The Flanarant: A reality check about "uncompetitive China"
Towards the end of 2011, apparel imports into the US and EU suddenly collapsed. But this had less to do with falling consumer demand and more to do with Asian producers raising their prices, says Mike Flanagan. But many manufacturers still mistakenly believe there is some substantial alternative to Europe and North America as a source of orders.
There have been two basic sets of belief among Asian garment producers throughout the first quarter of 2012. Both are so universally held they must be completely wrong.
And they are.
What's more, they combine into an ingenious excuse for poor management - and a rationalisation for demanding more tax subsidies, or exemption from regulation, from their governments.
The universal argument goes:
- With increasing Chinese uncompetitiveness, the textile and garment industry in my country is bound to have a shining short-term future.
- Oddly though, our garment exports are flat. Actually they're flat in dollar terms. We don't like to admit this, but once you allow for inflation we'll accept that we're actually exporting fewer garments than we were last year. Or the year before, come to that.
- But that's all because of Europe. Their economy's collapsing, their garment sales have disappeared, and our orders with them.
- See, that's what happens if governments are allowed to set minimum wages, provide social benefits and levy income taxes. Mind you, ours is trying to do the same thing right now.
- But two things are certain: we're getting more competitive than China, and western apparel markets in general - and Europe in particular - are collapsing.
Now one element of this complaint - which can be heard everywhere from Indonesia to Laos - is true.
As fully analysed in the Clothesource Souring Toolkit (which will be published on just-style in late April), towards the end of 2011, the West's apparel imports suddenly collapsed.
In the first quarter of 2011, the US imported 7.3% more apparel, measured in square metres of fabric, than in the first quarter of 2010. In the fourth quarter, the US imported 14% less. In the first quarter of 2011, the EU imported 4.7% more apparel than in 2010: in the fourth quarter it imported 14% less, just like the US.
Western retailers and brands lost interest in buying clothes - from anywhere - as 2011 progressed.
This wasn't because their customers lost interest. Apparel retail sales in the EU, for example - in cash, discounted for each country's garment inflation - were about 0.8% lower in 2011 than in 2010. In the US, calculated in the same way, they were about 0.8% higher.
And retail sales in the last three months of 2011 grew at pretty much the same rate as the rest of the year in both the EU and US. European and American brands and chains cut back their procurement towards the end of 2011 because practically all Asian producers were charging 15% to 20% more than the previous year, while Western consumers were prepared to pay little more than 2% to 3% more.
And with cotton prices falling in late 2011, most sensible buyers assumed that Asian suppliers would be cutting their prices to match sometime in 2012. So, naturally, buyers decided to wait and see what would happen.
Practically all Asian producers upped their prices by 20% or so in late 2011 because they all suffered from more or less the same inflation in raw materials, wages, interest rates, and energy.
Some like to pretend their banks have been a lot greedier, or their governments imposed higher minimum wage rises, than the country next door. But the truth is that during 2011 the inputs Asian garment manufacturers had to pay for grew overall at pretty much the same rate everywhere.
By December 2011 for example, the average price of apparel imported into Europe from China was 23.5% higher than the previous year, but was 32% higher from India, 27% higher from Bangladesh and 24% higher from Cambodia.
The average price of apparel imported into the US was growing more slowly by December 2011 (because in late 2011 the euro devalued against the dollar) - but the average price increase in apparel from China (8.2%) was a lot lower than from Bangladesh (23.6%) or India (16.3%).
Western markets set to be static
The fact is that the apparel market in Europe and North America is mature and is unlikely to see any significant volume growth. In a good year some Western markets are likely to grow, in volume, by 2% to 3% and in a bad year they'll slip back a couple of per cent.
They grew a bit faster than that in the first decade of the century because the process of moving production to Asia brought garment prices down a lot and that sparked off growth. There's now no domestic apparel production to move to Asia, and little likelihood in the next few decades of any more demand stimulation from falling prices.
So Western markets will simply grow and fall in line with the economic cycle - which usually means up a bit one year and down a bit the next. However many horror stories there might be about retail sales in Greece right now, clothing sales in Germany, France, the UK and Northern Europe are likely to carry on just being flat for the foreseeable future.
Possibly challenging for retailers - but ensuring more or less constant volumes of orders for well managed garment suppliers.
The problem for Asian garment suppliers
The problem for Asian garment suppliers, though, is that most are beginning to find it almost impossible to manage their business they'd way they'd like. The fluctuations in raw material, energy and interest costs have been beyond their control.
But over the past couple of years, wages have been something they can't control either. Just about every garment manufacturer believes his government has strong-armed his industry into increasing minimum wages in the past few months (Laos increased its minimum wage by an extraordinary 80% in local currency), trying to buy off potential street violence by paying potential rioters higher wages.
Certainly almost every civilised Asian government except Singapore's (even supposedly regulation-averse Hong Kong's) has introduced or drastically increased its minimum wage in the past year or so.
But almost every Asian garment trade association that is now moaning about "irresponsible" wage increases was moaning just as loud a year ago about the difficulty of finding workers. Or (in the case of Thailand and Bangladesh) about the disruption to business caused by wage-related riots.
The world that Asian manufacturers are competing in has been transformed over the past couple of years. Most Asian garment makers thrived as a tidal wave of production orders spread throughout the region between 2000 and 2008.
Helped by rock bottom wages, a general lowering of Western import duties at the same time as quotas were lifted, and a general tendency for their currencies to devalue against the euro, it wasn't just the fittest that survived - it was just about anyone putting up a knitwear factory that a buyers' agent could easily get to from the nearest airport.
