The Flanarant: Politics, productivity and predictions for 2014
Political instability has impacted the garment industries in Cambodia and Bangladesh
In this month's Flanarant, Mike Flanagan looks at why it is so difficult to forecast long-term trends in garment making.
The last two weeks of December threw up three huge issues that overturned most of the current wisdom about the garment industry.
1: The brutal reality of politics in developing countries
Garment-making happens almost entirely in developing countries, where United Nations data released in December shows it continued to grow faster than in the West during the third quarter of 2013 - despite all the talk of onshoring.
Predicting the effect of instability in those countries is getting almost impossible - and with 40% of the world's population having national elections in 2014, prediction is going to get tougher still.
But the instability can come close to killing the viability of an entire garment industry, as happened in Nepal a decade ago. In Cambodia and Bangladesh, there is no other activity that can employ so many people.
Notwithstanding a year of repeated tragedies and violence, immense efforts by Bangladesh workers, buyers, factory owners and worldwide wellwishers managed to keep the country's garment exports growing - and new jobs being created - in the 12 months following the Tazreen Fashion fire in November 2012.
But industry spokesmen claimed a" hartal" (a programme of intimidation forcing businesses to close) called by opposition politicians during the last few weeks of 2013 in the run-up to the 4 January elections had seized up transport, making garment manufacturing almost impossible, and threatening a lethal liquidity crisis for most of the country's factories.
In Cambodia, cynical exploitation by opposition politicians of a garment worker wage claim led to a strike by six unions, mass worker intimidation by strikers, and the near-closure of most factories on 25 December. This was followed by a spiral of increasing violence leading to five deaths on 3 January and the real threat of a collapse in the country's apparel industry.
On 6 January, it looked as if workers were responding to calls to end the strike, and most were returning to their jobs. Cambodia's garment industry - its leading job creator and exporter - has probably survived, though a number of factory owners are probably reconsidering expansion plans.
Bangladesh may have been more badly wounded. Mohammed Shahidullah Azim, vice-president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) estimated on 7 January that his member factories had lost about $1bn in total from the political unrest. But the only response of the opposition to the election was to declare another hartal.
As well as the garment industries in these two countries, a host of other initiatives - from H&M's trials on living wages to tests run by the Better Factories programmes - look under threat.
In far too many developing countries, one bunch of politicians will risk damage to the economy to try to kick the others out. In Bangladesh and Cambodia the garment industry is the only viable industry around to bear the brunt of any planned campaign of disorder.
Meanwhile, elections in Honduras - with just as lethal a tradition of political violence as Bangladesh - passed off with no disruption to the garment trade. The re-emergence of violence in Egypt has further destabilised its massive formerly state-owned spinning and weaving plants - but scarcely touched its garment exporters.
In Thailand, though - which the respected Economist Intelligence Unit predicted was no more prone to political violence than the UK, France or Holland - escalating riots have led to casualities, and threaten to disrupt clothing production and transport.
2: China's apparent productivity miracle in garment making
During December, Clothesource TradeTrak showed that the average price of garments arriving in the US from China during autumn 2013 was 1% lower than in 2008.
Garment imports from the rest of the world were 12% more expensive. And despite repeated claims buyers are fleeing China, the number of garments the country exported to the West was still higher than both last autumn and autumn 2008.
There are lots of explanations for this. But however much dodgy dealing might be involved, no-one can ignore the fact that there's also been a near-miracle in its garment workers' productivity.
This is a threat to the rest of the world - not least because attempts by other Asian countries to hike wages are undermining their competitiveness. Who's going to want to make clothes in riot-prone, inflationary, Indonesia when they're just as cheap in peaceful China?
But it's a lesson too. Wages growing as fast as China's don't have to mean declining competitiveness.
The world's still full of consultancies claiming to rate the competitiveness of garment production centres - and China's score in these publications is usually at odds with its growing real-world competitiveness. That's partly because the ratings look at relative input costs (such as labour), where China scores only modestly. China scores a lot higher when we rate the external factors that determine how efficiently those inputs are turned into garments.
On measures like reliability of power supplies, time and cost of ports processing exports, getting decisions from local authorities for building permission, availability of efficient freight between factories and ships, and even the need to bribe officials, China is among the most efficient places on earth to make things.
If factory owners are prepared to improve productivity, and the local environment permits, rising wages in China have actually spurred factories, peacefully, to greater productivity.
It's tempting to conclude that businesses elsewhere need to learn what they can from China's success, rather than complain they can't compete with it.
