The Flanarant: Asia hit by multiple whammy
The problems affect the garment and textile industry more than most.
New pressures on Asian manufacturers are likely to hit apparel buyers on both sides of the Atlantic, including labour issues, minimum wages, raw material prices, abscondment, pollution and financial “redlining”. Mike Flanagan looks at the potential impact.
In November - the latest month for which data is available - the average price of clothing imported into both the US and EU fell year-on-year for the first time since the middle of 2010.
It is unlikely to stay like that for long. For a start, the major European currencies have both devalued against the US dollar since November so, whatever Asian factories charge, the price will go up when translated into euros or pounds.
But new pressures on Asian manufacturers will hit buyers on both sides of the Atlantic - in ways few of us expected when cotton prices started to spike at the end of 2009.
The pressures mostly start off in China
For years, the smart thing to say about China has been that the risk of political unrest is high and simmering discontent will spill over into violence that will disrupt business.
So far as the garment industry is concerned, that has not happened. The China Labour Bulletin reported that across the whole of China, with its billion workers in all industries, there were just 32 strikes or protests in February 2013. Up from the 27 it reported a year earlier - but hardly the growing wave of dissent Western observers have been predicting for the past few years.
There are two reasons for this. The Chinese government has been pushing minimum wage rises of around 15% per year for the past five years - and, since the financial crisis began in 2008, it has been bending every possible regulation to keep employment-generating sectors, like garment factories, in business.
Now, partly spurred by cases against its policies at the World Trade Organization (WTO), but more as a result of the effect its stimulus is having at home, it has been reversing many of those policies.
The boom of the last 20 years has pulled people into China's coastal cities, causing huge pressure on limited space, and creating massive disparities between cities and the countryside.
With the past five years showing surprising urban peace (at least compared to other rising Asian economies), China's rulers are now more worried about potential rural unrest - and have pledged to see rural incomes grow faster over the next decade to narrow that income gap.
They are also increasingly concerned about the effect of the abuses of industrialisation on the country's stability: pollution and unsafe working conditions, legal dodges to avoid paying statutory minimums, and the phenomenon of abscondment. I can't think of a snappier tern, but that's the technical term for businesses going bust and owners disappearing without paying outstanding wages or social security.
The problems affect all industries - but in six key ways, they're currently hitting the garment and textile industry more than most.
- Attracting labour. For the past decade or so, we've known winter is over in the northern hemisphere when the first article appears in the Chinese press complaining how tough it is for garment factories to entice workers back after the Lunar New Year holiday. It always takes a while to work out whether the problem's bigger or smaller than in previous years - but this year, there are more complaints about workers finding salaries more attractive nearer their home towns than in the big coastal cities.
- Enforcing minimum wages. Throughout Asia, hard-pressed businesses have found ways of ducking the effect of minimum wage rises, most often by hiring staff on temporary contracts. In early 2013, China announced the use of temporary staff in permanent jobs would be illegal from July, and that in the few roles where temps would still be legal, they would have to get the same pay and conditions as permanent staff. No other major Asian garment making country has taken such a hard line on temporary contracts.
- Cotton prices. China at first welcomed the 2009-2011 cotton price boom. Not only did it help Chinese farmers make a lot of money, it didn't hurt Chinese factories any more than their foreign competitors. But the price collapse since mid-2011 terrified the Chinese government, so it has been buying up China's raw cotton at extraordinary prices to prevent a rural revolution. Raw cotton now costs 35% more in China than elsewhere in Asia - and that's the main reason Chinese garment competitiveness compared to other Asian countries fell during late 2012 in both in the EU and US.
- Cracking down on abscondment. In January, China's Supreme Court "clarified" (ie invented) the law on wage arrears. Put simply: owe one worker more than CNY5,000 (US$804) and you get up to seven years' in prison. This is unlikely to inflate wages - but anyone without much capital will be terrified away from setting up new factories. Few would-be entrepreneurs setting up clothes factories are ever over-capitalised - and no other Asian country has adopted such fierce laws to tackle the abscondment problem.
- Dealing with pollution. During February, China launched two new initiatives aimed at tackling its serious pollution problems: tough restriction on chemicals used and the way they will have to be controlled, and mandatory insurance programmes for polluting industries.
