The Flanarant: How's sourcing going to be in 2013?
Will 2013 really be a favourable sourcing environment?
Sourcing is influenced by a lot more than wages and fabric prices. Infrastructure, social tension, energy costs, currency rates, power availability and a buyer’s ability to control the uncontrollable all make sourcing as unpredictable as ever in 2013, says Mike Flanagan.
Most of the time I've been writing here, I've been exposing common views I think are fundamentally wrong. As a change, though, here's a view that's not that common, and might even turn out to be right.
But it embodies some classic confusions, and the very fact it's being put forward from a normally respectable source is worth looking at.
2013 will be "a favourable sourcing environment for the first time in years," according to stock analysts at the New York office of Credit Suisse.
At first sight, it sounds simply an insular view of someone whose world view stops a few yards from Wall Street.
In the third quarter of 2012, average US apparel imports per square metre were 4.5% cheaper than a year earlier, and just 2% more expensive than in 2008. But in the EU (which typically sources more clothing than the US), average apparel import prices in Q3 2012 were 13.7% more expensive than in 2011, and 30% up on 2008.
Look closer, though, and the argument might be a bit more universal. Those price changes are in local currencies - US dollars and Euros, respectively. Europe's rise in import prices mirrors the recent devaluation of the Euro (both about 13.5% in Q3).
In January 2013, the Euro is at roughly the same level against the US dollar as it had been in 2012. If things stay that way, we should expect apparel import prices in Europe and the US this year to move more or less in parallel.
So why does Credit Suisse New York believe this year's going to be benign - at least from a buyer's point of view?
Its argument is that most fabric, yarn and fibre prices now seem stable, after a roller-coaster couple of years. Though wages are seeing double-digit growth in most developing countries (especially China, Vietnam and Indonesia), there's serious overcapacity in spinning and weaving worldwide (which is just the same thing as saying yarn and fabric prices are stable). So they think it seems reasonable to expect US apparel import prices to go on falling.
Trouble is, that's just part of the story
Two key factors in apparel prices - basic raw materials and foreign exchange conversion - have fluctuated over the past ten years, not in response to movements in market demand for clothes or manufacturing capacity, but as a result of arbitrary changes stimulated by commodity and foreign exchange speculators. No-one predicted either process.
When it was launched in 1999, the Euro was worth US0.90, in May 2008 it was around $1.60, and at the time of writing it's worth $1.31.
During the years the Euro was approaching twice its launch "value", apparel import prices in the US were growing much faster than in Europe. But over that time, nothing happened in the real world to justify the Euro being worth 45% more than at the beginning of the century.
The fluctuations mainly reflect changes in foreign exchange traders' perceptions of how they can maximise their own earnings.
Which is pretty much the same as the explanation for the roller-coaster cotton prices of the past few years. Though some movements were stimulated by some real (though rarely justified) fears of crop shortages or supply gluts, the only proper reason for the way cotton prices soared then plummeted was traders' fear and greed.
A third key factor - energy prices - is even tougher to predict. Forecasters struggle to get the price of West Texas Intermediate or Brent Crude oil right, but those two widely-quoted numbers are largely the result of the balance between supply and demand.
But what a factory owner in Dhaka, or a truck driver in Indonesia, has to pay is more the result of utterly unpredictable government decisions about legislating for maximum energy prices, or the level of subsidy they'll pay to keep prices down.
A quarter of Bangladesh's total government spending, for example, went on publicly declared energy subsidies in the 2011/12 financial year. That level is unsustainable - and many businesses can't understand the logic for the near-doubling of energy bills during 2012 as the government tried to cut those subsidies down to size
Minimum wages add to the mix
Many factory owners feel the same about wage rises. With a growing population in most poor countries, they can't see an economic case for increasing minimum wages - or for having a legally-enforced minimum.
Politicians describe things differently. In public, many argue that factory workers should participate in their countries' rapid economic growth in proportion to the way factory owners do. In private, they'll point to the fate of many Arab leaders (and their countries) over the past two years, and say the way to avoid a similar fate is to put wages up.
It doesn't matter, of course, who you agree with. The truth is that minimum wages aren't set in any predictable way, but as a result of politicians' judgements about how they can keep workers happy without sending successful manufacturing businesses to the country next door.
Predicting the outcome of all that requires subtle political judgement about often obscure processes in countries few observers really understand as well as they like to pretend.
And of course minimum wages are only part of the story.
Over the past decade, many factory owners have sidestepped the restraints created by minimum wages by employing most workers on temporary contracts instead. Workers are fighting against this system in a number of countries, with support announced by the Indonesian government (though they've now had second-thoughts) and the Cambodian prime minister.
