Clothesource Comments

The real significance of China’s growing market share

2011-12-15T06:48:00.001Z

China's share of America's apparel imports in September 2011 was within a few hundredths of one percent of its highest ever. In fact it slipped back a bit in October – as it does most Octobers (It peaks in September every year, falls back every month till March, then builds up again till September). Month to month fluctuations don't signify anything much.

What matters a lot more though to Chinese businesses and their workers, though, is the amount they're shipping to the US. Which (measured in kilogrammes of clothes) in May of this year was 5% more than in Mat last year – and in October was 14.6% less than in October last year. And what matters more to their Western customers is how much buyers are having to pay (in October, 14.9% more per kilo than in 2010 for garments from China, but 18.6% more for garments from the rest of the world)

Quite extraordinarily, it's quite in keeping with the evidence of the past few months to say that if you want to find cheap clothes, China's the place to go to. America bought its clothes from China 8% cheaper than from the rest of the world last year: now China's 11% cheaper.

Now of course all these numbers fluctuate from month to month, and the precise number differs between buying countries. But the general trend is clear: Western apparel buyers are buying less, they're paying more – but they're finding better prices in China than most other places, and China's relatively cheaper (though obviously a great deal pricier in absolute terms) than it was a year ago. What's bizarre is watching how people react to this statement – which of course is common knowledge among buyers, but not among their colleagues or their bankers.

To buyers, the "China's getting uncompetitive" thing is generally a bit of a red herring. Their company's first problem is that sales are pretty weak – though that varies a lot around the Western world, and there are a number of chains doing reasonably well for sales. Their bigger problem is that it's practically impossible to get anything like the volume they want at consumer prices that fully reflect the 15% and up cost hikes they're being hit with on the clothes they buy. In one sense, as far as they're concerned, China IS uncompetitive (it's not offering the prices they'd like), but that isn't something they can do much about. Their current concern is how much cost prices will fall back once the current cotton price works its way through, and what live options (such as despecifying, or moving to Bangladesh) they can follow right now.

Because most of them have discovered that some options that looked worth pursuing 6-12 months ago don't stack up any more:

South Asia isn't looking as sharp as it once looked. The Bangladeshis aren't putting on any extra capacity. Indian factories aren't expanding. Pakistani and Indian businesses are more worried about local problems than about chasing new business. And there's something very weird indeed about the claims the Sri Lankans keep on making about customers flocking to their garment makers' doors.
Central America looks as if it isn't living up to its promise. The Honduran factory owners claims hundreds of thousands of jobs have been lost because of an excessive wage increase. But they claimed Nike and adidas were quitting Honduras one day, then said they weren't the next. So maybe their claims are just a wee bit designed as evidence for people too lazy to check of why they'd be better off not putting wages up? The Mexicans are claiming 200 garment plants will close this year "because of a flood of contraband from China". Or maybe just cheaper clothes? But no-one can deny there are closures in Guatemala. Whatever's really going on: all the claims we heard in mid-2011 about US buyers flocking to Central America may have been accurate. But there's no evidence any orders came out of all those flights south of the Border
The Europeans haven't got much to chortle about either. The Euro's falling – and the apparel trade on their doorstep isn't exactly evolving in a way that improves the quality of garment making for European buyers. The chaos that seems to be hitting Egyptian garment making doesn't seem to have infected Tunisia or Morocco (much more important suppliers) yet. But the efforts of the government in Jordan to reduce its garment industry's dependence on temporary foreign workers is a further indication of growing nationalism the Arab world which isn't encouraging investment in an industry that, by definition, thinks multinationally
Which leaves South East Asia. But even here, the floods have made the Thai industry into a mess it will take months to sort out. The Thai problem has affected Laos, which needs Thai ports and accessible Thai roads to bring raw materials in and get finished goods out. So that really leaves just Indonesia, Vietnam and Cambodia.

For most buyers, finding cheaper sources isn't as urgent now as it felt a year ago: most now understand there just isn't a cheaper, reliable alternative to China and many have switched their attention to other problems. Among those problems is the realisation that putting all your sourcing eggs into one basket isn't prudent in the long term – even if that basket is as big, and stuffed with so many factories, as China.

But finding other baskets to add is looking increasingly tricky

Bangladesh should lose its duty free concessions

2011-12-13T08:55:00.001Z

Bangladesh's garment makers have formed a cartel that's keeping foreign garment makers out because foreign businesses pay their workers too much. And European taxpayers are forking out at least €1.4 billion to encourage them.

Bangladesh is currently the country the world's garment buyers want to buy from. With abundant cheap labour and duty free access to the EU and Japan, most of the time it's the cheapest place on earth to make clothes in. The best place to do that is in one of its Export Processing Zones (EPZ). But they're close to full – and the Bangladesh government requires foreign investors to become members of either the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) or the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) to export garments made outside the EPZs.

Only the BGMEA and BKMEA will no longer accept foreign members. Why? In the words of BKMEA President Salim Osman "foreign investors might create workers' unrest because of the mismatch in wages and benefits that the local and foreign units offer to their respective workers." Foreign investors, in other words, pay more than the peanuts Osman does. Probably give them the odd day or two holiday, or make sure they're fed properly. And he's determined to keep meddling foreigners out.

Now Osman's words ought to be made compulsory reading, of course, for fatheaded activists yammering on about "evil multinational corporations". Bangladesh certainly isn't the only country where foreign factory owners offer substantially better employment terms than local ones do. It's just the only country where local factory owners are stupid enough to admit the fact publicly. And it's the only country where they're allowed to freeze out companies who might pay workers a decent wage.

All of which is bad enough – but the BKMEA and BGMEA are able to do all this only because EU and Japanese taxpayers don't just subsidise them, but have just changed their rules – to the detriment of Bangladeshi spinning and weaving workers – to make it easier for them. The EU imported €11.7 billion of clothing from Bangladesh in 2010, and would have received €1.4 bn if Bangladeshi clothes were subject to the same import duty as most other countries. They aren't: indeed Europe and Japan changed their rules this year to allow clothes made in Bangladesh from Chinese yarns or fabric to be duty free. Bangladeshi spinners and weavers – not to mention their workers – were up in arms, of course, as their factories were closed and their workers lost their jobs. But the perfectly reasonable argument went that there were a lot more jobs in garment assembly than in spinning or weaving, so the boom in garment making would easily outweigh the damage to spinning or weaving.

It never crossed anyone's mind that Bangladesh would refuse to allow foreign owners to invest in their investment-desperate country.

And something so absurd didn't cross the mind of India's Prime Minister in October, when he relaxed Indian import duty on Bangladeshi clothes. Quite the opposite: the moment he announced the decision his office was swamped with Indian protests from people assuming Indian factories would immediately switch investment to Bangladesh. For the very good reason that dozens of Indian garment companies were saying they were getting on the next plane to Dhaka to do just that. The BKMEA and BGMEA's reaction to this boom in interest was to repeat, yet again that they didn't want new factories and they certainly weren't going to let any foreigner build one.

Right now the Bangladeshis' intransigence is winning. Just two new garment making companies have been created this year, according to the country's official Business Registrar. Letters of Credit to import textile equipment into Bangladesh were 25% lower in the July-October quarter than a year earlier. We can find not a single example of an Indian or Pakistani manufacturer in the past two years moving to Bangladesh. The job losses in spinning and weaving stemming from the European and Japanese rule changes have all happened: we struggle to find the consequential gains in apparel assembly jobs.

Rich countries give poorer countries trade concessions to help them develop their economies – but that works properly only if other countries don't get the concession. The growth in Bangladeshi garment sales isn't coming at the expense of European or Japanese jobs: it's coming at the expense of countries (like China, Vietnam or Indonesia) that don't shut their doors to garment companies prepared to pay a decent wage. And no-one dreamt for a moment that a government would hand a group of producers the right to decide who's allowed to produce. Or that, as Osman seems to believe, producers would be allowed to keep competitors out for paying a wage their workers might be able to live on.

Banning foreign investment in an industry destroys the purpose of giving trade concessions. Sooner or later, Europe's and Japan's voters will find out how their subsidies are being misused and will force the withdrawal of import concessions from Bangladesh. There's a very easy way for the Bangladeshi government to avoid this: remove the power it's given the BKMEA and BGMEA to decide who's allowed to compete with their members.

China’s recovered apparel competitiveness

2011-12-12T15:43:00.000Z

China's never been the cheapest place to buy clothes from – and no-one in this business has ever really thought it was. The silly phrase "China price" seems to have been invented by journalists to describe something quite different from how the garment trade works.

There have always been countries – above all Bangladesh – where clothes could be made more cheaply, and the last year's mania about rising Chinese prices hasn't changed that. But this year's conventional wisdom has been that China is getting remorselessly uncompetitive. And right now, that's just not true.

The chart shown here shows the change each month on the same month the previous year for the past three years in the average price per square metre (US$) paid by US importers for Chinese garments and for garments from the rest of the world. Imports from places like Italy are minimal: "rest of the world" in the chart below means almost entirely Asia and Central America .

China kept on getting cheaper than it had been the previous year till around May 2010. Then until the end of the year, its clothes started getting more pricey than a year earlier – and they got pricier faster than the rest of the world. China was – just – losing competitiveness.

But all that stopped in Spring 2011. Chinese price rises slowed down, while price rises from the rest of the world accelerated. And by October, there was a very wide gap between the rate of price rises: they rose 14.6% from China, but about 19% from the rest of the world.

No-one's really tried very hard to explain this. We think it's a mixture of reasons

China by late summer 2011 had started encouraging its banks to lend to small businesses again
In the last recession we saw China getting ahead of other producer countries in ratchetting productivity up
Chinese garment output growth slowed suddenly this autumn, as softening export demand coincided with a slowdown in dlkmestic growth. A lot of this has been hidden by media quoting market trends in cash (which is inflating) rather than number, weight or square metreage
Other countries might have started getting greedy after reading all about the fall of Chinese competitiveness.

Whatever the explanation, China's no longer losing competitiveness – at least not for now. But it's not reversing those price rises either. It's just staying cheaper than most of its competitors

Why is everyone so worked up about Indian retail investment?

2011-12-11T12:43:00.000Z

Why is India getting so excited about foreigners investing in Indian retail? Just as weird: why are foreigners getting so excited about investing in Indian retail?

India has slightly different laws for two kinds of retail. Foreign investment is seriously limited in what Indians call multi-brand retailing: businesses like supermarkets and department stores, which sell lots of different brands. It's currently less restricted in what they call single-brand retailing (the businesses like Gap or H&M selling just one brand, which have come to dominate the Western apparel market over the past thirty years) – and the Indian government proposes loosening those restrictions still further. Single brand retailers will still be subject to restrictions they rarely find elsewhere – but as we'll discuss in our next Blog , those restrictions may well turn out to be in the chains' own interest, and most of those chains have been remarkably unexcited about India. Few Indians seem to care much either way about how whether Gap will move in this year, next year or never.

The controversy over supermarkets (absolutely no-one seems interested in department stores) is baffling, though. The argument sounds straightforward enough. For foreign investment: India has appallingly high malnutrition, and this must be linked to the cost of food which, relative to incomes, is unnecessarily inflated because of the immense wastage the country's inefficient delivery chain creates and the relatively high markup its traders are able to get away with. Against: letting Walmart Tesco and Carrefour in will kill the country's millions of small shops and food markets.

But it's an absurd argument. There are over a billion people in India, and they and their forbears have been inventing things for centuries. Mumbai's dabbawallas have developed over the past 130 years a method of getting hotter, fresher, cheaper food directly to office workers 'desks than Tesco or Carrefour could ever dream of. Practically everyone who's ever looked at Indian food distribution and how land is used there knows the future of food distribution is very unlikely to be 100,000 square foot Walmart style boxes. If we're honest, it's the spiritual descendants of Mahadeo Havaji Bachche (the inventor of the dabbawalla system) who are likely to be the people driving India's food retailing future rather than the corporate planners in Bentonville or Cheshunt.

Carrefour, Walmart and Tesco aren't the product of people waiting for a foreign multinational to turn up and invest: all three are the invention of modestly-educated entrepreneurs (men just like Mahadeo Havaji Bachche) seeing a business opportunity relevant to their country, then putting their family's limited cash where their bright ideas lay. Marcel Fournier (Carrefour), Sam Walton (Walmart) and Jack Cohen (Tesco) would probably never have made it into a business school (their brains just weren't wired that way), but they were outstanding at doing things that excited their potential customers. The difference between the reaction of my mother and her neighbours when Tesco rebuilt our local Irwin's in 1960 and the yawning empty spaces of the last Mumbai hypermarket I visited is quite extraordinary. While everyone near the earliest Walmarts and Carrefours knew exactly why they were better places to shop than the dingy, understocked and overpriced shops they replaced, the Mumbai Museum of Last Year's Western Retail Fads offered, as far as I could see, just one advantage over the informal retail it was surrounded with: it gave the few customers shopping there a glimpse of how people shop in the West.

Now some Indian teenagers might want, once a week or so, to buy snack food or shop for a T shirt as if they were in Cincinnati or a Paris suburb. But a Mumbai housewife (or her servant) has completely different objectives, and Mumbai is built completely differently from the US Midwest. And it's not as if Carrefour, Walmart and Tesco are particularly skilled at operating in big foreign countries: Carrefour got nowhere in the UK or US, Walmart left Germany in disgust and its UK Asda chain is further behind Tesco under Walmart control than it was when independent. Tesco will probably claim its frozen food chain in France was just an early experiment - but its US Fresh & Easy chain has been racking up losses in the hundreds of millions a year. Probably the kindest thing to be said about it right now is that the jury is still out.

One day, food will arrive in Delhi or Chennai homes far more cheaply than today after a number of revolutions in how food gets from farm to distribution centre, and from distribution centre to consumers' kitchens. Those revolutions might be stimulated by businesses for whom India is just another territory – or they might be stimulated, just like the surprisingly different revolutions Fournier, Walton and Cohen sparked off, by people who intuited what would work in their own country, and had no real alternative to making it work on their own doorstep.

If I had to bet, I'd say that ultimately, India's food revolutions will be conceived and carried out by Indians (and Indians a great deal more like Mahadeo Havaji Bachche than the average Indian MBA) than by Carrefour or Tesco, though the businesses they spawn might well be snapped up by a multinational. I'd imagine that in overcrowded cities (is there an Indian city that isn't overcrowded?) they'll be based on mobile phones, remote selection and home delivery by bike, rather than by fruitless attempts to find space for lots of 100,000 sq ft stores and their attendant car parks all around a metropolis.

But why isn't that revolution being started now, by an Indian? India's clearly not short of money or bright people. It's got around a billion more potential customers than the UK, France or the US in the 50s, but that never stopped Walton, Cohen and Fournier. Might it take Tesco and Walmart being allowed in and getting it wrong (as they very likely would) to trigger off the spark in a few Indian entrepreneurs that would spark off a chain of events that would finally eliminate the scandal of India's wasteful food distribution system?

China’s solution to the polyester shortage? Hogwash

2011-11-15T15:39:00.000Z

China will look to hogwash to increase its availability of polyester, the government-controlled China National Apparel and Textile Council (CNTEX) reported in mid-September.

No doubt many of our more cynical readers thought hogwash is simply an accurate description of the uncritically regurgitated Party propaganda CNTEX often specialises in. But hogwash is also the word for waste edible oil, which can have been recycled from restaurants or extracted from sewers.

Fermented, hogwash can be lethal if re-used for cooking. But a research programme at Donghua University is now producing tonnes of 1, 3–propanediol from the fermented product. This is a precursor of polyester, and the consortium sponsoring the research now believes, according to CNTEX, that an entirely biologically-derived production chain can be developed for polyester, allowing yarn to be made from renewable resources.

CNTEX has no estimate at present of the resources needed to drive the process, or of the real likely costs in running it.

How an egotistical BBC journalist has undermined the fight for decent working conditions

2011-06-17T15:36:00.002+01:00

Of all the subjects to choose to fake film about, BBC journalist Dan McDougall couldn't have chosen a stupider subject than child labour in the Indian garment industry. And he couldn't have chosen a more ridiculous time to make the film than November 6, 2007 – the date he and the editor of the Panorama programme are now known to have first discussed the subject.

Indeed, the only possible way any rational person could have chosen to make the film he did, at the time he did, was by failing to do any research about the use of child labour in Indian garment making. The BBC has now been required to make a public apology to Primark. It should be making a public apology to all of us for employing truly incompetent, uninformed, journalists at all.

In late 2007, allegations surfaced about the use of child labour in factories used by Gap - allegations partly supported by undercover work done by McDougall. These infuriated India's then Trade Minister, Kamal Nath – probably the only man in India with the gall to claim in public no Indian garment factories employed children. So on October 31, 2007, Nath publicly threatened retaliation against EU countries where groups making such allegations were based. Indeed he even claimed at the time that "some Dutch NGOs had morphed pictures of children in their reports"

India's hypersensitivity to claims about child labour – and public posturing about fraud by people making them - were no secret to anyone in the industry at the time. Nor was Nath's cynical preparedness to claim night was day if it gave him a chance to look like a brave little Indian fighting against devious Westerners. Five days earlier, on October 25, Nath had publicly complained to a visiting Dutch trade delegation that activist group, India Committee of the Netherlands, was guilty of criminal defamation in claims made about a Bangalore garment factory.

It is not of course reasonable to expect BBC journalists to have been familiar with this background in November 2007. But it beggars belief that a journalist who'd recently been investigating Gap factories and was then going on to research allegations of child labour in Bangalore could have failed to find out about the paranoia in the Indian government about "false allegations". Unless of course, they'd failed to do anything as basic as Google child labour in India. Try it. Set the range for the two months prior to December 14 when McDougall set off for India, and see what Google tells you.

Nonetheless McDougall flew off to Bangalore a month later, where he claims to have started researching on the spot. In February 2008, McDougall began filming what he claimed to be children at work in a Bangalore factory.

Today, three years later, we know the film he made was a fake. And so, in the minds of those Indians supporting Nath's preposterous denials, McDougall's sloppy journalism clearly demonstrates that all those Western claims really are based on lies.

And such Indians still exist. On May 31 of this year, the US Department of Labour confirmed its blacklisting of garment making in India because of the use of child labour. For the previous year, India's Apparel Export Promotion Council (AEPC) had been using American lobbyists to try to persuade the US government there were no child workers in Indian garment factories. The lobbying failed: the Americans rejected the document presented by the AEPC as being "not germane"(getting an expensive firm of Washington lobbyists to write a document repeatedly denying the existence of child labour, without a shred of evidence, does not constitute evidence of nonexistence). But there are still a large number of people in the Indian clothing establishment who seriously believe that if they claim allegations of child labour are all lies often enough and loud enough, people will believe them.

And now, thanks to McDougall's inability to work even the simplest search engine, they've got their evidence. After all, if even the BBC is faking these child labour charges, they'll say, how much less reliable must claims from charities like Oxfam be? As for campaigns against other unpleasant Indian practices, like Sumangali? Well these campaigns are coming from Dutch activists. And we know they're all liars, the AEPC lobby will be saying.

McDougall's fraudulent film one was awarded as the "Best Current Affairs programme in 2008" by Britain's Royal Television Society.

His next award will almost certainly come from Indian human rights abusers for giving them the "Best Excuse Ever for Denying Everything"

All supply chains are vulnerable. And there's almost nothing anyone can do about it.

2011-04-02T09:28:00.001+01:00

Every few months journalists invent a new fad. That's fine: that's what journalists do.

Very often they try to apply that fad to the garment industry. And usually demonstrate their complete misunderstanding of how it works.

The current fad is about "supply chain vulnerability". Because of the Japanese earthquake, many journalists are convinced that the world's network of supply is liable to be broken at any moment. Bizarrely, this includes even professional observers of the garment trade. In fact the Japanese earthquake has had almost no impact on any element in the global garment and textile trade. Japan still has a significant technical textile industry – but almost none of it is anywhere near the area affected by the earthquake or by the tsunami. China's garment exports to Japan may be affected by it – but only a handful of Chinese factories are so far reporting any loss of orders. The great expectations Bangladeshi factories had of a boom in exports to Japan might well be postponed for a year or two: but their exports to the West are growing so fast almost no one will notice.

The Japanese earthquake and tsunami probably will affect parts of the global automobile and electronics industry. And that really is the point. The world supply network is extraordinarily complicated - with each category of merchandise being affected by completely different things. And over the past two years, the garment industry has been hit by a number of complications that have affected almost no other industry. We've had:

In Honduras, disruption of imported raw materials and exported garments as a result of an attempt to force the president out of office.
In Bangladesh, a series of violent riots that have disrupted production for weeks at a time
In much of the West, but especially north-west Europe, the Icelandic volcanic eruption of spring 2010 prevented almost any air freighted movement of garments for almost a month.

But none of these problems caused any real difficulties for importers or retailers. With one or two exceptions most had sufficiently diverse supply chains that a few weeks' disruption in one country scarcely affected their business. The evidence for this is very simple: few people are more creative than a retailer trying to explain a period of poor sales. Yet not one single apparel retailer in Europe or the United States over the past two years has blamed disruption in Honduras, in Bangladesh or in Icelandic volcanoes for any hiccup in their sales.

Yet the myth continues that somehow or other the modern world is vulnerable to chaos in a way it wasn't at some undefined point in the past. But let's look at how the past has developed in the garment trade.

200 years ago, in 1811, UK garments were almost entirely made in the UK. But between March 1811 and about 1815, Britain's garment industry was drastically disrupted by programme of industrial terrorism organised by a group of disaffected hosiery knitters now known as the Luddites. Because all Britain's garments were made in Britain, that campaign was for a while quite successful in cutting off the supply of garments to the market.
50 years later, in 1861, Britain still got most of its garments from factories in Britain. But most of those garments depended on cotton imported from the United States. And as war threatened between the northern and southern states, the southern states seriously believed that cotton was so important to the British economy that the very threat of a blockade on US exports would force Britain to side with the Confederate states. This didn't happen: Britain accepted it would not be able for some years to obtain American cotton, simply decided to live with the widespread destitution this caused in north-western England, developed a cotton trade in Bombay and eventually rebuilt its garment business on the back of that Indian cotton. The disruption to the British supply chain between 1861 and 1865 didn't just cause a temporary lack of garment sales: it reduced hundreds of thousands of people to abject poverty – and in many cases death by starvation. But the disruption to the garment industry was actually greater in the United States. Northern garment factories had access to no cotton at all but British textile mills eventually brought on Indian cotton. Having access to a global supply chain made businesses in Britain less vulnerable than their US peers who had access only (or in this case didn't) to US cotton.
50 years later still, in 1911, the US garment industry was disrupted by a tragic fire at the Shirtwaist factory in New York. This did not impact the textile garment industry anywhere else than in the US, but it forced on America's garment industry a complete rethink of how it managed industrial safety. Again, the disruption caused to the industry by an entirely domestic problem outweighed hundreds of times any of the difficulties the garment trade has suffered over the past two years as a result of events in Honduras, Bangladesh or Iceland.
And in the century since then we've had the supply chain of garments and raw materials disrupted by world wars and frequent closures of the Suez Canal. We've seen non-events like the widely touted bird flu that was supposed to be making international sales impossible – but actually had no effect on anything.
But perhaps most important of all, we've seen dozens of events that no one could have predicted.

No one predicted the First World War; and once it started no one predicted how long it would take or how many dozens of millions of people would be killed. No one predicted the Russian Revolution. No one predicted the collapse of the Berlin Wall – and even once it had fallen no one predicted how quickly East Germany would disappear. And when we say no one we mean not the CIA, no diplomatic service, no serious journalist – and no business offering expensive consultancy in risk analysis. The day in late December 2010 the riots in Tunisia started – and for a full month after they started – the Financial Times was promoting a gadget that predicted political risk. Six weeks after the first local demonstration in Tunisia that gadget was still claiming zero political risk in Tunisia or Egypt.

Worse, it's almost impossible to decide what "political risk" actually means. As it happens, the unrest during February and March in Egypt caused very little disruption to Egypt's overseas garment customers. At the end of February, it was quite possible to conclude that the unrest had passed with almost trivial impact on our industry. But the results of that unrest, as we report in The Source, almost certainly haven't even begun to be felt yet. Restrictions on foreign workers, calls for complete bans on imports, even stronger calls for crippling import duty on garments and textiles – all seriously threaten foreign garment chains who had begun to invest in Egypt, and may well completely undermine the ability of Western garment buyers to use Egypt's excellent manufacturing capacity. It may take at least a year before we even begin to understand the real implications of the Arab spring on Egypt's manufacturing economy is

The ideas that many naive observers cling to so touchingly that somehow supply chain risk can be predicted, or that supply chains can be moved safely to one's own country, both fly in the face of common sense and the last 200 years of history.

So how does a business protect itself from the risks of severe disruption to its supply chain? Well, it can't. At least not under most circumstances. Western clothing brands and retailers have lived through the past two years with almost no commercial damage simply by having a wide range of countries from which they sourced. That's the principle on which insurance companies for the past thousand years have operated: spread your risk.

Any attempt by unsophisticated political observers to predict global events is 99% certain to be wrong. Any attempt to avoid supply chain risk by moving production home is 100% certain to be wrong. What apparel businesses need to do is to source from a variety of countries and to have good fallback plans for when things go wrong. And under no circumstances to believe a word any hokey consultancy says about how it can predict risk.

Why Wiklileaks isn’t quite reliable about Egypt’s garment industry

2011-02-23T09:52:00.001Z

Wikileaks has published two apparently contradictory accounts of Egypt's garment export industry.

Speaking to US diplomats in early 2010, Magdy Tolba, Chairman, Cairo Cotton Center and formerly head of Egypt's Ready-Made Garment Exports Council till he quit in frustration at the country's politicians, said the industry "will face a severe downturn in the next 3-5 years, and may not recover." But speaking to other diplomats six months earlier, Kesavi Murali, the Senior Compliance Specialist in the Middle East for Jones Apparel Group is reported to have said that "there were no signs that Egyptian QIZs had any major labor issues"

Actually both are ill-informed. In 2009, Egypt lost share of US garment exports to Bangladesh: rather than collapsing in 2010 as Tolba predicted, Egypt's garment exports to the US grew nearly 5% in volume. Murali, presumably, is describing Jones' experience – and seems, like many country managers, to be promoting "his" patch. Tolba, though, reflects one widely held worry: the poor productivity of Egyptian workers, which provoked similar, though less hysterical, concern from the American Chamber of Commerce in Egypt at about the same time as the leaked cable, and spawned a number of detailed research programmes.

Both offered a number of other interesting insights into the industry

And both are, in their way, right. Murali is probably not talking about inefficient labour: his big concern is with human rights abuses – which are relatively rare in Egypt's garment industry, as the Wikileaks cables confirm. Even the criticism of wages made by workers at the country's old-line textile plants do not apply as much at QIZ garment factories. Tolba's criticisms are widely shared in Egypt – though possibly less by foreign buyers, who simply move countries if prices get too high. Poor productivity, for most buyers, is the factory's problem, not theirs.

Ultimately, productivity will sort itself out if unions are allowed to develop. The new Egyptian Federation for Independent Trade Unions (EFITU) has a first priority of driving wages up – and it is impossible to see how any new Egyptian government can resist these calls, since minimum wages have been inchanged for decades.

Higher wages, almost automatically, drive productivity up. But only eventually. In the meantime, Turkish investors are predicting wage increases of up to 40%, and current anti-dismissal regulations are likely to take longer to dismantle. We suspect that, over the next few years, there is a real possibility Egypt will become less competitive.

Is Colombia about to write America off?

2011-02-22T19:27:00.001Z

If the US keeps on postponing its Free Trade Agreement with Colombia, Colombia "will not keep insisting" said the Colombia president Juan Manuel Santos in mid-February. For Colombia, trade with the US may well not be the only game in town.

While America's politicians were gratuitously insulting Colombia by letting its ATPDEA treaty with the US lapse almost overnight over an absurd squabble about Bangladeshi sleeping bags that had nothing to do with Colombia, Colombia was busy agreeing with China to build a rival to the Panama Canal – but one that's completely outside US control.

The idea is to build a railway line across northern Colombia linking the Atlantic and Pacific, backed by China, and costed partly on the basis of extracting raw materials from the north of Latin America. "It's a real proposal ... and it is quite advanced," Santos told the Financial Times. "The studies [the Chinese] have made on the costs of transporting per tonne, the cost of investment, they all work out." Santos stressed the "incredible" number of Chinese delegations pitching proposals. The railway would require a production and assembly hub in a new city south of Cartagena, he said. "I don't want to create exaggerated expectations, but it makes a lot of sense."

Well, maybe. The world's industrialisation was sparked off by a colossal miscalculation about this.

In the early 19th century, the merchants of South Lancashire, in NW England, seriously thought they'd easily pay for the cost of building the world's first real railway, between Liverpool (where most of America's cotton was exported to) and Manchester (where it was spun into cotton yarn and fabric), because the rival canal was so slow and expensive.

In fact, scarcely a single bale of cotton ever used the train. Once opened in 1830, the railway forced the canal operators to cut its costs, and the barge operators to speed up. Meanwhile the sheer hassle of offloading cotton from Liverpool port, dragging it by horse-drawn carriage up to the railway station, and then going through the whole process in reverse at Manchester (where they'd built mills along the sides of the canal to simplify receiving raw cotton) meant the trains made no sense. But the people of Liverpool and Manchester discovered all sorts of advantages in travelling the 30 miles or so between the two cities in not much more than an hour (well: the people of Manchester discovered the advantages of being able to escape quickly to civilisation: no Liverpudlian's ever seen the point of Manchester, except as a place to send raw cotton to or as a dumping ground for footballers when they go soft). By the end of the first year, passenger travel between the two cities grew fivefold, and just one stagecoach operator was still running between the two – but all the cotton and finished goods were still travelling by canal. In next to no time, the investors got their money back – and started scouring the world for new investment opportunities. The industrial world had been invented, and a new kind of venture capitalist to go with it.

Later: trains cut the cost of moving goods in many places. But trains first became credible by demonstrating the value of fast passenger travel. And so fast transport took off, and within a few years most of the developed world had trains.

What's the significance of what happened in 1830 at the end of the street I grew up in (that's where the deserted ruins of the world's first real railway station were still visible in my childhood)? Well, the cross-Colombia railway will probably never speed up, or reduce the price of, garment transport between Asia and America's East Coast, or of cotton moving between the Gulf ports and Asia. Or any other goods. Especially with a deeper, wider, Panama Canal coming onstream around 2014: the problems of double-transhipment could destroy that source of revenue.

The railway might create a whole new – and totally legitimate - revenue stream for Colombia, as a conduit to Asia for Latin American raw materials. With Chinese financing, the project would be a viable and attractive way for Bogota to ease transport bottlenecks in its mining industry, said Heather Berkman, a Eurasia Group analyst."They need financing from outside sources and this makes sense for them."

But there's little excitement about the idea among today's conventional venture capitalists. Many are acutely aware that Scotland would still be independent if the country hadn't bankrupted itself – and had to turn to England for a bail out – over a similar venture in the early 18th century.

That's not how many Chinese see things, though. Chinese funding and Chinese engineering has carved a 550km railway to Tibet, rebuilt Angola's railways and is busy erecting a giant industrial port in Brazil. Chinese money could be a real boost to Colombia – even if the railway never makes any money (as an extraordinary number of Chinese infrastructure projects probably don't)

But it's no concern to the Colombians if China throws its money away. US legislators argue about Colombia's human rights record, pointing out that more trade unionists get killed there than anywhere else on earth, and the detection rate – 14% - is terrible. The Economist magazine, however, claims Colombian unionists are less likely to be killed than non-unionists and 14% is well above Colombia's normal clean-up rate for murder. The problem isn't a campaign again unions: it's Colombia's propensity to homicide – the result of its drugs trade, which in turn is at least partly down to its low level of real industry. An Atlantic to Pacific railway line can only help Colombia's real problems.

