The Flanarant: What's the real cost of Offshoring 3.0?
Audit fatigue among many clothing suppliers has prompted firms like Nike and Levi Strauss to adopt new strategies for driving standards among manufacturers. This is just one of the responses to what Mike Flanagan describes as 'Offshoring 3.0' - where companies begin to take measures to correct the downsides of overseas production. Here he asks what it means to the cost of garment procurement.
A recent article on just-style referred to "audit fatigue" - the growing feeling among many suppliers that corporate responsibility audits are getting excessive. Compliance audits in apparel and footwear factories are claimed to cost up to $2bn a year, and there's a growing backlash against them.
Companies that get audited complain they're disruptive, repetitive, trivia-obsessed, time-consuming and often mutually contradictory.
Businesses like Nike and Levi Strauss, who believe that buyers have too often "sourced, audited, then remediated", in April launched what Levi called 'A New Approach to Supply Chain Engagement' and Nike called its Sourcing & Manufacturing Sustainability Index (SMSI) - both involving completely different philosophies to drive manufacturer standards.
just-style's article on audit fatigue was prompted by an update from the Hong King based Global Apparel, Footwear and Textile Initiative (GAFTI), which aims to cut compliance costs through greater buyer collaboration.
But I suspect the $2bn figure is just a pinprick compared to all the costs that 'Offshoring 3.0' seems to be adding to garment procurement - and the jury's still out on the net effect it has on the prices customers have to pay in the shops.
What's Offshoring 3.0?
A quarter of a century ago, most clothes were worn in the country they were made, with a small proportion imported into rich countries, mostly from a few small, dynamic Asian countries.
Since Western markets were growing, those Asian imports did little to challenge Western garment factories - but in the late 1980s, Offshoring 1.0 meant American garment sourcing from Mexico and Central America began to bring about the closure of some US factories. Their fate was shared by Western European factories as apparel manufacturing moved to Eastern Europe and the southern and eastern Mediterranean.
More and more garments began being made in neighbouring countries.
Offshoring 2.0 followed in 2005, when EU and US import quotas - mostly against Asian countries - were meant to be lifted, and garment making moved massively to Asia. In practice, European and US imports from China remained under loosening control until 2009, which was the year it looked as if China's share of Western apparel imports peaked.
That was also the year the great financial crisis hit the West, and marked (we hope) the temporary halt in 20 years of constant growth in Western apparel markets.
We've now moved into Offshoring 3.0, though it's taken a couple of years for a reasonably accurate picture to emerge.
The new Clothesource Sourcing Toolkit 2013 looks in some depth at the implications of this new regime, but three features of Offshoring 3.0 are widely understood:
- The Western apparel market is mature. It grew in real terms between 2000 and 2010 because Offshore 2.0 brought clothing prices down, and most Asian suppliers saw sales grow even faster because they were taking business from factories in or near the US and Europe. Apart from a percent or two in good years, further growth in one Asian manufacturer's apparel sales to the West can come only by taking sales from another Asian manufacturer.
- Offshore costs are inflating faster than costs in the West.
- The growing debate about sourcing geography. I've argued before in this column that it's naïve to expect growing relative costs in Asia to bring about any substantial return of large-scale manufacturing to Western Europe or North America. But we're clearly never going to see the fantasies of China's 100% monopoly of apparel manufacture conjured up by the more rabid Western protectionists either.
And there's a fourth feature many of us rarely admit:
- The downsides of Old Offshoring get more widely recognised. Offshoring 1.0 and 2.0 brought millions of jobs - and higher wages - to some of the world's poorest people. But there were real abuses of human rights, appalling wages in many cases, and widespread increases in pollution in poorer countries. And hundreds of thousands more jobs were lost in rich countries that haven't yet been replaced.
One crucial element in Offshoring 3.0 is the diversity of actions being taken around the world to correct those downsides - such as growing protectionism in most of the developing world outside China, and hostility to any further erosion of protection in the West.
