Behind H & M'S Boycott Of Xinjiang Cotton: Competition For Dominance, Pricing Power And Standard Of Supply Chain

On March 25, H & M's boycott of Xinjiang cotton continued to ferment on social network media. At present, several multinational clothing enterprises such as Nike, Adidas, Zara and gap have been disclosed to have made similar statements.

On March 24, H & M China responded that "H & M group purchases more sustainable cotton through globally certified third parties, with the aim of supporting cotton farmers around the world to adopt more sustainable planting methods. H & M does not purchase cotton directly from any supplier. H & M group, as always, respects Chinese consumers. We are committed to long-term investment and development in China. At present, we cooperate with more than 350 manufacturers in China to provide clothing products in line with the principles of sustainable development for Chinese and global consumers. "

Officials have also spoken on the incident.

At a regular press conference held by the Ministry of Commerce on March 25, Gao Feng, a spokesman for the Ministry of Commerce, said that "pure cotton in Xinjiang should not be tarnished by any force", and stressed that "the Chinese government has always welcomed and supported the normal business activities of multinational enterprises in China and the efforts to build an industrial chain supply chain. Chinese consumers have responded to the so-called business decisions made by individual enterprises based on false information. We welcome foreign enterprises to visit Xinjiang on the spot, and are willing to provide active support for foreign enterprises to carry out trade and investment in Xinjiang. "

China Consumer Association said on March 25 that it was "seriously concerned about the H & M incident" and that the termination of cooperation by "individual international industry organizations and multinational enterprises" had "seriously harmed the feelings of Chinese consumers and infringed upon the legitimate rights and interests of consumers".

In the storm, BCI, the better cotton Initiative (BCI) behind the brand, also stood in the spotlight. The H & M statement said that "BCI has decided to suspend the issuance of BCI cotton licenses in Xinjiang, so the cotton required for H & M products will no longer be obtained from there."

"This is not the behavior of a single brand. It is BCI, which has a greater economic interest. Behind it is the control over the pricing power and standard power of the cotton supply chain." Ma Gang, an analyst in the clothing industry, told reporters in the 21st century economic report that "while foreign brands want to make money from Chinese consumers, they also suppress the Chinese supply chain and underestimate the response of Chinese consumers."

On March 25, the China Cotton Association stated that "the cotton association of China firmly opposes any restrictions imposed by the United States led western countries on the textile and clothing supply chain and related products in Xinjiang, China, and strongly urges them to stop their wrong practices."

Competition of supply chain

Ma Gang pointed out that in September 2020, H & M announced that it would stop cooperating with Xinjiang Huafu (A-share listed company, mainly engaged in yarn manufacturing and sales) because of "forced labor".

Behind H & M's ban on Xinjiang cotton, there are also brands such as Nike, gap, Zara, UNIQLO, etc. the leader behind them is actually BCI, and behind them is the competition for the dominant power of the supply chain, pricing power and standard.

Ma Gang explained that BCI is a supply chain alliance and has pricing power. BCI has five categories of members, namely: (1) retail brand members, i.e. purchasers, such as H & M and Nike; (2) suppliers and manufacturers, mainly cotton merchants and yarn mills; (3) grower organizations; (4) other categories, mainly companies providing technology for the supply chain; and (5) social groups, mainly non-profit organizations related to cotton.

According to the data released by BCI, in 2019, the cotton consumption of its retail brand members exceeded 3 million tons, accounting for 10% of the global consumption, while the supply of BCI accounted for about 30% of the global supply. BCI's purchasing and supply are second to none in the world. It controls the cotton standard and pricing power, and its influence is self-evident.

"BCI's purchasing volume accounts for 10% - 20% of global cotton, and it is the leader of the supply chain and has an important voice in the safety of upstream and downstream industries. This organization has been growing in recent years, and the withdrawal of individual brands seems to have limited impact." Magang stressed that the certification of BCI directly affects the pricing of cotton by member enterprises, and indirectly affects the purchase price and selection criteria of cotton by non certified enterprises.

The essence of banning Xinjiang cotton is to exclude China's supply chain. China's cotton production accounts for about 22% of the world's cotton production, and Xinjiang's cotton production accounts for 80% of China's. the target is not Xinjiang cotton, but China's cotton, and even China's textile supply chain.

"This is related to the global division of labor of China's textile industry. In 2018, China's total fiber processing volume was about 54.6 million tons, more than 50% of the global total fiber processing volume; China's textile and clothing export volume was 276.73 billion US dollars, accounting for 35% of the world." Ma Gang said that the textile products exported from China can be sold at higher prices with various brand logos in international brand fashion stores.

In 2019, the global cotton production will be 122 million bales. The main proportion of cotton production areas: India accounted for 24.3%, China accounted for 22.4%, the United States accounted for 16.3%, Brazil accounted for 10.7%, and Pakistan accounted for 5.4%.

In 2019, the global cotton consumption will be 118 million bales. The main proportion of cotton consumption is as follows: 36.5 million bales in China, 24.5 million bales in India, 10.8 million bales in Pakistan, 3.5 million bales in the United States and 2.9% in Brazil.

The main cotton exporting countries are the United States, Brazil, Australia and India. In 2019, more than 80% of the output of the United States, about 80% of the output of Australia, about 60% of the output of Brazil and more than 10% of the output of India will be used for export. The export volume of the four countries accounts for more than 80% of the world's cotton exports. Import countries are mainly concentrated in Asia. China, Turkey, Vietnam, Bangladesh and Pakistan import more than 4 million bales of cotton annually, accounting for more than 70% of the total global imports.