Americans seem determined, from the point of view of Colombians, to lecture, obstruct – and still do nothing that might facilitate trade. But ironically, the US deficit Colombia's garment exports to the US in the fourth quarter of 2010, for example, were 9% down on 2009 - and represented just 0.3% of America's apparel imports. Colombia's future may well not be in exporting manufactures to the local superpower at all anyway. Meanwhile, the Chinese just want to get on with building things.

Who would you rather do business with?

China: Reasons to be cheerful or reasons to be dismal?

2011-01-21T15:01:00.001Z

If China' as terrible a place to make clothes these days as many buyers say, why's so much clothing still coming out of the country? Its clothing exports to the West are growing faster than the rest of the world, and its prices seem to be hardly moving up at all. The answer, I think, is that there's a real risk China's real competitive edge is under threat. And that's not price, and it's too soon to tell hiw serious the threat is

Scarcely a single piece of hard data coming out of China, or the countries that buy apparel from it, gives any support at all to the extreme pessimism about its long term future as an apparel making centre that so many buyers are reported to be expressing. We seem to be in the world of a famous joke about a UK supermarket chain in the 1980s that totally dominated food buying in the London area: no-one shopped there, it was claimed, because their stores were too crowded with other shoppers.

China's share of the global apparel market keeps on rising, its prices aren't going up much faster than its rivals' – and there's scarcely a shred of real evidence for any of the bumptious talk from those rivals that they're taking sales from China.

Indeed, Turkey – whose manufacturers were among the loudest boasters of Chinese collapse a month or so back – is now seeing its sales so poor it's trying to slap penal import rates onto clothes coming from almost anywhere except Western Europe.

Most of that talk is best summed up in the optimism Central American boosters are showing. Garment exports from most Central American countries are healthily up on 2009. So are the number of people employed in the garment business. But both sales and employment are still down on 2007 and 2008 – and Central America's share of the rapidly growing global market for clothing is way down even on 2009. Most garment making countries, apart from China and Bangladesh, saw their apparel exports crash in late 2008 and 2009: in today's rapidly growing world trade, most countries' sales can be described as healthy because – as another British joke pithily puts it – when the tide's rising, even the corpses float higher.

Actually, most of the problems China's garment industry's supposed to be facing – like rising raw material costs and rising wages – are shared by all other garment makers (or, if they're not, they soon will be) – and most of those rivals have problems of their own which are every bit as great as those China's claimed to suffer from.

Indonesia's textile lobbyists, for example, say they'd be awash with new foreign-owned garment and textile plants – if only all their potential investors weren't turned off by Indonesia's chronic power supply problems. And there's a similar "if only…" tale of woe in every other major Asian garment exporting country. Almost without exception, China's Asian competitors are worried about fundamental, long-term, structural problems in their country. So there's one reason to be cheerful about China: making garments in most of its neighbours isn't getting any easier.

Now none of this is to deny that getting garments out of China on time right now is difficult, that prices almost certainly will start going up and many Chinese factories really are trying to turn business away.

Which takes us to why China dominates the world clothing industry right now and why smart buyers believe there's a real possibility its real competitive edge is being eroded.

China doesn't account for roughly half the clothes worn in the rich world because of low prices or low wages – and certainly not because it employs slave labour. China's significantly pricier than Bangladesh or Vietnam, for example, because its garment workers are paid more than many in Central America or the poorer parts of the Europe/Mediterranean area – and there's no serious suggestion of any use of child or forced labour (though, inevitably small-scale scandals pop up from time to time).

Most clothing buyers have been using China as their core sourcing location because it's reliable, almost as cheap as anywhere else they're likely to buy from, they can find practically any service or piece of trim they want there and because doing complicated things can be relatively painless.

Above all, as far as garment buyers are concerned, things work in China. If raw material needs to be imported, it typically gets into the country and to a factory relatively quickly and hassle-free. Goods move around the country on an efficient road system, any dishonesty on the part of officials is rarely visible to buyers, factories have reliable sources of energy and water, and production never gets disrupted by strikes or civil disorder.

Buyers are relaxed about paying a slight premium for a Chinese garment over the same garment from elsewhere in Asia because they've learned they can place an order in China in reasonable certainty that order will leave a port, at the price agreed, pretty much conforming to the specification, on more or less the day agreed.

But now they've got three broad sets of worry.

First, there's always been a slight worry of serious disruption in China, so as China's share of the world clothing market grows, buyers are increasingly aware of the need to have an alternative source if anything goes wrong. Not because it's any likelier – but because the scope for serious commercial damage is so much greater than it was. That's why Japanese buyers are diversifying out of China
Second, some buyers are worried China MIGHT see price inflation that's seriously faster than its rivals. More urgently, though, many just wish they could find China's advantages somewhere prices aren't likely to be going up.
Third, and most importantly, they're concerned that the sudden widespread delivery and quality problems so widely reported in China during late 2010 might well be a symptom China's real strength – its manufacturers' reliability – can no longer be taken for more or less granted.

In short, the main reason to be dismal about China is the real possibility its garment makers have been hit by factors making China likely to be less reliable in the future. Those fears are spreading – and what happens in the month after workers return (or, for some factories, don't) from the Lunar New Year holiday will probably prove crucial in how buyers assess China for the next few years.

Reliability apart, many of the reasons buyers are being reported as giving for wanting to dump Chinese factories altogether are so wrong-headed we've got to assume the reporters got it wrong. The North American business leader who talked of "hyperinflation" there is clearly just fantasising – or, more precisely, trying to pitch his own company.

There's a great deal to be cheerful about in China. So our next few blogs will examine what's really happening in China, what's likely to be happening soon in China and what's happening in its rivals. In most cases, common sense will show that China's got many reasons to be cheerful. We'll also look at the reasons Chinese garment makers might have cause for being rather less cheerful, and try to find a measured conclusion.

By then, we might have a better idea of how China's reliability coped with the New Year closedown.

EU apparel industry airfreight mirrors consumer apathy

2011-01-12T22:47:00.002Z

Are European brands and retailers serious about their sustainability plans? Because quadrupling your carbon emissions is a pretty odd way of showing it.

Europe's apparel importers inexplicably airfreighted 28% more clothing in the first ten months of 2010 than a year earlier, though total apparel imports from outside the EU grew just 1.4%

As a result, airfreight, which had been falling since 2005 as retailers adopted "ethical" sourcing policies, accounted for its highest share of imported clothes since the EU's statistical agency began publishing the information in 2001.

The environmental impact is extraordinary. Studies by the UK agriculture ministry DEFRA show that a kilogramme transported 10,000 km by air emits 44 times as much carbon as the same kilogramme seafreighted. With surface intercontinental transport accounting for just 7% of garments' energy use, the abrupt switch to airfreight means Europe's garment importers almost quadrupled their total carbon emissions between 2009 and 2010 – more than wiping out any beneficial effect of their widely promoted and booming sustainability programmes.

The apparent lack of interest – by both retailers and by environmental activists - in the apparent ineffectiveness of these sustainability programmes highlights an odd paradox. Activists continue to publicise minor shreds of evidence of growing public concern, such as the 2009 35% growth in use of organic cotton (though it still accounts for less than 1% of cotton use). But opinion surveys show quite the opposite: the UK's Ipsos MORI, for example, has tracked people agreeing they are "extremely worried" about global warming falling from 44% of the UK population in 2005 to 29% in 2010.

Europe's apparel retailers might be destroying the planet – but they may well be in closer agreement with their customers than the environmental lobby is prepared to admit

US “blacklists” put forced labour into context

2010-12-20T15:43:00.001Z

There's a truth about forced and child labour in our industry few dare admit in public.

There's very little of it about – and, compared to other ethical problems, child or forced labour cause relatively little human misery in garment manufacture.

In a week where about four Bangladeshi garment workers were killed in riots over minimum wages, and at least 30 killed in a factory fire, it's hard to convince ourselves that child labour, whether forced or not, is the single most important ethical problem facing clothing buyers. Indeed the 800-page report into the issue published by the US Department of Labour (DOL) makes that quite clear: it sometimes happens (though rarely in making clothes for export to the US or other wealthy countries), but it's very hard to find real human misery created as a result. Certainly compared with the problems buyers face every day - lethally unsafe factories, abuse of minimum wage laws or unrealistically low wages, illegal or unpaid forced overtime, serious pollution or physical abuse in factories – almost certainly cause more human misery than the isolated cases of child or forced labour in this industry.

The practices that really cause deaths, poverty and human abuse are rarely exclusive to a few countries: they occur when specific vendors take short cuts either through greed or in response to buyer pressure for quick and cheap turnaround. But no Western government devotes the energy to analysing the incidence of factory fires (which have killed at least 50 people in Bangladesh garment factories alone this year) that the US devotes to hunting down child or forced labour.

Why? Should they? And are governments diverting attention from serious and widespread problems when they focus so obsessively on something that happens so rarely?

The reason child and forced labour preoccupies governments is partly that it's emotive and clear-cut: customers dislike the idea their clothes might have been made by children, and when the practice is found it's rarely open to dispute. But one more important benefit is that government blacklists really do help buyers avoid time-wasting audits for non-problems, and therefore put more energy into monitoring suppliers for real problems.

The DOL's lists limit the number of places where child or forced labour might be a problem to relatively few.

These products from these countries can't be sold to US Federal buyers without the vendor carrying out real investigations about the use of forced or indentured child labour:

• cotton from Benin, Burkina Faso, China, Tajikistan and Uzbekistan

• embroidered textiles (zari) from India and Nepal

• garments from Argentina, India and Thailand

• hand-woven textiles from Ethiopia

The DOL is required to ensure these products from these countries are not imported into the US if they are made with forced or child labour:

• cotton from Benin, Brazil, Burkina Faso, China, Kirghiz Republic, Kazakhstan, Pakistan, Paraguay, Tajikistan, Turkey, Uzbekistan and Zambia

• footwear from Bangladesh, Brazil, China and India

• garments from Argentina, China, India, Jordan, Malaysia and Thailand

• silk fabric and thread from India

• textiles from China, India and North Korea

• hand woven textiles from Ethiopia

And that means buyers aren't likely to be using anyone's time effectively if they impose child labour questionnaires on garment factories in Honduras or Bangladesh. So they can concentrate on problems more subjective to define, tougher to monitor – and a great deal more damaging to their victims.

Claims of sloppy fire safety being the reason for this year's Bangladesh fires aren't the result of the kind of government imposition of unethical practices we see in the use of child labour in Uzbek cotton fields, for example: they're almost certainly the result of poor safety procedures and a few catastrophic mistakes, which are probably the result of faulty wiring and shift managers convinced unlocked exit doors encourage theft. Routine auditing won't stop that: if the Bangladeshi government can't create and enforce the kind of safety laws the US eventually introduced (and mostly made stick) after the 1911 Shirtwaist Factory Fire, buyers need to pool resources to do that. If, as is often claimed, many factories in Sri Lanka or Honduras have actively suppressed workers' representatives, buyers need to conduct – and share with their competitors – hard-nosed monitoring into whether the specific factories alleged to be misbehaving are really as committed to the human rights they publicly claim.

With the constant pressures on garment factories, there's really very little Western governments can do to alert buyers to the real abuses in many places that can kill or impoverish people. In this industry, the US blacklist of countries with potential forced labour problems is of limited use. But it can help buyers concentrate their compliance monitoring on issues and businesses where there's a real risk of serious problems.

Bangladesh wage blunders underline on factory audits

2010-12-13T16:17:00.001Z

The outbreak of another wave of lethal Bangladeshi violence in mid-December 2010 contains some important lessons for the crucial commercial role of garment factory audits.

As we write, dozens – and possibly hundreds – of Bangladeshi factories have been disrupted over widespread misunderstandings over wage rises. Though some media reports claim the agreed rises in minimum wage were not paid, the reality seems a great deal messier: many workers had expected bigger rises than had actually been agreed, and there's considerable evidence that a number of factories have manipulated their allowances and paygrade structures to prevent many workers from getting the rises they might have reasonably expected.

So there can be little doubt that a great deal of the blame for the violence lies with the owners themselves. And many buyers might well have avoided seeing theory production disrupted by using the system their factory audits in a commercially positive way.

Youngone for example – so heavily hit by violence from December 10-11 it had to close all its Bangladesh factories - now admits that, though it paid the wage increase, it withdrew a "temporary" 250 Taka inflation increase at the same time. Fellow Koreans GS Haewae appear to have admitted they restructured their salary grades before the latest pay rises, so that many workers – apparently without knowing it – received an increase on a lower level of pay than they had been receiving before. Unsurprisingly, many workers thought they had been defrauded.

In a country as prone to violent over-reaction as Bangladesh, this ought not to have surprised anyone. Indeed, the only surprise is just how spectacularly incompetent Youngone and Haewae appear to have been – and how badly their ineptness has damaged neighbouring garment factories affected by the predictable worker reaction. In many other factories, the problem has been slightly different: the full 890% rise went only to those on minimum wages, so more experienced or more loyal staff felt hard done by at seeing bigger rises going to inexperienced colleagues or to inveterate job-hoppers. That, of course, was the national agreement – though it's downright absurd of Mohammad Hatem, acting president of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), to say of the inevitable problem this created: "We can do little, as it is the guideline approved by the government,". No law prevented the knitwear manufacturers from paying everyone the same increase: Hatem's members may reasonably have thought they couldn't afford the rise – but no government was stopping them from paying more than the legal minimum.

Assuming virtually all factories have paid what they're legally required to, the riots demonstrate that there's a great deal more buyers need worry about than simple adherence to the precise letter of a legal requirement. We conventionally think of factory audits are mainly concerned with ethical issues – but in Bangladesh, they're becoming a matter of basic commercial due diligence.

Youngone's behaviour, for example, has almost certainly been completely ethical. It gave its worker a temporary cost of living allowance while minimum wage negotiations were going on – so it's understandable it believes it has a right to withdraw that now legally required wages have been adjusted to take account of recent inflation. But, whether we'd agree with them or not, there's no discussing the fact that the decision has been handled appallingly: it's not the ethics buyer need to worry about, but the commercial incompetence. Similarly, Haewae has done something that makes it an undesirable business partner: not because it pays badly, but because it's incapable of managing its employee relations in a way that avoids pointless disruption.

Everyone knew Bangladeshi workers were going to be very sensitive to the likelihood of not getting their full wage rise at the end of November. Everyone knew that unhappy Bangladeshis don't just sit in a meeting with management for an hour of constructive discussion. In retrospect, buyers ought to have made sure their factories had a proper programme of managing worker expectations – and, if they wanted their orders on time, moved those orders to a factory that did understand how to handle its staff.

Predictably, the Bangladesh trade associations are already blaming poor policing and outside agitators for the mess and the deaths. Those complaints may be well-founded: but it's the straightforward managerial uselessness of people like Youngone and Haewae that's really to blame. And their mismanagement illustrates why buyers need to improve the due diligence they do on potential suppliers in difficult countries

Why noodle bowls are good for trade

2010-12-10T17:01:00.001Z

Hardly a week goes by without a couple of countries – or a lot – announcing they're about to start discussing a free area, or that they're adding some feature or other to their current relationship. And when that happens, there's always someone complaining that it's getting even more complicated to keep track of what's being offered to whom.

And it's fashionable to argue that all these different agreement cropping up are a nuisance to traders – because they're difficult to keep up with – and maybe even bad for the world. Trade guru Jagdish Bhagwati, economics professor at Columbia University, has argued that these agreements are like termites eating away at the world trading system, and letting powerful countries extract unjustifiable concessions from weaker trading partners. Victor Fung, Chairman of buying agent Li & Fung, has argued that country to country agreements "destroy value", are hard for even the biggest companies to keep track of and have "the potential to hinder the development of the global production system". We need one global set of rules, applying equally to everyone, they both argue. Anything else damages the world economy. Our current complicated mass of different rules – usually dismissed as a noodle bowl, except in the US where it's called a spaghetti bowl – is just impossible to live with

This hostility sounds close to absurd. If Li & Fung are as good as they claim at keeping track of thousands of factories, is it really beyond them to stay aware of the trade rules between fewer than a hundred or so countries? (If it is, by the way, our Guide to Trade Rules will tell them). What "unjustifiable concessions" has Bangladesh made to the EU in getting its duty-free access that's made it the world's second largest garment exporter? Messrs Bhagwati and Fung really ought to get out more.

And finally, some else has come along and said so. Ganeshan Wignaraja, of the Asian Development Bank, calls the Fung-Bhagwati view "outdated". There's no serious prospect of one worldwide set of rules, he argues – and companies are demonstrably perfectly capable of understanding the present rules. The noodle bowl is encouraging more international trade, which is keeping prices down in the West and still creating jobs in poorer countries.

And of course he's right. No doubt, in theory, the world market would be more efficient if there were no barrier to trade between countries at all. But few voters have any interest at all in efficient markets. They want jobs, easier profits from unfair advantages, and lower prices – and even the highest-minded politicians in the most honest societies stay in office only as long as they deliver their electorate something roughly along the lines of what that electorate wants.

One thing that follows from that is that, sometimes, countries are happy to open their markets to some other countries for some products but not for others. The US and EU are a lot happier seeing apparel assembly jobs going to poor countries, like Mexico or Guatemala, than to see textile weaving jobs going to China. So they invent Rules of Origin, limiting duty free access from Mexico to garments made from fabric or fibre spun or woven in just a restricted number of countries. Self-evidently, these restrictions keep out the very cheapest raw materials (that's why EU and US businesses argue for restrictions) – but they encourage far more garment-assembling jobs in Mexico than would ever have existed if we'd all had to wait for perfect global free trade.

Because, of course, we all know that there's never going to be perfect global free trade. Free trade, we believe, inevitably creates more net new jobs. But, in doing so, it's going to kill some jobs somewhere. And, since voters aren't stupid, they're usually very astute at sniffing out the possibility of job losses – and in any negotiation, those frightened of losing shout louder than those who think they might gain an advantage. It's simply not true that the rich and powerful inevitably win: Japan's small farmers regularly carry more weight in persuading their government to keep food imports out than the European and US agribusiness lobbies do in pressuring Japan's government to open its markets. Though lazy commentators always describe the textile businesses lobbying in Europe and the US for protection as "giant", they're completely dwarfed by the retailers lobbying against protection. Yet those dwarves forever outmanoeuvre the giants.

So the widely-touted Doha Round of trade talks, sponsored by the World Trade Organisation to produce One Big Global Agreement on trade, is almost guaranteed to disappoint most of its supporters. Some of the major trading countries – like China – want to finish them off by 2011 or 2012. But they can't. Countries' interests are forever changing: the best original account of free trade, Adam Smith's Wealth of Nations, used as an example of why free trade was good the then indisputable fact that the Portuguese could get better and cheaper clothing from England than they could make themselves. So whatever countries agree today, they'll want to change in a year's time.

If you can't find a decent steak, a steaming bowl of noodles is always going to be a better option than trying to eat something that's just not around. And moaning about the noodles is unlikely to solve anything

The power of spinners and weavers

2010-11-29T17:39:00.001Z

Bangladesh spinners and weavers may still undermine the benefits of the new EU Rules of Origin.

The new Rules allow all low-income countries poor enough to be designated Least Developed Countries (LDCs) to use raw materials from anywhere in most garments and still get duty-free access to the EU from January 1. They should significantly increase the competitive advantage in Europe of Cambodia and Bangladesh

The Rules have taken some time to change – not least because of concern about their possible effect on what is known in the jargon as the textile industry's "backward linkage": the capital-intensive spinning, weaving and dyeing industries that most very poor countries lack almost completely. EU administrators have worried about this for some time – largely because it was long the dominant orthodoxy among development activists that garment manufacturing jobs were unstable, temporary things that would disappear to somewhere cheaper, while jobs in spinning and weaving would help poor economies develop. The argument was never very good (there just aren't that many jobs in spinning and weaving). But it's been looking a lot worse since 2005, with businesses obviously happy to close spinning and weaving mills, be it in Nicaragua, Namibia or Mauritius.

Clearly, if a country like Bangladesh can export garments duty free with fabric from China or Thailand, using imported raw materials is sometimes going to be cheaper or more convenient than buying locally made fabric. Whether the resultant growth in demand for Bangladeshi garments creates more jobs overall, or even creates more jobs for Bangladeshi spinning and weaving businesses comes down to how efficiently Bangladeshi mills operate.

But in the past, that's something Bangladesh mills haven't been prepared to leave to chance. Under current rules, Bangladeshi garments can in theory use Indian or Pakistani raw materials, and still export duty free to the EU. But, to protect local spinners, yarn has to be imported from India by sea, rather than by land – adding weeks to the cycle, and putting a significant obstacle in Indian spinners' way. This obstacle was resisted by garment makers – but the spinners and weavers proved politically stronger.

Garment makers are arguing the new rules are good for the country's economy. But they've not even tried to demonstrate they're good for spinners and weaver – who argue they've invested $4 bn in equipment, and all that investment will go to waste under the new rules. This isn't strictly accurate – it'll be needed to get duty free access to Japan, for example – but it's potentially a strong argument. So far it's unclear how forcefully the argument will be made, and there's only four weeks to go.

But who knows what processes the country's textile lobby might engineer to make it tough for the Chinese? And, as far as we know, those wasteful obstacles against Indian yarn still stand.

So it's possible European importers might find it tougher in practice to make the most of the new rules – and we won't know for certain till the textile makers have had a chance to think about tactics and start their lobbying. In the meantime, businesses need to ensure they're covered against sudden new systems or taxes imposed at the country's ports

Colombia letter from US trade associations: bad news for AGOA?

2010-11-23T18:33:00.001Z

A group of 14 US trade associations who normally disagree with each other wrote to Congressional leaders on November 18 – and their letter demonstrates how unlikely further US trade deals now look.

The group claim concern about the December 31 expiry of the Andean Trade Promotion and Drug Eradication Act (ATPDEA): the programme offering duty free access to Peru, Colombia and Ecuador for garments made with US textiles. In fact 71% of the textile and apparel trade conducted under APTDEA is with Colombia, since Peru now uses the more generous provisions of the US-Peru free trade agreement. A similar agreement with Colombia looks stranded for the foreseeable future: not only are most US Congressmen leery of further trade deals, but Colombia's record of suppressing trade unions in particular deeply upsets Democrat members.

The crucial thing about the APTDEA letter, though, is the basic argument. It supports the agreement for creating US exports and secures US textile jobs: with no US garment assembly industry to protect, there simply are no US jobs threatened – an unusual feature of any trade deal. Yet in spite of the fact that there are next to no US opponents of extending APTDEA, we are now only a month from its expiry and there is a real risk it will be allowed to lapse.

This clearly is bad news for other US trade concessions with a more complex effect on US jobs. The TRADE Act – the proposed bill giving duty-free access to Philippine products – and the Reconstruction Opportunity Zone Bill giving duty free access to goods made in defined parts of Afghanistan and Pakistan have both attracted opposition from US textile makers because they claim the proposals really do threaten US jobs. America's proposed Free Trade Agreement with Korea looks to be going nowhere.

None of this should surprise anyone. With unemployment at politically unacceptable levels, this is not a good time to propose any trade deal that even might imperil low-wage US jobs – and it is far from clear the new Congress, from January, will be any more favourable. The question now has to be asked whether there is a real prospect the AGOA Special Apparel Provisions will be extended when they expire in two years' time.

The Special Provisions are the rules allowing garments made in most Sub-Saharan countries to be imported duty-free wherever their fabric is made. When first introduced, they were intended to be temporary: allowing African countries to develop a garment making industry that would tempt commercially viable textile plants to emerge in Africa. This has scarcely happened: fabric plants built with an eye on AGOA - as in Namibia – have folded, and older plants, often built with Chinese money in the Cold War, have rarely been upgraded. There is scarcely any likelihood any new ones will be built before the current Provisions expire.

Without them, it is also unlikely AGOA will be of any value to African garment makers. The programme stimulated high hopes when launched: it has consistently disappointed since. But, though it underpins few African exports, those few exports are a large proportion of Africa's manufactured exports.

But they survive mainly by importing Chinese raw materials. America's textile makers could easily argue that those raw materials are taking business that would otherwise go to US factories, exporting fabric that would be made up in America's Western Hemisphere neighbours. Whether that argument is right or not, it is one tat America's legislators in their current mood could easily accept.

Colombia's difficulties today could easily turn into Africa's in 2012

A small step on the road to normality

2010-11-19T15:37:00.001Z

The peaceful start to an annual holiday in Bangladesh really shouldn't be newsworthy.

But the fact that the annual Eid-ul-Azha holiday got under way without any reported demonstrations in apparel factories over unpaid or inadequate bonuses contrasts both with scaremongers' predictions and what's been happening in Pakistan.

Confusion over the basis for calculating the bonuses, and fears some businesses would default on them, raised the spectre that the riots at he beginning of the month, but on a wider scale, would resurface. Strong teamwork by the country's businesses, and sensible interventions from the government, appear to have put a stop to those worries. With higher minimum wages about to be paid (and implementation monitored by the country's Chief Inspector of Factory and Establishment) and serious steps to establish trades unions, this is the best news to emerge from Bangladesh for years. Add to that the easier access to EU duty-free privileges announced this week, and prospects for Bangladesh look rosier now than for a very long time.

It's all a stark contrast with Pakistan, where protests against unpaid Eid bonuses were exacerbated by a foolish government promise in May to increase minimum wages – a promise that seems to have been made without any prior consultation, or any attempt to honour. Labour leaders' claims that apparel factories are rolling in money might well be unfounded – but in a week in which textile industry profits in Pakistan overall are reported to have grown by over 200%, neither factories nor the government seem to have put any effort into communicating with workers or defusing potential trouble.

Are India’s apparel exporters going mad?

2010-11-17T16:27:00.001Z

India's apparel exporters are all going on strike on November 19, their trade association says. No: not the workers: the owners and senior managers.

If true: they're mad. If this is just posturing hot air from a trade association: the trade association's mad. Either way: adolescent gesture politics like this has no place in today's competitive world – and makes observers wonder what world these people think they've working in.

Let's start off on the assumption the gesture – known in India as a hartal – is meant to be taken seriously, as the country's bizarrely misnamed Apparel Export Promotion Council (AEPC) claims. The AEPC claims its members' businesses are being destroyed by high cotton prices, so it wants them all to close for a day, and spend that day lobbying politicians to ban yarn exports, rather than making sure export orders leave on time. Problem is, says the AEPC, all that yarn's going to China and Bangladesh, where it just makes their clothes cheaper

So if you're an American, German or British customer, you're going to be happy to hear your order's missed its shipping date so that your supplier can spend the day persuading politicians to make the clothes you're ordering from China or Bangladesh dearer. That's REALLY going to encourage you to do more business in India, isn't it? And what about the workers? Are they going to be paid for work they're not doing? Because if they are, the factories must be making too much profit. Or are they going to be forced out of work, and deprived of their wages, for a day over a dispute they've not asked for? Because if so: how's that going to look on the next compliance audit?

Hartals were invented by Mahatma Ghandi as a way of publicly protesting against a government whose legitimacy Ghandi denied. They proved a reasonably effective way of putting pressure on a relatively liberal and tolerant colonial regime: get all the merchants in a market to close for a day and you demonstrated solidarity. Few people were inconvenienced, since shoppers bought their food a day earlier or later. But what's a good way in a subsistence economy of attracting publicity for a serious political cause is a thoroughly irrelevant and self-destructive way of fighting a commercial battle against Chinese competitors. Any business following APEC's recommendation is simply telling its customers it's not putting its customers first. Which might make that business feel jolly good about life for a day – but is a dynamite way of getting those customers to shift future orders to China, Vietnam. Bangladesh or Indonesia – all countries where businesses put getting orders delivered ahead of silly demonstrations

Or is APEC serious about this at all? Does it actually realise the danger in what it's recommending and is it just saying "lobby politicians, but don't risk your business?" Well, who knows? Hartals weren't invented as a commercial weapon: they're politician-speak, and the AEPC is a politicians' invention, originally created to handle the doling-out of export quotas. Invoking hartals seems to show (as happens disturbingly often) that AEPC is still living in a world where producers can dictate to customers.

That may well be the world the AEPC still lives in. Anyone with orders in an Indian factory might want to make it clear that any supplier who thinks that's the world India's customers live in isn't going to be a supplier for much longer

New EU Rules of Origin may be mixed blessing for Bangladesh

2010-11-16T13:25:00.001Z

The new EU Rules of Origin should, from January 1, make it easier for garment-makers in Bangladesh, Cambodia, Laos and Nepal to achieve duty-free status for their garments when exporting to the EU. But that won't necessarily make them popular with everyone in those countries – or with outside lobbyists who purport to speak for their interests. And, at least in one important case, the rules might not be effective as quickly as the EU intends.

As far as the apparel and textile industry is concerned, the most immediate effect of the new rules is to eliminate, for all Least Developed Countries (LDCs) the need to use locally-sourced raw materials to qualify for duty-free access. Till now, the only LDCs with this privilege had been those who had signed Economic Partnership Agreements wit the EU: virtually none of whom are really capable of being commercial apparel suppliers to Europe.

Cambodia, Laos and Nepal have no local spinners or weavers operating on a scale to supply their garment industries, so being able to use imported fabric and yarn is an unmixed benefit for those countries' industries. Bangladesh currently has limited weaving capability, and lacks enough local spinners to meet all its knitwear factories' needs. But those Bangladeshi spinners are a serious political force, and it's undoubtedly not in their interest for Bangladeshi garment makers to be able to import Chinese yarns to knit into garments for the EU market.

The problem's been simmering for some years in a different guise. Bangladeshi garment makers may use Indian yarns and fabric and still get duty free access to the EU: but pressure from the local spinning lobby has forced the government to make importing from India difficult: for most of the past few years insisting on all yarn being imported by sea, adding considerable time and cost to the process.

So far, the problem's not been raised with the government by Bangladeshi spinners, who are currently preoccupied with the problems of cotton prices and cotton shortages. But those problems, together with India's restrictions on cotton exports, will actually make the prospect of facing direct competition from China even more or a concern when they do latch on. Which, in our view, will almost certainly provoke anger, threats and some kind of government obstacle to yarn imports.

Whether, as the issue is noisily and messily argued over, woven fabric imports will also be caught in the debate is completely uncertain. If logic alone were the only criterion, woven fabric should be left alone. The real risk posed by the new rules isn't to existing weaving mills, but to the business models of a few new mills either in construction or currently being proposed. But those developments represent real jobs and real business interests – and their instigators might well feel forced to lobby for restrictions on imports as well.

It might not, though, be as easy for Bangladesh to impose restrictions on Chinese textiles as it has been to hit imports from India: many Bangladeshi garment factories see their country's new duty-free access to China as a real new business opportunity, and would oppose any barriers against China as an invitation for reciprocal barriers that would hurt them.

Until the spinners and weavers wake up and notice, none of this will be predictable. But if we were a European importer, we'd expect any Bangladeshi factory thinking of using raw materials imported from anywhere but India or Pakistan to be clearly responsible for any consequential loss if Bangladesh's import rules changed.

Harvard confused over Mrs Obama’s effect on fashion sales

2010-10-28T20:12:00.001+01:00

Harvard University seems to have gone into the business of understanding what stimulates apparel sales. And got it extraordinarily wrong.