The outcome of this is unpredictable - as is the level of disruption to production and delivery schedules while the fight goes on. India's facing a two-day general strike in late February over the issue for example, though personally I doubt it'll attract the support of many of its workers.
Elsewhere - as in Haiti - there are worker campaigns (which also disrupt production) against less transparent ways activists claim factory owners are getting round minimum wage laws.
But in other places too - especially in China - the inflationary effect of wage rises seems to have been neutralised by a rapid increase in productivity. US average apparel import prices from China in October 2012 were the same as in October 2008: so much for all that guff about "declining Chinese competitiveness."
We can't predict whether import prices will go on falling, because we've no way of predicting that China's productivity gains will be followed anywhere else.
Or even that those gains will carry on in China - since the complaint filed by Mexico against China at the World Trade Organization (WTO) makes a very persuasive case that most of those gains result from subsidies paid to exporters by China in defiance of commitments it made when it joined the WTO.
Guessing whether Mexico can substantiate those claims, persuade its WTO partners to accept its case, and then what China will do, all need forecasting skills only a fully-qualified crystal ball wielder is likely to have access to.
We can't predict whether other Asian producers will be able to follow China's trick of absorbing higher wages by productivity or government subsidies. Nor can we predict whether other Asian producers (or even China) will as successfully avoid delivery delays as a result of social unrest as China has over the past few years.
And even in China, a speech in late December by the new leader, Xi Jinping, implied that he feared the Party might fall if it failed to reform politically.
In Indonesia, growing union strength and increasingly violent tactics have led some businesses to threaten to pull out.
Scarcely a week goes by without some factories in Bangladesh erupting into violence over anything from unpaid wages to a colleague hurt in a traffic accident on the way to work.
In Cambodia, only a few months after an apparently agreed wage hike, there has been an eruption of demonstrations for minimum wages more than twice the currently agreed level - and over the perceived unfairness of the country's legal system in any issue involving factory workers.
The new Cambodian wage claims involve strikes and protests as well as "naming and shaming" demonstrations outside branches of some Western apparel specialists.
This looks like the first serious labour dispute arriving from the Asia Floor Wage Campaign (AFWC), a coordinated attempt in a number of countries to calculate a "living" rather than a minimum wage (usually by labour-friendly overseas academics) then push for its adoption, either as a revised legal minimum or voluntarily by suppliers to major Western buyers.
The campaign has gone through its calculations in Cambodia, Sri Lanka and India, though the movement also has some activist presence in Indonesia, Malaysia, Pakistan and Bangladesh.
This is part of a substantial expansion in compliance campaigning over the past few years - and the impact is still unclear.
The campaign launched in July 2011 by Greenpeace to enlist buyers into a coordinated programme to eliminate toxic discharges in their spinning, weaving, dyeing and finishing suppliers has so far proved highly effective in recruiting most better-known large brands and retailers (though it's still too early to judge how much toxic discharge will be prevented, or when, as a result).
On the other hand, the campaign launched in April 2011 by a group of activist organisations for buyers to sign up to what's now called the Bangladesh Fire and Building Safety Agreement (BFBSA) has so far failed to find a single committed signatory (PVH's agreement is conditional on three other major buyers signing up - but so far only Tchibo has).
Campaigns to force Adidas, Li & Fung and Esprit to pay wages outstanding to workers at factories that have gone bankrupt have also made little progress - but the argument rumbles on. The AWFC campaign is too recent to form any judgement about its effect.
Meanwhile, the unprecedented rate of economic growth in many developing countries is putting serious strains on infrastructure.
Unscheduled power outages keep getting worse almost everywhere in South Asia (causing havoc in delivery schedules and forcing production costs up). And few places have China's network of modern highways and trains, allowing production to be relocated away from congested coastal cities.
Of course there's always a country coming into prominence that's previously had no role to play in garment making. But we have no idea how long it will take before Burma has the manufacturing and delivery facilities to supply Western buyers, how efficient its factories will turn out to be, or even whether Burma will lose its pariah status in the eyes of Western consumers.
Imports into the West from Ethiopia are growing remarkably fast (even if they're still well below forecasts made by the country's most bullish promoters). But they're still less than a quarter of what's arriving from Mauritius, Lesotho or Kenya - which only just squeeze into Clothesource's Top 50 Western Supplier Chart at numbers 46, 49 and 50.
Forecasters have to start somewhere. But a lot more influences sourcing than wages and fabric prices. Infrastructure, social tension, real energy prices, currency rates, power availability and buyers' ability to control what their customers expect them to be responsible for all count a lot more.
The prospects for these things in 2013 can't be called any more positive or negative than they've been for the past decade. Just an awful lot more uncertain.
And if there's one thing most business people hate more than rising costs or falling sales, it's uncertainty.
An interactive databank with intelligence on the major apparel sourcing countries
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