Of greatest interest to most readers, though, is the avalanche of measures aimed at correcting the downsides of Old Offshoring in manufacturing countries. Nike helpfully categorise them into:
- Lean. In its early days, offshoring involved all kinds of wasteful activity - from excessive use of air-freighting through absurd "throw more people at the problem" practices in offshore factories, to all kinds of needless duplication - not least in activities like auditing. These days, we're seeing more and more collaboration between buyers, through projects such as the Sustainable Apparel Coalition. Programmes like this are classic examples where everyone gains.
- Green. Some greener production techniques ultimately save costs - but they're already in the "lean" basket. But right now, most don't; that's why factories typically cause some pollution until local government forces them to do something expensive to become a less smelly or dangerous neighbour.
The industry faces Green pressure from Western governments in all kinds of ways - from REACH legislation to the EU's carbon taxes on air-freight - that inflate their costs. It often faces parallel pressure from developing-market governments (most of all, China) to produce in a less environmentally destructive way. And the industry itself is creating its own initiatives.
Last summer, Adidas, Puma, Nike and Li Ning were targeted by activists wanting a commitment to zero discharge of hazardous chemicals (ZDHC) anywhere in the supply chain. They agreed remarkably quickly to do so by 2020, were promptly joined by H&M, C&A and G-Star Raw - and to publicly report on progress every quarter.
Unlike most previous brand projects for ethical improvements, the ZDHC project involves a great amount of common procedures and measuring systems between the seven lead partners.
This collaboration is undoubtedly praiseworthy - but, though it avoids expensive duplication and speeds up the elimination of those chemicals, it means whatever extra costs are incurred by the cleanup will, ultimately, hit customers of all seven partners.
The ZHDC programme started as a result of pollution in China. Now five grassroots Chinese organisations have targeted around 40 other major apparel brands, including Abercrombie & Fitch, Uniqlo, Victoria's Secret, and Zara. They want to see a similar, but more widespread, programme, and help in enforcing existing Chinese laws more rigorously than the Chinese government does.
If those five succeed, the Chinese environment will be improved - but almost certainly at the cost of even more auditing, further up the supply chain, by Western buyers.
- Equitable. Until recently, of course, the biggest objection to Old Offshoring was working conditions. Wages weren't just low because the cost of living in Bangladesh was lower than in the US: they were low because Bangladeshi workers had a spectacularly lower standard of living than the Americans they replaced, and worked longer hours in nastier factories.
There are two broad responses to that self-evident assertion. One points out - generally accurately - that Bangladeshi garment workers have chosen to work in those factories because they offer a better standard of living than the alternatives, and goes on to argue that the only reliable way to improve working conditions substantially is for Western buyers to agree to pay more.
The other argues that ill-paid workers are unproductive workers, and that training workers better and differently produces greater employee health and productivity.
Ultimately, this assumption goes, investments in workers more or less pay for themselves. And the odd thing about this argument is its proponents. Not extreme union activists (who rarely believe anything of the sort, and just think the only way bosses will ever pay decent wages is by physical violence) or liberal development activists like Oxfam. But on the one hand shareholder-accountable US capitalists such as Oregon-based Nike and San Francisco-based Levi Strauss & Co. And on the other, the Communist Party of the People's Republic of China, which is busy outlawing polluting plants and promising to double wages.
Odder still, there's relatively little difference on green issues between the New Age capitalists of the American West and the Chinese government (it's forcing the closure of more polluting plants than any government anywhere, ever).
But none of them are crystal clear in public about who actually picks up the tab for greening the supply chain. I suspect Nike and Levi's believe making it greener will cost more than the savings from making it leaner, and that's part of the cost of their brand values, which they'll recoup from premium pricing.
The Chinese government, I suspect, simply thinks the Communist party has no alternative to cleaning the country up and increasing wages. But, whether they've thought this through or not, they may well be intending to experiment how far the pre-offshoring Industrial Revolution might have gone.
At the beginning of the nineteenth century, textile makers in Western Europe stepped up the pace of mechanisation. Until around 1980, other garment and textile makers followed a similar path: automating jobs saved money - usually by substituting energy and expensive capital equipment.
