The Flanarant: The perils of social risk on garment supply
Instead of searching for new sourcing hot-spots, Mike Flanagan is more concerned with new risks to production in previously stable garment-making environments. Labour disruptions, inflation, political unrest, mass illness, safety infractions are among the new raft of problems he terms the perils of social risk.
Most of Clothesource's energy these days is spent working with clients who realise that a sourcing country they'd once seen as "hot" is throwing up all kinds of new problems. We're more concerned with predicting the next disruption that's going to flare up than going on a wild goose chase to find a new, problem-free nirvana.
But old beliefs die hard. One of them right now is that moving mass garment production home is the way of the future.
A new just-style white paper - 'Is there a future for garment near-shoring?' - argues that most labour intensive manufacturing will remain in low-wage countries, whether in Asia or the poorer neighbours of the EU and US, for the foreseeable future. The white paper has been produced to accompany a new just-style webinar on 'Near-sourcing: a new opportunity for apparel firms?' which takes place on 25 October, and will be available to download after the event.
Five forces released between the late 1980s and 2005 made it almost inevitable that low-value manufacturing would migrate from the rich West to lower income countries.
It's very unlikely any of these five genies can be put back into their bottles. But in the exuberance following their escape, few noticed that another one lay corked up.
Over the past year or two, that genie has come out as well. It won't reverse the domination of garment-making by low-income countries. But it's causing mayhem when selecting which low-income countries to source from - and sellers need to be just as aware of it as buyers.
40 years ago, garment-making was heavily concentrated in the rich West. In the UK for example, 800,000 people worked in companies making garments and textiles: today such companies employ just 91,000 - most in design, management and logistics.
Garment making stayed in rich-countries at the time because:
- Most of the world's poor lived in countries disrupted by Cold War sponsored guerrilla wars, sponsored by Cold War antagonists, or run by governments with limited interest in economic growth;
- International communication systems were slow, expensive and cumbersome. Few today can believe how difficult it was in 1980 to get a simple sketch from London to Paris;
- The West imposed a complicated network of tariffs and quotas to block low wage clothing imports, and to inflate the cost of any slipping through;
- Western retailers and brands sold most of their clothes in their home markets;
- So most Western retailers and brands mainly used factories in their home countries - often factories they owned.
Those five restraints have been blown away over the past 20 years. And though they may be tweaked or resurface from time to time, it is very difficult to see all five coming back.
But the one big genie that may yet throw a spanner in the works has recently shown itself in a number of different ways:
- In Pakistan, we still don't know the cause of a garment factory fire last month that spread throughout the building with the death of 300 people. Credible stories have emerged of fire services running out of water, electrical wiring not being tested for over 10 years, and safety certificates being handed out irresponsibly. At the very least, many buyers now doubt Pakistan is a place where workers' safety can be assured. And that's on top of worries about the reliability of the country's power supply.
- In Bangladesh, a Marxist has now publicly boasted he and his associates have been deliberately whipping minor grievances in garment factories into full scale riots, involving tens of thousands of workers with widespread deaths and injuries among protesters and police.
- In India, industrial relations in garment factories have been relatively calm for some time - even though some lobbyists have claimed that up to a million jobs have been lost over the past couple of years as the country's exports have shrunk in real terms. In September, though, under the tag of "Contractualisation", one explanation emerged together with a new threat to the immediate future.
A few years ago, India's factory owners and customers complained about the country's "inflexible" labour laws. It's a complaint you never hear any more - because a growing number of workers have what's known as "contractualised" terms, in which they lose most of the job protection the law offers to full-time workers.
Many people, of course, would argue that "contractualised" jobs are ones that would never have been created at all under the rigid rules that apply to full-time workers in India. But after violent, almost Bangladesh-style, disturbances in a car factory during July provoked by disputes over contractualisation, the country's trade unions have become more and more heated about the problem.
In some areas, such as around Delhi, up to 90% of jobs are now claimed to be on contractualised terms - especially in the garment, textile and car making industries. Pressure from unions is growing for major agitation over the issue in the coming months. Contractualisation is becoming a growing source of dissent in Cambodia as well.
- In the US, the Dominican Republic, Jordan, Bahrain and Honduras are undergoing investigations by America's Department of Labor (DOL) for alleged breaches on the labour rights clauses in their free trade agreements. The likelihood is that the US AFL-CIO trade union confederation will soon call for a similar investigation of Colombia; while the US and Guatemala seem to have differing opinions about labour rights violations widely alleged to be going on in Guatemala.
- Many US and European buyers are worried that even when America's import ban is lifted from Burmese goods, and the EU adds Burma to the list of countries getting duty-free access, European and US retailers will still face pressure from activist groups against buying garments from Burma, given allegations about Burma's Muslim minority suffering officially-sanctioned ethnic cleansing.
