COMMENT: Apparel sourcing shifts likely to be short-lived
Apparel makers around the world are profiting from the rising value of the Chinese currency. But this outbreak of optimism is totally misplaced believes Mike Flanagan, who says any shift in orders away from China is likely to be short-lived.
There seem to be several quite different games being played among apparel sourcing countries right now.
First there's China. Its government and many of its businesses are seriously worried because apparel and textile production seems to be falling.
So worried, in fact, that China's not just restored its full VAT rebates on clothing and textile exports, it has also issued a circular freezing any more increases in minimum wages, suspended deposits on raw material imports, directed state-owned businesses not to fire staff, and insisted unemployment benefit is used to retrain staff while they're still at work (otherwise known as subsidising wages).
Meantime, though, as it worries about jobs disappearing, its share of US apparel imports hit an all time record in September.
And its domestic retail clothing market (which accounts for most of its production) grew 20% in October, after several months of annual growth close to 30%.
Then there's Turkey and Bangladesh. After months of gloom from both countries, some of their spokespeople were positively glowing in triumph by mid-November.
Bangladesh announced its knitwear exports had grown an extraordinary 45% year-on-year from July to September, with a number of its largest businesses practically turning customers away.
In Turkey, Jak Eskinazi, president of the Izmir-based Aegean Garment Exporters' Union (EHKIB), said orders from Europe started to increase in October.
He predicted exports will continue to rise in December and January, as European retailers affected by the financial crisis stop buying in big quantities and shift orders from China to Turkey.
But Turkish factories have been closing all year, and half the clothing/textile workforce in the South Eastern city of Adiyaman has been laid off this year as half the city's factories have closed.
Then there's most of the rest of the world.
In most countries, the picture's been simple for the past year: most garment exporters have just been getting gloomier as they look at orders being cancelled, some customers not paying and future orders not materialising.
Outbreak of confidence
But there has also been a bizarre outbreak of cock-eyed optimism.
"Many of those who put up factories in China are beginning to move out due to its high labour cost. Export rebates were also abolished and they lack workers now," said the Philippines' George Sly, arguing that up to $500m could be invested in Philippine garment factories as businesses pull out of China.
"Cambodia's garment sector will not be seriously impacted by the global financial crisis", its Prime Minister Hun Sen said in November. "At this point, I think that there has been no serious impact on the garment sector."
Few other Cambodians agreed - though one union leader, admitting that 35 garment factories have closed in Cambodia this year, said: "Factory closures were caused by the pullout of some investors who...have moved on to avoid legal conflicts over labour issues with the workers."
So, nothing to do with a collapse in demand then?
The same apparel industry?
Are they all describing the same apparel industry? Oddly enough, yes. Let's take them in turn.
First: China. Is there something wrong with the US data that shows China's share of US imports has been growing since March 2008? Not at all. US imports are down, and China's share is growing.
Partly because Chinese factories are both ruthless and resilient in making sure prices don't go up. Ex-factory clothes price inflation in China hasn't risen above 2.6% once this year, and translated into US currency that's never meant dollar price rises much over 10%.
Labour rarely accounts for more that 15% of the cost of a Chinese garment - so all those scare stories a year ago about how Chinese prices were going to rocket simply came from people who didn't understand garment costing.
In fact, the real cause of Chinese clothes prices going up in the US has been the rise in the Chinese currency, which accounts for 80% of the annual price hike in Chinese clothes when landed in the US.
And there lies China's problem.
Translated into euros, Chinese ex-factory clothes prices are currently 20% up year-on-year. Translated in to British pounds, Chinese prices are up 40%. For Europeans - who last year spent more on clothes from China than the US - China really is getting pricier.
Hence the sudden spring in the steps of Bangladeshis and Turks.
Europeans are worried: they're shifting low-cost business to Bangladesh, and trying to delay orders - which is good for some countries (like Turkey) with fast road access to Germany and the UK.
If I were Turkish or Bangladeshi, though, I'd think twice before getting too excited.
It's the collapse of European currencies that's really getting Europeans to move from China, and not real inflation in China. Foreign exchange markets are very unpredictable - and who knows how long those currencies will stay in the doldrums?
Turkey and Bangladesh (and one or two other countries, like Vietnam) are better placed than most of the rest of the world, though. They offer a real point of difference for customers worried about China.
This makes the apparent optimism of so many other Asian countries so difficult to fathom.
Does Chea Mony, president of Cambodia's Free Trade Union of Workers, really believe factories are closing only because owners want to run away?
True, there is an outbreak in many countries right now of factories closing and owners disappearing with months of salary left unpaid.
But they're running away after staying open long after they ought to have closed. They'd been selling far too cheap, or dealing with dodgy clients in a desperate attempt to keep business going.
There are lots of reasons why politicians, trade union leaders and businesses might like to pretend more firms aren't going to close.
Some of those reasons - like not wanting to start a cycle of banks cutting off credit facilities, or encouraging workers to quit factories while there are still unfinished orders - are easily understandable.
But to argue, as its Prime Minister did, that "Cambodia's garment sector will not be seriously impacted by the global financial crisis," isn't trying to keep national morale up. Optimism, maybe. But I'd say just cock-eyed.
Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.
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Apparel makers around the world are profiting from the rising value of the Chinese currency. But this outbreak of optimism is totally misplaced believes Mike Flanagan, who says any shift in orders awa...
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