HONG KONG TEXTILES AND APPAREL SECTOR: UPDATED

UNCLAS SECTION 01 OF 03 HONG KONG 003914

SIPDIS

State/EB/TPP/ABT LERSTEN
Commerce/ITA/OTEXA D'ANDREA
STATE PAST TO USTR HEYLINGER

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD KTEX EAP
SUBJECT: HONG KONG TEXTILES AND APPAREL SECTOR: UPDATED
STATISTICS AND PROJECTION OF FUTURE COMPETITIVENESS

REF: STATE 138090


1. Summary and Analysis. Hong KongQs textile and apparel
manufacturers demonstrated their nimbleness in responding
to quota, market and technical requirements in 2005. With
the elimination of global textile quotas at the end of
2004, Hong Kong textile producers shifted much of their
textile and apparel production to mainland factories to
take advantage of lower operating costs. Therefore, during
the first half of 2005, Hong Kong exports of domestic
textile and apparel fell, whereas re-exports of mainland-
produced textiles and apparel increased. However, this
trend reversed in the latter half of 2005, resulting from
textile quotas being re-imposed on mainland China by the
United States and the European Union. As Hong Kong textile
manufacturers used up their quotas on the mainland, they
moved part of their production capacity back to Hong Kong.
They also took advantage of Hong KongQs Outward Processing
Arrangement (OPA),which allows garments that are mostly
produced in China with finishing in Hong Kong to qualify as
having been made in Hong Kong. The final result was that
Hong Kong registered a 4.2 percent growth in total exports
in 2005 over 2004.


2. Another effect of the re-imposition of textile quotas
on the mainland by the United States and the European Union
was that some overseas buyers shifted parts of their orders
away from Greater China, for fear of shortage of quotas, to
countries such as Bangladesh, India and Indonesia. Some of
Hong KongQs largest textile producers have invested in
production facilities throughout the Asian region and
rotate production among their various factories. Thus they
have been able to take advantage of both global buying
trends and lower operating costs in other countries to
improve their bottom lines.


3. Total textile and apparel exports grew 2.9 percent in
the first seven months of 2006. The meager growth may be
attributed to three factors: a) higher base of comparison
in the same period of 2005 when Hong Kong manufacturers
shifted their production to China to take advantage of the
quota-free environment; b) weaker world demand -- in
particular in the U.S. and E.U. as a result of the economic
slowdown there and; c) aggressive diversification of
overseas buyers for their regional supply sources. End
Summary and Analysis.

By the Numbers


4. The 2004 Annual Survey of Industrial Production, issued
by the Census and Statistics Department provided the
following 2004 data:

Total industrial production: US$ 20.2 billion
Total textile & apparel production: US$ 5.6 billion


5. Census and Statistics Department and Trade Development
Council figures revealed the following for 2005: (Comment:
Both official and industry contacts note that 2005 data for
total industrial production and total textile and apparel
production will not be available until January 2007 so we
have not included this information. End Comment.)

Textiles/apparel share of Hong Kong exports (domestic
exports + re-export): 14.2 percent
Textiles/apparel share of Hong Kong imports: 10.8 percent

Exports in textiles and apparel to the US: US$ 10.1
billion, up 10.3 percent from 2004

Total manufacturing employment (December 2005): 167,367
Total textile and apparel employment (December 2005):
41,973


6. Data for January-July 2006

Textiles/apparel share of Hong Kong exports (domestic
exports + re-export): 13.6 percent
Textiles/apparel share of Hong Kong imports: 10 percent

Total exports (domestic exports + re-export) of

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textiles/apparel rose 2.9 percent from the same period of
2005

Imports of textiles/apparel rose 0.4 percent from the same
period of 2005

Exports of textiles and apparel to the US: US$ 5.7 billion,
down 0.6 percent from the same period of 2005

Total manufacturing employment (March 2006): 161,482
Total textile and apparel employment (March 2006): 39,471

(U) Questions/Responses:

-- Are host country producers receiving lower
prices due to heightened international competition? Have
manufacturers received more, less, or the same number of
orders as in years past? Have foreign investors,
particularly Asian investors, closed factories or
otherwise pulled out of local production?

Indicators are that quota prices have dropped in the first
eight months of 2006. This decline contrasts with a surge
in prices during the same period in 2005 due to quota
speculation. With more quotas becoming available, some
factories have moved production back to China. In general,
Hong Kong producers are receiving lower prices in 2006.

-- Has the host government implemented, or is it
considering implementing, safeguards or other measures to
reduce growth of imports of Chinese textile and apparel
products into the host country?

The Hong Kong government to date has not implemented and is
not considering implementing, safeguard or other measures
to reduce growth of imports of Chinese textile and apparel
into Hong Kong.

-- Has increased global competition affected local
labor conditions by causing employers to reduce wages,
seek flexibility from government required minimum wages,
or adversely affected union organizing?

In terms of real wages, workers in the apparel industry
registered a 3.7 percent increase year-on-year in the first
quarter of 2006, while workers in the textiles industry
recorded a 5.1 percent pay rise during the same period.

-- Has the host government or private industry
taken action to increase the country's competitiveness,
such as improving infrastructure, reducing bureaucratic
requirements, developing the textiles (fabric production)
industry, moving to higher value-added goods, or
identifying niche markets? Does post think that the host
government or private industry's strategy will be
successful?

The Hong Kong textiles and apparel industry sees the
imposition of U.S. and E.U. quota restrictions on Chinese-
made textiles and apparel as an opportunity to redevelop
the industry and expects some local manufacturers to
relocate part or all of their manufacturing operations to
Hong Kong, or to expand their production in Hong Kong. In
January 2006, the government approved a plan allowing
manufacturers to import Chinese workers by maintaining a
1:1 ratio with one Chinese worker to one Hong Kong worker
for the garment sector and one Chinese for every four Hong
Konger for the knitwear industry. However, industry
response to the worker importation scheme has not been
keen. As of mid-September, the industry has imported only
70 workers from China.

According to Daniel Poon, Assistant Chief Economist, Trade
Development Council, Hong Kong can be competitive in
textile and apparel exports given heightened global
competition. The Hong Kong textile and apparel industry
has been developing itself into producing high-value added
products prior to the elimination of the quota system. In
order to stay competitive, the industry is targeting
higher-end markets, focusing on fashion design, developing
brands, and developing China's fashion market under the

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Chinese-Hong Kong Closer Economic Partnership Arrangement
(CEPA). Under CEPA, Hong Kong-origin textile and apparel
products enter China with zero-tariff. This includes both
local and overseas manufacturers and will encourage the
expansion of their existing production facilities in Hong
Kong.

With respect to government assistance, the Trade and
Industry Department has streamlined import and export
arrangements for textile and apparel products and removed
all quota-related measures and charges, which directly
leads to reduced operating costs. The Innovation and
Technology Commission (ITC) has set up the R&D Centre for
Textile and Clothing to promote the application of R&D work
and technology transfer. Small- and Medium- Sized
Enterprises (SMEs) in the textile and fashion sectors can
seek support from the SME Funding Scheme in acquiring
business facilities and equipment, resolving working
capital needs, expanding overseas markets and enhancing
their overall competitiveness. In addition, with the
government's support, the "DesignSmart Initiative" promotes
the wider use of design and innovation in industries to
help them move up the value chain.

CUNNINGHAM