The process of automation in garment assembly stopped when it became possible to use really low-wage labour in poorer countries. It was a great deal cheaper and less risky to move production abroad than to buy the high-cost kit necessary to drive production costs down further.
But what if it's possible to combine growing automation with lowish-cost labour?
Doubling Chinese wages still makes them two-thirds cheaper than wages in the US or Western Europe, and moving production away from China's crowded east coast potentially brings costs down still further. China accounted for over two-thirds of all the world's new spinning, weaving, knitting and finishing investment in 2011: can better-trained and paid staff, with better equipment, produce more cost-effectively than their worst-paid peers in Bangladesh or Burma?
Many Asian governments would like the answer to that question to be "yes". For the past few years, they've nearly all been succumbing to the pressure for higher minimum wages to forestall public disorder.
In our view at Clothesource, the difficulties faced by developing-economy governments in handling their citizens' economic aspirations is likely be one of the biggest external challenges of Offshoring 3.0.
Levi's and Nike put more emphasis on training factory staff to improve productivity than on capital investment. Nike is "exploring ways...contract factories can reward their workers for obtaining higher skill levels through supported training and more focused investment" and says it "believes this will lead to an increase in productivity that will allow factory partners to transition to a more complex wage model and still maintain profitability."
It goes on to argue that "increasing awareness among factory managers of what good [personnel management] looks like and helping them develop related capabilities leads to significant increases in worker satisfaction in those factories."
But Nike doesn't say there is clear evidence that higher rewards or better personnel management actually do always lead to higher productivity. Nike doesn't run factories, and isn't directly absorbing the cost suppliers carry in skill-related pay or "better" personnel management practices itself.
Many of us may wish them well - but it's a lot easier to be clear about the costs of training and higher wages than about the consequent improvements in productivity.
Subtle differences in philosophy
Levi's "New Approach to Supply Chain Management" contains broadly similar principles to Nike's. But they're not the same: where Nike majors on better training in personnel management practices, Levi's is concerned with issues of gender equality and access to financial instruments.
On wages, Levi's says it is committed to working closely with other stakeholders who are trying to determine how to achieve a living wage and improve workers' standard of living. It will "advocate with governments to set minimum wages consistent with the cost of living."
The two don't seem to be incompatible, and Levi's stresses its willingness to collaborate with other buying companies. But they're slightly different approaches from each other, and differ from the Chinese government.
This leads, of course, to the possibility of a commercially-owned factory in China, used by both Levi's and Nike, but with an officially-approved union. Four subtly different philosophies (because the government-accountable union will differ from the owners) scarcely sound like a recipe for productive collaboration.
The gap between factory owners wanting to make a profit, while buyers and governments want better trained, better motivated workers, is real. Life would be terrific if those visionary governments and buyers were proved right.
But right now: we just don't know.
An interactive databank with intelligence on the major apparel sourcing countries
Top stories of the week include a look at the clothing and textile challenges that face Xi Jinping, the new leader of the Chinese Communist Party, accusations by Greenpeace that 20 leading fashion bra...
Twenty leading fashion brands are selling clothing contaminated with chemicals with hormone-disrupting or cancer-causing properties when released into the environment, according to Greenpeace Internat...
Sportswear retailer Foot Locker has unveiled a new store concept designed for women, featuring fit zones....
- TPP trade pact in milestone signing by 12 nations
- Cheap polyester contributes to cotton import shift
- US apparel retailers' January 2016 sales roundup
- Combating the new normal – 10 trends for 2016
- Under Armour defends questions over strategy
- Bangladesh factory fire renews worker safety fears
- China factory activity continues to deteriorate
- Southeast Asia – a strategic sourcing review
- H&M and Primark price rivalry reaches equilibrium
- PVH to take control of Tommy Hilfiger China unit
- Southeast Asia strategic sourcing review – a focus on Cambodia, Vietnam and Myanmar
- Wearable technology: The future market potential for smart garments and e-textiles
- Global market review of denim and jeanswear – forecasts to 2021
- Wearable Technology Market by Product, Application, Type, & Geography - Global Forecast to 2020
- E-Textiles: Electronic Textiles 2014-2024