THE FLANARANT: Arab unrest and its impact on the apparel industry
The recent strikes in Egypt. Photo credit: Helwan Plant/ITUC
When the Berlin Wall fell in 1989 it triggered events which indirectly led to garment and textile manufacture leaving rich countries. Is the current unrest in the Middle East likely to create anything so transforming? The answer may well be "yes," says Mike Flanagan, but not in the same way.
Back in 1989, after widespread but relatively peaceful political unrest, most of the Communist regimes in Eastern Europe began collapsing. This meant:
- Their textile and garment industries, mostly built on government-negotiated deals with each other, briefly collapsed - but after a year or two, began actively selling to Western Europe.
- The Soviet Union, after it passed from Communist control, abandoned its involvement in the long-running guerilla wars through much of Central America. This resulted in an uneasy peace, and US-backed development of light, export-oriented industry in countries like Guatemala and Honduras.
- There was little alternative for the major remaining Communist states - especially China and Vietnam - to join the world trading system. Up to 1984, China's clothing industry had been so underdeveloped, Chinese citizens had a rationing system to limit the number of clothes they could buy every year. In 1990 it wasn't at all certain that China's recently introduced system of relatively free enterprise would survive.
The result we all know. In 1990, Westerners mainly wore clothes made in their own country and most imported clothing came from a small group of Asian "tigers" (South Korea, Taiwan, Hong Kong and Singapore).
Over the next decade, clothes imported from Europe's and America's neighbours grew tenfold. Since then, of course, Asian manufactures have grown even faster - so that by 2010, 45% of Western clothing imports came from just two allegedly Communist countries: China and Vietnam.
Without the European revolutions of 1989, Chinese factories might still be making a handful of Mao jackets.
Will the current Arab conflicts have a similar effect?
Certainly not. Communist ideology in the 1980s kept Eastern Europe and most of East Asia out of international trading. And the rivalry between Communism and the West made much of Central America simply too frightening for businesses to invest.
Neither of those problems really applies to today's Middle East, where almost every economy depends heavily on exports. Middle East protesters are currently angry at rising prices, at poor job opportunities, at outright theft by their leaders and at decades of repression.
Their protests might end up with all sorts of outcomes, but none of those outcomes is likely to make trading significantly easier. In fact, the current Middle East uproar and its possible consequences might well make life a lot trickier for many of us. But first, let's remember two things NOT significantly affected by the uproar.
First, the garment industry. Four Middle East countries are substantial suppliers to the US and Europe: Jordan, Egypt, Morocco and Tunisia. They have modern, reasonably stable, garment industries focused on making clothes for the European and North American markets.
Though there are persistent worries about mistreatment of foreign (mainly Bangladeshi) workers in Jordan, and occasional complaints about wage levels, this industry has been trouble-free for years. Not because their governments savagely repress dissent - though we know from Wikileaks that some Egyptian factories have fired militant workers - but because the local garment industry provides safe, reasonably secure, jobs paying better than the local industrial average and run on a straightforward commercial basis.
It's quite different in Egypt's massive, once state-owned, spinning and weaving mills, where wages hardly seem to have changed in 20 years and there's been around a decade of dubious privatisations. Workers in those mills' workers, were early backers of Egypt's February turmoil and typify the resentments that have sparked the Arab protests.
Second: all Muslim countries. It's naïve to see this as a Muslim thing. Most of the world's Muslims live in six very different countries: Bangladesh, Pakistan, India, Indonesia, Nigeria and Turkey. All with their problems - but all democracies in their different ways.
Resentment has flared up in the group of countries at the south and east of the Mediterranean and around the Persian Gulf that have been governed by unaccountable dictators for the past few decades. But there's not a shred of similar concerns in Muslin democracies, like Turkey or Malaysia.
So what WILL change?
Diminished regional competitiveness. The current success of the protests will almost certainly mean - especially in Egypt and Tunisia - more union activity (until recently virtually illegal). And it would be naïve to expect the garment industry will not be affected.
In Jordan, the new government appointed to deal with growing economic dissatisfaction - partly the result of widespread unemployment - might well try to reduce the Jordanian garment industry's dependency on imported Asian workers and act more decisively to get the business to recruit locals.
This would probably reduce its competitiveness - but the government might see that as a low price to pay. It is certainly hard to see any way the new political climate could make these four countries' garment industries any more competitive.
Some more disruption. Although few Egyptian garment factories were affected directly, almost the entire infrastructure of internal transport, emailing documents and port operations ground to a halt at some stage. Similar disruption is probably the reason Tunisia's garment exports fell 15% in January.
No Middle East country has yet done anything much more substantial than change governments since the protests started. So we've probably got years of political confusion still to come - each involving more opportunities to mess up delicate production and delivery timetables, and each making a similar revolution in Morocco more likely.