The big question, though, is whether the business climate will be as favourable to improved productivity anywhere else: it may not.
To my mind, any forecast for the next few years fundamentally misunderstands the garment industry if it doesn't take account of China's ability to remain competitive as wages soar.
3: The flight from spinning and weaving in China
China's Keer Group announced a $218m spinning mill investment in the US in mid-December. This was just one of dozens of newly-announced overseas plans (from Uruguay to Turkey) by Chinese spinners and weavers, and dozens of plans by all kinds of foreign upstream textile companies to invest in the US.
Unlike garment-making, upstream textile investments always involve tens or hundreds of millions, and often involve just a handful of jobs. Many Chinese companies now operate mills overseas for three reasons:
- they're going to have to close polluting and energy-intensive plants in China anyway; and/or
- they're worried that other countries' proposed trade deals - like the TPP (Trans Pacific Partnership) and the EU-US Free Trade Area - will freeze out garments using Chinese-made yarn; and/or
- China's cotton policy is making Chinese-spun yarn absurdly uncompetitive. Plans announced by the Chinese government in late December to reform this policy are vague, tentative and unlikely to be implemented nationally for the next couple of years
A hugely disproportionate number of plans involve setting up in the US. I think this is because:
- Many so-called overseas expansion "plans" are still very tentative, and need assurances from local governments about the cost and reliable supply of power. In my view, many of the assurances investors are seeking in, say, India or Pakistan are hopelessly unrealistic and the projects will never materialise.
- US energy costs are now a real competitive advantage for energy-intensive businesses like spinning and weaving. The prospect of further falls in US energy prices from fracking gas onshore may be almost as fundamental a factor in the garment industry as Chinese wage increases driving up productivity in labour-intensive businesses like sewing.
- American policy on using public money to subsidise inward investment in big plants would horrify most American politicians if a foreign country copied it. One local paper put the cost of state and municipality subsidies to Keer at a staggering $70m, though this has been denied.
- America's "yarn forward" rules of origin mean most free trade deals allow duty free access only to garments made from yarn spun in the partner's country or in the US. So yarn from US spinning mills has a competitive advantage for garments made under current deals - and in the proposed TPP and US-EU FTA.
Among the likely immediate consequences of mills' flight from China are:
- A change in the debate about trade deals. Retailer and brand lobbyists have argued that the "yarn-forward" rule is all about propping up a collapsing industry. What are they going to say when American spinning and weaving grow a lot faster than apparel retail?
- A similar change, though, in the debate about the virtues of onshoring. America's new mills are costing close on half a million dollars per job created; the money's being spent on German and Swiss machinery rather than American workers. Higher textile productivity might actually reduce still further the number of people at work in America's mills - raising the likelihood of a new scare about "all these foreign investors putting Americans out of jobs."
- A sudden obsession with the importance of subsidies in trade deal negotiations. Progress on the TPP is bogged down by American suspicion of other countries' subsidy policies. Expect even less progress on the TPP and the US-EU FTA if negotiating partners can demonstrate the claims of subsidies to Keer (which would be illegal in Europe) contain even a grain of truth.
It's tougher to forecast the longer-term implications for garment making. All of the plans will take years to turn into yarn and fabric, and who knows what else will change in that time?
Was that all?
The inability, for the third year running, of TPP negotiators to meet their year-end deadline suggests no-one really appreciates the complexity of getting the 12 countries to agree.
Over the past decade, it's taken at least seven years for every single major trade deal discussed by the US to move from the negotiating table, through Congress, to detailed regulations allowing the deal to be implemented. And the TPP needs a dozen countries to go through the same process.
And just as domestic politics in much of the developing world have recently become a lot more violent, even those countries with a more stable government have seen politics have become a lot more fractious, legislators less prepared to back governments, and decisions taking longer to emerge.
Strong year-end growth in garment exports from India and Sri Lanka, combined with the December grant of duty-free EU access to Pakistan, implied a rosy future for South Asian producers outside Bangladesh.
But power supply problems in Southern India, and a badly implemented programme for improving power supply to garment makers in Pakistani Punjab, just emphasised again how essential a reliable infrastructure is - and how scarce it is in South Asia.
For the first 11 months of 2013, lots of flaws in the global garment industry were revealed, and the industry went through huge changes to fix those flaws.
But in the last couple of weeks of the year we saw, dramatically, how the industry is subject to bigger influences outside its control. 2014 is unlikely to be anything like we thought in mid-November.
Companies: H&M Hennes & Mauritz AB
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