David Yermack, a finance professor at New York University 's Stern School, has published an article in the Harvard Business Review (HBR) demonstrating that clothing companies whose garments Michelle Obama wore at public meetings between November 2008 and December 2009 saw their share price rise almost immediately. Which much of the world's press has interpreted as showing that Mrs Obama is remarkably effective at selling clothes.

Now that's absolutely not what Professor Yermack has found. He's concerned with the reaction of share buyers – not with whether anyone actually bought any frocks on the basis of Mrs Obama's wardrobe choices. But such academic precision doesn't get the HBR's articles quoted in ordinary newspapers. So Harvard's publicists have decided to invent a few ideas Professor Yermack hasn't had. Like "Consumers flock to the stores, and even if they don't buy what she wears, they often leave with something else." or "The First Lady's astonishing influence may be tied to the fact that consumers know she's not paid to wear what she does"

These claims are the absolute opposite of the truth: between November 2008 and December 2009, those companies whose garments Mrs Obama wore and who published their monthly sales data all saw consistent year-on year, like for like, declines. Unlike TJ Maxx, The Buckle and Ross Stores, whose garments Mrs Obama didn't wear, but whose sales consistently increased. Mrs Obama's tacit endorsement of a clothing range impressed Wall St – but seems to have had limited impact on Main Street. And Professor Yermack never said anything about Main Street's reaction to Mrs Obama

So why are the HBR PR people putting downright untruths into the mouths of its contributors? We think it's because the article's to do with fashion. Serious universities don't usually go round inventing untruths – but heck, it's only fashion and no-one in the apparel industry reads long articles, do they?

A point worth considering if you're looking for serious strategic advice about an apparel or textile business. Harvard's the last place to look if you want soundly-based consultancy. Getting headlines matters a lot more in Cambridge, Massachusetts than rigorous analysis

European importers make rotten case against origin labelling

2010-10-28T18:16:00.001+01:00

There are good arguments against compulsory origin labelling for garments in Europe. But importers' association the Foreign Trade Association (FTA) isn't making them – and by grabbing the wrong end of the stick, is doing itself and the garment trade no good at all.

Countries in the EU have widely differing rules about what should be said on a garment about where it comes from – even as far as having different definitions of what "made in Bangladesh" needs to mean. Some European garment makers (yes, there really are some still going) want a standard EU-wide law requiring all goods imported from outside the EU to be marked with where they were made – and, in the case of garments, with standardised definitions of what defines a country of origin for labelling purposes.

The current position is a bit murky, because it involves the European Parliament, whose role few Europeans understand - and fewer still can predict how it will vote. On October 21, the Parliament voted 529-45, with 44 abstentions, to adopt a report recommending a law that requires country-of-origin markings to appear on a wide range of products including clothing and textiles, footwear, furniture, pharmaceutical products, tools, screws and taps. Origin markings would be required on goods imported from outside the EU, unless they were imported from Turkey, Norway, Iceland or Liechtenstein, and should be in ""in a language that is easily understood by consumers in the Member State where the goods are to be marketed", or in English. The draft needs to be approved by the European Council, on which each national government is represented, and where debate on the principle is likely to be a great deal fiercer – with Northern European governments generally opposed

The ostensible arguments for the law are that "consumers can make informed choices to help guard against health risks, counterfeiting and unfair competition". The real argument, at least as far as clothing is concerned, is that many brands imply a garment is made by a French lingerie factory, an English shirtmaker or an Irish knitter of fishermen's sweaters, when it has actually been made in Bangladesh. The law's supporters believe origin declaration will bring that production back to Europe. Supporters also argue that, since for many goods (like food), origin marking is already required and many brands already carry origin marking because they're exported to countries where marking is required, the cost of marking will be trivial

The real arguments against marking are precisely that many brands WANT to imply they're made in Europe when they're not, and that origin marking is yet another cost for businesses to bear. It's highly unlikely, opponents admit privately, that lingerie, shirts or fishermen's sweaters ever would return production to Europe, because there just aren't the factories in France, England or Ireland any more. "Made in Bangladesh" labels will kill sales – leading to fewer, not more, European jobs. Claiming that origin marking is an important weapon against dangerous or counterfeit goods is just silly (are European criminals so much less competent than Asians?). And the fact that businesses currently exporting to the US carry origin marking already doesn't make it any cheaper for those businesses that don't.

There's a real debate between the undesirability of deceiving consumers (which is what brands that look as if they're made in France really are doing) on the one hand, and the undesirability of imposing unnecessary costs or killing businesses on the other. That's what Parliaments are there to discuss – though there's not much evidence there was much debate, in the European Parliament, where the nonsense about "defence against counterfeiting" seems to have been swallowed without a moment's thought. Real debate will take place between governments on the European Council – and those governments will have been fully briefed on the real arguments

So what arguments are being put? "This only…serves the interests of a minority of south European manufacturers seeking to improve their competitiveness" said the FTA's Jan Eggerts. And what's wrong with that? Opposition serves the interest of a group of northern Europeans wanting to improve theirs. Eggert went on to criticise the proposal as "protectionist" – which it is, of course, but so what? Much opposition to the law is simply trying to protect brands' rights to mislead customers.

In throwing emotive criticism around, the FTA is lowering itself to the level of the law's proponents, whose arguments about "consumers can make informed choices to help guard against health risks, counterfeiting and unfair competition" are absurd. Well-intentioned opponents of marking point out the lack of any real evidence consumers care about the issue (Europe's fastest-growing volume apparel retailer, Primark, doesn't bother – and I've never heard a single consumer express any concern), and the real costs marking imposes on those smaller retailers who don't currently mark.

These are good reasons to oppose the measure. Belittling the proposals because their supported by businesses in Southern Europe is offensive – but worse, it distracts attention from the real arguments against

Is it really the end of an era for cheap clothes?

2010-10-20T16:47:00.001+01:00

The average price of clothing in the UK rose in September by 0.9% over September 2009 – the first annual price rise since current records began in January 1996. But does it really make any sense to talk, as some commentators have started to, about the "end of the cheap clothes era"?

Amazingly, for something as internationalised as clothing, the "cheap clothes era" has differed extraordinarily between countries. In the UK, clothing in August 2010 was 53.5% cheaper than it was in January 1996, when the process of demolishing quotas on clothing imports from poor countries really began. Prices overall were 32.7% higher so, relatively, clothing prices fell 65% over the 15 years. In the US, clothing prices in absolute terms fell just 10.5%, prices overall rose 41%, so the relative price of clothing fell just 37%. In the Eurozone, though (those European countries using the Euro, which the UK doesn't use), clothing prices actually rose 6.2% between 1996 and 2010 – though not as far as the 32% prices overall rose, so clothing was still relatively 20% cheaper.

Commentating is something most accessible in English, so the UK story is often assumed to be typical of the rest of the developed world. It isn't: clothing prices in September 2010, for example, were unchanged on 2009 in the Eurozone and 1.8% cheaper than in 2009 in the US. But most people – including me – think US prices are likely to stop falling soon. And it's pretty likely we're about to enter a period in which clothing prices, even in English-speaking countries, are going to stop falling month after month for year after year.

For many English-speaking buyers, a period when clothing prices aren't going down really will be a novelty. For the past 15 years, clothing production has consistently been getting cheaper, as barriers to buying clothes where costs are lowest have been gradually falling. Indeed it's probably true to say that most English-speaking buyers in retail chains simply can't remember a time prices weren't falling: and with that limited memory, there's inevitably an assumption that any decent buyer will always be able to find a factory somewhere prepared to cut prices further. A huge proportion of retail management are children of the cheaper clothes era: a time there was always some new headline-grabbing price threshold ("the £10 school uniform" or "the £15 business suit") to break

Learning prices can't be depended on to fall might be tough for many, and there's a whole battery of skills – second nature to buyers before the 1990s - to be learned. And there's no doubt that the phenomenal growth in clothing sales over the past 15 years is partly the result of clothing being relatively cheaper. Measured in dollars, US apparel store sales in September were 61% up on the same month 15 years earlier – which means, with prices down 10.5%, the volume of clothing grew 78%. Without those price falls, growth would probably have been a great deal slower.

Without the assurance of falling prices, retailers will have to do many things – including learning to negotiate – very differently

But is that really the same thing as "the end of cheap clothes"?

Because some of the commentators who think they're the same thing see more profound consequences for global trade. They see clothing getting more expensive in real terms – though Britain's 0.9% rise in clothes prices coincided with a 3.1% increase in British prices overall: the September price rise didn't even cover the year on year increase in sales tax. They see workers' wages rising, and with it apparel production moving back to rich countries.

Which, to be blunt, is about as likely as me winning a gold medal at the 2012 Olympics. Garment making is labour-intensive – and whatever else is happening in the world, there's no shortage of people prepared to work for low wages. The United Nations Food and Agriculture Organisation estimates that in 2009 1.02 billion people suffered from malnutrition – the largest number in human history, and a 20% increase on 2006. The people of China might be bidding their wages up – but there'll be other places desperate for any jobs China might throw off.

Cotton prices may or may not stay high – but the assumption the current cotton shortage will go on forever is based entirely on land shortage. That assumption ignore the fact that agriculture gets more productive: here in England's Cotswolds, for example, the average sheep yielded less than a kilogramme of wool 500 years ago. 200 years ago, thanks to better husbandry, that average had risen to about 2.5 kilos. Now it's about 10 – and we keep more sheep per hectare and don't use a gramme of insecticide on their pasture. There's no reason cotton shouldn't see the same productivity improvement.

But it'll take time for production to move from East Asia, or for fibre prices to fall. Retailers are going to have to learn to live wit the demise of the cheaper clothes era – at least for a while. But ideas production will move back to Tuscany or South Carolina are no more realistic than the sheep at the end of my garden becoming the world's leading provider of high-quality fabric as they were in 1510.

US import boom may not be more sustainable than many think

2010-10-19T21:00:00.001+01:00

US apparel imports grew 15.3% in September, according to government agency OTEXA. This, and similar sales growth in previous months, have led some observers to conclude that US imports are about to crash

With retail sales up just 3.6% , common sense seems to say that inventories in stores must be ballooning. America's imports have been growing between 10% and 20% every month since the beginning of the year – but though retail sales have been growing as well since October 2009, they've rarely grown much more that 3-5%. So sooner or later, buyers are surely going to slam the brakes on?

Well, not necessarily – because even with imports growing faster than sales, inventories in US clothing stores are still more or less at the lowest level, relative to sales, that they've ever been. Since the beginning of this decade, clothing inventories were equivalent to between 2.5 and 2.6 months' sales every month till May 2009. Then, as order cancellations in late 2008 really began to bit, inventories started tumbling, till they got to 2.2 months' worth in March this year. In August, they'd crept back to 2.3 months worth.

We've argued before that this crash in stock levels signalled a real change in US retailers' attitudes: Fast Fashion, the web, digitised ordering and all the rest have helped retailers manage their business on less stock than they used to need – and the cashflow pressures of the 2008 recession didn't just provoke knee-jerk responses but stimulated retail chains to real, long-term business improvement in areas like inventory management.

And we may well have been right. It's possible that the industry norm has now moved to 2.3 months' stocks – and if that's the case, then the current 10-point gap between sales growth and import growth can't possibly be sustained for long. Alternatively, though, retailers may well be discovering the real business damage that comes from cutting stocks too fast: fast-sellers aren't replenished, stock balance goes wrong, with important colours and sizes missing, and there aren't enough of all those valuable belts and blouses that get sold alongside the skirt or suit.

It's not yet clear which, and my guess that many retailers are tempted to let stocks rise to help push sales. At current inventory levels, many will let stocks build up at least till the New Year, confident they're unlikely to reach the levels that were normal before last year.

We'd bet that any possible crash is unlikely to be seen until 2011. But we may be wrong

Li & Fung display the agent’s dilemma

2010-10-17T11:55:00.000+01:00

Consumers have already enjoyed "too long a period of very low prices" said Li & Fung's Leung Wai Ping recently, when asked her views on the impact of rising input costs. She reportedly went on to say that according to Li & Fung's indices, apparel prices are currently running 30% up on last year.

Now this is very odd. L&F are the world's largest apparel buyer, after Wal-Mart (and they buy a pretty large slug of Wal-Mart's clothes) so they ought to know. But they still account for just a few percent of all the garments bought by rich countries. And according to Clothesource Pricetrak - which monitors 100% of the clothes bought by the US, EU and Japan - garment inflation isn't just anywhere near 30%: in August, for shipments to the US, overall it was just 1%

So if Wai Ping's been accurately reported, L&F aren't doing their job very well: their customers are seeing prices rising, while customers not using L&F's services are still seeing them going down. And it's not just Tradetrak that's reporting a different picture from L&F: manufacturers throughout the world are complaining that buyers just aren't prepared to let prices go up. After two years where falling demand's been the problem, factories everywhere agree the demand's there – but buyers still expect to see 2007 prices.

Which, if true, puts people like L&F in a tricky position. They're remunerated by commission. And, in the world of the past few years, where garment prices have been constantly falling, that's meant they've had to do more and more work for the same fee. They've partly got round this by some productivity improvements – but their overall strategy has been to grow their business by acquisition: but the number of garments they've had to monitor and quality control has grown a lot faster than their income.

A long period of very low prices has been good for consumers. It's probably been good for brands and retailers, because it's made clothing cheaper relative to other things consumers buy, which is one of the reasons clothing demand kept up so well during the recession. That in turn has kept Asian factories going much more stably than many thought when the recession hit.

But low prices aren't good for L&F: indeed L&F are probably the only people for whom the past few years' falling prices really have gone on for "too long a period.

And that doesn't sound good for L&F. They've generally acquired their business on the basis they're saving their customers money – but if they really are saying their customers are paying 30% more while everyone else is paying 5% less, using L&F looks like a very expensive way of getting a few buyers off the payroll. And if L&F gets a reputation for being pricey, no-one else is going to want to move their buying to them.

In fairness to L&F, they've been putting less and less emphasis on bread-and-butter buying services lately, preferring to put more emphasis onto diversifying into other parts of the industry. Like buying into the Hello Kitty business, or into Chinese logistics businesses

But we predict a growing proportion of L&F customers will start getting worried about whether their agent is fighting as hard as it might to keep buying costs down, and will start looking for ways of building competition to L&F into their buying, or of monitoring the value L&F actually offer.

Either that, or L&F will have to stop claiming garments they're buying are going up in price thirty times faster than garments bought by other people.

Rising prices worries show how short our memories are getting

2010-10-15T11:53:00.000+01:00

Here's an extraordinarily confident forecast of how apparel prices are going to rise sharply.

Well documented, beautifully argued – but nearly three years old and, as it turned out, absolutely wrong.

The forecast was made in early 2008, as Chinese wage increases stated to worry buyers. True, the recession helped dampen those worries – but prices started falling before the recession. Chinese factories especially began worrying about losing business to rivals abroad well before demand fell.

Now the lessons of history are never really as clear cut as people think: history never really does repeat itself. The article we're citing doesn't prove prices aren't going up: it just demonstrates that price rises are never inevitability. Prices don't go up because historical forces dictate a price rise: they go up because vendors ask for one and buyers agree.

Right now, there's more noise from sellers complaining buyers won't pay more than from buyers complaining prices are going up too much. In fact, as we report today, garment prices are finally showing signs of rising – but at an average of less than 1% over last year.

The data we've analysed refers to goods arriving in the US during August, so it doesn't include the surge in cotton prices during September (or the likely subsequent fall). But there's always a great deal more to price rises than the costs of labour and raw materials. Any time we analyse the structure of a garment price, there's a huge gap between what a factory's charging and the current price of energy, capital, raw material and direct labour. That gap includes profit, indirect labour, downtime, and depreciation on machinery used, overheads – and the cost of equipment and space that's not being used.

Assigning most of these costs to a specific garment is far more an art (or an exercise in random numbers) than a scientific piece of accountancy. When factories are desperate for business, they cost one way: when they're not, costings are calculated utterly differently.

What really influences costs almost as much as the cost of labour and raw materials is how much demand a factory is receiving. What we have no way of predicting at present is how demand will grow over the next few months. Demand from rich countries is growing right now – but unemployment's not coming down, and government spending cuts in Europe look almost certain to reduce demand soon.

Looking back at "news" stories from just two years ago really ought to remind us that price forecasts seldom turn out right

Diplomats just don’t get it. 1

2010-10-11T15:24:00.001+01:00

Rules of origin are tricky things to understand. But someone's got to.

And among those someones are diplomats from countries whose economy depends on these complicated footnotes to the world trading system.

Like the unnamed diplomat from an African Least Developed Country (LDC) who told an Inter Press Service a news agency that "raises the voices of the South": "We are not exporting one single textile to the EU, but rather to the U.S. because [America's] AGOA scheme is much more relaxed in terms of Rules of Origin."

Now there's just one country that can say this: Ethiopia, because every other African LDC has exactly the same Rules of Origin for exporting garments and textiles to the EU as to the US. And why does Ethiopia lack the trade advantages better-off African countries like Botswana and Mauritius have been given? Because Ethiopia won't sign the necessary Economic Partnership Agreement with the EU – even though the EU's the biggest customer for Ethiopian exports, and practically every other African low-income country has signed.

So Ethiopian textile and garment makers are denied the access to European markets their peers elsewhere in Africa get because their government's decided it doesn't want it. It may have good reasons for not wanting it – but it's a conscious decision by the Ethiopians, not some barrier erected by Europe.

The diplomat was praising Europe's new draft rules of origin, which will apply to countries that haven't signed Economic Partnership Agreements. They'll likely allow garments to qualify for their duty reduction (which in Ethiopia's case means duty free) wherever the raw materials come from. And at first sight, that's good new for Ethiopia.

But the concession will apply only if 30% of the value of the garment derives from work done in the nation the concession applies to. In very low-income countries, that's not an easy level to achieve in garment-making: it's tougher still in some basic made-up textiles. That's why the Partnership Agreements probably suit most LDCs better.

But if you're a diplomat, it's much easier to moan about rich countries than to bother understanding the complicated mechanics of trade rules. Just as it's easier for your government to assume benefits they don't get are denied them by rich-country selfishness, rather than a poor-country's own decision.

Sometimes, aid might be necessary for trade

2010-10-09T11:31:00.001+01:00

The EU's seriously discussing giving Pakistan duty-free access on 80 products, mostly textile, for the next three years. But is that really what Pakistan needs – and even if it is, should the EU grant it?

The argument for the concession seems to be led by the UK coalition government, which argues that when emerging countries are in trouble, "trade's always better than aid."

Just the sort of simple soundbite that simply can't always be correct. Or even relevant – since trade concessions rarely translate into greater sales

The EU already makes gives small concessions to Pakistan: apparel imported into the EU from Pakistan is liable to import duty that's just 80% of what garments of China are liable to. Not a huge concession: but a lot more than Pakistan gets from the US, since garments imported into America from Pakistan are liable to exactly the same duty as garments from China. Yet China's garment sales to the US in 2009 were eleven times Pakistan's (roughly in line with the ratio of China's population to Pakistan's), while China's garment sales to the EU were twenty three times greater than Pakistan's.

Why? Well, the only explanation is that Pakistan's garment makers are just more effective at selling to Americans than to Europeans. Nothing to do with duty concessions – just with commercial competence. Which, as far as sales to Europe are concerned, is fast disappearing in Pakistan: its apparel sales to the EU, in numbers of garments, were 70% down on 2009 between April and June of this year: to the US they were 17% up. For some reason, Pakistani's just seem unable to understand the European market

But the EU believes that "immediate but time-limited reduction of duties on [Pakistan's] textile exports" will boost Pakistan's economy after the destruction from its floods. To offer this, it needs to get its member states to approve a package of textiles that will be duty free for three years (and only three years), then get the WTO to agree to approve the offer. Something that's unlikely to be "immediate", since the EU countries that stand to lose from the offer (like Portugal, Poland and Italy) will probably oppose it, and India is equally likely to oppose WTO approval. A cynic might argue that's not something that affects the British politicians arguing for the deal: there aren't any textile workers likely to lose their jobs in Prime Minster Cameron's Witney constituency, or Business Minister Cable's either. But Britain's coalition government, determined to cut government spending, doesn't want to increase aid to Pakistan.

Even though aid is what Pakistan's textile industry really needs. It's all very well arguing that much of its cotton crop's under water: what matters is the expertise and resources applied to it that ensure it's not destroyed by crop diseases as the flood waters recede. The country's roads are under water – and its industry needs help to rebuild them, fast so cotton and finished goods can get to ports in time. Pakistan's power supply is dreadful and unreliable: but that's not a force of nature, it's the result of under investment in power stations and transmission lines.

Duty concessions are simply useless without an infrastructure to make use of it (not to mention managers with the gumption to understand the market). The Pakistani textile industry's problem is that Pakistan's power supply, roads and Customs clearance are unreliable – and the country needs to be a great deal more reliable a trading partner than it is today.

Providing reliable infrastructure doesn't need a few duty concessions it'll take months or years to get approved and will soon disappear anyway. It needs cash.

Because here's a case where real aid would be a great deal better than spurious trade. And it wouldn't destroy jobs in Poland or Romania

Are “Currency Wars” the latest Fad of the Week?

2010-10-08T15:50:00.001+01:00

Does all the fuss about currencies really matter for the world garment trade?

Since the middle of the decade, we've had a series of fashionable theories, first voiced by consultants, then taken up by the media and finally parroted by every politician. And never reflected in how garments were bought and sold. Now it looks as if "Currency Wars" are the latest in a long line of fads whose time never seems to come.

India was going to rival China as a beneficiary of quota abolition in 2005 (India now exports fewer clothes than Bangladesh)
China in 2007 was getting so expensive everyone was moving production somewhere else (China's exports just haven't stopped growing since)
Offshore production in 2008 was moving back to the US and Europe, or their immediate neighbours (not a chance)
Once the 2008 recession hit, Western countries would slap all manner of new protectionist barriers on Asian garment makers (which is why on Jan 1, 2009 the US finally abandoned quotas against China, the EU dropped the requirement for Chinese garment exporters to have licences, and since then Japan and Australia have started to let garments from their low-income Asian neighbours in duty-free and the EU has abandoned its rules of origin against most very low-income countries)
Again, throughout 2010, China's getting so expensive everyone's leaving it. Which must explain why its apparel exports in August were 27% up on 2009. And why US garment imports from China in September were 16% up in volume

The faddists' track record over the past five years has been simply awful when it comes to our industry. What about the latest?

The International Monetary Fund and the Brazilian government both believe Currency Wars are going to be the Next Big Thing. Countries all want their currencies to be worth less (well, at least their exporters do: tourists have a different view) – and everyone's going to be in what the media call a "Beggar My Neighbour" (after a once-popular English card game no-one's ever heard of) competition.

Or are they? In our industry, it's hard to see it working. Devalue, say, the Sri Lankan rupee and the raw material and energy it needs to import gets dearer. Conversely, if all those lectures to the Chinese about increasing the value of their currency were ever listened to, Chinese garment makers would be looking at cheaper imported cotton while their competitors were suffering from price rises. In our trade, very few production costs are really incurred in the currency of the exporting country.

But that doesn't deter lobbyists trying to force the Chinese to increase their value of their currency. Indeed, the US House of Representatives has agreed to a Bill that would let the country's International Trade Administration impose penal duties against exporters from a country the US Treasury deemed to be "manipulating" its currency. It's very likely the US Senate will agree a similar Bill when Congress briefly reconvenes after the November elections.

So does that mean a raft of new barriers against Chinese clothing imports into the US?

We think not.

1. The US Senate has to pass a similar Bill. This cannot now happen until after the November elections, so the Bill currently being piloted through the Senate by Charles Shumer needs Senate approval between mid-November and early January. Media report that Senate Majority Leader Harry Reid has not yet decided whether or not to take up the Chinese currency bill after the elections. If the Senate does approve Schumer's bill there would have to be a conference to resolve differences with the House measure, but House Ways and Means Committee Chairman Sander Levin has said he believes there would be enough time to do so. The Senate must approve the Bill in this Congress – that is, before January 3, 2011 – or the whole process must start from scratch again in both Houses in the next Congress

2. US President Obama has to approve it. Far from certain. On September 29 in Iowa he said the value of China's currency is "not the main reason for our trade imbalance," although it is "a contributing factor." Obama is temperamentally more interested in developing US exports than stopping imports – and there is no doubt the currency issue will make Chinese action against US exports more likely. Many US trade officials, even those in favour of aggressive action against China on this issue, oppose approval of this Bill unless US diplomacy can persuade the EU and Japan to enact similar legislation. One-sided action by the US, they argue, means Chinese barriers against, say, Boeing – and therefore an easier ride for Airbus salesmen in China.

3. The US Treasury has to declare China a currency manipulator. It has consistently avoided doing this. No one doubts that China's currency is affected by the actions of the Chinese government: but all currencies are affected by their government policy.

4. If 1-3 all happen (which takes us to late winter 2011), businesses must bring petitions for countervailing duty (CVD) to the International Trade Administration (ITA) of the U.S. Department of Commerce. In our view, successful CVD petitions against Chinese garment imports are unlikely. The process is in any case drawn out: decisions to accept or reject petitions take up to six months or longer, and no action can be implemented without several months' negotiation.

5. And if the US does impose CVD on Chinese imports, those duties need to survive China's inevitable appeal on the grounds that America's accession treaty to the World Trade Organisation does not allow it to use currency manipulation as grounds for imposing import duty

In the least favourable scenario for importers (near-immediate Presidential signing, a Treasury declaration and a fast decision by the ITA, new duties are unlikely before late 2011. But the US textile industry lobbies which have argued so loudly for the Bill keep on avoiding discussion of their biggest problem. A successful petition needs to be made by claimants representing 25% of US domestic production of the goods for which competition is causing material injury. US fabric and fibre makers cannot demonstrate they are losing sales in the US to China: the reality is that imported Chinese garments are taking sales from Central American manufacturers who would otherwise be buying US textiles. US textile makers' exports are being hit by allegedly unfair Chinese practices – but the ITA has no authority to penalise China for US exporters' problems: only for what happens inside the US. So US textile makers have to fund the costs of a complex legal battle they have a high chance of losing – against, ultimately, the world's richest opponent.

In the garment industry, US currency legislation probably makes the case for US importers to have alternatives available to China stronger. But it does not make the prospect of immediate, sustainable, new taxes on Chinese garment imports significantly more likely.

If you’re planning to buy clothes from Kosovo or Colombia…

2010-10-07T11:46:00.000+01:00

…Don't. At any rate, not right now.

In theory both countries' garment industries enjoy duty-free concessions to their bigger neighbours. But Colombia's concession on sales to the US expires on December 31 - just over 12 weeks away. And so does Kosovo's on sales to the EU.

So if you were planning on placing orders in either country right now, you'd have to do so without knowing whether the concession would still be there when the goods arrived at your home port. We know there's not the remotest chance the US will extend Colombia's deal until at least the middle of November – because Congress is in recess till then, and extending the deal takes a Congressional resolution. The future of Kosovo's deal is messier: the European Commission proposed last February it should be extended – but the European Parliament hasn't endorsed the proposal yet.

Neither deal is being opposed significantly by domestic textile interests. Colombia is claimed to have the world's worst record for murdering trade unionists, so US politicians are leery of more concessions till there's some progress on labour rights. Kosovo's problem is that discussion of the rules relating to its trade with the EU is wrapped up in complex discussions about Serbia.

Neither country's apparel industry poses a threat to domestic interests: they're both too small. But both countries offer a real threat to their neighbours' stability if they stay poor: Colombia's drug barons are based next door to its textile industry, and the risk of criminal activity hitting Europe from Kosovo is highest as long as there's little chance of legitimate trade. Paradoxically, better trade with these two countries matters more to the EU and US than trade with China or Bangladesh.

So why the delays? For both countries, trade's just part of wider problems. But delays are turning customers away – and, worse, risk losing existing customers.

If politicians and administrators thought about the laws they're discussing, they'd understand that the real world operates on real timescales.

It's a depressing commentary on our governors that such simple matters seem beyond them

Can clothing stores run countries better than governments?

2010-08-16T12:27:00.001+01:00

Britain's new government seems suddenly to have fallen in love with the men who run the country's apparel chains. And the silliness of much reaction to this shows how limited the effect is going to be.

On August 12, it announced the appointment of Arcadia owner Sir Philip Green to lead an external Efficiency Review into government spending. The announcement followed its appointment of Next chief executive Simon Wolfson to the UK's House of Lords, and widespread rumours that New Look chairman John Gildersleeve had been offered a role advising the government's Cabinet Office, but had turned it down.

Of the three, the Green appointment caused by far the most extreme – and often inane – reaction. He's been taken on (for nothing), according to the government release, to look carefully at all government spending over the past three years, identify inefficiencies where savings can be made and find lessons that can be learned for the future . In particular he's supposed to assessing the value for money of government leases and contracts entered into since 2007 and review the government's progress with the recommendations of an Operational Efficiency Programme the previous government launched in 2008.

Green is far from the only businessperson recently taken on to look at the British government's efficiency. In June, it appointed three other businesspeople (including a director of Tesco) to join its Efficiency Board, which runs its Efficiency and Reform Group, to which most of its current central procurement agencies report. But he was the most immediately savaged.

Some of his critics clearly just didn't get it. One political opponent said "It's pretty rich…to appoint a man who has spent £5 mn on a birthday party to preach about waste". But Green's been appointed because his ability to control Arcadia's costs, while persuading customers to spend more, means he's rich enough to regard £5 mn spent on a party as small change. His argument has been that governments wouldn't have to cut public services if they got better at paying suppliers less.
Mind you, his defenders didn't help much either. The government minister responsible for the decision, Francis Maude, talked about Green's "fantastic track record at managing large organisations". Which doesn't say much for Maude's judgement: Green's successes have been either running very small organisations, acquiring then selling off biggish organisations (like Owen Owen , Olympus and the UK's Sears retail chain) –and successfully running just one large organisation, Arcadia, which he acquired in 2002. And even Arcadia is, by the standards of Britain's government, pretty small: its retail network, for example amounts to just one-fifth the number of outlets operated by the country's Post Office alone. Green differs from the legions of previous businesspeople who've tried to help make government more efficient in coming from a business small enough for his personal management style to show through in everything Arcadia does. Where previously people were taken on from businesses that understood the necessity in government of committees, well-informed debate and careful attention to what powers were delegated to whom, Green's attraction to Maude is precisely in his being a genuine entrepreneur. Green, famously, dislikes running publicly-quoted companies – and his results show that, if they're freed from having to talk to smart-ass stockbroker analysts every day, or get the kind of non-executive board members regulatory authorities feel comfortable with, CEOs have more time, and better colleagues, to make sure customers are constantly getting a better deal and no vendor's getting paid a cent more than necessary.
But equally, Green seems not to have quite got the fact that making money's not the same thing as developing policies that work in government. His personal tax affairs (the family fortune's in his British wife's name and she's moved to Monaco to avoid being taxed on them) are legally above board, but create widespread public resentment. His reaction on August 12 to being asked about them by one journalist was apparently to call the journalist a "****ing tosser": the following day, in a live radio interview he'd had ample time to prepare for and rehearse, he preposterously claimed "My wife's not a tax exile: my family do not live in the United Kingdom". Amateurish mismanagement of legitimate questions can make an entrepreneur appear an endearing rogue – but they make a government advisor appear an incompetent bully.

Even in government, incompetent bullies can do things if they've got power. If they're just advisors, they eventually join the long list of people whose good ideas get nowhere.