These are all problems that would once have been seen as belonging to the "ethical compliance" department. But they're all turning into problems that threaten serious disruption to continuous supply.
The 'Sixth Genie' of new risk to continuous supply isn't just concerned with ethical issues:
- When Chinese rioters attacked Japanese-owned stores in 2005, Japan's garment makers decided to reduce their dependence on Chinese factories, which at the time accounted for 93% of clothes on sale in Japan. Though they announced a plan to reduce this to 50-60% of Japan's apparel imports, seven years later Chinese factories still account for 86% of Japanese clothes.
- This September though, within a week or so of anti-Japan riots in China, trade diplomats in Indonesia found themselves swamped with questions from Japanese garment makers about how quickly they could move production there from China.
- The EU wants to remove import duty discounts from a clutch of developing countries like Brazil from 1 January 2014 - but won't announce which until 2013. The US, meanwhile, is reviewing the trade concessions for countries in the Americas it doesn't have a free trade agreement with. And the countries whose anti-trade measures are worrying European and US trade diplomas right now are Brazil and Argentina. In many respects, China's looking almost a model of meticulous respect for international rules.
- In Egypt, the chief executive of garment exporter Arafa Holding claims wildcat strikes are ruining Egypt's reputation for timely delivery, while one major politician believes the recent wave of strikes has hit between 5% and 7% of the country's production. Islamist groups, though, are now campaigning against the requirement for Israeli content in Egypt's QIZ programme (which gives qualifying garments duty-fee access to the US) - apparently oblivious to the fact that US Congress has zero interest in giving Egyptian goods duty-free entry without some benefit to Israel.
In my view the single most important fact about apparel sourcing this decade is that there are two or three dozen low-income countries, other than China, where most buyers can find adequate and competitive garment production.
The continuing competition between those countries is why we're sceptical about the current fad that volume production will return to retailers' home countries.
But in all of them, including China, the Sixth Genie is stirring.
The move of large-volume Western production to poor countries during the 1990s meant massive income growth for the newly employed workforces. Now, in different ways in every country, we're seeing new risks of disruption to the stable environments importers found two decades ago:
- Many poor-country urban workforces are now finding it impossible to maintain their living standards as global food prices inflate and the drift to big cities in developing countries inflates rents. Urban dissent - as we've seen in Egypt and China - might not just be about wages: resentment against a neighbouring country or national minority can disrupt production just as much as resentment about falling living standards.
- Employers deal with worker dissent in different ways, some of which risk losing their country's trade concessions from major importers, or upsetting Western consumers.
- Some exporting country governments want to force minimum wage rises to avoid more versions of the Arab Spring mini-revolutions.
- America's Department of Labor keeps finding more countries where there is a real risk of children being involved in making garments or their raw materials.
- Trade concessions can be removed as easily as they can be offered.
- Economic growth in many garment exporting countries has outstripped their ability to provide the basics of commerce, such as reliable power, reasonable laws and the ability or will to enforce them, safe and healthy working conditions, and adequate transport from factories to ports.
The risks faced by buyers differ widely in each garment producing country, and are changing rapidly.
Between 1990 and 2010, apparel exports from developing countries to the West grew six-fold (from 7bn garments to 50bn), according to the forthcoming Clothesource Handbook of Apparel Sourcing 2013.
Since 2010, they've been at best flat, while producer margins have been severely squeezed, meaning most (though by no means all) garment makers are looking at falling profits
And with that fall, there's been a rise in the number and frequency of times the smooth flow of garments from developing world factories has been threatened by labour disruptions, inflation, political unrest, mass illness, safety infractions and a whole new raft of problems.
Most of them are side-products of the tensions between providing workers with safe, sustainable, well-remunerated work and ensuring the employer stays in business to give them those jobs. Not to mention how these tensions can get inflamed by perceived slights.
And in many cases, the Western countries the companies export to are looking at trimming their access privileges.
The perils of social risk, as we call it, are hitting garment buyers and sellers everywhere - and over the next few months Clothesource will be producing a growing range of new surveys on the likely impact of that risk.
The first, the 'Clothesource Guide to Apparel Trade Regulations,' is now available from just-style. The Guide (a snip at GBP500) is a quarterly report: each edition gives the buyer a year of quarterly updates, covering changes in the import rules announced by the leading trading nations (developing as well as developed) and updating our estimates of likely rule changes over the following three years.
It'll be followed by several more - all helping buyers and sellers avoid the constant flare-ups of risk that Sixth Genie is dragging round the world.
An interactive databank with intelligence on the major apparel sourcing countries
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