More than a dozen garment manufacturing countries have seen their viability as volume suppliers to Western customers seriously undermined in the past year. China's growing strength hasn't been the clincher in any of them, but makes the market a great deal less comfortable for marginal players, writes Mike Flanagan.

The closure of Caratex - Botswana's largest garment making group - last month is bad news for the 5,000 people it employed, and for its largely Taiwanese management.

It certainly means substantially fewer garment exports from Botswana.

But, unlike the closure of Malaysian-owned Ramatex in neighbouring Namibia last year - which has led to the near-extinction of apparel exports from the country - the exit of Caratex won't wipe Botswana's garment industry out.

There are several dozen other garment businesses in the country, making clothes for South Africa, Europe and the US.

And though Caratex was by far the country's biggest manufacturer, it didn't dominate Botswana's industry in the way Ramatex almost was Namibia's garment and textiles industry.

The closure doesn't flag the likely end of sub-Saharan Africa as a significant location to buy clothes from either.

Caratex had a specific beef with the Botswana government over duty rebates - and though that beef niggles garment manufacturers in Swaziland, Lesotho and South Africa as well, it doesn't apply anywhere else.

Two crucial lessons…number one
Nonetheless, the Caretex closure flags two crucial lessons about worldwide garment sourcing today.

First: the recession so far has produced some surprising results:

• Overall, world demand for clothing didn't decline very much. But a wave of bankruptcies in late 2008, coupled with banks' growing terror, caused payments to dry up between September 2008 and spring 2009.

During this time many manufacturers were wiped out, and many others began to get very nervous they'd get wiped out too.

• At the same time, retailers became a great deal more grasping in the terms they were demanding. World garment prices, according to Clothesource Pricetrak, fell 8% between September 2008 and September 2009. That added to the pressure on the weakest manufacturers, so even more have folded.

• But China - in mid-2008 widely claimed to be becoming uncompetitive - was almost uniquely well placed to make the most of this. Because not only did US quotas against China come off at the end of 2008, but the EU's system of requiring Chinese export licences came off too.

So China was free to compete far more freely - just as non-Chinese suppliers were being savaged.

Its government had spent the years before the recession driving Chinese costs up: by increasing legal minimum wages, by reducing the rebate proportion of the Value Added Tax exporters paid on their raw materials and bought-in services, and by letting its currency appreciate against the dollar and euro.

Come the recession, it simply reversed all those policies. And at the same time only the Chinese government had the insight - and muscle - to ensure its banks kept the flow of credit to export factories between autumn 2008 and spring 2009.

So small and medium size firms in China survived the worst of the recession, while their rivals in many cases were driven out of business.

Worldwide weakness
Businesses worldwide were seriously weakened between autumn 2008 and late spring 2009.

In some countries - like Vietnam, India or Bangladesh - most of the bigger companies have come through all this relatively unscathed, and are picking up business many now-defunct local competitors once had.

It's still not clear how much damage those countries have suffered from the recession so far (estimates of job losses are mostly plucked out of the air to provide spurious justification for whatever subsidy some lobbyist's trying to scrounge from unsuspecting taxpayers).

But the garment industry overall in those countries remains in pretty good shape.

And though China's now got a record share, its manufacturers are having a tough time competing - and in some categories, like casual jackets, they've actually been losing share this year.

But the other side of China's success is what's happened in a lot of smaller countries.

Lesson number two
Second: as their firms get weaker, many smaller countries become more vulnerable to quite small changes in the operating environment.

How vulnerable a country is, though, depends on a number of factors:

• Madagascar is currently under threat from a US review of its duty-free concessions under the AGOA (African Growth and Opportunity Act) rules.

Those rules require the US President to take regard of a country's commitment to honest government - and the US doesn't agree with the overthrow in March 2009 of the country's democratically elected President.

Both the US ambassador to Madagascar and the American deputy assistant trade representative for Africa have made statements during November implying a high likelihood Madagascar will lose its concessions unless there are serious reforms.

It could lose those concessions from 1 January 2010: losing them can add 20-30% to the price of garments delivered to the US, which buys over 70% of Madagascar's garment exports.

Loss of AGOA privileges would probably devastate Madagascar's garment industry - and this could hit European customers, even though Madagascar's duty-free access to the EU would be unaffected.

• Sri Lanka has a quite different problem. Its duty-free access to the EU under the GSP+ rules depends on its honouring 27 international human rights conventions, which the EU, after an investigation the Sri Lankan government refused to cooperate with, believes the Sri Lankan government hasn't honoured.

The EU has recommended taking away these GSP+ duty-free concessions. But not before June 2010.

For most garments, the removal will add just 9.6% to their price when landed in Europe - and only if the Sri Lankan government reneges (which its Central Bank has argued it should) on the promise it made in 2008 to provide a subsidy equivalent to the new duty.

Sri Lanka's strengths, though, lie in garments like bras (on which the EU will charge only 5.2% duty), around a third of the garments it sends to Europe don't qualify for duty-free entry anyway. And sales to the US account for about 40-45% of the country's garment exports.

So loss of its EU concession would clearly hurt many Sri Lankan exporters and lose many Sri Lankan jobs - but it would hardly destroy its thriving garment industry forever.

Drastic impact
Other quite small changes in smaller countries' operating environments threaten to have drastic effects.

Costa Rica's exports have never recovered from the confusion about whether it would join the Central America Free Trade Agreement - and by the time it actually got round to signing up, buyers had realised there were other places to buy from, so its exports are currently running down 42%.

The Dominican Republic has suffered similarly - it its case from the apparently growing attraction of Haiti, with which it shares an island - so its sales are running down 51%.

The disruption doesn't need to be in the country concerned. Cone Denim's decision not to operate its recently completed denim plant in Nicaragua hasn't hurt Nicaragua's clothing exports too much.

But it's contributed to huge sales losses in neighbouring Honduras and Guatemala, whose jeans factories were relying on a Central American denim factory that could get Central America's low operating costs and retain duty-free access to the US.

In all, there are now over a dozen once-substantial garment manufacturing countries whose viability as volume suppliers to Western customers has been seriously undermined in the past year by closure of significant facilities, or threatened change in operating environment.

China's growing strength hasn't been the clincher in any of them: but that, combined with the recession, makes the market a great deal less comfortable for marginal players to survive in.

Today's environment is driving out both weak business- and vulnerable countries.
And, in almost every case, their disappearance is creating opportunities for other businesses and countries.

The growing vulnerability of the weak is one of the key themes in The World in 2012, the latest report from Clothesource.

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. The new suite of Clothesource Guides help buyers find the best value - and give emerging-market lobbyists hard data on what their competitors offer.