Which in Green's case would be a pity. His essential insight – that running governments needs more people dedicated to providing better services for less – cuts right across most public servants' most deeply held views. Our local railway station had half its lines removed forty years ago, for example, to generate some footling saving. Now that decision is costing the train operator a fortune: delays are mounting up, which turn potential passengers away. So the UK government's spending nearly £100 mn to replace the lines pointlessly thrown away in the 1970s. If the lines had stayed, the government would be extracting more money than it currently does from the operators, rather than spending a fortune to meet demand – but public servants rarely understand that kind of logic. And those public servants are generally a lot more skilled at manipulating public opinion and politicians than people who make little secret of their contempt for the media (Senior public servants aren't too in love with the media either: but they're brilliant at keeping that a secret.

Injecting real commercial nous into how governments buy things would save taxpayers a fortune, and buying things is something clothes retailers know a lot about. Transferring those skills into infinitely bigger, more complicated, environments, though, is something clothes retailers are generally complete novices at – which is why the government minister for business, asked to comment on Green's role, said "I'm tempted to comment but I think I'd better not".

So will Britain's clothing retailers transform its government? I'd love to see it: but the overwhelming likelihood has to be that Green will introduce a few bright ideas about how to stop landlords ripping you off – then go back to his real love, maybe pausing only to buy Gap or Inditex on the way.

Some love affairs look dangerously one way. This is one of them

Life after the Bangladesh riots: is there any chance of calm?

2010-08-05T15:08:00.001+01:00

It's easy to list the reasons why the Bangladesh garment industry shouldn't have got itself into its current mess. The question that matters, though, is whether it can get itself out of it. Right now, the evidence seems to be that it's going to be difficult.

First: to summarise our view of how the mess came about. Bangladeshi garment factories pay low wages (but, be it remembered, enough to entice people away from what they'd have been doing if the factories weren't there). A national minimum wage for the industry (of 1,662 taka, or about $24, a month) was last calculated on the basis on living costs in 2005 and introduced in 2006. Despite persistently rapid increases in the cost of living since, there has been no adjustment to that minimum. The Bangladesh government promised in April that a new wage would be "implemented" by mid-August, the country's prime minister said the minimum would be trebled, the factory owners said that many would go bust if they had an overnight tripling of their wage bill, so a new minimum of 3,000 taka (roughly $43) was announced on July 29, to be incorporated in wage packets from November. Many workers responded in fury to this announcement of dashed hopes. The resulting riots at one point reportedly closed 350 factories. The riots, we believe, wouldn't have happened if:

The minimum wage had been trebled. But this really was never likely. However small Bangladeshi wages are, few businesses can survive a major cost trebling overnight. But the problem wouldn't have arisen if:
Bangladesh had a system of annual increases in minimum wages: businesses are understandably terrified of trebling wages – but Chinese factories have coped perfectly well with several successive annual wage rises around 20%. Or they might not have been so bad if:
Bangladeshi politicians hadn't built up unrealistic expectations. Particularly because things wouldn't have been so bad if:
Those politicians had devised a way of guaranteeing bank credits so businesses didn't collapse in the first shock of higher wages, or if
Inflation in the price of basic food hadn't started to soar. Rice prices in May soared by up to 32% over 2009. If workers were resentful about their rotten wages at the beginning of the wage negotiations, they were a great deal angrier by late July. They would, of course, have been a great deal less angry if:
Bangladesh had proper trade unions. In the absence of any, routine disputes between workers and employers escalate into aggressive confrontation. Bangladesh has a previous history of corrupt unions making industrial relations worse than they might have been, and it's understandable why there's some nervousness about reinstating them. But excluding unions really is probably making things worse

Nonetheless, the Bangladesh garment industry is now where it is. Except that two things have changed:

Factories' cost structures have got more costly. With the best will in the world, those factories are going to have to try to get price increases – which risks falling market share, factory closures and fewer jobs. The dominance of garment making in Bangladesh means there's less chance of an unemployed garment worker finding a job in another industry than almost anywhere else on earth. So each job loss risks creating a new temptation to riotous protest
The shock the July 29 riots gave the country's government, businesses and ordinary people means there are growing calls for greater crackdowns on "agitators". One report claims 14,000 people are now under investigation. If workers get angry because an 80% wage rise isn't enough, they'll get angrier still if their colleagues start getting arrested for protesting against it. Even if all this turns into just a few leaders being prosecuted, that's days and days of trials – each, again, likely to provoke violent reactions.

Sadly, the mishandling of garment wages over the past five years has created a situation in which commissioning garments from Bangladesh is about to become as great deal more unreliable. Unless there's real evidence of far greater sensitivity in how government and factories handle garment workers, potential buyers are going to have to accept that risks of sever disruption will remain high for the foreseeable future – and trim what they're having made in Bangladesh accordingly.

India : Barking up the wrong child labour tree?

2010-07-21T07:48:00.001+01:00

The Indian government seems, yet again, to be making an ass of itself over child labour in the garment industry.

Readers of this blog will be aware that we have long been critical of India's complacent, insular and frequently downright deceitful behaviour about child labour in clothing factories. Belatedly, its government and its garment makers have woken up to the threat now posed to garment businesses' future: but they appear to have fundamentally misunderstood the threat and what they need to do about it.

India is currently threatened by two quite different US government investigations. By taking only one seriously, it is in effect conceding it will fail to pass the second – and missing the point of the investigation it claims to be taking seriously

Since the beginning of the Obama presidency, the US has stepped up pressure against the use of child labour in imported goods, and its government agencies are currently making existing legislation bite harder. How exporting countries react to this pressure may well influence future legislation. In February 2010, its Department of Labour (DoL) sought public comment on two lists it is required to draw up.

A list required under the 1999 Executive Order No. 13126, which prohibits federal agencies from acquiring products produced by forced or indentured child labour. On July 20, the DoL produced its "definitive" list, which includes :
- garments from Argentina, India and Thailand, and
- cotton from Benin, Burkina Faso, China, Tajikistan and Uzbekistan, and
- embroidered textiles (zari) from India and Nepal
In May 2010, India appointed a US lobbying company to attempt to avoid the Indian garment industry in this list. Its government's focus was summarised by the Secretary at its Ministry of Textiles, Rita Menon: "We have made it our personal mission to disprove that the garment industry is using forced child labour".
Inclusion on this list means Indian garment manufacturers cannot sell to the US federal government. But hardly any do. And even if India can disprove the used of forced child labour, this list creates problems for Indian businesses its government has not even touched. The list also bans the use of Uzbek cotton – which India's Spentex publicly boasts about. And nowhere in India's programme to deal with the problems posed by Executive Order 13126 is there any mention of monitoring the use of Uzbek cotton.

In any case, none of this deals with the other threat to India:
The list required under the 2005 Trafficking Victims Protection Reauthorization Act (TVPRA) of products made by child OR forced labour. This list does not ban anyone from doing anything: it merely requires the DoL to work with producers of the goods on the list to set standards to eliminate child or forced labour and to work with other U.S. government agencies to "ensure that products made by forced or child labor are not imported into the United States".
Garments from India are on the list published in September 2009: the DoL has not yet released its updated version.

But India almost certainly cannot avoid being on this list when it is published – or indeed for some time. However often spokespeople for its government and the garment industry deny child labour, Indian government inspectors report its existence and major factories have failed to deny allegations of its use

It seems virtually certain that India will be on the new TVPRA list, because it is irrelevant to this list whether child labour is forced or not. But its government seems determined to focus on a quite different allegation.

Does any of this matter? First, of course, India is not the only country likely to feature on the TVPRA list: Thailand and Argentina are also on the current list for using child labour in making garments. But being on the TVPRA list does not, of itself, bar Indian garment makers from any business: but it is bound to raise a question mark over ethical standards in India in many buyers' minds – and create the possibility of outright consumer or activist boycotts. Had the Indian government acknowledge the truth of public child labour exposure some years ago, it could have been off this list: years of trying to talk its way out of the problem now pose the real possibility of a buyer strike.

But there is a bigger threat still on the horizon. America's Customs Facilitation and Trade Enforcement Reauthorization Act of 2009 is still under debate in Congress, but if passed – and many legislators support it – adds significantly to the possibility of an outright ban on importing goods made with any kind of child labour, forced or otherwise.

Since all this sank into the brains of India's garment makers and rulers, there has been a raft of initiatives by businesses to deal with the problem – which, in fairness, affects a very tiny proportion of India's garment workforce. But those initiatives started in May and June: they cannot disprove the existence of as problem, but merely stress that the industry is finally doing something to eliminate it. Too many in the industry are still obsessed with what America is doing wring in all this – which merely emphasises how out of touch those people are.

India starts off the battle for public sympathy in the West with a huge set of advantages. Unlike most of Asia outside the subcontinent, English is widespread: unlike Sri Lanka it has a robustly free press, unlike Pakistan it has no real tradition of authoritarian rule and unlike Bangladesh it is a comfortable place to visit. Activists, by and large, look for ethics infringements in India only after they have fully researched the possibility of infractions elsewhere.

But, once activists begin to suspect a country, the likelihood of self-fuelling damaging stories grows massively. Lobbying governments and legislatures does nothing except enrich the lobbyists: once mud has been thrown it sticks somewhere, and cannot be negotiated away.

In India's case, the mud has now been flung. Is it too late to stop it sticking in its garment factories' international reputation?

The US finally benefits from the denim boom. But are technology gains overstated?

2010-07-12T09:50:00.001+01:00

The claim by Brazil's Santana that it will begin constructing a US plant by July 15 rounds off an extraordinary boom in denim investment.

This month alone, The Source reports that Brazil's Vicunha plans to be the world's largest denim maker by 2013, even though practically all its competitors are announcing substantial investments in new denim capacity. Even so, many cynics were unconvinced Santana's 2008 announcement of an imminent plant in Edinburg, Texas, would actually materialise.

Local boosters for the US investment are claiming that advanced technology in the new plant made the US a preferred location. The logic is currently fashionable: one competitive advantage the US might claim as a location for denim production is its proximity to cotton growers - and Vicunha has recently argued it believes fabric mills should be located close to raw material production centres too. A high-tech plant (Santana is spending $100 mn on its new Texas mill) certainly eliminates lots of labour – but it still incurs the capital and energy costs that are what really drive denim prices, and capital and energy aren't outstandingly cheaper in the US than elsewhere.

Santana's case for building a mill in the US is rather more complicated. First, the local authorities are pouring a fortune into inducements: tax holidays, training funds, outright grants: just about all the things American textile lobbyists are forever moaning foreigners do to steal jobs from honest Americans. On top of the substantial subsidies US taxpayers pay its cotton producers – and the bizarre $147 mn a year it pays Brazil not to ban imports from the US because of those subsidies. Santana claims it's delayed starting construction because of financial uncertainty: but Santana's clearly been able to use the delay to squeeze even more benefits out of Texan taxpayers.

Second, and possibly more crucial, putting the plant in the US means garments using its denim, when made up almost anywhere round the Caribbean, get into the US duty free. That's not always possible with denim made in Mexico or Central America: US duty-free arrangements are a mass of special exceptions for denim, that make it nigh on impossible, for example, for most denim woven in Mexico to get duty-free status if made into jeans in Guatemala or El Salvador.

All of which said, though, Santana's investment in the US does show that it can make sense to build new textile capacity in rich countries. Not because better technology redresses rich countries' lack of competitiveness – but because some rich countries are happy to distort the market just as much as China

India’s the odd one out again

2010-07-11T23:21:00.001+01:00

The latest issue of The Source reports a remarkable series of events in which producer-country governments have been busy trying to get their garment industry to raise its standards. Except in India

China removes VAT rebates from polluting industries to discourage excessive use of energy : India tries to have the EU's REACH rules for chemical monitoring declared illegal under world trade rules. The Mauritius government sees for itself that allegations Bangladeshi migrant garment workers are being abused, and promises to change the laws that allows Mauritian factory owners to mistreat them: India, as its government inspectors provide evidence of child labour in its textile factories, hires an American lobbyist to persuade the US government there is no child labour. The Bangladeshi and Cambodian governments actively intervene to negotiate wages between garment factory owners and workers: India's dissipates its energy trying to keep spinners, weavers and garment factories to stop destroying each other.

Is there a common thread? Well, only partially. The squabbles between the different operators in the textile/garment chain are probably the inevitable result of India's having both a complex textile/garment industry and a free press. Bangladesh and Cambodia have only a garment industry to worry about: China simply doesn't let the debate between cotton growers, spinners, weavers and garment makers come out into the open – which is probably why it's taken China so long to allow enough cotton imports to feed its rapidly growing garment industry.

But that doesn't explain India's foot-dragging over child labour and chemical monitoring. In neither case is India acting in its best medium-term interests. Denying there's child labour simply destroys its credibility with its trading partners: attacking REACH and trying to get it overturned diverts its textile and garment makers from the blunt truth that if they don't conform to it they won't be able to export to the EU – and that its competitors are investing in facilities to ensure their factories aren't competing with one arm tied behind their back.

REACH, in fact, is a kind of litmus paper for a government's commonsense. Not surprisingly, given that REACH has been developed by the EU, it's difficult and costly to conform to. But it's difficult for everyone, and it absolutely isn't a device to keep foreign competition out. Properly looked at, it can be a competitive weapon for big countries: India can afford the training and facilities to ensure its industries are REACH-compliant far more easily than, say, Bangladesh or Honduras. And that's why there's no complaint about it from China.

But it's a lot easier to embark on a "the rich world's discriminating against us" campaign than to deal with the real-world complexities that are holding India's garment industry back. The revelation on July 8 that of the 24 Textile Zones approved in India since 2005, just two have opened is a good example of a real problem, entirely of India's own making, that its government keeps ducking. Approval is given for ambitious new infrastructure programmes before any thought is given to the complexities of acquiring the necessary land: the land's owners and other dependent on the land want compensation- and India lacks any real way of recognising the value this land has to owners and peasants. There's no point planning new estates without a legal system that recognises land disputes and deals with them promptly. Similarly, India announced a "new fibre policy" in June to deal with the country's chronic underperformance in man-made fibre garments. It was immediately dismissed by stakeholders as "essentially nothing".

The Indian government helps no-one but its citizens' Chinese competitors when it denies real problems or indulges in posturing accusations of protectionism over rules that affect everyone. It would help its businesses if it ensured they had the infrastructure and import duty rules that enabled them to compete. At present, it's got its priorities completely the wrong way round.

Does the Yuan really matter?

2010-07-11T22:55:00.002+01:00

The likely increase in the value of the Chinese Yuan may well be the most over-rated issue in the world garment trade since commentators seriously argued that Bird Flu would make exports from China impossible.

China's currency is likely to appreciate against the US dollar about 5% between mid-June 2010 and summer 2011. So common sense implies garment prices will go up 5%: even customers in the Eurozone negotiate most of their Chinese contracts in US dollars, so many people assume the currency appreciation will just pass itself straight on.

But that belief misses three crucial points.

First: that's not what happened when the Yuan appreciated in 2006-2008. And it's not what's been happening in Europe. Over the past year and a half, the Yuan has appreciated 20% against the Euro. Because, even though Europeans contract in dollars, the US dollar appreciated 20%. European customers, though, have paid on average, 1-2% more for clothing from China, according to Clothesource PriceTrak, our unique quarterly guide to prices actually paid.

Chinese merchants simply learn, when their currency rises, to sharpen their pencils. Garment costing isn't a science. It isn't even an art: it's simply an exercise in assessing how much the market will bear.

And there's a second point many observers miss. The biggest cost in most garments isn't something that's created in China. Fabric costs are driven by the cost of raw materials – cotton, say, or polyester – energy costs and the cost of capital. Energy costs are heavily influenced by the cost of oil, so they decline, relative to other countries, when a nation's currency appreciates against the dollar. So, oddly can the cost of capital: spinning and weaving equipment is often negotiated in dollars, so the cost of loans and depreciation associated with that equipment will often fall if the dollar falls in value. And that's why, in earlier editions of The Source, we've reported that many Chinese capital-intensive businesses have welcomed Yuan appreciation.

Third, though: now in particular, Yuan appreciation helps Chinese manufacturers with the cost of raw materials too. Chinese businesses pay more than their competitors for cotton: the latest edition of the International Textile Machinery Federation's cost comparison study shows – as has been the case for some years – that Chinese spinners pay up to% more for raw cotton than their competitors in Italy, Brazil or Turkey. That's mainly because Chinese protectionism typically bans, limits or taxes cotton imports. With a worldwide cotton shortage, though, China is relaxing those controls: as much as 35% of this year's Chinese cotton needs will be imported. That 35% doesn't just mean cost the Chinese less than it would have done if the Yuan value had stayed unchanged: it also, if imports remain tolerated, means Chinese spinners and weavers are under less pressure from upward movements in cotton prices than their competitors around the world.

None of this means there's no inflation in Chinese garment prices: but the growth in the value of the Yuan isn't anything like the revolution in world garment costs many people are making it sound. And our review of retailers' forecasts shows just how deeply divided buyers are on the issue.

The great China inflation fallacy

2010-07-11T22:24:00.001+01:00

It's suddenly become the fashion in Western media to announce that Chinese dominance of low-cost assembly businesses – like garment manufacturing – is about to collapse. But the reality is a lot more complicated than the oversimplified "the Chinese Dragon's losing its edge" headlines clogging up too many US and European papers.

To take them bit by bit:

Wage costs. Wages are under pressure in China. Just like almost everywhere clothes are made. This year's minimum wage increase in Delhi has been higher than anywhere we can find in China – and in Bangladesh, government ministers have assured workers minimum wages will be trebled by August. I doubt that'll happen – but unrest over wages, or higher wages, is simply going to be part of the background for garment buyers almost anywhere. Except, possibly, Burma – where the government has just announced anyone trying to form a union will be prosecuted. Even there, though, the absence of a union doesn't mean smooth labour relations: between February and May this year, there have been demonstrations outside at least 20 Rangoon-area garment factories. Many believe unrest in Burma (just like in Bangladesh) is partly the result of there being no unions. Unrest is universal
Raw material costs. Raw material costs – especially cotton – are going up everywhere. Bizarrely, China's unusual protectionism over cotton supplies means they will inflate LESS in China than elsewhere.
China imposes limits on the amount of cotton that can be imported – and then slaps a variable import on much of the cotton that it actually does import. Those limits, and the incidence of duty, vary a lot from year to year – but they often mean Chinese garment makers pay more than they need to for cotton. Though things often change, the regular cost comparison survey last carried out by the International Textile Manufacturers' Federation in 2008 showed raw cotton costing more in China than in any other major textile producing country. Chinese manufacturers were paying 27% more than their Turkish competitors for cotton, and 17% more even than businesses in India.
This year, China's producing 30% less cotton than it needs, so it will be importing a great deal more: probably around 3 million tonnes. It's perfectly possible that a greater amount of import in the mix will actually mean Chinese cotton inflation will be lower than in its competitors. Especially because:
Currency appreciation. There's been an awful lot of hot air about Chinese currency shifts. Lots of legislators around the world want the Yuan to appreciate a lot: most foreign exchange specialists think it'll appreciate 2-4% against the US dollar over the next year. That means prices in dollars or Euros will be in danger of going up.

Possibly. But the Yuan has appreciated 20% against the Euro over the past year, and Europeans aren't paying 20% more. Chinese factories have sharpened their prices to keep the business – and it's simply unpredictable whether they'll do the same thing as their currency appreciates against the US dollar, just as they did in 2008

But a more valuable Yuan doesn't just mean higher prices. The cotton China's having to import more of actually gets cheaper for Chinese garment makers – a competitive advantage China's competitors won't be able to benefit from. Imported oil gets cheaper. To make many garments, the Chinese actually pay more in dollars than in Yuan.
Protectionism. Many manufacturers are convinced that European and American concerns about pollution, child labour and the like are a form of trade protection. They're wrong, of course: growing Western concern about compliance issues applies equally to all exporting countries: it doesn't freeze out foreign suppliers (after all, Europe and the US have next to no apparel industry to switch orders to), but it does favour suppliers able to respond credibly to these concerns.

China, increasingly, is emerging as a supply base that's better able to respond to these concerns than many of its competitors. While China's far from perfect, there's a huge difference, for example, between how it's reacting to Europe's REACH programme of record-keeping for chemical use and reactions in India. China's encouraging its factories to be REACH-compliant, and has the testing infrastructure to help the. But India, according to Sanoj Kumar Jha, deputy secretary at the country's ministry of commerce is going to "strive for the total abrogation of REACH" by having it declared illegal at the WTO. India will get nowhere with this: but its government's attempt to hold back progress will merely discourage its exporters from setting up the monitoring and record-keeping necessary for continued access to European markets.

It's close to impossible to predict how China's competitiveness will emerge from the four key forces of wage inflation, raw material scarcity, currency fluctuations and growing compliance needs. But I believe it will remain a great deal more competitive overall for the next five years than many emotional comments are predicting.

Because a lot of the predictions are just wishful thinking. Western businesses deluded into thinking production is going to move back to Europe or North America (it won't). Or developing-country businesses keeping their morale up by thinking production will move to Indonesia or Pakistan (it might. But that depends more on how well Indonesians and Pakistanis up their game than on whether the Yuan appreciates 5% or 6%)

There are three pretty firm predictions we can make, though:

China's competitiveness, compared to its neighbours, will ebb and flow a lot over the next few years. And it will evolve differently for some customers than for others. Most buyers are likely to find from time to time that China's not the best place to buy every single item in their assortment, and will need a repertoire of alternatives to fall back on
There will be no "new China": no location will emerge offering China's benefits across the whole range of garments for almost all customers. Existing strong competitors, like Bangladesh, Indonesia or India, all have their strengths: none offers the coverage China does – but all are likely, on occasion, to be a better be for some part of a buyer's needs.
Buyers absolutely won't be running away from China. The wiser will be developing good insurance policies – which, given the prevailing uncertainty, means keeping a range of suppliers in a number of countries they can work with as relative competitiveness changes.

Clothesource will be spending this summer launching a range of research reports to help buyers decide the right insurance policy for them. Success in the next few years won't involve buyers predicting the unpredictable – or believing other people's wishful thinking. It'll involve sensible contingency planning.

Which is what Clothesource is here to provide the information for

US review is the real threat to Sri Lankan garments

2010-07-05T11:25:00.001+01:00

A US review into a duty concession of almost no benefit to Sri Lanka is likely to damage the country's garment industry far more than the EU's withdrawal of duty-free access.

The United States announced on June 30 that its Trade Representative (USTR) had accepted a petition from American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) to review whether worker rights in Sri Lanka met Generalized System of Preferences (GSP) eligibility criteria.

The US offers practically no GSP concessions on apparel or textiles. So, even if the claims of inadequate human rights protection are investigated and confirmed, and GSP withdrawn, there will be no immediate damage to the country's garment industry – and little elsewhere in Sri Lanka, since the country exports little to the US that does attract GSP concessions.

But, in our view, the indirect effect of America's GSP review is likely to be a very great deal more damaging to Sri Lanka's garment industry than the loss of the EU concession.

The EU loss really does have to be seen with a sense of proportion. If factories find it impossible to cut their prices, there'll be a 5.2% increase in the price of bras that had previously been duty-free, and a 9.6% increase on most other garments. That's less than a third of the duty the US charges on Sri Lankan bras – and the country sells America an AWFUL lot of bras. Admittedly, the Sri Lanka rupee has hardened 18% against the Euro since November 2009, and that's adding to exporters' problems – but that's the result of the Sri Lankan government's policies, not the concession loss.

The EU loss is damaging – but it merely hits the country's price competitiveness. Most buyers shared an understanding of why the concession was being withdrawn: there were serious allegations about Sri Lankan human rights, and the EU concession was explicitly granted on the condition that Sri Lanka should observe certain rights standards. Sri Lanka refused to discuss the allegations, so the concession was lost. But the allegations in the EU case mostly referred to how Sri Lanka dealt with a civil war. Irrespective of the rights and wrongs of the case, buyers saw the allegations as having no more to do with conditions in garment factories than concerns over Guantanamo or Northern Ireland terrorist suspects had to with working conditions in their own offices. No buyer believes his company is going to attract the kind of protests outside her stores that target garments from Uzbekistan or Bangladesh.

Indeed, many buyers think of Sri Lanka as having better working conditions than most other Asian countries – and that's probably true of the Brandix or MAS factories buyers from Marks & Spencer or Victoria's Secret see most often. That common perception has even led Sri Lankan garment makers to try to run a "Garments without Guilt" promotion – and the reason major European and US retailers aren't running it is that the slogan implies there might be something guilty about garments those retailers sell from Bangladesh or Honduras. It's proved to be an ill-conceived campaign because major customers aren't going to attack products sold under their own label: but we don't know of any retailer that's refused to run it because they thought working conditions in Sri Lanka are unethical. Many buyers, since 2005, have happily paid a slight premium for clothes from Sri Lanka, convinced that standards of workmanship, productivity and ethics were relatively high.

But America's major union confederation, the AFL-CIO, is a lot less benign about Sri Lankan garment factories. The claims they made in 2008 are hair-raising. Whether they're true or not, by agreeing to review them, the US is putting Sri Lanka – and, more precisely, its garment factories – in the same group as Uzbekistan, Bangladesh and Niger. If they're found true, the whole argument for Sri Lanka's premium pricing collapses.

This means that Sri Lanka has no commercial choice about cooperating fully with the US investigation. Posturing, obfuscation or trying to deceive will simply ensure an ultimate report that allegations of abuse in clothing factories couldn't be disproved: the country will become somewhere buyers will regard as a potential hassle to deal with – and expect discount pricing as a result.

Will Sri Lanka's politicians realise their main export industry is in a lot more trouble than they understand. And do they care anyway?

How the US investigation gets handled over the next year is likely to be crucial

Bangladesh: At least buyers can stay calm

2010-06-23T09:05:00.001+01:00

It's terrifying getting caught up in a riot.

And the escalation in Bangladesh's garment-industry violence has been extraordinary and rapid. By Tuesday, June 22, Bangladeshi media were talking about 800 factories being closed by the owners in the Ashulia area, with around a million workers at least temporarily out of their jobs. The closures themselves caused riots, with media reports of tens of thousands on the streets – often in Bangladesh, a euphemism for near-lethal fights and widespread property destruction.

Since all buyers source from Bangladesh, it's easy for Western media to turn all this into emotive stories about Tesco, or Gap, or whoever else, having their production threatened. But only one buyer has so far publicly commented: Marks & Spencer simply say that "only three of the 39 factories we source from in Bangladesh are affected".

Intense violence has been part of how garments are made in Bangladesh for some years now. It's unlikely to get better soon: workers are the world's worst paid, the country's government has made a foolish public commitment to a timetable for better pay it simply cannot deliver on, its factory owners simply refuse to make any serious wage concession, and there may well be a germ of truth in businesses' constant claims of a conspiracy to destroy the country's factories.

But none of this will get any better if Western buyers start to panic. More than anywhere else in the world, Bangladesh's economy depends on low-cost garments for European, American and, increasingly, Japanese chains. The chances are that Bangladesh will remain a more or less reliable source for the foreseeable future: but the chances also are that occasional disruption will also remain a fact of life.

For buyers to leave Bangladesh would make the problem worse: but it also has to be admitted that for buyers to assume tight deadlines will be met is commercially unrealistic. Demanding that Bangladeshi manufacturers airfreight delayed garments also makes the situation worse: fearful of bankruptcy, garment makers are even less prepared to concede decent wages if they have to cost every garment as if there were a high likelihood it will need to be flown to the US or Europe.

The most helpful things garment buyers can do, in our view are:

To continue buying from Bangladesh
To mistrust scare stories of imminent chaos
To continue pressure for decent wages
But to source from Bangladesh only garments that can survive extended production cycles.

Though violence has become part of the Bangladesh way of masking garments, Bangladesh has become an essential part of most buyers' sourcing mix. There is no real alternative source of low-cost volume knitwear, and foreign businesses continue to invest in manufacturing capacity there. Continuing support for the country's products – but properly controlled - is still a commercially wise strategy

Child labour: India’s going to have to come clean at last

2010-06-07T16:20:00.001+01:00

India might be about to be shamed into admitting its government and garment makers have been behaving badly misleading garment buyers over child labour in its garment industry.

It’s there. There’s not that much of it, and everyone in India knows it’s there – but India’s government and garment makers alike have pointlessly destroyed their credibility by absurd, and absurdly hysterical, denials whenever they’ve been asked to tell the truth about it.

Three years ago, the country’s Commerce Minster, Kamal Nath, seriously threatened to ban imports from countries that allowed the truth to be told about India’s small amount of child labour – an exhibition of arrogant stupidity not even North Korea or Zimbabwe have ever tried. Especially when his own country’s major newspapers were pointing out there really was child labour in India’s garment industry and India really did have to do something about it if it was going to hold on to its customers
Even after Mr Nath took his unique brand of bumptious posturing somewhere he could damage his country’s credibility less, Indian officials and garment makers carried on insisting black was while.

Announcing an annual social audit of labour-intensive industries, such as garment manufacturing, in April 2008 the then Minister of State for Commerce, Jairam Ramesh, claimed the audit would help "contradict the propaganda in the U.S. and other Western countries" that there were children in India’s garment factories. In August 2009, Bombay Rayon failed to deny allegations made to the Karnataka State Commission for Protection of Child Rights that it was using children and paying them less than the minimum wage. When confronted with the claim, it issued a meaningless statement saying it followed its own compliance standards, but doing nothing to counter the specific claims made against it.

Now, though, an official body has finally admitted what the entire country knows. The official National Child Labour Project (NCLP) admitted on June 4 that 42 child workers had been rescued from businesses in and around Tirupur in the first five months of this year. 29 were found in the whole of 2009. "Over 70% of the child workers rescued during 2009 and 2010 are from textile units" NCLP Project Director D. Vijayakumar told local newspaper "The Hindu".

Which gives Indian businesses and officials an opportunity to stop the bluster and start doing something.

First, and in some ways most importantly, the Indian government might begin to realise that years of lying have damaged India far more than the child labour they’ve been lying about. We’re not condoning child labour – but the Vietnamese government admits that it’s almost impossible to buy a garment in Hanoi that’s not been partially subcontracted to a factory where child labour is rife. Identifying child labour doesn’t mean the end of the world, or even the immediate loss of contracts: and there are many worse fates that can befall a child in a poor country than working in a factory at 14.

It’s a problem buyers need to deal with: but it can be dealt with only if people’s word can be trusted. The climate of distortion and evasion that’s been fostered by Kamal and Ramesh (supported by trade associations far too often) have damaged the credibility of India as a garment-buying source far more than the relatively rare cases of underage workers.

With last week’s report from the NCLP, it now looks likely that India’s government will be forced to come out of its bizarre denial of the issue. Manufacturers and buyers can now move on to the more useful activity of dealing with it.

Why China’s still competitive. Well, probably

2010-06-07T12:39:00.001+01:00

The latest edition of Clothesource PriceTrak shows China became more competitive as a supplier of garments to its main Western customers in the first quarter of 2010. Which is precisely the opposite of what most commentators claim to believe.

There are four possible reasons for that. But the difference between our survey and current common wisdom illustrates, we believe, an important truth too many people forget.