- Financial "redlining". During February, Chinese media published more complaints from garment and textile industry pressure groups about banks' "redlining": limiting loans, or making them only at high rates, to designated industries, and including garment or textile businesses in the loan restriction list. In fact by the end of 2012, Chinese garment and textile businesses were finding that interest costs were growing faster than labour or raw material costs.
Urban social unrest
If you believe the constant mantra from activists about "races to the bottom", these six changes in the trading environment ought to reduce China's price competitiveness.
But politicians in the rest of Asia are comparing the gentle retirement enjoyed by China's current leadership with the savagery shown to Libya's Gadaffi and Syria's Assad.
Of the major garment producing countries in Asia, the biggest urban social unrest in the past decade has been in Bangladesh. But this is not connected to the specifics of pay and working conditions that have led to intermittent riots among garment workers.
Riots in late February over the death sentence passed on an opposition politician for war crimes in 1971 have so far led to the deaths of about 80 people. Protest strikes before and since the verdict have wiped out garment production for almost a quarter of working days in January and February - and have disrupted far more garment production this year than fires or wage riots.
In my view, the current violence and endless general strikes are all the result of fierce hatred between Bangladesh's political parties. And they threaten to completely undermine the political consensus that had been emerging to tackle the garment industry's unsafe factories, inadequate pay and employer opposition to trade unions.
The continuing ethnic violence in Burma's western Rakhine state is the major reason the EU is still reluctant to remove import duty on Burmese products.
China is no longer the country where the threat of social unrest is the biggest long-term concern. Over the past six months, industrial disputes have caused levels of disruption in Bangladeshi, Indonesian and Cambodian garment factories on a scale unheard of in China.
And nowhere in Asia has seen a general strike on such a large scale as that in India on 20-21 February.
Issues across Asia
Labour shortages can cause problems for garment makers almost everywhere in Asia, though usually in tightly defined areas.
Minimum wages are rising, often spectacularly, everywhere but Bangladesh - though their effect is partly nullified in India, Cambodia and Indonesia by temporary contracts and, worker representatives claim, by outright refusal to comply in Laos.
Raw material prices are only a real problem in China, though recent fluctuations have damaged the financial health of many businesses elsewhere.
Abscondment has caused scandals almost everywhere in Asia this year - leading to an extraordinary range of solutions. In Vietnam and Cambodia, the national government has stepped in with help - which will eventually have to come out of those countries' tiny tax base.
In Pakistan and Bangladesh, the Export Processing Zone authorities have stepped in - ultimately inflating costs for businesses in those zones that have not defaulted on wages. The two biggest collapses over the past few years - Bangladesh's Hall Mark Group and Joe's Fashions in Pakistan and Sri Lanka - were both businesses that looked completely above board. Legislating against the problem is far trickier than most amateur commentators think.
China has had the biggest response by far to the need to control pollution - but mainly because there's so little upstream spinning or dyeing elsewhere. Local authorities in Vietnam make it difficult to set up textile industries; and India's pollution control rules are largely implemented by individual States, and can be very inconsistent. But it's not just 300 smallish dyeing plants in Tamil Nadu that have been closed recently: major conglomerate Raymond received notice to close a 20m metre a year suiting mill in Gujerat state in early March.
Clothing factories in Thailand are now complaining they're being redlined for loans by some banks who are worried about over-exposure to the garment industry, while its Board of Investment is planning to cancel some of the export incentives it has offered garment and textile businesses.
The practice seems to have died out in Indonesia - but an extreme response by the Bangladesh central bank to the Hall Mark collapse is having much the same effect according to Bangladeshi garment makers. Tight rules imposed on banks advancing cash to garment companies against receivables is killing their ability to trade, they claim - and destroying their profitability far more than wage rises.
No country in Asia is immune from these issues. But they hit different countries in completely different ways. Where they don't threaten to push up prices (as with Bangladesh factories' refusal to increase the minimum wage), they almost certainly guarantee more widespread disruption.
How they net out, though, is impossible to predict. The sheer complexity of the ecosystems surrounding each country's garment industry makes trite generalisations not worth the web page they're blogged on.
Whether they're about mythical "races to the bottom", the "inevitable" Chinese monopoly we used to hear so much about, or the easy ride China's focus on environmental and worker protection is giving other Asian garment makers.
In ten years' time we may even look back at 2013 and decide this was the year China was responsible for starting a race to the top in improving Asian production standards.
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