But now those days of perpetually guaranteed growing Western orders have disappeared. Worse: the ultra-low Asian costs that induced western buyers to move production from their low-income neighbours seem to be disappearing too.
So, for many manufacturers, has the belief that there is some substantial alternative to Europe and North America as a source of orders. The Chinese and Indian domestic markets have slowed down, and most other developing markets (such as Brazil and Turkey) have thrown up protectionist barriers against imported clothing.
As for further falls in Western duties, I'd rather back my Auntie Mary's tips for the notoriously unpredictable Grand National horse race than bet on whether Europe's perpetually delayed Free Trade Area with India or America's Trans Pacific Partnership with a clutch of Asian countries will ever be ratified by a democratic legislature.
The West's trade liberalisation, which many Western politicians believe opened up Western markets while creating domestic unemployment, is very much last decade's big story.
No immediate solution in sight
Delusions about some unspecified silver bullet still persist, of course. Some Indian manufacturers believe they can get cheaper cotton products from Uzbekistan - though no respectable western buyer will touch Uzbek cotton, and most have the technology to trace it.
Thai manufacturers have announced they will move manufacturing to Burma - just a few months after the Korean manufacturers already in Burma threatened to leave the country altogether because profitable garment manufacture was getting impossible there.
(Incidentally, my short-term prediction of the month is the imminent outbreak of a 'Burmania' epidemic among pundits. Apart from the lack of reliable power supplies, an overvalued currency and inadequate transport infrastructure, you would have thought the illegality of exporting anything made in Burma to the US would deter anyone relying on exports from moving garment production there. Never mind wages that are higher, at current exchange rates, than Cambodia. But when did reality ever deter consultancies from proclaiming some new Shangri-La?)*.
Many Bangladeshi and Cambodia manufacturers are also convinced the Japanese movement of production away from China will create rapid growth elsewhere in Asia (like in Bangladesh and Cambodia).
But it has now been over three years since Shigeru Takagi, director of Japan's International Textile and Clothing Trade Office, announced that Japan wanted to take China's share of its apparel imports down from 93% to 50%. And China's share hasn't exactly collapsed: by 2011 it had simply declined to 87%.
Most Asian garment manufacturers are suffering from an order famine right now, which many quite mistakenly attribute to non-existent declines in Western consumer demand. In fact, they're not getting orders because their prices are rising too fast, and the constant inability to understand this says a lot about how out of touch many are with their customers.
For many Asian manufacturers, stagflation in the West (static consumer demand coupled with rising cost inflation but static consumer prices) is translating into supplier slumpflation (collapsing real buyer demand coupled with input price rises the suppliers can't pass on).
Their problem, in other words, isn't that European governments are setting high minimum wages, providing social benefits, levying income taxes, and killing consumer markets as a result. It's that their own governments are doing exactly the same thing - and too many manufacturers haven't worked out how to deal with it.
A reality check about Burma
*For the Burmaniacs among you: a reality check. The EU and US enforce a wide variety of sanctions, under many different laws, against Burma. Many of these are irrelevant to our industry, but two in particular matter a lot: America's total ban on importing practically anything made in Burma, and the EU's imposition of full import duty on Burmese products, while it offers duty-free access to the world's other 48 poorest countries, such as Cambodia and Laos.
Many of those sanctions (like restrictions on travel by Burmese politicians) can be relaxed by simple governmental directives, and some of them almost certainly will be over the next few years as Europe and the US try offer incentives to Burma's ruling junta to encourage liberalisation.
But on 26 March, Derek Mitchell, America's Special Representative and Policy Coordinator for Burma who oversees US policy on Myanmar for the Obama administration, outlined the conditions Burma would have to meet for the US Administration to present legislation to Congress permitting Burmese imports (the import ban requires Congressional approval). These were "the unconditional release of all political prisoners, peaceful relations with ethnic minority groups, and fair elections".
So far, there have been only token releases of some political prisoners and no apparent change in relations between the ruling party and ethnic minority groups. And on 30 March, Burma's opposition leader Aung San Suu Kyi described the Burmese government's attempts to disrupt her campaigning in a by-election as "beyond acceptable".
It's worth repeating this. Burma, right now, is a very long way from meeting the conditions the US Administration has laid down for trying to persuade Congress to withdraw the sanctions that really affect our industry. There appears very little likelihood a US president will propose lifting import sanctions against Burma before Burma's full elections in 2015.
Even then, I wouldn't put money on Congress agreeing open trade with yet another Asian low wage economy - unless its current anti-trade mood changes radically. For what it's worth, though, I'd be less pessimistic about the EU adding Burma to its duty-free list, if Ms Suu Kyi supported the proposal.
But unless European anti-Burmese activists promised not to picket stores or brands selling Burmese garments (which they'd promise only if Burmese garment wages grew sharply, and that's not the basis on which the Thais want to move there), I still wouldn't bet on any responsible buyer ordering Burmese clothes any time soon.
So here's my left-field tip of the month. By 2015, even if all goes well and Burma stabilises, the country will still be as unattractive to foreign mainstream garment makers as it is to the country's Korean investors today. But it'll be a terrific place for social entrepreneurs to put Aung San Suu Kyi- endorsed, microfinance-funded, Fairtrade-certified, fully organic garment factories no-one could possibly object to.
The politically correct sourcing location for the wardrobe of every radical young person in Europe? Very possibly. But an alternative to Cambodia or Bangladesh for Top Shop or H&M? Simply not reliable enough.
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