1. Why the difference between China’s perception and reality?
Four obvious explanations spring to mind:

a) All China’s competitors are sharing its problems
The “China’s pricing itself out of the market” argument lists all the inflationary pressures on China’s garment exporters, like rising wages, increasingly costly raw materials, the price of compliance with more stringent EU/US certification standards and upward pressure on interest rates for working capital. All true – but all, more or less, shared by everywhere else in Asia. True, increases in statutory minimum wages take longer to work their way through in some countries than in others. But an enormous number of comments about China’s falling competitiveness are coming from Chinese or Hong Kong businesses pitching for an easier life, or competitors to China talking up the case for moving production out of China. The costs of making clothes are going up everywhere: only in China are there journalists so insular as to believe their country's problems aren't going on everywhere else.

b) China’s uniquely able to overcome inflationary pressures
We went through all this “China’s getting expensive” argument just before the 2008/9 recession hit. China didn’t get relatively expensive: Chinese businesses got a lot cleverer in avoiding putting prices up, and eventually persuaded the country’s government to provide a range of support (including keeping the currency artificially low) to keep prices down. That doesn’t mean the same thing will happen again (there are many in the Chinese government who believe labour’s getting scarcer, and shouldn’t be wasted on low-margin industries like clothing). But it does mean that we can't assume pressure on input prices automatically results in higher prices to buyers. Apart from anything else, industry profitability grew very healthily indeed during 2009 – and there are bound to be a number of businesses who’ll sacrifice margin to keep sales.

But both in early 2008, and in the early days of the recession, the more gullible (or sensationalist) media kept on printing all sorts of catastrophic forecasts by Hong Kong businesses about how the world was going to come to an end, with businesses collapsing, millions being laid off and riots throughout China. None of them materialised: China’s garment makers – often with more than a bit of help the WTO wouldn’t altogether approve of from China’s national and provincial governments – navigated their way through boom and bust with a remarkable lack of drama

c) Our survey’s out of date
All surveys are. Ours refers to prices being charged on clothes arriving into US ports between January and March this year, because those are the latest figures available. It’s only ever possible to be 100% accurate in hindsight, and the contracts for most of those clothes will have been signed in the last months of 2009. It’s wouldn’t be surprising if prices are on their way up right now – but, again, that’s probably going to be just as true of garments made in Bangladesh, Vietnam or Indonesia

And there is, of course a fourth explanation:

d) All or some of the above.
There can be no doubt that, somewhere in China, there are factories suffering just the same inflationary pressure as their foreign competitors, factories clever enough (or bits of the Chinese government devious enough) to ensure those input increases don’t mean higher prices for buyers – and factories that have lost business because they’ve recently had to put prices up more than their buyers would tolerate. China’s a big place, and buyers are coming and going all the time. A commentator wanting evidence buyers are deserting China will always find a few – but so will another commentator wanting evidence new buyers are sourcing from there.

2. So what should buyers be doing?

Well, in our view, what they shouldn't be doing is looking for a single alternative to China. What makes a country’s garment makers competitive isn’t just wage costs, import duties or exchange rates. It’s a huge mix of costs, ability to live through difficult times, availability of manufacturing resource and a business-friendly infrastructure of efficient transport, reliable water, energy and support services and honest and speedy Customs officials. Those things are all constantly fluctuating – so a combination of circumstances that makes a country more competitive for short lead-time woven tops might make it less so for long lead-time formal tailoring. What buyers need is a range of alternative sources at their disposal to move to when one production location becomes tricky. And the time to look for those alternatives is when everyone else isn't.

We believe that’s the real reason for the success of Li & Fung: having a worldwide network of suppliers helps garment makers adjust their sourcing as circumstances change. And, of course, Clothesource is in business precisely to help buyers and sellers have access to the information they need to stay competitive.

China’s not likely to go the way of the Maldives and see its garment exports wiped out any time soon – and there’s never going to be a new version of China. We think it’s likely that China’s share of the world garment market is now very close to its peak and that the share will start slowly declining: but we also know we’re probably as likely to be wrong about that as right. Prudent buyers will keep a lot of irons in a lot of fires.

And they’ll be very sceptical indeed about premature declarations of China’s imminent disappearance – or even slight decline – as the world’s dominant garment supplier

Does the Indonesian government want its garment industry to thrive?

2010-05-17T18:03:00.001+01:00

Of the major garment producing countries, Indonesia has always been just about the most enigmatic. But statements of intent from the country's government aren't doing much to make the case for making garments there that much clearer.

Its apparel and textile trade associations probably outdo even their endlessly quarrelsome peers in the Indian subcontinent for constantly complaining about the impossibility of doing business.

In fact, though, its garment exports to rich countries performed relatively well in 2009: in volume, they fell 3.2%, while rich countries overall saw their imports fall 4.3%. Indonesia's share of rich-country apparel imports, as measured by Clothesource Tradetrak, grew from 3% in 2008 to 3.2% in 2009.

The gloomy version of the Indonesia story goes like this: The country has had a traditionally strong upstream textile industry of spinners and weavers – the classic, capital-intensive, industry developed in much of Asia in the "crony capitalism" days before the Asian crash of 1997. Some of the plants built then were constructed on the basis of very suspect loans from reasonably crooked banks: a number of the holding companies have gone bankrupt since. Since then, there's been a kind of paranoia about bank loans, and banks' policy is now tightly controlled by the country's government through its Central Bank. The Bank has designated textiles a Sunset Industry, in which Indonesia is unlikely to retain its world market share – so banks are discouraged from lending. That means spinning and weaving infrastructure is old, decrepit and relatively inefficient, so Indonesian garment makers don't have access to the best value raw materials.

Now you have to add to that a recent history of garments for the domestic market, and textile raw materials for both domestic and exported garments being smuggled into the country from China – because Indonesian businesses allegedly can't compete. To make everything apparently still worse: a Free Trade treaty with China came into effect at the beginning of this year, apparently after very little consultation with Indonesian businesses: the steps taken against smuggling in 2008 and 2009, it is being claimed, are now useless, because Chinese garments and raw materials can enter the country unrestricted.

There's a lot to be said for that gloomy view. But it's not universally held. Take Janet Fox, senior VP of sourcing at JC Penney, who thinks Indonesia "will grow even more if we can get some raw materials production there. We need some more fabric mills, and more localisation so there can be virtual verticalisation of the industry. In regard to factories, Indonesian factories are second to none." Is anyone going to invest in Indonesian spinning and weaving mills? Well, according to Ade Sudrajat, acting general chairman of trade association API, banks' rating of garments and textiles as a sunset industry make them reluctant to lend and to charge high rates of 12-15% when they do. But, with the advent of the free trade deal with China "Credit suppliers from China have confirmed to give $300 million since 2009", with the China Machinery and Technology Corporation (CTMTC) offering rates of 4-5%, he said.

Even more extraordinary: a group of Chinese garment factories, the API's Ade says, is about to relocate to Indonesia. Or was, until China's Prime Minster had to postpone a visit to the country during which Ade thinks he was going to announce a textile and garment project claimed to be employing up to 200,000 people. Indonesia's perfect, its lobbyists claim, as a place for Chinese garment companies to relocate to as the cost of labour and other inputs in China keep on growing.

Except that Hendra P Iskandar, First Secretary for Economic Affairs for the Indonesian Embassy in Bangladesh announced on May 13 that "There are good potentials for the Indonesian apparel manufacturers to relocate their plants in Bangladesh.

"This would enable them to take the opportunity of the [duty-free] facilities… while offering them cheap labour and lower production cost for manufacturing"

Now it is true that making clothes in Bangladesh offer some duty advantages over Indonesia. But only when exporting to countries (like the EU and Japan) that impose quite low duty anyway – and only if the importing country's rules of origin are followed, which is tricky in a country like Bangladesh. But is there really a rush of Indonesian garment makers wanting to relocate to Bangladesh?

What seems to have happened is that Indonesia's technocrats think garment making will move away from the country sooner or later – and, trying to discourage any more dubious loans by their banks, are discouraging their own companies from investing in better facilities.

They may well be accurate in their analysis – but only because they've made it so. If a government keeps on being convinced its textile industry going to collapse, it'll rapidly become a self-fulfilling prophecy.

Having an MBA and working for the government gives you no special knowledge at all of how the world garment market is going to evolve. Indonesia's garment and fabric makers are being ill-served by badly informed public servants, who've obviously been to the wrong seminar and are trying to be clever.

Why certainty’s bad for the world garment trade

2010-05-16T09:24:00.001+01:00

Contrary to what people say: right now certainty's bad for clothing sales. Apparel retailers who say different are either mouthing political propaganda or just don't understand their customers – and those customers are very likely to depress the world apparel trade almost before it's got used to sales turning upwards

Throughout the recent UK General Election, British garment retailers kept on telling anyone who'd listen how bad uncertainty was for their business. Dozier British analysts supported them: weak British April retail sales, some claimed, we the result of consumer uncertainty over the makeup of the next British government.

Codswallop. In spades, with knobs on.

The British Retail Consortium (BRC) estimates April sales – for all products - were 0.2% down on April 2009. As in the US, that fall was mainly because of differences in the date of Easter 2009 and 2010, which made March, 2010, sales look high and April sales look low: March-April growth combined, according to BRC numbers, are still looking healthy.

One reason they're healthy is that Britain, so far, has done little to reduce its formidable government deficit. With an election coming up, its government was reluctant to hike taxes, or reduce spending. So economic growth resumed in late 2009, and British consumer spending on clothing remained surprisingly buoyant throughout the recession. But with a new government now elected, in office and beginning to take decisions, it's clear that Britain's going to see higher taxes AND lower government spending over the next couple of years. Many think that's a good thing – but the wiser among them know that consumer spending, for at least the immediate future, is going to fall.

There's an important reason for that. "Excessive" government spending, in the long run, is bad for a country. But whether a public servant is doing a vital role fighting crime or teaching children – or wasting everyone's time sitting in an office surfing the web – that employee's got an income coming in, which she'll spend on things including clothes. Fire her, freeze her wages or cut them – and for a while at least, that's less consumer spending around. In the short term, however good prudence might be later, making governments spend less cuts jobs.

Customers know this. The UK government's going to start spending less and putting taxes up within weeks. And, as that process starts, there'll be less cash around to spend on clothes for the next year or so. A similar process is likely in much of Europe: it's started already in Greece, Ireland, Spain and Portugal – but even Germany's under pressure to do something similar. Soon

Government debt is a problem in the US too: but it worries the politicians less. So President Obama has set up a Deficit Reduction Commission, which is taking the relatively stately approach of conducting hearings, making proposals, then having them debated in Congress. The likelihood of imminent real reductions in public spending is low.

So over the next year or two, we're likely to see a complete turnaround in the way the world garment trade behaves. Since America's recession started, European spending on clothing has been surprisingly healthy: throughout 2008 and 2009, Europeans continued increasing their clothing spending, and increasing the number of garments they imported. In the US, by contrast, sales in clothing specialists fell throughout the two years. It was only in March this year that imports from countries outside China started growing again – and then only by comparison to the miserable levels of early 2009.

Americans are increasing their spending on clothes again because they're uncertain about the future: not knowing whether they'll be better off in a year or so, many are catching up on clothes they've not bought. Europeans, though, are becoming increasingly certain about the immediate future: for many, things are going to get a lot tighter quite soon. Europe's sluggish growth in clothing spending is going to turn into at best slight decline, while, at least till early 2011, the US is going to see modest growth.

This, of course impacts their suppliers. US-dependent countries, like Central America and Pakistan, are going to do better than it looked a year ago: EU-dependent countries, like Turkey Morocco, Bangladesh and Sri Lanka are going to do a bit worse.

And they'll do worse because the end consumers they sell to will have become more certain life's about to get grimmer.

A tale of two kinds of duty concession

2010-05-10T08:55:00.001+01:00

The HELP Act, trebling the amount of garments made from Asian fabric Haiti can export duty-free to the US, has received an easy and rapid passage through the US Congress. But this is no indication other trade preference Bills under discussion will get anything like the same benign reception.

HELP was supported by both political parties, got enthusiastic endorsement from ex-Presidents Bush and Clinton, received no opposition from America's textile lobby and was widely supported by most US businesses involved in the industry. This is simply not true of the other trade preference Bills tabled earlier, but still awaiting serious discussion.

US Trade Representative Ron Kirk recently pointed out the lack of appetite among US politicians at present for making imports easier. Haiti is a special case: a close neighbour of the US, it is agreed by almost anyone to need a stronger garment industry to help rebuild its shattered economy. But other contenders for better access to the US market enjoy no such consensus.

Bangladesh and Cambodia are pitching for similar access – and are getting almost no support, with US fabric and yarn makers rightly pointing out that those two countries are trying to gain duty-free access for Chinese raw materials denied to any other serious garment-making nation. The Philippines have had a Bill (the so-called SAVE Act) tabled that claims to allow duty-free access for garments made in the Philippines from US fabric – but, in the small print of the Bill, lie dozens of special exemptions for garments made from Asian fabric which America's textile lobby is opposing. Pakistan still seriously believes a bizarre Bill, allowing duty free access for garments made in parts of the country practically inaccessible by road and currently closed to civil war, will be extended to places it's actually possible to make garments in – but no-one in the US gives that proposal any chance of acceptance. Proposals to extend African countries' ability to export garments made from Asian fabric beyond the 2012 deadline in current legislation are going nowhere. And the Administration's desire to introduce the Free Trade Area with Colombia agreed by the Bush administration is stuck in deep opposition from Obama's own party: unsurprisingly since the President was a vocal opponent of the deal when he was a Senator.

Rightly or wrongly, public opinion in the West is increasingly concerned with preserving local jobs. Though ill-informed commentators still go on about increased protectionism since the recession began, the garment industry has seen almost no new protectionist activity by rich countries since early 2008. But this rigid adherence to trading rules is no indication Western politicians are any happier about making it easier to export jobs: merely that they, on balance, recognise that banning some imports can damage their economy by making it more difficult to export other products.

That insight does not lead to an enthusiasm for inviting more imports. The "US fabric" parts of the Philippines SAVE Act might go through Congress: in our view the other trade preference bills seeking to help other countries export to the US face a long, and probably unsuccessful, slog to get approval

Vietnam power crisis: the government doesn’t always know best

2010-05-03T14:22:00.001+01:00

The problems Vietnam's apparel makers are having with power outages is a perfect example of the China Fallacy.

Infrastructure problems have plagued the garment industry in India, Pakistan and Bangladesh. The last few months' power shortages have seriously undermined manufacturers in Bangladesh especially. With the difficulties the Indian government has encountered in delivering its promised Textile Parks, and the three countries' problems with adequate ports, Customs procedures and roads, many contrast the spectacular improvements China has achieved in infrastructure and conclude that unaccountable one-party rule may have its problems – but is a terrific way of getting things done.

Vietnam – till recently a perfect example of a dynamic garment industry – is a good counter-example. Its power outages are no accident: it's got an ambitious programme of new power stations – but construction is hopelessly behind schedule. With thirty-five new stations planned, just five are on the planned timetable. At least eleven lack even a source of finance to start building: the Vietnamese are struggling to find overseas investors interested in tendering for contracts to build the stations.

So it's clear that Vietnam might not be an ideal country over the next five years for energy-intensive businesses. But that's not stopped the country's government from lecturing its clothing factories at every excuse about why they ought to be buying locally made fabric and yarns. Vietnam actually has little local fabric or yarn making capacity: the government's trying to attract foreign investors – but if it can't provide the electricity for their mills to operate, the country's garment makers are going to be unable to use local fabric.

State planners aren't infallible. Vietnam's, bizarrely, have devised a strategy for the clothing industry that requires foreign companies to invest in power stations to provide the energy for the spinning and weaving mills other foreign investors are going to be building.

But those investors are reluctant to come. And with an economy growing far faster than the country's power supply, Vietnam's not just going to be struggling to attract textile businesses: it's going to find it increasingly tough to power even the country's relatively labour-unintensive clothing factories.

Vietnam's power outages aren't yet as bad as Pakistan's: at least factories know when they're coming, and can plan around periods when there's going to be no electricity. But it looks as if factory production will be disrupted from April to June for the next few years, since that's when demand is highest – and there's no prospect of real supply improvement till 2015 at the earliest. And those ambitious plans for energy-intensive weaving look even less realistic.

Is Bangladesh risking even more violence?

2010-04-29T11:49:00.001+01:00

It's gratifying to see the first signs that Bangladesh's long-running wage scandal might be resolved quickly. But we're very sceptical of any speedy action. We're now very worried that its government won't be able to ensure the honouring of promises it's made on behalf of the country's 4,500 garment factories. And about what might happen if workers realise those promises aren't going to be kept.

On April 28, the Bangladesh government promised a wage rise would be implemented by early August after Bangladesh's apparently endless cycle of violent garment-industry disputes had gone through a further twist the previous day. Till now routine – if devastating for the workers involved – grievances, like overdue wages, have frequently escalated from making a complaint known, through a demonstration, to arson, factory destruction, blockading major inter-city roads and riots in adjacent factories and violent, sometimes lethal, police repression within hours. But the grievances have almost always been about specific problems at individual factories which, if true, most other factory owners willingly agreed need to be resolved more or less to the protesters' satisfaction.

This week, though, the protests were about something much more fundamental: the workers wanted their minimum wage tripling – as do many observers, and even a number of buyers. The owners, collectively, don't – and have been trying as hard as possible to avoid making any commitments for years.

In fairness, it's not at all clear the Bangladesh garment industry can afford to triple its minimum wage. With awful infrastructure and corrupt and incompetent Customs clearance, the country competes at the cheap end of the market – and though many enlightened buyers want to see higher wages, few are so enlightened as to offer to pay more. But, whatever the rights and wrongs of the pay argument, it beggars belief that this week's demands can agreed to by 4,500 factories and honoured on 4,500 paydays with the right cash in workers hands – all in about the time it's taken the country's wage review board to rearrange a meeting the employers failed to turn up to in January. Last time minimum wages went up (in 2006!), non compliant factories were still being found three years later.

And the country's Labour Minister, Mosharraf Hossain, didn't say on April 28 that there'd be an agreement by August. It would, he claimed be "implemented before the month of Ramadan". This year August 11, and a date as familiar to most Bangladeshis as the date of Christmas to most Western children. He has no power to enforce this promise: even if employer representatives agree and he passes a law requiring implementation, he's not going to be able find cash for manufacturers unable to pay the new wages because power shortages mean garments can't get shipped on time. And though he didn't indicate a level of increase, it's highly likely the workers rioting for a tripled minimum imagine it's their claim, not their bosses' renegotiated variation that he's promising to pay.

So what's likely to happen on August 12 when (not if) a group of workers, irritated after a whole day at work with nothing to drink in the middle of the summer (it's Ramadan, remember?), realise what they thought was a government promise isn't going to happen?

Bangladesh isn't doing itself any favours by promising things its government can't guarantee. This summer looks like a great time to have an alternative source of supply.

Is the Indian cotton ban as important as people think?

2010-04-27T11:49:00.000+01:00

Businesses throughout South Asia are getting very engaged in the consequences of the Indian government's ban on cotton exports.

And for many of them, the ban might have a huge impact. But are the rising raw material prices that provoked the ban really the biggest problem to local garment factories?

The real price of making a garment in South Asia and shipping it to the US or Europe has been subject to constant fluctuation over the past few years. Since 2007, space on a container, the price of oil and the price of cotton have all reached levels close to both their all-time highs and their all time lows.

So, depending on which periods you choose, it's not difficult to find a comparison that shows how dramatically prices have shot up. World cotton prices, for example, are currently about 80% higher than in March 2009. But cotton prices then were close to the lowest for 40 years – and today's cotton prices are still 25% lower than they were this time in 1995.

Commodity prices fluctuate, and cotton's been fluctuating wildly since the first bale of US cotton was shipped to England in the 17^th century. So one of the most important skills a garment maker needs is the ability to plan for likely fluctuations. And it's not just fabric.

Take a typical T-shirt. From India to Europe, averaging $2.83 in 2009. A garment maker quoting a few months ago on the basis that cotton would cost the same today as in March 2008 will find its normal 140 gramme raw cotton content is about 13 US cents (or 4.3% of average selling costs) higher than at last year's ultra-low levels.

But an Indian factory quoting in dollars and getting paid today will get about 10% less (about 29 cents a t-shirt) than a year ago when they convert their price into rupees. Indian currency revaluation is hitting garment factories' profits at least twice as hard as the centuries-old ups and downs of cotton prices.

Other people's problems might be even worse, though. Bangladeshi and Pakistani garment makers have been hit for the past year by near-endless unpredictable power outages. This has inflated energy costs – but for many, the havoc power cuts have caused production schedules is even more devastating. On average in 2009, Bangladeshi factories had to airfreight 3,100 tonnes of garments a month to the EU – or about 7.5% of their total European exports. By February of this year, production chaos had pushed the volume airfreighted to Europe up to 8,600 tonnes – nearly a fifth of the country's monthly total.

The effect on factory profits can be catastrophic. Seafreighting a T shirt from Bangladesh to Europe costs around two US cents a shirt. Airfreighting it averages 60-65 cents. The extra cost is five times as great as the inflated cost of cotton.

Rising cotton prices are stirring emotions in South Asia because they arouse the age-old squabbles between cotton growers, spinners, weavers and garment factories. All sorts of ancient scores present themselves for settling, and there's no shortage of reporters keen to describe the savagery with which businesses accuse each other of every commercial crime under the sun.

That's not the real problem, though: cotton prices invariably come down as often as they go up. The problem is much more fundamental.

Buyers expect apparel makers to quote an FOB price for a garment several months before delivery. Today's fluctuations in raw material costs – or the occasional need to spend a fortune expediting delivery - aren't new. Since garment making first moved offshore in the late 1980s, manufacturers were generally insulated from the unpredictability of input costs by emerging-market governments' habit of devaluing their currency. But since around 2004/5, it's the US dollar (which still dominates international garment contracts) that's tended to devalue against producer-country currencies.

Few garment makers have the resource to survive savage cost fluctuations. They can't walk away from a contract: by the time they're about to ship they've spent a fortune on making a garment that can be sold only to the buyer who commissioned it. They can't seek compensation for their higher costs: with today's competition between vendors, buyers just refuse. The harsh commercial logic of the industry's pricing system repeatedly drives businesses unable to cope with fluctuating input costs to bankruptcy.

And here's the most horrible irony of all. Those fluctuations are worse in a period of rising demand than in a slump. Far from taking the pressure off factories, the recovery in sales is going to squeeze many even further.

There simply is no good time to be a garment maker these days.

What Asian airport garment mountains are really telling us

2010-04-26T11:30:00.000+01:00

Over a million kilogrammes of garments waiting shipment to the EU are frozen at Bangladesh's Dhaka airport, local freight forwarders are saying, because of the chaos created earlier in the month by the volcano-induced flight bans in Europe. Actually, there seems more to the mountains than an airline problem that's now a thing of the past.

Similar claims have been made about backlogs in Hong Kong and Sri Lanka. They too indicate serious underlying problems for the trade.

A million kilogrammes – a thousand tonnes – certainly sounds a lot. But Bangladesh exported 578,000 tonnes (or 578 million kg) of garments to Europe last year. The backlog is equivalent to half a working day's total exports. A serious disruption for the brands and retailers those thousand tonnes were destined for (and just as serious, but a great deal more expensive, for the manufacturers despatching them). But hardly trade-destroying.

And an even smaller proportion of the trade than first appears. In 2009, Bangladesh airfreighted just 3,500 tonnes of garments a month to Europe. But by February this year, said Abdus Salam Murshedy, president of the Bangladesh Garment Manufacturers and Exporters Association, 8,600 tonnes were airfreighted: the alleged "mountains" in Dhaka are just three days' worth of exports. They look huge, because the whole point of airfreighting is that goods don't hang around: a typical airport cargo warehouse has about half a day's worth of freight. Multiply that by six – and the pile looks high, but isn't going to take long to clear.

But they do highlight a far more serious question – why the amount of airfreighting has increased so much. Air freight costs about 25 times as much as sea freight, adding around 60 cents to the production cost of a T-shirt. No-one does it if they don't have to. Trade associations in Bangladesh blame the continuous and unpredictable power cuts, as the country's Power Development Board admits it has generating capacity for only two-thirds of the country's daily needs.

There's no doubt the shortage of power in many countries – especially in South Asia – is a real threat to their garment industries' future. It's serious in Bangladesh and Pakistan: it's a problem in much of India as well. There's no real evidence of serious plans to overcome the problem, and that must cast real doubt on all three countries' ambitious long-term plans for expanding garment production.

But increasing difficulty finding capacity for airfreighting garments from China and Hong Kong isn't down to power shortages. Explanations vary: shortage of workers or shortage of raw materials (which usually means garment factories putting off buying in the hope prices come down) might explain unforeseen growth: demand picking up faster than expected might explain why there's simply less airfreight capacity than there was.

It's not possible at present to be clear which it is. But the industry's ever greater demands for fast turnaround on bespoke orders from the other side of the globe are pushing manufacturers' capabilities to the limit. And often those limits aren't under manufacturers' control: there's very little a factory can do to sidestep a power shortage, for example, except install a private generator - which few can do, and involves extra cost for all.

After a couple of years where factories' biggest problem was a shortage of demand, rising demand makes supply pressures more likely. We don't see many people doing much about it

What’s the Next Big Thing in garment sourcing?

2010-04-23T13:07:00.001+01:00

"What's the next big thing?" is the question thrown most often at us at conferences and the like.

In the past 20 years, the number of garments being imported into rich countries has increased sixfold – almost entirely the result of production being relocated (and often re-relocated) for greater efficiency.

But between 2010 and 2015, the market may be just as revolutionised as it was between 2005 and 2010 by some crucial changes in the trading environment. Above all, the imminent decline in the number of Chinese of working age – but also by further changes in Customs rules, in buyers' requirements, and in increasingly scarce and costly cotton and power supplies.

"The Garment Trade's Next Revolution: what's likely to change by 2015" reviews the changes likely to start transforming the industry again from about 2012, and makes specific, country by country, predictions about their effect on the garment trade in the leading 80 garment exporting countries.

Normally £500, it's just £400 to May 31. And initial buyers get a FREE copy of edition 2, when we revise our forecasts in the light of new events and reader and commentator feedback.

Why the Rupee Paradox is going to be even more destructive in a recovery

2010-04-16T07:16:00.001+01:00

Today, the Indian rupee is worth about 11% more than it was in January 2009. The Pakistani rupee is worth about 10-11% less. And apparently both currency movements are bad for business.

In India, major garment exporters are saying the new, more valuable, rupee is killing their profits – to a point where several are reluctant to quote for new business. When this problem last happened early in 2008, the forex loss for many exporters seems to have run into billions of dollars – though even the order of magnitude of the loss is tough to find out, since the manufacturers and banks are still arguing about it.

In Pakistan, though, the Central Bank is blaming the Pakistani rupee devaluation for soaring potential bank write-offs. 63% of all loans Pakistani banks have recently decided are unlikely to be repaid are in the garment and textile industries. And the Bank believes that comes from the rupee's fall: their loans are in dollars, euros and yen, so interest and repayment are a lot pricier.

The Rupee Paradox seems to demonstrate that there's no economic condition in which garment exporters can make money. Either:

Garment factories operate so near the edge, ANY change in the outside environment can tip them over, or
The whole garment and textile industry is riddled with complaingitis. Businesses are so used to getting subsidies and protection, they'll moan about anything if there's the slightest chance they can con some easily deluded politician knot giving them some kind of help.

I suspect there's a germ of truth in (b): there's a long and dishonourable history in this business of perpetual complaint. But in reality, (a)'s nearer the truth.

Garment exporters everywhere get a brief from a Western buyer. They quote a price – usually aiming for about 10% net profit: they can't aim much higher, because competition from elsewhere is a pretty efficient profit minimiser. They make the goods, send the invoice and then: well, then pretty much anything. Between the quote and the invoice, all sorts of things can go wrong – and recently factories have been plagued with rising fabric and yarn costs and in much of South Asia, increasingly expensive and unreliable energy supplies. Minimum wages in some places are being put up significantly, and at very short notice (allegedly in Delhi by over 20%, though this seems to apply mainly to the least skilled only). Since none of these changes were budgeted for, net margins can be shredded to bits. For some, devaluation will indeed mean higher finance costs: for all, local currency upward revaluation will mean less cash in local currency coming in when the invoice is paid.

Businesses can't renegotiate with customers. Practically any change in trading conditions between the time a contract's signed and payment is received is gong to be bad for some businesses. And the problem, hard-wired into garment exporting, is likely to get worse for exporters as Western economies recover

During the recession, flat Western demand reduced some of the pressures that lead to energy shortages and growing raw material prices – and governments did something to try to minimise risks to their manufacturers. Once factories can't claim their markets are tumbling, governments are going to be less likely to offer subsidies – but inflationary pressures will inevitably grow. Western buyers, on the other hand, aren't going to be falling over themselves to offer higher prices.

The lesson, in our view, is that factories are just going to have to learn how to plan, budget and tender for the worst possible case. IN a recovery sales might be easier to get – but costs are going to grow faster, and scarce resources are going to get scarcer still. The Rupee Paradox isn't just proof businesses can always find something to moan about: it reflects the real fact that just about any change in circumstances is going to tip some factory, somewhere, into bankruptcy

Soaring cotton prices bring out the real industry tensions

2010-04-15T07:58:00.000+01:00

Does having a thriving local textile industry improve a country's competitiveness in garment making?

Many people automatically think so. But it's surprising how rarely this seems to happen. But recent events in India and Pakistan might well be changing all that.

The increasingly bitter squabbles in India, Bangladesh and Pakistan about yarn prices show how little love there is lost between spinners, weavers and garment makers. The arguments have got seriously nasty. And that was before India was reported on April 14 to have decided on a 3% export tax on raw cotton, just days after a requirement on cotton exporters to register exports in advance and as it withdraws duty rebates on cotton exports.

The rulings, taken together, add about 4-5% onto the cost of Indian cotton for most Asian customers, and are designed to bring prices down on the domestic market. They coincide with Pakistan's reduction of the monthly legal cotton export limit from 50,000 tonnes to 35,000.

The restrictions were imposed after growing concerns in India about the scarcity and cost of yarn for garment making. Those concerns have been forcefully expressed by garment makers, and caused intense and bitter arguments between the garment industry, spinners and weavers.

The inter-sector squabbling has been intensified by confusion about what is actually happening. Since November 2009, raw cotton prices have increased 14% in India, while some yarn prices are claimed to have leapt 50% over the same period- leading many Indians to conclude spinners are somehow profiteering on substantial, but not extreme, raw cotton price rises.

Such comparisons can be highly deceptive for a commodity whose price has always been volatile. The average New York cotton price of $0.858 per pound in March 2010 was 51% higher than in April 2009, for example – but only 11% higher than in April 2008, and 25% lower than in 1995. Yarns on sale today aren't being made with yarns bought today.

But, as long as there's been a textile industry, growers, spinners, weavers and garment makers have always assumed the other bits of the chain were making money unfairly – and workers and management in each bit have been equally cynical about each other. Governments consistently intervene: a huge proportion of the economic history of England from 1100 to 1950 is about which party national policy was cajoled into favouring. And these tensions are behind the Law of Sourcing most people have most difficulty with: the fact that having a thriving local textile industry seems to undermine a country's competitiveness in garment making.

Whether it's Egypt, India or Brazil: hardly any country with a significant spinning and weaving industry has been able over the past five years to lever that industry into a real competitive advantage for its garment exporters. The graph below shows how countries with a string textile industry saw their garment exports fall between 2005 and 2009, while those without one – and therefore dependent on imported fabric and yarn – saw their exports grow. China, by the way, is the world's biggest fabric and yarn importer

This certainly isn't because buyers don't value having spinning and weaving nearby. Usually, it's because decades of industry dominance by spinners and weavers have distorted public policies: India and Egypt, for example, make importing most foreign yarn expensive, and Bangladesh makes importing Indian yarn time-consuming. This often prevents garment makers from getting the right raw materials.