Hot air about the need for trade assistance. People will start campaigning for easier trade access - forgetting that Jordan and Egypt already have one of the most flexible programmes of all for duty-free access to the US. Morocco has a free trade deal with the US, and just about every Islamic country round the Med, apart from Libya, gets duty-free access to the EU.
There's very little the West can do to encourage more jobs in the region - except to increase import duty on goods from Asia, which Europe and the US certainly aren't going to do.
The real question hanging over the protests is about their wider implications for:
- World inflation. Most protests so far are in countries with lots of people but few natural resources, like Tunisia and Egypt. Instability there has no effect on world prices. Fears about Libya - with relatively little oil - are upsetting the oil market and causing the dollar to fall.
Now Libya's total oil production - about 1.6m barrels a day - is less than half the currently unused capacity in Saudi Arabia. Normally when oil prices start going up, Saudi Arabia turns on the taps to release more and keep things steady. Its unused capacity, in fact, is greater than the entire combined production of Libya, Oman and Algeria - the three oil-producing states with the greatest amount of current unrest at present.The most common explanation for why Saudi isn't keeping the price steady this time is that it's signalling to the West in general - which really means the US - how important it is for the Saudi royal family to stay in power.
Further growth in the oil price means more expensive polyester, higher freight costs and declining markets for almost everything except oil. But, leaving aside a bit of market panic, that's not going to happen unless Saudi Arabia fails to honour its unspoken contract with the West: its rulers stay in power as long as they keep the oil price roughly stable.
Like everywhere else in the region, Saudi's had a few demonstrations. But unlike the others, it's rich. So it simply handed out a $36bn subsidy on food and other essential prices and, for the moment, the streets are relatively quiet.
As long as things stay that way - and the Saudis are confident they will go on staying that way - oil will stay around $100 a barrel, and we'll have a few years of slightly faster inflation. If the Saudi royal family falls: all bets are off.
- The entire culture of "just in time" delivery. In the past 15 months, garment shipments from Bangladesh, Thailand, Honduras and Egypt have been disrupted by political turmoil. Worker unrest has disrupted supply continuity in Cambodia, terrorism has been aimed at major production centres in Pakistan, and an unreliable power supply has disrupted Indonesia.
Employer, rather than worker, strikes have shut part of India's apparel manufacturing down at least twice in the past year - and even deliveries from China became very unreliable in the second half of 2010.
None of these disruptions was ever flagged in advance by major organisations giving advice on political risk. In our industry, which is almost entirely dependent on imports from countries with a propensity to some instability, no production centre can ever be regarded as risk-free.
And, with Icelandic volcanoes adding to the complication, even using air freight can't get buyers out of the mess if goods can't be sea-freighted on time.
- The media fad of the month. Garment-making and freighting costs are influenced by the price of raw material, labour, energy and capital.
The current hysteria about declining Chinese competitiveness comes from alleged relatively fast Chinese wage increases. But with raw material and energy inflation increasing everywhere, and interest rates in China staying below its Asian competitors, there is now a likelihood this obsession with competitiveness will soon become last year's discredited media fad.
To be replaced first as the hot topic by worldwide inflation, then by "onshoring" as more Western businesses start looking at domestic manufacture, then by a "skills shortage" scandal as they discover how much people at home want to get paid.
So who's next?
The common feature in today's protests is unaccountable dictatorships. The Burmese tried confronting theirs in 2007, and were savagely repressed. Otherwise, with just two exceptions (China and Vietnam), all the major non-Arab garment-making countries are now democracies.
Are we likely to see a re-run of the 1989 Tien An Men demonstrations? Almost certainly not. For the past 20 years, China's rulers have been applying the lessons they learned then to prevent another Tien An Men.
Unlike Tunisia, the Chinese rulers haven't pocketed much of the country's wealth for themselves. They've spread the benefits of a growing economy, both enriching most people and investing in better communications and working conditions. They've inculcated in their population a horror of the disorder that's kept China poor for the past 300 years. And they're extraordinarily skilled in sniffing out dissent and nipping it in the bud.
Something roughly similar applies in Vietnam at present. Personally I believe both will get a dose of the Tunisias some time in the next 30 years. But as long as annual growth in both hovers close to 10%, I'd confidently expect their rulers to disappear into a well-earned retirement every five years or so to be replaced by someone just as personable as their predecessor.
No sudden regime change anywhere outside the Middle East then?
Well, there IS a group of countries important to our industry run by unaccountable dictators, with no record of bettering their subjects' lot. And they're all Islamic.
Will the rulers of Uzbekistan (the world's second largest cotton exporter) and its cotton- exporting Central Asian neighbours still be around in a years' time? Some experts think the rulers of these Central Asian countries are so unspeakably nasty they're even less likely to be overthrown than the thugs running Burma or North Korea - and they're probably right.
Were I a betting man, my few pennies would go on no further garment or textile making countries seeing an Egyptian-style revolution. The big revolution is more likely to be the surprising growth in interest from buyers in both China and, for some, making garments closer to home.
Companies: Hot Topic Inc
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