the ultimate piece of clothing: “They can be worn on any occasion.” And she is absolutely sure Beijing will become one of the world’s top fashion centers. One can only imagine the global repercussions of the Xiushui gang starting their own legitimate labels.

Meanwhile in Wangfujing, Beijing’s premier shopping street, the traditional Nike swoosh is busy battling the Chinese swoosh and accompanying foxtail on a mass scale. The clever swoosh with its foxtail is the symbol of Li Ning Sports Goods, China’s largest athletic shoe and sports-apparel brand, based in Beijing.

Li Ning’s sports shoes sell for around $40. Nike’s sell for around $100. Beijing’s hip-hop generation prefers Nike, of course – widely considered to be the coolest foreign brand in China, ahead of Sony, Adidas and BMW. Li Ning sells much better in rural China.

The company set up by founder, chairman and key spokesman, champion gymnast Li Ning (six medals, including three golds at the Los Angeles Olympics in 1984), also the holder of a masters in business administration from Peking University, gives giants Nike, Adidas and Reebok a tremendous run for their money. Li Ning Sports currently has a 10% share of the athletic-shoe market, ahead of everybody else (there are more than a mind-boggling 4,000 sports shoe makers in China), including Nike. There are more than 1,000 Li Ning shops scattered around the country.

Basketball superstar Yao Ming sells Nike’s pricey shoes

Nike has blitzkrieged China, with 1.5 new stores opening every day. Its success is based on two things: it has tied itself with hip hop – every young Chinese hipster is a hip hop fan – and it is selling status. Of its 16 suppliers, 15 only sell to Nike. Nike’s Shoetown in Guangzhou employs 10,000 women who work from 9am to 5pm, five days a week, for 780 yuan a month ($95), hardly remarkable news but far from outright exploitation.

Li Ning knows that the key to his success is also to target young, urban, affluent Chinese. So he hired top ad agency Leo Burnett Beijing to go on the offensive. He can tap national Chinese pride all the way through the run-up to the 2008 Beijing Olympics. And he already understands what it takes to conquer the world: he hired two top sports shoe designers, Italian Massimiliano Zago and Frenchman Jean-Philippe Paviot, to create his top pret-a-porter.

Europeans shopping at the Li Ning store on Wangfujing find this all too cool. So the Chinese are already turning it upside down. For any Western hipster, why buy a pedestrian Nike – everyone has it – when for a fraction of the cost you can buy a cool, exclusive Li Ning, made in China and designed by China? Reverse chic sells.