The events of the past month, though, might imply all that's about to change. IN both Pakistan and India, governments, faced with a straight fight between spinners and garment makers, have sided with the garment makers – for the first time we've ever seen such a thing anywhere outside China. This might just be a straw in the wind. But governments may be beginning to understand that a textile industry needs to be focused on providing what its local garment makers want – and that a country gets competitive edge only when the two really do have a synergy.

If that lesson is being learned by governments, having an integrated textile and garment industry might well be to some countries' advantage. But unless they learn the lesson, governments will go on propping up industries for decades after their use has disappeared

Being nice doesn’t mean being honest

2010-04-14T17:30:00.001+01:00

Should the US increase the amount of clothing Haiti may export duty-free?

Well, put like that, who could possibly say no? There's a Bill before the US Congress to increase the amount of clothes that can be made in Haiti from fabric made outside the Americas and get duty-free entry to the US. From 70 million square metres to 250 milion.

And, after all, as ex-President Bill Clinton put it, most of the extra garments produced "would be shifted production from Asia to Haiti, so there'd be no greater penetration of American markets and we'd be helping our neighbour and it could create hundreds of millions of dollars of investment."

Really? That's not quite how it looks to lobbyists, the National Council of Textile Organisations commented, which claimed to be "alarmed" at the idea and thought it "would cause significant damage and job losses to the industry". But they're just a bunch of protectionists, aren't they, and isn't it awful how they're stopping Haitians from recovering after the earthquake?

Well, yes they are bunch of protectionists. But why shouldn't they be worried that everyone else expects their members to pick up the cost of being nice to Haiti?

Because Clinton's just wrong to claim letting Haiti use more Chinese fabric will leave US jobs unscathed. He's even probably wrong to claim it would involve shifting production from Asia to Haiti. The first losers from such a change would be other countries in the Caribbean and Central America: they, after al, were the major losers in 2009 from the current Haiti third-country allowance. And that means less fabric woven or knitted in the US for use in Central American garment factories.

Now it's hard to predict how many US jobs would be lost as a result – though you'd have thought a smart Southerner like Clinton would understand the economy of where he'd grown up well enough to have inkling. But if I worked in the US textile industry – and spinners and weavers still employ a couple of hundred thousand people - I'd be damn miffed at ex-politicians happily denying that my job's threatened by other people's generosity on my behalf. I'd notice that ex-Presidents' pensions and healthcare aren't threatened by such gestures.

In fact, though, America's textile workers have done rather better out of the past few years than anyone could have expected. Back in 2004, their lobbyists were predicting China would have 60% or more of the US garment market: it's actually around 30%, depending on how you calculate it. Countries in sub-Saharan Africa, who get the same deal that's being proposed for Haiti, are capped at 750 million metres of fabric from any source apart from the US or Africa: last year they used just 250 million. With African exports to the US in continuing decline, the proposals for Haiti would still mean less Asian fabric will be imported duty free in the US, even if Haiti uses its entire allowance, than Congress authorized back in 2006, when they set the African cap.

There's obviously a strong case to be made for encouraging investment in Haiti, and for giving the country the same duty-free concessions offered to the poorest countries in Africa. Some African countries benefitting from those programmes – like Mauritius - are a great deal richer, and infinitely more stable, than Haiti.

So why can't the politicians just tell the truth?

Those workers seem to keep on getting tougher to find

2010-04-13T21:39:00.000+01:00

There is of course no shortage of workers in the world.

But there's hardly a garment making centre on the planet that hasn't behaved as if there is lately. Illegal rings of smuggled Vietnamese garment workers in Russia and China. Allegedly soaring wage costs in Delhi – though, as we point out, there really is a great deal less to this claim than meets the eye.

Claims in Jordan and Malaysia that governments really have to make it a great deal easier to import foreign workers if the local garment industry is going to survive. And even in Vietnam, the national garment industry trade association believes urgent action is going to be needed to get enough garment workers to meet the country's export targets.

And that's before we start thinking about the problems China's got now – and that are going to get worse as its population decline starts to bite

Countries that just a year ago were terrified about massive job losses in the garment industry are now desperately trying to find enough workers. Can this be real?

Yes. Because we're seeing a number of quite different problems produce the same symptom. And all fundamentally change the way garment sourcing will change over the next five years

In China, there really is a growing shortage of people of working age. So China will soon decide again it makes no sense to subsidise Wal-Mart by helping its garment exporters compete with Bangladesh. That's what it decided in 2006 – and acted on, until there was a real threat of mass unemployment as first the US market, then the European market, started to fall during 2008/9.
Whether China decides to subsidise other industries, or briefly subsidise plans by the garment and textile industry to improve its productivity before killing subsidies altogether, is unclear. But by 2015, China's garment exports won't be subsidised. Indeed – unlike the case in Europe, for example - most of the VAT paid on inputs to garment exports won't even be refunded. The claim that China competes only because of artificially low prices will be forgotten
In Malaysia and Jordan, there's the bizarre situation of a largely foreign-owned industry built on exporting imported fabric made up into garments by imported workers. Where even in the middle of a recession, it seems impossible to recruit local people. But that hasn't stopped the garment industry in Jordan asking for government subsidies. Or its Malaysian opposite number asking its government to increase public spending by banning more efficient foreign competitors from public procurement contracts.

Some garment industries just won't be around. These two look exceptionally marginal – created by legal quirks, and failing to cope with he fact that as the developing world's economies expand faster than their populations, the low wages their garment industries are built on will inevitably disappear.
The Vietnam problem is the interesting one though. Factories in Hanoi and Saigon can't recruit because the internal migration myth's lost its allure. Less than 20 years after it began to embrace capitalism, Vietnam's discovered its peasants don't believe big-city streets are paved in gold. They're happy to work endless hours – but don't see the point of dealing with big-city costs, when the world food boom makes real incomes back in the village go so much further than what they can earn on an urban assembly line.
The gold pavement myth is collapsing all over Asia. Sooner or later, it's going to mean either higher garment prices or more investment in productive garment assembly lines.

How local industries deal with the demographic crunch, the increasing marginality of the marginal and the collapse of the gold pavement myth is tricky to forecast. We try to in a new report out on April 20. But it's the great conundrum of the next decade.

There just isn't an untapped pool of labour anywhere that can make garments efficiently. Sooner or later, Western buyers will need to find a way of dealing with this fundamental change in the rules of the game

Is diplomacy really returning to trade disputes?

2010-04-12T09:57:00.000+01:00

America's backing down from confrontation with China over currency management almost coincided with its agreeing to work with Brazil on a solution to the anger its cotton subsidies are causing.

Both disputes – like America's handling of anger among its NAFTA partners over bans on foreign trucks and foreign manufacture of airport security uniforms – demonstrate an important principle of international trade that's discussed far too rarely.

America's working agreement with Brazil involves the US making concessions to Brazil that compensate for the damage US cotton subsidies have done to Brazilian businesses. These include programme to make it easier for non-cotton exporters in Brazil to sell to the US. American cattle breeders, for example, will now face tougher competition as a result of the subsidies the US has been giving cotton growers
Mexico's sanctions against US exporters hit a wide range of US industries – few connected to the freight industry protected by America's illegal ban on Mexican truckers driving merchandise into the US
The agreement with Canada, arrived at to compensate the Canadians for America's breach of the NAFTA treaty by banning the use of Canadian manufacturers for airport security uniforms, opens up US government procurement to a much wider range of Canadian suppliers
The argument over Chinese currency management isn't just between Americans wanting China to increase the value of the Yuan and Chinese who don't. We're all used to America retail organisations arguing against measures that put prices up: but what's new is the range of Chinese businesses that want their currency to increase in value this time. Chinese steelmakers want the cost of raw materials from Australia to fall: airlines want to see their finance charges come down: computer makers just don't want to upset America

Lobbyists for a particular industry love to portray trade rules as being in the national interest. In fact, practically any rule a government invents is going to damage some of its businesses and workers, and help others. Lobbyists always try to hide this. It's much easier to blame devious or dishonest foreigners than to admit that something likely to increase job prospects in your town will create job losses in he town five miles away. Or in your next door neighbour's family.

In the past two months, the US has been forced to recognise that widely-praised support for bits of the textile industry is going to damage business prospects for other Americans. And, increasingly, Chinese businesses are admitting their interests and those of low-margin exporters like garment makers aren't perfectly aligned.

As governments grasp the complexity of today's world, more and more trade dealings will have to be discussed quietly, away from oversimplifying lobbyists and politicians. That's why – as our first review of the lessons the recession's taught us showed - the most important lesson of the past 18 months is how very, very few pieces of protectionism have been enacted by rich countries.

The corollary's more subtle, though. Trade agreements are going to get to cope with a world that's a million times more complicated than lobbyists like to depict. And sooner or later, politicians' demands will change with them

Whatever happened to all that protectionism then?

2010-04-10T09:52:00.000+01:00

Throughout the recession, we were always being told about all this protectionism that was being created.

And, as far as the garment industry's concerned, we're still looking for it.

The EU, US, Japan and China between them account for 86% of the world's spending on clothing. And this is what they did during the recession (ie from 2008):

China extended duty-free access to its markets to all of SE Asia. It enacted no new barriers against clothing imports, though it might have tightened up rules favouring local manufacturers pitching for government contracts. It undoubtedly poured hundreds of billions into helping its manufacturers compete in export markets. But hardly anything to keep imports out.
Japan extended duty-free access to its markets to all of SE Asia. We can find not evidence of anything to make it harder for foreign suppliers to sell garments into Japan: indeed the Japanese government has even paid for substantial training of Bangladeshi and Burmese manufacturers in selling to Japan.
The EU removed quota restrictions on China. It offered no-strings duty free access to most producers in Africa and the Caribbean. In return, it declined to remove anti-dumping duty on Chinese and Vietnamese shoes earlier than planned
The US removed quota restrictions on China and Vietnam. It improved duty free access for Haiti, Peru and Mauritius. IN return it imposed a ridiculous and counter-productive ban on foreign procurement of airport security uniforms and banned Mexican truck from driving in the US

That's it. Millions of acres of forest chopped down for paper to print "wall of protectionism" stories – and they all amount to a bans on foreign T-shirts for security staff.

Moral? The world of garment making is just too messy these days for new trade barriers. Like the horse and cart, they're last century's answer to last century's problems.

Outside the odd theme park, we're unlikely to see much of them in the future, either

Now the recovery’s officially started…

2010-04-10T09:35:00.000+01:00

Today's story that there was real growth during March in US clothing stores' like for like sales compared to 2009 seems a pretty good moment to assume the recovery, at least in the US, is now officially beginning.

There'll be a fair amount of bad news still to come, of course – and recovery's nowhere near in sight in Japan's clothing sales. But this probably marks the watershed when we should start working on the assumption our business is mostly going to be concerned with the challenges of rising demand, rather than sales collapses.

So we're going to be looking from now on at giving the business the help it needs planning for recovery, rather than managing amid decline. Our "World in 2012" report is a good example of that.

But it's worth remembering the central finding of our 12 Laws of Sourcing: What the recession didn't cause, a recovery won't cure. Most of the world's garment makers face serious competitive problems. Not just on price, but in:

The cost and availability of raw materials and power supplies
Food inflation continuing to hit garment workers harder than most – with consequentially serious upward pressure on wages
Unpredictable currency rates
Poor internal transport and inefficient, dishonest Customs procedures
Poor understanding of buyer needs
IN some cases. Limited local availability of the technical support needed to deal with importer-country regulations, such as the EU's REACH.

Over the next few weeks, we'll be analysing producer countries' ability to cope in the new world, and looking further at the lessons of the recession. Tomorrow will be our first: all that protectionism the recession unleashed. Didn't it?

China’s currency and the rules affecting the garment trade

2010-03-18T12:59:00.001Z

The louder people shout about China and its undervalued currency, the harder you have to think about why it matters – at least in the garment industry.

US politicians are getting crosser and crosser about how China's being a very bad girl in the way it treats its currency. And they think someone should jolly well do something about it. Just as the Europeans were saying a few weeks ago. Though, looking at their proposals, I'm not that sure just what it is they want someone to do.

But let's accept that China deliberately manipulates its currency to make it worth less than it's really worth. Let's even accept that it does so more deviously than other countries manipulate their currencies, and let's accept that doing all that improves China's competitiveness.

But what does anyone think they're going to do about it? US Congressmen have spent much of this week complaining. Ultimately though, they have few realistic proposals for doing anything about it. They want the country's Treasury to be more prepared to expose China's villainy, and if that doesn't make the Chinese change their tune, the Congressmen want the US government not to buy so much from China. Which might affect where the pens public servants push around get made – but little else. True, they want the US Department of Commerce to take currency misalignment into account when its looks into cases for antidumping and countervailing duty. But that doesn't remove America's treaty obligations to allow such cases only when they're brought by members of an industry that's losing US sales as a result.

There's no shortage of American businesses and workers – just as in Europe – who believe they're losing textile jobs and contracts because of unfair behaviour by the Chinese. The trouble is: the way the rules work, there's a high risk they'd lose a case for sanctions against China if they brought one, because the US isn't importing Chinese textiles. It's importing Chinese clothes – and there just aren't enough clothesmakers in the US (or in most of Europe) any more. Potential complainants just aren't prepared to invest time and legal costs preparing a case they'll almost certainly lose. Allowing currency manipulation to be accepted as evidence of unfair trading: it doesn't affect the fact that makers of one product aren't able to bring cases to penalise imports of a different product.

As anyone reading our new Clothesource Guide to Apparel Trade Regulations 2011 would quickly find out

Anyway: both the US and the EU see this problem differently from China.

To the US and EU, it's a straightforward trade dispute: only worth pursuing as long as it doesn't upset other issues with China – and both he US and EU are rather more interested in exporting more high-tech things, and protecting their companies' patent and copyright interests in what they export. To China, it's far more important – at least for the moment.

As long as the Western recession persists, China's rulers can't shake off their fear that widespread underemployment would stoke nationwide unrest – which could ultimately imperil the rulers themselves. China's handling of the recession has probably made thus fear unrealistic – but it's the Chinese rulers', not Western leaders', heads that would roll if the Chinese are right. At the same time, upping the value of the Yuan reduces the value of the money the US and Europe owe China. And what ruler would assent to as proposal that made his country poorer, and his own deposition more likely?

The issue just mattes a great deal more to China than it does to the US. What's more: China knows its wage rates are about to explode, as its working age population starts shrinking. The problem American politicians are working themselves up into a later over will go away – probably more quickly than the legislation would get through Congress.

As so often. If legislators round the world read the new Clothesource Guide to Apparel Trade Regulations 2011, or our 12 New Laws of Sourcing, they'd save themselves SO much time. And heir taxpayers SO much money

Are demographics the Next Big Thing?

2010-03-15T15:44:00.003Z

There's one thing just about everyone in the apparel industry agrees on. And it's actually profoundly wrong. And the likelihood is, its wrongness is going to underlie just about everything relating to the industry for the next decade.

Anyone remotely connected with the business has one basic assumption at the back of their minds. It goes:

There's a virtually limitless number of people in the depths of China who are so poor they'll ultimately work round the clock, seven days a week, for next to nothing. Even if there aren't, the government will make them. And their numbers are so inexhaustible that China will always turn out more, cheaper, workers than anywhere else, so sooner or later they'll take over any industry the Chinese government chooses.

Of course we all know in our heads that's not strictly true. But we believe that, for most of our lifetimes, it'll be close enough to true to be the base of all working assumptions. Sooner or later the country might run out of people. But the polar icecaps will have melted by then. Won't they?

Well, apparently not. Just about the only thing we know for absolute certain is the maximum number of people of a certain age there's be around in five or ten years time. Unless China starts importing low-wage workers, every single member of its labour force in 2015 and 2020 is alive today. So we know for certain there'll be fewer in ten years than there are now. In fact, there'll be fewer of the key 20-44 group by 2015 than there are now.

And that's not just some "Wow Zowie" statistic we pull out at conferences to get a reaction. The reality is facing Chinese businesses today.

In Nanchong, the largest worker-exporting city in Sichuan Province (population: 7.4 mn, of which 3.1 mn are rural labourers), over 1.8 mn workers migrated to jobs outside the area in 2009. As a result, there is a serious shortage of workers for local businesses. This month there are 20,000 unfilled vacancies in the city, mainly skilled jobs in machinery, electronic information, garment processing, and high-quality service provision. Nanchong's pool of rural workers below 45 years of age has shrunk. There were fewer people of that age group than a decade ago anyway – and official policy has been to encourage people to move to the richer provinces. So now there aren't even enough [people in the poorer provinces to supply local factories.

Now for the past 18 months, China's been throwing just about anything it can at keeping its garment export business going. Soft loans, VAT rebates on exports, suspension of minimum wage laws: just about the worst nightmare of European and US protectionists seemed to be coming true. But there was a specific reason for that: for a while, the Chinese government's worst nightmare seemed to be coming true.

The great fear of Chinese politicians is that one day the country will have real unemployment. Especially of people who, till recently, had had relatively well-paid jobs in the country's Eastern, coastal, provinces. After discovering creature comforts, the fear went, any spell of joblessness could turn these groups into a serious threat to peace. So in late 2008, Chinese policymakers' great priority was to pay what it took to keep all these potential troublemakers out of trouble.

As it happened, the crisis never really came, and it's probably over. Among China's garment and textile businesses, the big fear is wages rising as potential workers find better paid jobs, or stay in their home villages to look after ageing parents.

So China really doesn't need to hurl money at keeping garment workers employed. Indeed, many of its decision-takers will be arguing that it's out and out insane to spend money subsidising workers in low-profit industries that compete with Bangladesh, when they could be spending money subsidising industries China makes real money from.

And it's a problem that's come already. Chinese businesses are forecasting wages will go up 9% this year: workers are saying they'll need 14% to go back to east-coast factories from their home villages. China's civil servants are arguing the labour force is still growing (which it is: just): but that doesn't change the fact that it's not changing as fast as demand is growing.

But the country is facing a shrinking workforce and growing reluctance to migrate 2,000 miles across China at a time the country's elderly are the fastest growing section of the population. What will China do about it?

In 2006 – 2007, China thought it was facing precisely this problem. It erected a raft of provisions – lower VAT rebates, statutory minimum wages, and statutory rises in those wages, tighter credit, greater employee rights on job termination and greater rights for trade unions – all ultimately designed to move workers out of low-wages industries and into jobs with higher productivity and higher profit.

The likelihood is, China will return to that policy quite soon, accepting that the risk of a fall in the country's thread, fabric and clothing market share is a price well worth paying for a higher share of global aeroplane or computer manufacture. The timing's unpredictable. As will be the reaction of Chinese businesses – who, in 2007/8, managed to keep their prices under control as their costs were rising.

The important thing about China's demographic challenge for the garment industry isn't to worry too much about where, when and how deeply it hits. It's to keep aware of what's happening to Chinese quality, prices and speed of response and be abler to switch sources quickly.

We know the work force is going to get smaller, soon. Wart we don't know is how successfully their employers will respond to the problem

For many: The Recession is SO 2009

2010-03-15T09:24:00.001Z

The Recession of 2008/9 probably wasn't the biggest influence at the time on most apparel buyers and sellers.

It was certainly the influence that got most publicity, because the recession affected every aspect of all Western economies. But for the apparel market, it was just one of four major influences that became apparent at more or less the same time. But, unlike the recession, the other three will still be influencing the trade long after Western clothing markets resume stable, steady, growth.

We've charted those influences in The 12 New Laws of Sourcing, FREE with every subscription to The Source, or £50 as a one-off. Those Laws are based on an understanding of three other crucial developments towards the end of the first decade of the 21^st century:

Western buyers simply ran out of production to relocate. For most of the decade, Asian producers in particular had seen rapid growth in exports to the US, Europe and Japan, as rich-country production was moved to places with lower costs. By the end of the decade, that process had almost run its course
At the beginning of 2009, trading restrictions on China and Vietnam finally disappeared. Business that weren't in China or Vietnam suddenly had to cope with unfettered competition, just as Western sales started slowing and relocation dried up. Prices Western retailers and brands are paying to import clothes are falling at the fastest rate on record as a result
A decade of investment by Western retailers in new processes and technology began coming to fruition. Retailers' inventories fell faster than their sales – partly out of prudence, but largely because retailers had developed systems that allowed inventories to be squeezed without adverse affects on sales

We estimate that, for manufacturing countries outside China and Vietnam, only 20% of the 2009 fall in income from apparel reports is the result of falling Western retail sales. Four-fifths came from growing competition and unprecedented downward pressure on prices.

Understanding the combined impact of no more production to relocate, unrestricted competition and sophisticated retail inventory management is essential for understanding how apparel trading will evolve over the next few years. The 12 New Laws of Sourcing set out the key principles. The Clothesource Guide to the World of Apparel Sourcing calculates their effect.

WalMart goes holistic and agrees with Marx

2010-02-26T13:41:00.001Z

Holistic philosophy isn't the first term that springs to mind when you think of the world's largest clothes retailer. But it what lies behind WalMart's latest initiative on greenhouse gas emissions.

For the apparel industry, there are two huge mistakes responsible traders have to avoid. One is the nationalistic nonsense about "clothes miles": the fatuous propaganda from rich-country protectionists that making a garment in a poor country is bad for the planet, because of all the travelling a garment has to do. Repeated analyses constantly demonstrate the claim's absurd: washing and drying a t-shirt a few times uses more energy than freighting its cotton from the US to China, then freighting the t-shirt from China to Germany. And neither caring for the garment nor freighting it use anything like as much energy as screenprinting "Save the Planet: Buy Local" on the shirt.

And then there's the opposite mistake: the claim that worrying about sustainability just drives up costs. Which might happen – but not if you find a way of cutting the amount of energy used in whole life-cycle of a garment.

Which is where WalMart's holistic approach comes in. Announcing a plan to cut 20 million tons off its products' greenhouse emissions (GHGs) by 2015, it's singled out apparel. Pointing out that garment care is where the energy is really used, it's sensibly decided that's a challenge for its garment suppliers – but also for the companies selling WalMart laundry detergent, washing machines and driers.

And if you're not just the world's biggest garment buyer, but have an even bigger share of the world's laundry detergents – and a pretty impressive share of the world's washing machines – you're ideally placed to see your suppliers rise to the challenge.

I'm writing this as I'm drying a pair of trousers. The detergent we use didn't do a very good job of cleaning them when washed, as the eco-conscious retailer I bought them from recommended, at 30 degrees C. So I washed them again. Our new low-energy washing machine did its job – but they were so wet after spinning, they've been in the dryer now for two hours. And don't tell me I can dry them in the fresh air during a dull, wet, Oxfordshire winter. I've probably used more energy on this wash than went into an entire pallet full of them in their journey from American cotton field to Sri Lankan factory to Clothesource Towers.

Now, with WalMart's famously kind, sympathetic approach to motivating its suppliers (as in "do it our way and you don't get fired"), the likelihood is suddenly a lot greater that by 2015 those trousers will dry quicker anyway, detergents will work a lot better at 20 or 30, and washing machines will spin well enough the trousers will dry outdoors even here. WalMart's influence won't quite extend to our just as famously uncertain weather – but a bit of WalMart brutality with manufacturers will almost certainly do a great deal more to reduce energy usage than any amount of high-minded talk from governments or activists.

So – and here's the clincher – washing those trousers will cost me less.

Is WalMart doing this because it wants to save the planet or because it wants to make more money? Probably a bit of both. But does it matter?

Because you'll find the other bit of WalMart's philosophy on the Highgate, London, grave of Karl Marx. The old fraud would probably be turning in it if he realised who was agreeing with him on this, if on little else. But whereas philosophers interpret the world, he'd said before meeting his all too delayed death, "the point is to change it".

A holistic WalMart taking their cue from Marx? Strange times indeed

H&M’s having a horrid time

2010-02-26T12:50:00.001Z

Problems certainly come in ones. But few businesses can be seeing their core values under attack from so many directions as at H&M right now.

Most sensible observers have probably rated H&M's attempts to run their business ethically very highly indeed. They're conscientious, they're honest in what they publish, they go to great lengths to ensure responsible trading. They don't preach, they're perfectly happy about being in business to make a profit – but most trade unions and the like probably rate them as highly for their standards of behaviour as most stock analysts rate them for consistently good financial results.

But they've had practically as horrible a set of things happen on the ethical front in the past two months as I can remember anyone ever having in a year.

The year started off with claims in New York that H&M were throwing away unsold garments, rather than discounting them or giving them to charity. By the end of January, they were being accused by the Germany's
Federal Consumer Affairs Agency of "not being vigilant enough" after a Bremerhaven inspection agency was reported to have found 30% of alleged organic cotton garments in H&M stores contained GM cotton.

On February 22, the Economic Justice Forum (EJF) added another non-vigilance allegation: H&M had claimed to have been at the forefront of boycotting Uzbek garments over the country's use of slave labour in its cotton fields, but appears to do nothing about checking the source of cotton used in its garments, and uses suppliers known to be buying Uzbek cotton. H&M seem to have claimed origin auditing's not possible – but, says the EJF, Tesco audits where the cotton in its garments comes from, so what's the problem?

Then on February 25, 21 people were reported to have been killed at Garib & Garib – a Gazipur sweater factory which puts H&M at the top of its client list, thus implying H&M had inspected its safety standards.

Now we don't know whether Garib & Garib really are an accredited H&M supplier, or what caused the disaster. We do know that the Bremerhaven inspection agency strongly rejects media claims it found non-organic cotton in 30% of H&M samples (H&M claim they can't find any at all) , and few of us are really technically competent to judge between H&M's and the EJF's claims about how accurate cotton origin testing can be.

But no other apparel retailer has ever been hit with so many examples, so quickly, of what look like a superficial approach to responsible trading.

Personally, I don't suspect they're being particularly irresponsible, and there seems little doubt they're getting the raw end of some of the problems. Google H&M and organic, for example, and you get at least 20 references saying things liked "fraud" for every one reference to the inspection agency's denial. Their current quandary really illustrates just how whiter than white you need to be if you're trying to establish yourself as responsible.

Or do you? H&M are certainly getting a lot of unfortunate PR at present. But is it really translating into poorer results?

Or are staff and consumers just increasingly of the belief that bad things happen, however vigilant you try to be. In our view, H&M's current difficulties will help the whole industry understand better how important responsible trading really is – and how businesses need to handle the inevitable things that go wrong.

Let’s not get carried away about Madagascar

2010-02-12T14:37:00.001Z

Alarmist rumours are running around about the EU possibly announcing sanctions against Madagascar's apparel industry on February 19. But the likelihood the EU will copy America's withdrawal of duty-free access for the African island's clothing exports is getting absurdly exaggerated. Withdrawal is unlikely – and the effect on Madagascar of withdrawing duty free access to Europe would be much less than the US AGOA loss

The US withdrew its AGOA concessions in December over Andry Rajoelina's seizure of power with help from the Madagascar army last year. AGOA exists simply to offer trade concessions, and the US President is required to review regularly whether beneficiaries conform to certain principles of government. By law, he has no authority to continue those concessions to a country that fails to observe those principles.

For the EU, the legal position is different. Madagascar gets duty-free access because of the Cotonou agreement, a much wider-ranging programme offering aid, investment and a number of other benefits. The Cotonou agreement sets standards of governance – but contains no mandatory prescription of what should be done if a country fails to follow them. And the EU has a much wider range of sanctions available to it under Cotonou should it want to start wielding a big stick

The EU, officially, was as outraged at Rajoelina's coup as the US, calling it a "flagrant violation" of the Cotonou principles. But it is under no obligation to withdraw duty-free access: in theory Zimbabwe, possibly the most flagrantly misgoverned country in Africa, retains the concession; though the EU bans its officials from travel to Europe.

The most likely EU reaction will be some suspension of aid, or personal restrictions on the individuals concerned in the coup. It's simply untrue that "moves on the agenda ...include the loss of access". They include the loss of duty free access – but goods will be able to be sold, and there are options for the EU that hit Madagascar's politicians rather than its workers.

It should be remembered, of course, that losing duty free access to the EU wouldn't matter as much as a similar loss on sales to the US. Madagascar last year sold twice as many garments to the US as to the EU – and the EU's maximum duty is 12%, compared to America's 27%. Claims about "teetering on the edge" are making a wholly unnecessary drama out of a serious issue the EU is likely to handle with reasonable sensitivity to the need for preserving jobs

Turkey: another triumph of hope over experience

2010-02-11T12:15:00.001Z

Turkish garment makers' hiring of lobbyists to chase duty free access to the US has to make them the most naive of all the groups hoping to get a free pass to the USA.

Speaking to Turkish business daily Referans on February 5, the newly appointed Turkish Clothing Manufacturers Association (TGSD) chairman Cem Negrin said his association aimed to have a Egyptian-style system of duty-free Qualified Industrial Zones (QIZ) "within two years", and added that his association was "about to agree with a U.S.-based lobbying firm" that a programme to get one would start.

In chasing duty-free status, TGSD joins a pretty long – but pretty forlorn - club. Bangladesh and Cambodia have been telling the world for years they were going to get it – and, in fairness to them, the US DID agree some years ago to offer it to the world's 49 poorest countries and these two, with Laos, are the only ones in that group to have a serious garment industry and need to pay US import duty. Legislation proposing this goes on and off US legislative agendas – but it looks no more likely to be taken seriously now than at any point in recent history. Opposition is fierce, not just from the US textile lobby, but from far richer countries, like South Africa, who dislike the idea of losing their competitive edge in the US

Pakistan endorses the US government's enthusiasm towards duty free access for garments made in its most remote tribal districts – but few Pakistani manufacturers do, and apparently even fewer US legislators.

The Philippines, after getting nowhere spending hundreds of thousands on lobbyists for duty free access a few years back, now keeps on telling everyone it's going to be excused duty on garments it makes from US fabric. But its SAVE bill seems to be getting slow progress. As does the Bill to prolong AGOA.

Is there any real reason Turkey's attempts will fare better? It's actually hard to think of a less attractive candidate from America's point of view.

Unlike Africa and Israel, which get duty-free access, Turkey has no strong US pressure group. Unlike America's neighbours, or the Philippines, its garment factories aren't going to use US fabric: Turkey's real strength is in the quality of its fabric mills – and US textile lobbyists will just laugh out loud at the thought Turkish competitors might delude themselves they'll be allowed duty-free access. Unlike Pakistan, Turkey isn't a country undermined by terrorism – but even for Pakistan, the US is prepared only to allow duty free status for factories so inaccessible no-one would ever use them: there's not even the hint of a scintilla of a suggestion the US might look favourably at duty-free treatment for factories in Lahore or Karachi.

Turks might think they could claim their Southeast Anatolia development area (known in Turkey as GAP) needs support: but if they seriously believe the poverty and instability round Diyabarkir is in the same universe as the problems Pakistan has round the Khyber Pass, they're just delusional. The idea that they can claim the kind of poverty Egypt does to justify the case for its QIZ programme when Turkey's heaviest concentration of garment factories is in Istanbul, one of Europe's biggest cities and just a couple of hours by freeway from the EU, is doolally.

And Turkey's an official EU applicant. Indeed, as far as the apparel trade is concerned it's virtually in the EU already. Its garments have duty free access and Turkish trucks carrying them have unlimited rights to ride, and ply for hire, throughout Europe (unlike the restrictions the US places on Mexican trucks).

