From the credit crunch in the West, to rising raw material and fuel costs, and even strikes caused by the soaring price of food, the apparel industry is being ravaged by a series of catastrophes beyond its control. Mike Flanagan looks at a tale of four crises - and asks why no-one had foreseen any of them.

If there's one common thread to the crises the world apparel industry is going through right now, it's never listen to a forecaster. Especially if it's the future he's forecasting.

Because I can't find a single sane commentator who forecast any of the four, quite different, crises that ought to be ravaging our industry at present.

Stage 1: No credit in the West
We don't yet know the real scale of the credit crisis in the West, and there's no shortage of people with a vested interest in exaggerating it.

One British trade journal is currently running a campaign for lower interest rates on the quite spurious grounds that clothes sales are falling.

In Britain they're not; but discounters are gaining share, and mainstream retailers simply aren't getting sales increases to match their growing branch numbers and internet expansion.

So, while official data consistently shows apparel sales growing, most ordinary retailers see like-for-like sales falling, and claim there's something wrong with government data.

There isn't. Apparel sales in the West are flat or growing slowly. But most retailers think they're falling because of the amount of space and facilities available for selling clothes has grown faster.

Western retailer profits are suffering more than sales - and many are under great pressure to keep inventories low in case sales get even worse.

So, while clothing sales overall aren't falling, US retailers are buying less. In the first quarter of this year, US clothing imports fell 6% on 2008.

This doesn't mean supplier countries are selling less though.

The EU imported 7% more clothes in the first two months of this year than last. And because the EU has a bigger demand for clothes than the US, the rich world's clothing imports from poorer countries are still higher than last year.

But the credit crisis makes Western retailers especially keen to keep prices down - which in turn makes it almost impossible for many emerging-market suppliers to pass on their cost increases.

And there's been no shortage of pressures on suppliers' costs.

Crisis 2: Some supplying countries pay the price of success
In the second half of 2007, a number of supplying countries were affected by pressures that stemmed directly from their fast-growing economies.

Best publicised were China and India, where currency appreciation against the US dollar reduced their competitiveness - even though their currencies did not appreciate as fast as some less-publicised countries, such as Thailand.

While these currencies did not, generally, appreciate against the Euro, the British pound or the Japanese yen, currencies appreciating against the US dollar lost competitive edge in Europe and Japan against currencies (like Bangladesh's) which did not rise against the dollar.

But China also had cost pressures from rising wages, falling export rebates and the growing costs of environmental compliance.

Indian and Chinese producers complained loudly about the effects of these pressures. But they really do seem to have been exaggerating just a bit - mostly to lobby for government concessions or to try forestalling Western trade sanctions.
 
Both China and India have immense and extraordinarily fast-growing domestic markets in addition to growing sales to the EU.

And America has hardly ever been China's largest clothing customer. Before 2005, when quotas kept Chinese clothes off European and American shelves, Japan bought more from China than the US did; since 2006, the EU has bought more.

Nonetheless, repeated complaints in China about the effects of a tougher US market have made it easier for the US to announce that safeguard sanctions against Chinese imports will be withdrawn at the end of 2008.

Did anyone ever really believe the more fanciful predictions the more hysterical propagandists were making about China's clothing industry?

While one lobbying group was claiming that half of China's clothing makers wanted to sell up, those same businesses spent 29% more on new manufacturing businesses in 2007 than in any year in history.

Before Lunar New Year, the media was full of 15,000 Hong Kong-owned Guangdong businesses supposed to be closing after the holiday? Seen many stories of businesses that actually did?

With widespread scepticism about Chinese official data, it became fashionable in late 2007 to invent anything, secure in the knowledge few people ever bothered investigating absurd claims.

Now China's competitive position in the US market certainly has changed. From being 5% more expensive overall than all emerging-market apparel exporters in the first quarter of 2007, it was 12% dearer in the first quarter of this year.

But neither China nor India have fallen off a cliff. Their clothing exports continue to grow and their share of rich-country apparel imports has scarcely moved in the past year.

Crisis 3: Food
China and India are not the only producer countries with pressures on their competitiveness.

Sri Lankan inflation was hovering around 20% for some time before food prices hit the headlines, and Vietnamese workers had been claiming for years that official inflation figures badly understated the growth in prices.

But by April 2008, as food prices started to soar, consumer prices rose faster, higher, in Vietnam than they ever did in China - with the official inflation figure for May 2008 over 25%.

Overall, prices in the top 50 apparel exporting countries grew twice as fast in the year to April as they did in the previous year.

For many workers, though, things looked a lot worse. Food dominates the spending of a lot of them, and riots over prices hit many garment exporting countries, from Mexico, through Haiti to Bangladesh.

In some cases - as in Cambodia - governments moved quickly to force through increases in minimum wages.