"In terms of total output and total consumption, China's self-produced cotton is still unable to supply China's cotton consumption, which is related to the fact that China has a large number of textile enterprises. They are suppliers of foreign brands and need to consume a lot of cotton to provide manufacturing services." "Obviously, the beneficiaries are countries like the United States and Australia that export a lot of cotton," Ma said

According to the data released by the China Cotton Association, Xinjiang is the largest cotton producing area in China, with an annual output of about 5 million tons, accounting for more than 80% of the domestic cotton production. Cotton has become the main income source of local farmers in Xinjiang, and cotton planting income has accounted for more than 80% of the total agricultural income. Xinjiang's cotton textile production capacity is about 17 million spindles, and the yarn output is 1.85 million tons, providing nearly 600000 local employment. According to the statistics of China Customs, China's textile and garment exports will reach 296.23 billion US dollars in 2020.

In fact, the essence of the supply chain layout of international brands is to pursue the maximization of interests. In 2012, Adidas closed its own plant in mainland China, which is 15 years old in Suzhou. After withdrawing from Suzhou, Adidas chose Southeast Asian countries with lower supply chain costs.

Changing situation of clothing industry

Under the epidemic situation, due to the closure of offline stores due to the global epidemic, coupled with the sharp decline in social demand, the demand for related categories has dropped sharply. Clothing is one of the most affected consumer segments.

According to a previous report released by Aowei consulting, 400 billion yuan will evaporate from China, the world's largest clothing market, in 2020, which puts most clothing brands at risk.

The epidemic has brought about long-term structural changes in China's clothing and footwear market: e-commerce has achieved further growth and accelerated penetration into high-income groups; market differentiation among different line level cities has intensified; offline stores are facing more severe challenges; it is urgent to change ideas to adapt to the new normal after the epidemic.

The spread of Xinguan pneumonia in the world has greatly impacted multinational clothing brands. In 2020, the revenue of H & M, Zara and other groups will drop sharply. Under the circumstances that China's market takes the lead in recovering, the online market is mature and the brands are increasingly relying on online channels and digital marketing, the development of foreign clothing brands in China is "blurred".

H & M group has net sales of SEK 187 billion in fiscal year 2020 (December 1, 2019 to November 30, 2020). Net sales fell 18% in local currency terms. The outbreak had a serious negative impact on sales, especially in the second quarter, when most markets temporarily closed stores. At its worst, about 80% of stores are closed.

China is the fourth market of H & M group's sales in the fourth quarter of 2020, second only to Germany, the United States and the United Kingdom, and also one of the markets with the smallest decline.

The net sales of INDITEX group, Zara's parent company, amounted to 20.4 billion euro in fiscal year 2020 (from February 1, 2020 to January 31, 2021), with a year-on-year decrease of 28% or 25% after excluding the influence of exchange rate. During the financial year, 100% of the stores were forced to close or their trading hours were restricted. Online sales increased 77% to 6.6 billion euros.

Gap, another big U.S. clothing retailer, said it was weighing factors to sell its business in China. Gap entered the Chinese market about a decade ago, betting that residents' income in China, the world's second largest economy, would continue to grow to boost its sales. However, due to the sluggish business situation, gap withdrew its brand Old Navy from the Chinese market. In the fourth quarter of fiscal year 2020 ended January 31, only $227 million of gap group's $4424 million revenue came from the Asia Pacific market, and the annual revenue of $710 million in the Asia Pacific market accounted for 5.1% of the group's $13.800 billion.

In addition to the epidemic, clothing retailers are also affected by other regional factors. Factories of fast selling suppliers in Myanmar have been set ablaze, resulting in delays in the production and delivery of some products. The coup also led to the suspension of orders by some clothing brands, including INDITEX, H & M and mango.

In contrast, China's local clothing brands, Li Ning recently released its 2020 financial report, with revenue of 14.457 billion yuan, up 4.2% compared with the same period in 2019. Gross profit increased by 4.2% to RMB 7.094 billion from RMB 6.805 billion in 2019. The group's overall gross margin was 49.1%, which was the same as that of the previous year (2019: 49.1%). In 2020, the net interest rate will rise to 11.7%, net profit will increase by 34.2% to RMB 1.698 billion, making a big profit of RMB 1.7 billion.

In this incident, Anta, Li Ning and other Chinese local brands also issued statements to support Xinjiang cotton. Anta said in a statement on the 24th that it was starting relevant procedures and exiting BCI.

As for the impact of withdrawing from the organization, Ma Gang believes that "BCI has little influence in the eyes of consumers, and more importantly, it affects the supply chain, that is, cotton merchants and clothing fabric suppliers, as well as clothing brands. However, Anta's main business is still in China, and the real withdrawal has limited impact on its operation. Behind BCI is the dominance of the supply chain. Today is cotton, tomorrow it may be soybean or iron ore. This deserves long-term attention. "

What impact will the storm have on Chinese local enterprises? Ma Gang believes that "more Chinese clothing brands, with Chinese culture as the design elements, are on the international stage to show the beauty of China to the world. However, from the perspective of consumer brand awareness and business scale, there are not enough brands with absolute advantages in the Chinese market. The rise of Chinese brands depends on hard power. At present, Chinese brands have made certain achievements, but they have no absolute advantages in the mainstream consumer market, so there is a long way to go. "