Arguing to let Turkish garments, made from Turkish textiles, into the US without restrictions might not be quite as tough as making the same case for China. But it really is in pretty much the same league. This really is an idea whose time is unlikely to come in the lifetime of anyone reading this blog

Cambodian sourcing myths are disguising its garment businesses’ real problems

2010-02-11T10:04:00.001Z

Many reports of Cambodia's recently called off apparel factory wage negotiations claimed that the country's clothing exports to the US fell 30% in 2009, and most blamed the US recession for that. They didn't fall 30%, and their real fall had little to do with the recession. But the "30%" myth illustrates extremely well what Cambodia's real problems are.

30%? Well, the value of apparel imported into the US fro Cambodia fell 21% in 2009, US textile agency OTEXA announced on February 10. The value of imports fell 27% in one or two months – but the fall was way, way, below the reported 30%. Where does the 30% come from? No-one has the faintest. There's a culture in Cambodia of announcing any old number if it makes the right point, there might have been different customs scams going on in 2009 from those in 2008, or the country's official data systems might not work. Whatever the explanation: numbers reported as coming from official Cambodian sources are rarely worth the paper they were never printed on.

But sales still fell 21%. Actually, their value did: the volume of garments the US imported from Cambodia fell slightly less: just 15.5%, since the average prices paid for Cambodian garments fell 6.8%.

Fine, but both the 15.5% fall in imports and the 6.8% fall in prices were due to the recession, weren't they?

No. Cambodia's share of US garment imports fell too, as its exports failed to compete with clothes from China and Vietnam. If Cambodia's share of US imports had stayed the same as in 2008, its sales would have been 11.2% higher. Of the 15.5% fall, 9.4% was the result of Cambodia's falling competitiveness, and just 6.1% was down to the recession. The main reason prices fell was that once US and EU restrictions on Chinese and Vietnamese imports were withdrawn, price competition worldwide got tougher.

So, of the claimed 30% sales loss in Cambodia, just 6.1% - or one-fifth – is down to the recession. The rest is hokum, or the result of falling competitiveness.

Hokum in our view is pretty much the same thing as falling competitiveness. Alleging bad data, corrupt officials or a tendency to believe any old rumour aren't things that would surprise anyone familiar with Cambodia. The fact is: the country's increasingly unable to compete, in spite of its relatively low wages.

It's going to be just as unable to compete if Western markets start growing again, or if Asian beliefs prove correct that the world garment market is going to shift somewhere else. Our analysis shows that four-fifths of Cambodia's alleged sales loss is down to problems in Cambodia, and the political and logistical infrastructure that supports its garment business.

Hopes that sales in Gap or H&M might pick up are concentrating on the smallest aspect of the problem. The answers lie in Phnom Penh: not in Poughkeepsie or Portsmouth

Apparel buyer training needs to be fast as much as it needs to be right

2010-02-10T10:31:00.001Z

For many apparel buyers, time pressures are getting just as demanding as pressures on the bottom line.

It's a problem more and more people are recognising, and the Fast Fashion boom isn't making things any easier. Retailers and brands are expecting fewer buyers to manage more products, faster and more efficiently, than ever before.

So I'm pleased we've been able at Clothesource to work with our friends at Industry Forum Services to develop a fast, affordable seminar to help buyers catch up quickly with the latest sourcing trends,

Our March 3 Essential Sourcing Skills seminar is compressed into just four hours. So UK-based buyers will need to invest less than half a day honing up on the latest garment sourcing developments. And many buyers on the European mainland can get to London, catch up on all the latest trends, and get home for dinner without needing a night in a hotel.

The full brochure is downloadable . The March 3 half-day Essential Sourcing Skills seminar is designed to give help apparel buyers and sellers understand how their business can deal with the constant changes in international clothing supply chains.

This half-day seminar will provide Clothesource's latest information about supplier countries' changing competitiveness, helps participants review their sourcing and marketing patterns against their competitors' and demonstrate how to identify potential new sources, how to evaluate them, and how to make informed and profitable decisions.

Obviously, we're biased. But it's probably the best £125 most of our readers will ever have spent

Sri Lanka will lose GSP+. And won’t regain it

2010-02-09T19:20:00.001Z

The EU Council of Ministers will almost certainly decide on February 16 to remove Sri Lanka's GSP+ duty-free access to the EU. And, in our view, the world will have to be turned upside down before it gets the concession back.

The concession will be removed partly because Sri Lanka faces serious charges of abusing human rights, and the EU invented the GSP+ programme specifically to reward Sri Lanka after it was hit by the tsunami for its apparent superior human rights record. But since then it's faced serious terrorism problems, and it's claimed some rough treatment was necessary. There might well be some sympathy in the EU for that point of view. Former colonial power Britain has been hit by terrorism as well – but Sri Lanka's real offence in the eyes of many EU officials has been its refusal to assist the EU's investigations and to show any serious attempts at improvement.

And there's a great deal more to Sri Lanka's stance than the issue of duty-free access for the country's bras to Europe. The Economist has an excellent explanation for this.

Sri Lanka's president, like his counterparts in a growing number of poorer countries, resents having Western countries impose conditions – and it would rather not have benefits like GSP+, however useful, if that means doing what other countries tell him to do. Probably, that's long been the view of many developing-country politicians: what's the point of going through the bother of winning power if you've still got to do what people thousands of miles tell you? But if your economy depends on selling things, your markets are going to be in Europe or America, and for a long time responsible politics meant putting up with Europeans' and Americans' whims.

The recession and changing geopolitics have changed all that. Contrary to the self-delusion of many Asian politicians, they haven't changed the blunt truth that practically all the money the world spends on importing clothes from the Indian subcontinent is spent by Europeans, North Americans or their near-clones in Australasia. Other clothes markets are dominated by the Chinese and imports are worth so little they're dwarfed by sales to the North Atlantic. That doesn't stop Indian politicians constantly telling Indian clothes manufacturers to sell more to the Arabian Gulf, or to Russia: but it does stop any meaningful sales being made. But politicians don't understand markets: they understand power. Because they think power's shifted, they assume sales opportunities have as well.

And, as far as politicians are concerned, power really has shifted. In Sri Lanka's case, as Europe made its assistance depend on good behaviour, Iran provided $450m for a power station, and half a year's oil on easy terms. Pakistan and China provided the Sri Lankan government with weapons to fight its Tamil rebels, while the West wouldn't. China passed Japan in 2008 as the country's biggest single country provider of aid. Though the EU in total provides more, China has lent it over $1 billion for an airport and a Chinese-built port that might well be handy as a Chinese naval base. That worries India, which is now lending the county $700mn for railway improvement – and trade with India is growing.

Now little of that might help Sri Lankans if jobs making things to sell to Europe and America disappear. But Sri Lanka's president thinks he's now got a choice. He might not need to accept European rules if he can borrow nigh on $1 bn from India just by exploiting India's fear of growing Chinese influence. And if blowing a raspberry at Westerners destroys jobs – well, he can always blame Western arrogance. And are jobs dominated by women workers real jobs anyway?

So, just as in Madagascar, there's a non-argument going on here. Sri Lankan businesses want to keep GSP+ because they want the economy to function. Many Sri Lankan politicians don't care about that: they simply dislike neo-colonialism.

This of course raises questions about the whole direction of Western trade policy. But they're above my paygrade. What's easier to cope with is that, with China looking as if it's offering no-strings help to developing-country governments, threatening to make underwear exports dearer isn't going to strike terror into the hearts of developing-world politicians.

Sri Lanka, under its current ruler, is very, very unlikely to do anything to keep GSP+ eligibility. Or to get it back. Its ruler thinks the world has turned upside down already: he's very unlikely to believe it'll turn back the other way in his lifetime

Retailers to government: make your companies pay higher wages

2010-02-05T07:16:00.002Z

When the CEO of the world's largest retailer flies across the world at zero notice, few people expect he's planning to tell its government to force his supplier's wages up.

But the surprise two-day visit of Mike Duke, WalMart CEO, to Bangladesh, his demand for a meeting with the country's prime minister and his signature on a letter demanding "swift action" over scandalously low wages reflects the growing frustration – and sometimes downright fury – among garment buyers over the Bangladesh garment industry's persistent refusal to deal with the greatest running sore in our business.

Bangladesh set its minimum wage at Tk 1662 ($23) a month in 2006 (it had been unchanged since 1994), and for the past four years, we've been carrying stories about the number of factories not even paying that. The country's government has pressed for its minimum wage board to set a higher level – probably $72 – but business owners have undermined the process by just not turning up to its last meeting, so nothing got decided. And with 10% of Bangladesh MPs garment or textile business owners, there's more than a whiff of a government not trying to enforce its own rules as hard as it might.

Hence a letter to the Bangladesh Prime Minister from 11 key buyers published on Feb 5, demanding swift action for a minimum wage workers can actually live on. The 11 – including WalMart as well as the world's other two biggest retailers, Tesco and Carrefour, in addition to Gap, H&M, Ikea and Levi Strauss – claim to account for 40% of Bangladeshi garment exports, which means about a third of ALL the country's exports. They are frustrated at constant violence in Bangladeshi factories over the most trivial dispute and they are sick of customer complaints about their alleged complicity in low wages. H&M even went on public record to claim they'd offered to pay more if wages went up, but factories had rejected their offer

Will it work? Well, buyer pressure over big government issues hasn't had a great record lately. Letters from US apparel buyers to their government over Honduras have achieved nothing. Threats by the US to Madagascar's government to withdraw its apparel industry's duty free access have been ignored – as, almost certainly have similar threats by the EU to Sri Lanka's. And Bangladesh's dependence on garment exports is roughly the same as Madagascar's.

Bangladesh garment businesses have an influence over their government unmatched anywhere else: the government publicly complains about low wages but has done nothing to force them to the Minimum Wages Board table, and has recently announced plans to reduce penalties for factories breaching the country's labour code. It consistently joins in the downright silly witch-hunt for "foreign rabble-rousers" every time a riot breaks out – thus feeding the state of denial factory owners have been in since violence broke out.

The businesses will, understandably, point out that buyers never stop demanding lower prices. They DO face violence from their workers to a level unseen anywhere else and there can be little doubt that there is some kind of organisation behind the riots and the arson. But they make an awful case for themselves.

Explaining why 30% monthly labour turnover is quite commonplace, Bangladesh Garment Manufacturers & Exporters Association (BGMEA) President Abdus Salam Murshedy cheerfully admitted in an interview published yesterday that workers sometimes move jobs for an extra Tk 100 ($1.40) a month. His vice-president, Siddiqur Rahman, thought that was wrong of workers "These workers always want to raise their wages making the factory owners hostage". Rahman's answer to high labour turnover? The taxpayer should solve the problem "The only way to solve the labour crisis is establishing training centres by the government."

But, however aggrieved Bangladeshi businesses might feel, ultimately you can't argue with your biggest customer. The question is, though: what will Wal-Mart and Tesco do if the Bangladeshis keep wriggling? It might be odd for a retailer famous for his tough negotiations to drop everything to try to put prices up – but the Bangladeshis have already behaved even more oddly by refusing higher prices. For all the frustrations of working there, Bangladesh does now have an important niche in European and US buying as the place for finding low-cost clothes. If its businesses postpone living wages again, are the world's most cost conscious buyers rEally going to switch to – well, to where?

Is there really a labour shortage?

2010-02-04T20:31:00.001Z

Over the past few days, we've carried reports of growing concerns about labour shortages in the garment industries of Thailand, China, Vietnam, India – and now Bangladesh. These are some of the poorest counties in the world: surely they're not short of workers?

Of course they're not. But they are short of two KINDS of workers:

Workers with the necessary skills to be productive in the garment industry
Workers near garment factories prepared to work for what are often extraordinarily low wages.

And the way the world has changed in the past few years has made it increasingly tough to find people like that. Here's our take

Garment factories have always, since the Industrial Revolution, been a good way for people to get almost-decent wages instead of the awful standard of living they had to cope with in the countryside. Typically, though, what seemed in the village amazing wages aren't quite so amazing for a worker who's got to pay city rents and city prices for food she almost regarded as free back in the village. For many, of course, the wages are still good enough they can send cash home to the village, so their family can invest in land, tools or a new house.

We think that's changed recently. High worldwide food prices have meant living near Saigon or Mumbai or Guangdong has got more expensive, while the wave of factory closures in 2008/9 have made job prospects in garment factories look a lot less rosy. Many (according to some activists, millions of) garment workers have lost their jobs. Going home, they've often discovered that rising food prices have also made working back in the village is a lot better paid than it was five years ago. Near India's Tirupur, they can make as much in two hours' farm work as they'd make in a day in a city far from home.

So, though there are still hundreds of millions of desperately poor people, many have discovered that a migrant's life in a distant city just isn't worth it. To which, for many garment makers, there really is only one solution: the only way to get enough staff is to pay them enough to make the discomforts of a shared room, hundreds of miles from family, worthwhile.

Now factory owners don't pay rotten wages for the fun of it. Wages are the only cost garment makers can control – and I wouldn't like to lecture those business people on how to pay proper wages without going broke.

But, ultimately, it comes down to productivity. The last edition of The Source carried mixed messages on that. Western retailers were claiming evidence higher wages led to higher productivity: emerging-market factory owners were claiming they didn't

But there really is no alternative for garment factories. Even in the poorest countries, food-price inflation is making city life pricier for workers and rural life more remunerative. Garment makers simply have to learn how to depend on fewer workers: and if they can't leverage higher wages into better productivity, they're going to have to learn how to.

There really is no shortage of workers in poor countries. But the growing shortage of people both able to sew garments AND prepared to work in a garment factory is a real threat throughout Asia. Businesses who can't deal with it won't be dealing with anything soon

Obama learns to be inscrutable

2010-02-04T11:52:00.000Z

The President Obama speaking about trade with China on February 3 was a very different man from the one who promised to be tough on Chinas while campaigning for office.

Writing to textile lobbying group the National Council of Textile Organisations in October 2008, he made five specific commitments:

On alleged Chinese currency manipulation: "I will use all strategic means at my disposal" to persuade China to change
He was in favour of the law requiring US armed forces to wear uniforms made from US fabric
He would "support inclusion of the yarn forward rule in free trade agreements".
"As President... I would use monitoring to help ensure that imports from China do not violate applicable laws and treaties"
"When domestic industries make use of...laws...applicable to imports from China, I will decide those cases on their merits

Now we pointed out at the time that this wasn't a manifesto for more protectionism: indeed it avoided any real commitments at all. But he certainly meant it to sound that way.

And he's still trying to sound hawkish on China's currency manipulation. But his Treasury keeps on arguing that Obama absolutely shouldn't do anything to persuade China to change its policy – and, though it thinks China IS playing games, it really isn't sure that's such a bad thing for America. So the currency markets' price for 12 month Yuan options stayed practically unchanged from the previous day after they'd listened to him.

And on more general trade issues, instead of sounding hawkish, Obama's now shouting the case for avoiding trade disputes: he went out of his way to stress he did not want to escalate trade arguments with China as "to close ourselves off from that market would be a mistake"

The simple truth seems to be that Obama knows trade wars in general aren't in America's interest – but also that lots of Americans think they are, lots of Americans think they aren't and lots of Americans change their mind on the subject, depending on whether their job depends on selling to China or on selling things China makes more cheaply. So the odd skirmish might be totally in America's interest from time to time

The likelihood is that tensions will neither rise nor fall. It's a hugely complicated issue, and Obama is smart enough to know there's no one simple stance that assures growing US prosperity. Over the next few years, there'll be times he'll tread on Chinese toes – and the Chinese will scream – and times he'll go out of his way to make them happy – so his more simple-minded fellow citizens will scream. He'll be scrupulous in following WTO rules when he's got a squabble with them – but what he ends up doing during a dispute will depend entirely on the circumstances at the time.

The moral for the apparel industry? Take nothing for granted. The likelihood is there'll be no more restrictions on Chinese exports. But any real threat of them (like a petition for antidumping duties) has to be taken seriously. Assume China is the place to put most of your business would be our view. But make sure you've got an alternative source ready.

Never trust a stockbroker

2010-01-29T08:34:00.000Z

Here's a cautionary tale about how little stockbrokers know about the businesses they give advice to.

On January 27, US President Obama announced that he wanted to see progress on establishing free trade agreements with Colombia, Korea and Panama. The following morning, shares on the Bogota stock exchange of textile and garment maker Fabricato jumped 3%. The assumption by the dealers was clearly that Fabricato would benefit from the closer trade ties with the US that would result from an agreement finally being implemented.

We're unconvinced an agreement will be implemented. Opposition to the agreement by America's Democratic Party was fierce under the previous administration, with the then Senator Obama among the fiercest. Colombia, activists claim, sees more trade union leaders murdered every year than the rest of the world put together and the party wanted to see an immense change in Colombia's human rights record first. Trying to get an agreement Obama's own supporters will back is going to take immense energy and political capital – and there are a lot of other candidates for both of them right now.

Nonetheless, on January 28 the likelihood of such an agreement was a lot higher than it had been before Obama spoke, and Colombia's textile and garment exports to the US might be expected to benefit if a new agreement actually came to pass.

Not so, though, said one local broker: Rupert Stebbings, an analyst with local brokerage Interbolsa, said the Fabricato share price rise was not justified, since textiles already enjoy duty-free status under the Andean Trade Promotion and Drug Eradication Act (ATPDEA). Interbolsa has a "sell" recommendation on the stock, because Colombia's garment exports to neighbouring Venezuela are collapsing.

Which rather makes you wonder whether Stebbings knows anything at all about the industry he's issuing recommendations about. Yes, Colombia is part of the APTDEA agreement, and yes some textiles do get duty-free access to the US under it. Or rather they would if ATPDEA was worth the paper it's printed on.

For the past few years, ATPDEA has been renewed annually: most farcically in December this year when Obama finally signed the one year extension a week before it expired. Part of the political price he paid for that was a promise to come back to the US Congress by June with another review of how it's working – which most buyers will assume means the future of ATPDEA will be in doubt again from the middle of this year.

The garment and textile industry can't work on that basis. Practically everything bought and sold is manufactured against a specific order. And no-one's going to place an order for garments, or for the dyeing and finishing of the fabric those garments are going to be made from, if there's no way of knowing whether they'll be taxed at 0% or 27% when they arrive in the US. ATPDEA differs from a likely full Free Trade Agreement (FTA) in just one crucial detail: the FTA, if it happens, will be a long-term agreement, providing Colombia's garment industry with a secure duty framework buyers can get their heads round.

Colombia's quite well placed to exploit such a framework: US-owned Denimatrix is already routing to Colombia orders for jeans it can't afford to make in its Guatemala plant. But, in the present ATPDEA chaos, that's a programme that would be financially suicidal many months of the year.

Our industry lives and dies on small details like that. An analyst who doesn't understand something so fundamental really oughtn't to have any business pontificating. Except, of course, that that's exactly what they do all the time

Is India’s Alok the future for international retailing?

2010-01-21T14:52:00.001Z

Deloite's annual Global Powers of Retailing always provides insights into shop keeping. Sometimes they're worthwhile: sometimes little more than this week's conventional wisdom from the conference circuit.

One of its odder forecasts is that "Emerging market retailers are set to take on established players". The claim, from Deloitte's US-based director of consumer business Ira Kalish, is that emerging market retailers are rapidly becoming world-class players in their own right," and "The next step will be investments into developed markets"

It's hard to see any convincing examples of this, and Deloitte's don't do anything as helpful as give any evidence for this bizarre claim. The only example we can think of is Fabindia's investment in the UK's East, which is far too early to judge. But it's easy to find a number of emerging-market non-retailers moving into Western clothing and textile retail. With surprising results.

First: they're all – like Fabindia's East investment –Western textile or clothing retailers in trouble, like the acquisition by Techno Lifestyle's Rajive Ranjan of bankrupt German chain Wehmeyer. Indian soda ash manufacturer GHCL, for example, bought the UK's Roseby's home textile retail chain, and subsequently claimed to have been unaware of the company's awful financial position - even though its accounts were on public record. It closed the business soon after, amid much controversy – but seems to have been able to use some expertise gathered in the exercise in opening a potentially promising home textile retail business in India. Chinese clothing manufacturer Bosideng bought struggling UK menswear retailer Greenwoods in 2008, and is slowly converting many of its branches to Bosideng branded outlets – an interesting idea, but one about whose success there is no evidence yet.

The really interesting example, though, is the investment by India's Alok in Britain's QS Stores. Alok spent $10 mn on 10% of the relatively lacklustre, discount-oriented, retailer in 2006, claming at the time it would bring buying expertise to QS and provide a Western outlet for Alok's production. Four years – and, according to Alok, another $140 mn of Alok's money - later, Alok claims QS is about to show its first profit in a decade, and will be publicly launched this coming spring on Britain's AIM exchange. Alok might even bring the Store Twenty One fascia much of the chain is being converted to back to India.

So what's it done right? Well: it's worth being realistic about Alok's claims.

First thing: it hasn't brought much business to Alok's Indian factories. Just 5% of the group's sales now come from sister businesses. Second, though it's now claiming to be doing very well, just 18 months ago, the auditor was qualifying the accounts of the UK business. And third: it's all very well for Alok to announce proudly it's going to float the UK business. But a cynic would say it would say that: it's struggling to work down its debts at home – and still hasn't announced the source of new retail investment it said in early December it was going to reveal before January 1.

Alok needs cash (investing $150 mn in a loss making UK retailer whose turnover's never topped £100 mn might not have been the smartest of moves), thinks it might get some by floating QS, and so anything it says about QS right now isn't exactly going to be hyper-objective. But let's assume it really has turned QS round.

Alok hasn't brought any real retail expertise, because it didn't have any. What Alok's brought are two things that are far more useful:

Money for investment
Robust and ruthless commercial management.

It didn't bring any big fancy ideas. It sacked 80% of the QS head office staff, shifted most of its production to Asia from the European area, it says (though offhand I can't think of any UK clothing retail who was getting most of its clothes from Europe in 2006, so Alok might be exaggerating here) and speeded up distribution. It rationalised store staffing and closed a lot. And now it's refitted 50 of the remaining 211, rebranding them Store Twenty One (to get away, Alok says, from the "Quality Seconds" image the business had), and commissioning currently hot Dalziel and Pow to redesign the refitted stores.

Its locations are hardly at the cutting edge of fashion: Liverpool's Belle Vale shopping centre and Retford in Nottinghamshire were turned into Store Twenty Ones in November: Houghton le Spring, near Sunderland, is in solicitors' hands at present. For the 99% of our readers who don't live in Britain (and the 99.99999% of Londoners who know nothing about their country north of the Watford Gap) - these are about as far from Britain's metropolitan bright lights as it's possible to get without a passport. They're also not just a bit scruffy: they're very secondary locations

But the people living there wear clothes, and aren't necessarily happy with the choices they've currently got. So Alok's brought a bright and cheerful fashion business into some pretty gloomy parts of Britain many other retailers wouldn't touch. It's spent money doing so that no-one else would, and it's been aggressive in cutting costs. Whether they're overclaiming about their success or not, they've done something no-one else would – and something that's a million miles from the "let's create a highly advertised brand in our richest cities" conformity churned out, with a ton of incomprehensible management jargon, by many Indian retailers back home. Alok look to have intuited – possibly with some help from Dalziel – a solution to a real business opportunity.

And, if they've done it and if it really is making money, good luck. But what will it show?

First of course: never believe every single world of someone who needs cash, but also needs to reduce his debts.
Second, though: Alok's real contribution to QS was to invest in it when no-one else would. And all those other people might have been right: QS might be about to reveal a profit, but is that profit ever going to justify the $150 mn so far invested? That sounds like a criticism, but it isn't: the truth is that, at Wehmeyer, East, QS, Roseby's and Greenwoods, emerging-market investors are bringing limited retail experience, but enthusiastic availability of cash, to businesses Westerners won't touch.
Third: there's no evidence yet that a manufacturer buying a troubled Western retailer sells more goods. He might get useful experience, or profits, or ideas he can use at home. But no more business for the factory
Fourth: How did Alok survive killing 80% of head office jobs? No business is ever that badly run, surely? My guess is: Alok's not slashed jobs, but moved them to back offices in India. In the clothing business, it's not just sewing garments that can be relocated offshore: much of the central administration can be offshored just as easily.
And fifth and most crucially: success in retail isn't going to come from importing marketing concepts from India or China. No-one's really stumbled yet over a retail idea in a poor country than can work in the US or Germany. What Alok seems to have done is to bring tough, focused management and money to bear on the oldest and most important question in retail:

What do customers want from my kind of store, in the kind of locations I've got, that no-one else can offer as well as I do?

And they seem to have found a solution. One that looks to be right for secondary locations in downmarket parts of Britain. It's a solution that might work in Eastern Germany, or the small towns along the Ruhr in Germany's West, or Poland, or America's Rustbelt. Or it might not.

If Alok is a guide, it shows that emerging market businesses aren't going to take on western market leaders in the way that Tesco's trying to take on Wal-Mart in California, or that Uniqlo's going to take on apparel specialists in Europe.

All businesses are about three things: Management, Money and Markets.

Management and money are resources that can be moved from country to country – and emerging markets own an ever-growing proportion of the world's supply of both. Markets are all different: and good managers understand that. Rather than a flood of retail fascias that have worked in Mumbai or Beijing, what Western retail might see more of is emerging-market businesspeople interested in making their cash and skills work in what are still overwhelmingly the world's biggest markets. And they'll get the best returns if they start off by understanding the markets they're investing in

Haiti’s unspoken tragedies

2010-01-14T18:49:00.001Z

It's impossible to know with any certainty how much devastation the recent earthquake has caused in Haiti. But, just a day after the quake hit, two unspoken tragedies are revealing themselves.

The first lies in our industry's response. Clients of the country's 25 garment factories have first to reassure the market that the earthquake is not going to damage buyers' own commercial viability. Issuing statements about moving production to Asia or the Dominican Republic sounds harsh and unfeeling: but companies making these statements have no real alternative: US stock market rules require them to inform shareholders of important events that affect them – and if it's known you've got or use a factory in Haiti, you really have to tell the market what you're doing about the fact that goods can't move in or out.

The tragedy isn't that Hanesbrands and Gildan have announced they're moving production so quickly: it's what's going to happen to the workers.

Overseas garment is essentially about punctuality: even the most benign retail buyer needs garments to be ready to be loaded onto a specific boat, and achieving that requires water and power to be available, roads and bridges to be accessible, trucks not to be diverted from urgent humanitarian and repair jobs and port facilities to be operational. And that's not going to be the case for a while. None of the factories that are stopping production belong to big North American companies – and how's a factory that isn't producing anything going to afford to pay workers while the infrastructure's being brought back into operation? Something that could take years rather than weeks.

Just as North American buyers were developing confidence in the reliability of Haiti, as Bill Clinton announced that "political risk in Haiti is lower than it has ever been in my lifetime" and George Soros was talking about a $50 mn investment in new factories: a slice of existing factories are damaged and who knows how much damage has been done to "untouched" factories' ability to produce and deliver?

But the problem of even more potential unemployment in a country where only 30% of the workforce has a job at all is just half the tragedy.

The other half hits anyone who trawls the Web for news about Haiti's apparel or textile industries. Commentator after commentator dismissing the country's recent economic progress as a "sweatshop economy" and deriding the work of Clinton and Soros in bringing investors into the country. But that "sweatshop economy" makes up two-thirds of Haiti's exports and 10% of the country's GDP. And the commentators deriding what the garment industry has done for Haiti are just as scathing about investments in a tourist infrastructure, or cruise terminals – or anything else, it seems, anyone actually wants to invest in.

It's easy, sitting at a computer in a well-heated European or North American house or office, to wish Haitians were better off. But businesses like Hanesbrands and Gildan are actively working to make Haitians better off – or rather were, and will be again once the roads are working. Haitians' second tragedy is the number of foreign observers who are more interested in seeing Haitians ideologically pure than in seeing them prosperous and employed

How not to influence people. Unless you want the opposite effect

2010-01-14T13:41:00.001Z

The chairman of a US Senate committee on international trade has asked for Uganda's American duty-free access to be withdrawn if Uganda goes ahead with anti-homosexual legislation. His request probably establishes him as the legislator making this decade's single most likely proposal to have the opposite effect to the one intended – anywhere in the world. So much so, it's hard to believe the Senator concerned has any interest at all in the welfare of Ugandans.

Ron Wyden requested US diplomats on January 12 to tell Uganda the country's AGOA concessions would be revoked if it passed proposed anti-homosexuality legislation. He also asked them to attempt to get the EU to make similar threats.

But the AGOA programme is now ancient history for most Ugandans. A few years ago, there were a few factories set up to make clothes for the US. They immediately attracted unwelcome publicity: "AGOA girls" became a local term for Ugandan women who'd had high expectations of good jobs, but found insecure, ill-paid and exhausting work instead. AGOA-oriented factories also acquired a reputation as places where seedy foreign businessmen built ramshackle facilities on the back of unaccounted-for government subsidies. Hardly anything but clothes were ever made under he programme – and sales have fallen steadily, from about a million garments sold to the US in 2004 to 68,000 in the last three-month quarter for which we have records.

Threatening to remove Uganda's eligibility for AGOA worries most Ugandans about as much as not finding an umbrella in the middle of a drought. But when the world's superpower tells Ugandans to follow the superpower's code of ethics or else, that superpower is pretty well guaranteeing Ugandans will tell the superpower to take a running jump.

That's precisely what happened in Madagascar at the end of 2009. The US told the country it'd lose AGOA concessions – which matter in Madagascar, because selling clothes to the US is the country's biggest export industry – if Madagascar didn't reform its government. The government ignored the threat, and now uses it as a demonstration of how it's got the guts up to stand up to the US. The EU's been saying much the same thing to Sri Lanka about Sri Lankan duty-free access for the past year – and Sri Lanka's president manifestly boasts about how he won't allow the former colonial power to tell him what to do. And exporting apparel to the EU happens to be Sri Lanka's biggest industry.

In Uganda, though, making garments for export is an industry few want to be associated with. Making homosexuality illegal, though, is highly popular. Supporters of anti-homosexual legislation repeatedly say they think countries in the West are decadent for their stance on the subject – and many of their fellow citizens agree. If it really were to happen that the US government threatened to penalise Uganda because Uganda's parliament went along with a popular view in Uganda – well, that view would become a lot more popular very quickly.

Mr Wyden, by making his threats, has turned his laudable moral argument into crude bullying. Far worse, though – if he's interested in the welfare of Ugandan gays – he's turned his arguments into absurdly ineffectual bullying. Any Ugandan politician wanting cheap publicity can now claim that support for the anti-homosexual bill is showing Ugandan independence from a strutting, self-appointed, global policeman.

And he can do all that secure in the knowledge that if America does withdraw AGOA, hardly a single Ugandan will care.

Do these politicians turn their brains on before shouting? Or is this politician just interested in nice letters from some equally ill-informed constituents than in stopping persecution of a harried minority?

Either way: behind this exceptionally silly piece of grandstanding, lies a huge self-delusion among Western politicians about the effect they can have on the rest of the world. Something we'll be pursuing here over the next few days

Now deluding a new group. This decade’s new Shangri-La myth.

2010-01-08T19:15:00.001Z

Several garment-making countries – and apparently India in particular - are suffering from a very similar delusion to the one that gripped Western apparel retailers and brands a few years ago. We call it the Shangri La myth.

Many buyers at the beginning of this century were gripped by it: a belief that there was a new hotspot where clothes could be made even more cheaply than the places buyers were currently buying from. In the 1990s, the quirks of quotas and import duty made places such as Jamaica, Fiji and the Maldives worth manufacturing clothes in, because they offered reasonable costs, which Western regulations limited, or inflated the cost of, garment imports from the most efficient manufacturing locations.

