The global apparel industry is undergoing a significant transformation today, due to a variety of reasons. It is pivoting away from China, the long-dominant top apparel supplier to all major markets around the world. Other countries, such as Bangladesh, Vietnam, and India, are now eyeing the numero uno position and want to get there in double-quick time. And yet they are all failing, and will continue to fail, until they focus on building the key ingredient that drove the China success story: industrial or factory capacity.

Over the past thirty years, and especially since it joined the international trading order in 2000, China has become the world’s factory for a wide variety of goods, from toys to steel to electronics and everything else. Nowhere was this dominance more visible than in the apparel sector; in the mid to late 2000s, it was estimated that China produced more than half of all apparel destined for the world market, including for each of the major ones, the United States, European Union, Canada, Japan, Australia, India, etc.

While China still remains the world’s largest apparel-maker today, its dominance has come down in recent years due to a variety of internal and external factors. Apparel production is labor-intensive and therefore sensitive to higher labor costs. Consequently, increasing wages in China has made some of its apparel less competitive compared to other countries with lower wages such as Bangladesh, Vietnam, or Cambodia. In fact, this has already led to the production of some low-end apparel items such as t-shirts slowly moving out of China to these countries over the past few years.

This outgoing production trend has accelerated over the past two years because U.S. President Donald Trump’s escalating trade offensive against China has forced major apparel brands and retailers to offshore apparel production from China to escape punitive U.S. tariffs that are eating into their margins. Over and above the trade war, the deleterious impact of the coronavirus on existing apparel supply chains inside China is also pushing companies to start looking for alternative production sites in other countries.

Just recently in fact, the Indian Apparel Exports Promotion Council, a quasi-government industry body, said that Indian apparel makers had started receiving more order inquiries from global apparel companies to cover potential production shortfalls due to the coronavirus outbreak in China. No doubt other countries are reaping the same benefits as well.

Yet for all these disruptions, global apparel production still remains centered in China for one key reason. China has huge apparel manufacturing capacity that no other country can boast of. This allows China to simply out-compete all other countries in terms of pricing, speed-to-market, and volume.

Say a large brand, such as Walmart, needs to procure hundreds of thousands of sweaters for its fall/winter season. It is highly unlikely that Walmart will be able to source all its requirements from a few suppliers in India, Bangladesh, or Vietnam; there are simply no factories large enough in these countries to meet the volume requirements of orders of such magnitude unlike in China. Consequently, Walmart can either place smaller orders with many suppliers in India, Bangladesh, Vietnam, etc. or relatively much larger orders with one or two major suppliers in China.

For Walmart, using more suppliers in smaller countries may allow it to escape Trump’s trade restrictions, but it would face relatively higher logistics, energy, and regulatory costs as well as slower delivery times. In addition, Walmart would also have to spend more time and resources simply planning and coordinating its geographically spread-out supply. Consequently, even with the effect of the tariffs, it may still be more competitive for Walmart to produce in China.

In fact, an analysis of latest U.S. government apparel import data by an apparel industry expert at the University of Delaware highlighted just that. The average cost of an apparel good produced in China and exported to the United States actually fell by 4.3 percent in 2019, continuing a trend since 2011. On the other hand, the cost of apparel goods in Vietnam increased by 4.6 percent, Bangladesh by 5.6 percent, and even in Central American countries, it went up by 4.4 percent. In fact, average costs for apparel production in China still remained lower than all these other countries.

So why is this the case? Why does China remain competitive even after facing higher wages and escalating trade tariffs and other restrictions? The answer is capacity. China’s large capacity provides economies of scale, reducing average energy, regulatory, land, and raw material costs in comparison with other countries, which can only boast of having lower labor costs than China. In addition, significant infrastructure and transportation capabilities in China allow Chinese suppliers to achieve faster product delivery timelines at cheaper logistics costs than other countries such as Vietnam or Bangladesh, which has a significant impact on competitiveness.

Most importantly, other countries are simply just not able to service the huge volume orders required by customers in the United States or Europe as they simply do not have the labor force to do so. China, with its population of 1.7 billion people, has access to a vast and skilled labor pool. No Asian country, except for India, has human capital in such abundance, and India’s labor force is far less-skilled and productive than China’s. It would therefore be simply impossible for Walmart to place a large order in Bangladesh or Vietnam as it would in China.

Building capacity is therefore the key for any country looking to capture a significant portion of the global apparel market. More importantly, lessons gleaned from the apparel industry can be applied in other industries as well. For many emerging countries today trying to establish themselves as industrial and manufacturing leaders, China has really been a pioneer in demonstrating how to build a globally successful and resilient industrial base that can compete with anybody in the world and maintain its strength in the face of challenging headwinds. The key is building capacity. Only then can one think about becoming a global leader in any industry.