In others - like Thailand - growing food prices meant more agriculture became a more profitable option. Workers began to move back to their farming villages, and wages had to rise to stop the drift away from the towns.

But here's the dismal truth about food prices. They're mostly politically sensitive in very, very poor countries - in countries where there's simply no shortage of people to do jobs.

Food riots in Bangladesh, for example, were disruptive to business, but they weren't a convincing negotiation tool against employers who were being coshed daily by US and European buyers desperate to see prices stable.

Instead, many manufacturers gave subsidised rice to workers, claiming they would address wage levels a few months later when it would be possible to see whether inflation had abated.

As indeed, it now seems, inflation has abated.

With signs of a successful rice harvest in much of Asia, food prices have started to fall - though they're still, overall, a staggering 60% higher than last year, and the price of basic food in many poor countries has more than doubled.

But for most businesses, falling living standards among workers were pressures that could be negotiated away.

As long as there was a large pool of people wanting a job in a clothes factory (as there were in Bangladesh, and weren't in coastal China), requests for higher wages could always be refused.

So we simply haven't seen any real evidence of rising apparel costs since food prices started to go through the roof.

The workers are still getting poorer, though, But there is a finite amount of compassion in the world, and activist groups currently have their hands full worrying about Tibet, about the Burmese cyclone and about the prospect of serious hunger as a result of the food crisis.

Falling living standards in countries like Pakistan or South Africa are way down the queue of deserving issues competing for Western well-meaning concern. They may re-emerge, but before they do, we all have to take on board the effect of Crisis Number 4.

Crisis 4: The rest of the iceberg hits
By mid-April, buyers were avoiding price increases, vendors learned to handle currency instability, and workers resigned themselves to a few years of discomfort.

Many manufacturers were easily able to ignore wage demands - and, with commodity prices rising, countries formerly complaining about appreciating currencies found they were less at the mercy of raw material hikes than their competitors elsewhere.

Cotton, in US dollars, is 26% more expensive in May 2008 than it was in May 2007. But that hits Central American countries, whose currencies have fallen against the dollar, more than Central European businesses whose currencies have appreciated by almost the same amount.

Growing raw material prices can't be negotiated away or ignored, in the way factory managers dealt with some requests for higher wages. But they hit different businesses in different ways: factories in countries with appreciating currencies were discovering the silver linings to their inflationary clouds.

But then came other problems they couldn't negotiate away. Oil prices began an utterly unpredicted round of increases. And they did so as some governments began to attack the inflation that hit them in Crisis 2 with the classic anti-inflation tool: interest rate increases.

So in Vietnam, lending rates increased overnight from 12% to 18%. On the same day, West Texas Intermediate oil hit $125 per barrel.

Higher interest rates and energy prices hit different businesses in different ways.

There are things governments can do to offset the effect of rising energy prices: above all, they can subsidise them. So stage 4 brought in two new levels of complication. It wasn't clear what governments were going to do, and it wasn't clear which companies were going to be worst affected.

But, unlike food prices, manufacturers can't duck the effect of rising interest and energy prices. And they hit middle-income countries hardest.

Turkey's producer price index (the prices manufacturers charge their customers) is rising faster than its prices in the shops: high interest and rising energy costs hit countries with more automated machines more heavily.

The machines use energy and the loan from the bank has to be serviced whether customers like it or not.

There are three lessons in all this.

Lesson 1: Forecasting's tough. Especially if it's to do with the future
No-one had foreseen any of this. Prices rose faster year-on-year in April 2008 for most supplier countries than most forecasters had predicted they would in the three years to April 2010.

Consultants' expectations of Chinese inflation for 2008 varied from3% to 9%: sane forecasters' estimates of year-end oil prices varied from $85 to $200.

And these are the big, well-researched metrics: scarcely an analyst on the planet cares enough about Bangladeshi interest rates to hazard a guess. The complicated interaction between all these metrics was just beyond anyone.

Lesson 2: We've not even scratched the surface of the problem yet
Higher interest rates and energy prices affect everyone in an economy. After clothing manufacturers have felt their immediate impact, they'll start seeing all kinds of other costs growing - mostly in an utterly unpredictable way.

Lesson 3: Inflation's unpredictable because it hits different people in different ways
A manufacturer with few borrowings, or a source in the family who lends money in a different way from banks, might not feel the effect of rising interest rates, while they might be crippling the factory next door. Some factories use energy better than their neighbours.

In this environment, what's going to matter aren't 'Big Issues' that vary by country. The people who'll come through these crises - and any that follow it - will be businesses that are better run than their neighbours.

For buyers, what'll matter is knowing their suppliers a lot better than they do today. And it's how good you are, not where you're based, that will determine a supplier's success.

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.