Successful garment and textile businesses all seem to adopt different strategies to survive recession, recent brokers' analyses of Chinese and Indian businesses have shown.
In China, research into businesses listed on the Shenzhen and Shanghai stock exchanges showed some (like Inner Mongolia Eerduosi Cashmere) benefited from switching energy back to their core business (in this case cashmere). Others (like Yonggor) benefited from moving into property investment – while still others (like Ningbo Shanshan) lost heavily from diversification into businesses they did not understand. In China's case, many businesses that switched from exports to domestic sales (like Fujian Septwolves) improved profitability. But, while that might be true of businesses listed on the stock markets, China is full of horror stories about exporters finding out the hard way just how difficult designing clothes for China's clothes market, and selling into its retailers, can be.
In India, the evidence seems to be that some businesses are digging themselves out of trouble – but that debt levels are now worrying business analysts. This sounds like a change from the common concern a year ago about India's largest garment and textile manufacturers – that mishandled foreign exchange insurance contracts were creating liabilities many businesses could not handle – but, in essence, it's the same problem. Garment making – and especially garment exporting – is viciously exposed to global competition, and quite small shifts in the ever-changing external environment. Small fluctuations in currency rates, or local interest rates, can wreak havoc on the profitability of even what looks like the best-organised business. And keeping a business alive under the circumstances requires extraordinarily high levels of skill.
Which few businesses have – for reasons so fundamental, and so easily missed, it's worth spelling them out.
Labour rarely accounts for a substantial proportion of the costs of making a garment. Raw materials – which many naive businesses and observers delude themselves affect where buyers source from – rarely differ in price from country to country either, and neither labour nor raw materials fluctuate in price very much either (the real reason labour conditions are such a perpetual scandal in this industry. When times are tough, wages are practically the only cost most factories can control). But some costs fluctuate widely and suddenly, in a way factories have nearly no influence over. Interest rates, energy and foreign exchange in particular change during the lifespan of a contract – so businesses can find suddenly find a garment that looked profitable can only be made at a loss.
Telling a customer prices have to go up isn't really an option – unless the manufacturer wants to be stuck with unusable fabric: the central point about making garments for exports in most developing countries is that almost all garments are made to a specific order from a specific Western retailer or brand. Once a manufacturer has bought the fabric, he really can't avoid delivering the garment at the price originally agreed – and managing the risks involved in that is the central skill in making garments for export.
In practice, the risks of energy, interest or forex costs fluctuating in the wrong way are usually greater than the risks of orders being cancelled. That's why what separates successful garment exporters from those in trouble is their ability to deal both with fluctuations in demand and with cost fluctuations.
In selecting a vendor, buyers need to have a handle on a potential supplier's ability to deal with all these problems. That doesn't mean avoiding suppliers who are financially weak (because in this industry, that would involve ignoring a huge proportion of the world's factories): it means being sure the buyer is able to get garments if a supplier is struggling – or that the buyer's business can cope without the garments if a weak business goes under.
The range of strategies successful Chinese businesses have followed – and the difficulties so many Indians have found – demonstrates just how difficult those judgements can be