The delusion was shattered when quotas against everywhere but China were abolished in 2005, and finally became completely discredited when all quotas against China finally came off at the beginning of 2009. Journalists still cling to it (it's still the most common question we get asked), and even Li & Fung reportedly believes it . But we believe that was just an ill thought-out reply to a silly question.

The reality is that garment exports from exotic places like Jamaica, the Maldives and Saipan practically collapsed after 2005, much-touted Next Big Thing locations like Uzbekistan or Namibia have gone nowhere, and the really good new suppliers that have been uncovered have all been efficient and innovative businesses in China, other major Asian countries and a few places on Europe's and North America's doorsteps. Some of these countries – like Sri Lanka or Morocco -might sound exotic to sloppy journalists: but apparel buyers know they're places with strong apparel industries, often including businesses strong enough to invest in better facilities to survive in the teeth of intensifying competition.

To serious clothing industry professionals, though, the Shangri La myth is long dead.

But now a variant is spreading among garment makers. And an exceptionally virulent version is breaking out among the governments who use their taxpayers' money to lecture businesses about things governments know nothing.

"We don't look beyond US and the EU" said Dayanidhi Maran, India's minister of textiles on January 7 while telling the Federation of Indian Chambers of Commerce how to do their job - about which Mr Maran has zero experience. He described India's garment and textile industry, for example, as "monolithic", in spite of its being one of the most fragmented industries anywhere, with at least 15,000 companies and hundreds of thousands of one-man businesses supplying them.

But not just Maran: a couple of weeks earlier, the Bangladesh government had a similar delusion: offering subsidies to exporters for selling garments to countries that weren't in Europe or North America.

The new, manufacturing-country, Shangri La myth goes like this:

"We depend almost totally on sales to the EU and US. Those markets are sluggish: and most people in the world live elsewhere. So we really ought to be selling clothes to the rest of the world"

But the myth is just as ill-founded as the old, buyers' Shangri La myth that there were infinite potential new sourcing hotspots. And, like the buyers' myth, the manufacturers' myth wraps a trivial truth in a ton of complete fallacies.

So what's the truth about the new Shangri La myth? Well, it's certainly true that the US and EU don't account for all the world's clothing sales. We estimate that in 2009. The US and EU accounted for 56% of the world's $940 bn clothing sales – with a further 3-4% in countries that are practically clones of the EU and US, like Canada, Australia and Switzerland. But the fallacies all lie in the assumption that marketing to the remaining 40% will solve struggling industries' problems. Because:

25% of the remaining market is Japan. The Japanese clothing market has been stagnant for some years now – but it's certainly about to shift a lot of its sourcing from China. But tapping into that is hard work – and work India manufacturers haven't been that successful at. Though they started the year off well, in the third quarter of 2009 they sold less than half the number of garments to Japan that Bangladesh did – less than a sixth of what Burma did and less than a tenth of Vietnam's sales. Doesn't that prove Maran's point, though? Well, we'll come back to that in a moment
35% of the remaining market is China. China's not short of garment manufacturing capacity. Unlike the EU and US, Chinese retailers aren't looking for places with lower wages than those at home to buy from. China does import a few clothes – but mostly premium, heavily branded, clothes from Europe.
Another 5-7% is Russia. Where clothing imports fell at least 40% in 2009, and where the President publicly boasted this year of arbitrarily closing markets selling foreign-made clothes to help Russian producers
About 5% consists of countries – like some in the Persian Gulf – with minimal local garment making capacity
And practically all the rest is in countries with extensive domestic garment facilities. Many – like Russia – happy to ban imports at the drop of a hat. None – unlike Europe or America – desperately looking to buy things from countries with lower wages. And most with pretty sluggish garment markets: outside China, Europe and the US, the clothing market fell about 5% in 2009

Now there's obviously some business Indian manufacturers can get from Japan – if they really concentrate. And there are certainly lots of niches, especially in what Indians call West Asia and Europeans call the Middle East, many Indian businesses can profitably serve.

But, Indian garment manufacturers are massively outperformed by those in smaller countries when trying to sell to Europe or Japan – where there is zero competition from domestic firms. So why on earth should they do so much better selling to countries that are stuffed with local companies desperately hungry for apparel orders?

Because Indian government ministers ought to be hoping their manufacturers' problem isn't over-concentration on Europe and the US. Their real problem is their truly awful performance in those two markets – so if that's what comes of giving those markets too much attention, what's going to happen when they switch their concentration elsewhere? India sells far less than Bangladesh: its sales to Europe and the US are extraordinarily skewed to a small number of apparel types, and even then mainly when they're made from cotton.

Maran's quite right to argue that Indian garment makers consistently squander management time asking their government for help – when that time would be far better spent understanding Western markets better and organising their businesses to serve them properly. But he's totally misguided if he thinks businesses that get outflanked by their competitors when selling to the UK will do any better selling to Brazil or South Africa.

Successful long-term strategies for garment-making countries will obviously vary. But kidding yourself they're crying out for your products in Argentina is a perfect strategy for going bust

Why are small, poor garment-making countries bullied by big, poor ones?

2010-01-06T12:51:00.001Z

The near-collapse of Botswana's garment industry is probably all the fault of South Africa. After quotas were taken off, Nepal looked as if it might retain part of its garment industry by meeting some niche needs of its neighbour, India. But India's arbitrary and unpredictable imposition of special duty onto Nepalese clothes has put paid to that.

And India's pretty used to imposing arbitrary and unpredictable taxes on its neighbours. It's just done the same thing to Bangladesh – whose apparel makers claim it's simply impossible to get the duty-free access (for a measly 8 million garments a year) promised Bangladesh under a treaty with India: the Indians keep finding new ways of throwing a tax or two onto the garments, they say.

The theory used to be: it was the big, bad, Western countries that did things to mess poor countries up. The theory was always a bit flawed in this industry, since a number of the world's poorest countries rely on selling to the West for most of their industrial jobs. And, though there are still emerging-market politicians who don't fully understand this, there just isn't a significant number of clothes-making jobs in the West any more.

For Western countries, trade rules don't keep jobs in the West: they simply influence which poor country will get the jobs - though passing trade laws might convince some easily duped voters politicians are trying to keep jobs. The likelihood that Sri Lanka might lose its duty-free access to the EU doesn't come from European attempts to keep jobs in Europe. If Sri Lanka does lose its duty-free privileges, the beneficiaries will be garment workers and textile businesses in China, India and Bangladesh. So, even with relatively high unemployment, there's surprisingly weak pressure on Western governments to make importing garments tougher.

That's just not true of poorer countries. The idea that letting millions of garments into your country is good for your country is pretty tough to sell to voters and party supporters when you've got millions of unemployed garment workers unable to afford the next meal. There's pressure on India's government to treat its neighbours in a bullying way that Germany or Australia are never under these days. And South African politicians will force the rules of the SCAU Customs Union it dominates to suit South Africa's interests – not those of its tiny fellow-members.

So for many poorer small countries, the problem is that all their opinion-formers and voters instinctively believe their problems lie in Western attitudes and policies. In fact, their real difficulties almost always lie with the big country next door: ask Brazil's neighbours how easy it is to sell textiles or garments to Brazilians, for example.

And I've not just made a random choice of these three regional dominators (because it's often not bullying that's the problem, so much as their tendency to create rules in their interest without thinking of those rules' effect on the neighbours). Most of the world's debates about trade relations between poor and rich countries take India, Brazil and South Africa as the three spokesmen for emerging nations. In fact, all three are very different from their smaller neighbours in many ways (including the fact that all three have neighbours whose economies depend far more on exporting clothes to the West).

Many of the policies these three claim are in the interest of poor countries – like abolishing all import duties on manufactured goods – are actually in the interest of the big boys, but positively harmful to smaller ones. And too often, a warped sense of solidarity leads pro-poor country lobbyists to argue for the big boys' position, sometimes dismissing smaller poor countries' concerns as if some smaller countries were somehow traitors to the cause. Try talking to office-holders of the International Textiles and Clothing Bureau about Cambodia, for example.

Ironically, the most effective advocates of the interests of smaller garment-manufacturing countries are their customers. Sri Lanka has had no assistance from India in trying to stop the EU from suspending its duty free eligibility – because India wants Sri Lanka to lose an advantage Sri Lankan businesses have over their Indian competitors: it's the retailers importing from Sri Lanka who've tried lobbying the EU.

So Wal-Mart is a more reliable arguer for Bangladesh's interests than India?

To most Westerners, the idea sounds absurd. To most Bangladeshi politicians or businesspeople, it's just a statement of the blindingly obvious

Now it’s official: “Growing protectionism” is a myth

2010-01-04T15:07:00.000Z

Today, Australia announces new, lower, import duties on clothes and textiles. Last week, the US finally got round to extending its duty concessions on imports from Colombia and Ecuador for another year.

So where's all this protectionism the West's supposed to be carrying out against he rest of the world, then? Indeed, given this week's massive growth in free trade between China and the larger East Asian countries, where's any of this protectionism?

We've been arguing since the recession began that it's all a complete myth as far this industry is concerned. But now the World Trade Organisation has joined us.

A November WTO report found "that trade measures announced since the end of October 2008 had covered at most 1% of world trade. The overall fall in demand and a shortage of credit were bigger factors in curtailing trade" it said."

"Measures were concentrated in the automobile and iron and steel sectors, which in developed countries have been facing problems anyway. Outside such sectors the impact was marginal" it added.

Of course, there's a mini-industry (paid for by our taxes) trying to show the opposite: a study in mid-December for the World Bank and Britain's Department for International Department claims to have shown that "protectionist pressures are unrelenting with dozens of new measures announced in the past three months and more in the pipeline". But there are hundreds of countries. If each of them had made one minor legal change, the claim would be true. But that doesn't mean these new rules make much difference. And "more measures in the pipeline" doesn't mean more about to be introduced. In Europe and America, it means a serious review of whether new measures are justified – reviews which rule against new measures as often as they rule for them.

The question isn't how many new rules there have been: it's what effect they've had. In the case of this industry 2009 saw substantial share gains made by the country against which most protectionist rules are aimed (China): whatever rules might have been introduced, they did practically nothing to restrain China's growth.

There have actually been two great moves since the recession began – and they've not resulted in a flurry of new rules stopping trade.

First: there's been much more intensive argument for and against any new trade rules. In the US, in particular, this has led to last-minute decisions (as with the ATPDEA decisions last week), and a general growth in scepticism about against almost any new concession. Proposals for extending AGOA, for offering duty-free concessions to poor countries like Bangladesh and Cambodia and for finding complicated ways of helping the Philippines are getting almost nowhere. Legislators have other things on their minds, it's not at all obvious trade concessions like CAFTA-DR have achieved very much, and opponents of more concessions are probably getting a more sympathetic hearing than a few years ago.
Second, both in the EU and US, there's been a move to expect countries that get trade concessions to honour the commitments they gave when they got the concessions. In both Madagascar and Sri Lanka, the EU and US are showing themselves prepared to take the concession away.

Growing scepticism and insistence on scrutiny aren't the same thing as protectionism: but they do mean countries that feel they could do with easier access to rich markets need to be very realistic about their chances of achieving that access.

As we'll show in another blog in a day or two, emerging countries have been showing surprising naïveté (or optimism, if you like) in what they expect. Not just from laws, but from the readiness of Western markets to see things from their point of view.

Realism about markets will be the first essential for success in the next few years. As we'll review soon

The Twelve (Probable) Laws of Apparel Sourcing 12: In the post-post-quota world, China’s currently got the edge

2009-12-21T14:42:00.001Z

During 2009, garment sourcing moved from the post-quota world to the post-post-quota world. And many countries that seemed to do well when quotas first came off might be far less able to survive in tomorrow's post-post-quota world

Consider the data.

At the beginning of 2009, US quotas against China, and restrictions on Vietnam, and the EU's requirements for Chinese export licences, were withdrawn. And, in the first nine months of 2009, garment exporters outside China and Vietnam exported 12.5% fewer clothes to Western countries than in the same period of 2008. Not because of the recession: 60% of the average garment exporter's sales loss was due to growing Chinese and Vietnamese competition, rather than falling demand.

It's not just a fall in the number of clothes being sold. Prices have fallen throughout 2009: in October 2009, US apparel importers bought 8.8% fewer clothes than in 2008, but paid 15% less. Now at year-end, many manufacturers see costs rising as cotton prices surge. Fluctuating exchange rates don't help: in Central America, where currencies have fallen against the US dollar, raw material prices rose especially fast. In countries like India, where currencies have been rising against the dollar lately, export income in local currencies has fallen further.

Garment makers throughout the world have been hit by tougher competition from China/Vietnam at the same time as fluctuating prices and exchange rates. Nothing new, and completely unrelated to the recession: it's been that way in the garment industry all this decade.

But factories in many countries were shielded from full competition in the post-quota world after 2005 by continued restrictions against China and Vietnam. Those restrictions benefited developing countries especially – but now they're off, many non-Chinese clothes factories have simply not been able to compete in the ultra-competitive post-post-quota world we've now moved into.

Compare that problem with the really rather small decline in the number of clothes retailers are selling in rich countries. Western countries imported just 4.2% fewer clothes in Jan-Sep 2009 than in 2008. Far too many businesses have claimed that recession is what's underlying garment makers' current problems: in fact, though, the post-post-quota world competitive environment has hurt factories in some countries' garment industry a great deal worse than others'. From January-September 2009, the value of Botswana's apparel sales from Botswana to the US fell 27% by value, from Haiti they rose 25%.

In The World of Apparel Sourcing: 2010- 2012, we have looked at which countries have responded best to the new post-post-quota world. And five distinct groups emerge:

China and Vietnam
A handful of countries who've also gained sales in 2009, like Albania. Croatia, Moldova and Haiti. These countries' garment industries seem to share one characteristic: they're located near their main customers, and offer low-cost production while their neighbours (like Bulgaria and Honduras) have been exceptionally hard hit by China's growing competitiveness.
Countries that've held or slightly gained share, like Bangladesh, India, Pakistan and Nicaragua.
Countries with significant share loss, like Cambodia, Honduras and El Salvador. These countries' sales losses are far greater than what can be attributed to the recession. They've got real competitive problems – and their industries need to deal with these problems, rather than just wait for their customers' sales to pick up.
Countries whose loss is so substantial it has to be seriously doubted whether there's a future for garment making. In the old "tiger" economies, like Taiwan and Hong King, this in well understood, and businesses have strategies for dealing with it. It's less clear there's any such strategy among businesses or politicians in the Dominican Republic, Costa Rica, Botswana or Madagascar.

Laws 10 said it's extremely unlikely the US or EU will introduce any significant new measures in the next few years to shackle Chinese or Vietnamese garment exports again.

Successful garment exporters will be those that adjust to the reality of the post-post-quota world. Those hanging around waiting for a government to help them won't be hanging round anywhere for long.

We can't predict with any real certainty who will do well and who will do badly in the post-post-quota world. All we can say is that China did well when the playing field was tilted against it, and it will likely do a great deal better now the field's levelling. The World of Apparel Sourcing: 2010- 2012 calculates where the greatest dame is likely to be felt as firms used to a sloping pitch suddenly have to cope with one as flat as a pancake

The Twelve (Probable) Laws of Apparel Sourcing 11: Entire countries’ apparel industries are currently under threat

2009-12-21T13:17:00.001Z

Clothing manufacturing in surprisingly many countries is threatened by proposed changes in duty-free arrangements, or by political instability. And China's growing strength is putting growing pressure on the viability of many others'.

A large group of countries remain competitive because they enjoy preferential duty concession in rich countries that their rivals don't. But this competitive advantage is under heat from four directions:

Breaching concession terms. Some countries are in danger of losing their concessions because they have breached the terms of the concessions. Madagascar's duty-free access to the US and Sri Lanka's to the EU both depend on standards of governance with the US and EU say have been breached – and neither Madagascar nor Sri Lanka are showing any signs as these Laws are being written that they're doing anything to correct the problem – except claim it's unfair they're being expected to adhere to rules they accepted when they applied for the concessions.

Similar claims might be made about the eligibility of Kenya and Haiti for their duty-free concessions to the US. But the US has been very clear it's reviewing Madagascar's eligibility and the EU has been equally clear about its review of Sri Lanka. No similar announcements have been made about Kenya or Haiti, so the threat to these countries is, we believe, remote
Self-damage, or damage by a local minority Honduras' share of exports to the US has fallen far more quickly during 2009 than Nicaragua's – largely because of political uncertainty following the forcible removal of its President in mid-year and its politicians' inability to solve the resulting chaos. Botswana's exports to the US collapsed during 2009 because the Customs Union to which Botswana belongs changed, at the insistence of its dominant member South Africa, its rules about rebating import duty on exports – meaning fabric imported from Asia by Botswana garment makers made clothing they produce uncompetitive on the world market. South Africa's dilatory indecision has almost certainly destroyed Botswana's garment industry fore a long time, since its biggest garment group has now closed as a result of the mid-year rule change. Honduras might still stop the chaos.

Oddly, though, local businesses are rarely accurate guides to this kind of self-harm. Pakistani businesses spent all of 2009 publicly screaming about the imminent collapse of their industry because of – well, practically everything they can imagine. Yet it actually exported more garments to the EU and US in the third quarter of 2009 than in the previous year. A good example of the First Corollary to the Twelve Laws: never believe a local businessman's forecasts about their economy. If they were good forecasters, they'd be earning their living as commentators or fortune tellers: a much, much, safer and less stressful way of surviving than having to put up with the daily risks and chaos of running a garment factory
Expiry of trade agreements. The most significant threat is to the future of the AGOA duty-free concession to Sub-Saharan Africa. The whole programme is scheduled to expire in 2015: the special concession allowing most AGOA countries to use fabric from anywhere (usually called 'third party fabric provision') and still get duty-free access expires on September 30, 2012. Till recently, many people thought both would be renewed: but sentiment in the US Congress about more duty concessions is turning unfavourable, and there's a growing view that – even if such deals ought to be extended – the US is offering just too many different deals, and the whole system ought to be reviewed. "Ought to be reviewed" almost inevitably means a great deal of time is likely to elapse before any firm decisions are taken. But September 2012 is very, very close, given businesses' lead times to install new facilities or hire and train new staff. Unless there's real evidence very soon of serious US intentions to extend the third-party fabric provision, there's a genuine risk of a downward spiral of under-training, under-recruiting and under-investment, leading to factories deteriorating before the September 2012 deadline.

A similar problem hangs over a number of other US concessions, such as the ATRDEA which benefits Colombia. It is NOT, however a problem for America's individual free-trade agreements with countries like Israel and Mexico, for the QIZ programme from which Jordan and Egypt benefit, or for the CAFTA-DR programme in Central America
Preference Erosion. In the medium term, though, the biggest threat of all to many countries lies in the Doha Development Round, the series of trade talks sponsored by the World Trade Organisation (WTO) that both the WTO and many of its members believe will be completed by the end of 2010.
It is a long-standing agreement of the world's trading nations that import duties will, eventually, be removed – and that the Doha Round of talks will conclude with a timetable for removing them. Such an agreement inevitably means taking away the duty concession countries like Haiti enjoy in accessing the US and that Bangladesh enjoys in accessing the EU.
The damage to many poorer countries' garment trade could be immense – as a November report from the United Nations about Kenya's garment industry conceded. Countries most at risk from the agreement include all of the EU's immediate neighbours around the Mediterranean, Mexico, the Central American countries who have signed the DR-CAFTA agreement, all of Africa, Bangladesh, Laos and Cambodia. Countries with most to gain are China, Vietnam, India and Pakistan.
The timescale, and details, for the agreement are a long way from being determined. Trade negotiators insist a way will be found to limit the damage to poor countries as a result of what is known in the jargon as "preference erosion". But that device looks to be some kind of subsidy to countries worst affected: such subsidies will still mean that Morocco and Nicaragua will lose the competitive advantage in garment making they currently enjoy over Vietnam and China – and that, once there is a timetable for preference erosion, garment industries in affected countries will begin to cut investment, training, recruitment and long-term market development. It is worth noting that the most powerful developing countries – like China and India – are those whose garment industries will benefit from preference erosion
In our view, preference erosion, if it is announced, will have almost as destructive an effect on many countries' garment industries after 2011 as quota abolition had between 2005 and 2009. For long-term planning, preference erosion is certainly the single most important issue garment sourcing professionals need to keep under review – and the most vulnerable countries to preference erosion are the extremely poor countries, like Bangladesh, Cambodia, Haiti and Kenya, for whom exporting garments is practically the only manufacturing industry. For such countries, preference erosion is tantamount to de-industrialisation. Its effect is potentially catastrophic – and the risk scarcely understood.
Together with the threat from China's growing competitive strength (reviewed in Law 12) to a number of garment exporters, the post-post-quota age might seriously damage many of the world's garment manufacturing industries

The Twelve (Probable) Laws of Apparel Sourcing 10: Protectionist barriers are falling, and few are likely to be re-erected

2009-12-20T21:07:00.001Z

The world trade in garments is largely about rich countries importing from poorer ones. And – quite contrary to widely believed myths - those rich countries have been dropping their barriers against apparel imports consistently for the past five years. How likely is that trend to reverse?

At the end of2008 and 2009 alone, for example, the EU stopped requiring clothes imported from China to have export licences from the Chinese government. The US dropped quotas against Chinese apparel and on January 20, 2009 withdrew the ability of the US government to instigate proceedings for imposing anti-dumping duties on Vietnamese clothes without a petition from businesses hurt by Vietnamese imports – an apparently obscure legal change which had the effect of allowing Vietnamese garment exporters to reduce their prices without the risk of having substantial import duties imposed on them to make them uncompetitive. Both the EU and US made a series of adjustments in 2008 and early 2009 to make access easier for garment exporters from some favoured nations as well: the US made duty-free access easier for garments from Haiti and Nicaragua, for example – as the EU did for garments from Mauritius. Meanwhile, Japan extended duty-free access to a number of Asian countries, as it announced its intention to move garment production from China to South East Asia and the Indian subcontinent

Nonetheless, it has become a mantra among many that the world is becoming more protectionist. There is practically no evidence for this view in the way the EU, US and Japan have handled their policy on garment and textile imports over the past year – but many still repeat the claim

And, in spite of such scant evidence, the fact that Chinese-made apparel has made such substantial inroads into the US and EU during 2009 means many people believe it is close to certain one or both will impose some limitation on China over the next few years.

At Clothesource, we disagree. For four reasons:

The legal small print. The most likely sanction the EU or US can impose is anti-dumping or countervailing duties. These need a business or a group of workers that has been, or is likely to be, hurt by Chinese imports of the goods they are making to file a case – a process that takes time and costs money. This has so far deterred US and EU trade associations from filing cases: fabric and yarn mills are being hit because Chinese competition stops them from selling fabric and yarn to factories in neighbouring countries – but that kind of damage seems not to be covered in the WTO rules about how such disputes should be handled
Most Europeans and Americans benefit from cheaper Chinese imports. Everyone buys clothes, or has them bought for them. More people work in clothing shops than in garment factories or textile mills. The political clout of shopworkers and consumers might not always be as great as that of textile mills – but governments are subject to lobbying from both sides. And, as the EU debate about extending duties on Chinese shoes demonstrates, the arguments between pro and anti punitive duty advocates are reasonably well-match. There is no overwhelming lobby in Europe or the US for dearer clothes
The US and EU depend on China as a customer. And most government policy analysts believe that, long term, it is more important to develop jobs making Boeings and Airbuses than to preserve jobs in textile mills. Not all politicians agree - but most EU and US industrialists believe better relations with China are in their interest
Anti-Chinese trade barriers have done little to help endangered US or European textile and garment jobs. Re-imposed quotas in 2005 simply sent sales to India and Bangladesh. Not one European or American garment making or textile job lost at the beginning of 2005 returned.
Protectionists are lobbying for many different things, such as forced Chinese currency revaluation, anti-Chinese import duties, laws imposing certain standards on good imports. There are good arguments why none of these are in the national interests of the EU or US – and textile lobbyists simply lack the resources to make the arguments for all these convincingly.

None of these reasons guarantees no anti-China action, and all European and US importers should assume the possibility of protectionist import duty. But our arguments make it probable there will be no such legislation.

Nonetheless, anti-Chinese anger persists in many parts of the EU and US textile and apparel industries – and, with unemployment rising in many countries, this is spilling over into more widespread worries about imports.

We believe this anger is likely to show itself in attitudes to further trade concessions – and probably mostly in concessions made to countries that aren't China: For example

As this Comment is being written (December 20), the US House of Representatives had extended on December 15 duty concessions for Colombia and Ecuador from December 31, 2009 to December 31, 2010 – but the Bill to do so had still not been voted through the Senate, leaving businesses unsure what rules would apply to clothes exported from Colombia in 10 days' time
Parts of America's AGOA concession to African countries expire in 2012 and 2015 – and there is no hard evidence of willingness to extend
One Bill to offer duty-free access for clothing to Cambodia and Bangladesh looked doomed, and another was being attacked by US textile interests

It looks unlikely that the EU or US will do anything to upset China, or inhibit its ability to export clothing to the US or Europe. But we suggest it is also unlikely either country will show much enthusiasm for reducing barriers against countries with less political clout than China

The Twelve (Probable) Laws of Apparel Sourcing Apparel 9: An economist’s “recovery” doesn’t mean demand increases

2009-12-20T20:04:00.001Z

Though economists keep telling us there's a recovery going on, few retailers would agree. And, if they're honest, few emerging-market garment makers would either.

Retail demand for clothes hasn't fallen in all rich countries: in the UK, for example, official data keeps on showing real volume increases on last year in clothing sales, as retailers slash prices (prices have fluctuated during the past year between 7% and 10% below those 12 months earlier). But the level of imports has fallen throughout Europe and North America, as retailers slash inventories. To many garment factories, the rate of decline is worsened by the killing combination of falling prices, and the falling value of the dollar.

But it's all going to end soon, surely? We doubt it

Whether it's clothes for consumers or corporatewear for workers, market demand comes from people in work with the confidence to spend. Quite different from economists finding numbers to show the economy's growing. In much of the West, unemployment is rising still, there's a real possibility it might grow faster, earnings are scarcely rising at all – and in Spain, the UK and US, consumers are trying to reduce their debts.

So in most Western countries, there's a serious possibility apparent economic growth, when it comes again, will take some time to translate into consumers wanting to spend more money on clothes.

For some time, as far as most garment makers and sells are concerned, "recovery" is likely to mean at best things stopping getting worse.

The Twelve (Probable) Laws of Apparel Sourcing 8: “Ethical” sourcing has to be properly understood

2009-12-19T13:14:00.001Z

Everyone wants ethically-produced clothes. But few customers are prepared to pay for them.

In fact, there might not be that many customers who are even particularly interested. In the US, for example, Gap ran into intense criticism from activists in autumn 2007 after child labour was found to have been used in one Indian Gap supplier. But, for all the noise from media and campaigners, there is no evidence at all of any effect on the company's sales. In the UK, Primark regularly gets attacked by activist groups on the basis of unattributed allegations about conditions in unnamed Bangladesh factories. Yet its sales also seem unaffected.

This apparent consumer apathy can be misinterpreted by insensitive businesses, though America's Russell Athletic, a division of Berkshire Hathaway-owned Fruit of the Loom, ran into serious commercial trouble earlier in 2009 after closing a unionised Honduran factory. Russell is heavily focused on selling into America's collegiate market – and it was even claimed that college-branded garments it was selling had been transferred from the unionised factory to non-unionised assembly plants. Russell ran into a major boycott across a considerable proportion of its business as a result – but the circumstances of the boycott were widely different from what normally happens when an apparel retailer or brand finds itself art the centre of an ethical sourcing problem

Except in such unusual circumstances, though, there are two good commercial reasons for ethical sourcing:

When it's clear that a significant proportion of a brand or retailer's workforce are simply happier at selling clothes whose production methods they feel comfortable with. Today's ethical sourcing movement in major business like Gap, Nike, M&S and H&M started when workers and their families began indicating their unhappiness at causing suffering or seeing unpleasant stories about their business in the media.
When the cost of managing activist pressure and bad publicity after things go wrong becomes disproportionate. The furore in the early 1990s after sweatshop clothing was found in Wal-Mart under a brand endorsed by a US actress called Kathy Lee Gifford damaged both Wal-Mart and the actress: the conventional wisdom among buyers ever since is that businesses simply want to avoid such sandals in the future, and will invest considerably in avoiding them.

But avoiding scandals is one thing: expecting commercial rewards is another.

During 2009, the UK's Co-Op and Marks & Spencer, both retailers with records of considerable investments in ethical trading (not just sourcing, but across the whole of their operations), discussed the issue in public. Both agreed that almost any ethics programme – about working conditions, ecological sustainability or animal rights – motivated at best 5-10% of their customers. Both agreed that practically no customer – even in that 5-10% - would be prepared to pay extra for that ethical reassurance. And other retailers since then have put their estimates of committed customers even lower.

The lesson of all this, we believe, is that businesses need to be very clear about what they're aiming for with ethical programmes. Not all issues motivate people in a predictable way: the furore in the US and UK when Gap was revealed to have accidentally bought clothes made partially by child labour in one factory in 2007 was hundreds of times greater than the reaction to the Vietnamese government's 2009 announcement that child labour is practically endemic in Saigon garment factories. Yet it's now practically certain that every US retailer will be selling clothes that have involved child labour in Vietnam.

Something similar might happen with the sustainability argument: retail buyers know that the impact on global warming of shipping garments round the world by sea is trivial: study after study during 2009 has shown that repeated washing at excessive temperatures, use of too many colours in screen printing or poorly devised domestic transport both in the producing and in the consuming countries all use up over ten times as much energy over most garments' lives than a 10,000 mile journey by sea-borne container.

But activists may not: and it's perfectly possible businesses will see ill-informed pressure to reduce what some call clothes miles. And businesses don't exist to change the world, or to get into ideological battles with activists.

The crucial point about the ethics argument is understanding what customers, staff and the wider world want from a clothes brand. None will reward a business that overperforms their expectations: but even a small minority can destroy some businesses can get ruined if they underperform what even a small minority thinks it's got the right to demand.

The Twelve (Probable) Laws of Apparel Sourcing 7: Prices seem to be forever falling.

2009-12-18T19:56:00.001Z

Pricing is the central issue in sourcing. And it's often misunderstood.

Wholesale clothing prices have been coming down since Western manufacturers started moving their sourcing offshore.

But, as the forthcoming edition of Clothesource PriceTrak 2010 shows, prices took another spiral down during 2009. Or rather: prices from China did – and prices from Vietnam did for American customers. Elsewhere, some prices went up, some prices went down – but most countries saw their competitiveness against China and Vietnam deteriorate.

What, above all, happened in 2009 was that the era of quotas finally disappeared. Till the end of 2008, the Chinese government kept its manufacturers from discounting too heavily because it was worried the US wouldn't remove quotas or that the EYU would keep the system of export licensing going. The Vietnamese government actively intervened till Jan 20, 2009, to ensure garment prices to the US didn't fall too fast for fear that, if they did, the US would be able to "self-refer": the industry jargon for the country's government being able to start proceedings leading up to imposing penal duties on Vietnamese garments, without waiting for an offended US manufacturers prepared to fund such a case itself.

None of that now applies. Subject to the risks of protectionism in the West that we review in Law 10, neither the Chinese nor Vietnamese governments need to intervene any more to keep their factories' prices high. And throughout 2009, the reason non-Chinese factories suffered more from Chinese competition than from the recession was that few countries' garment makers could afford to compete with newly-liberated Chinese and Vietnamese businesses

The question for the future, though, is whether this will go on.

We doubt there'll be any further downward ratcheting. But it's equally unlikely any other country will start a new price war.