August 2010 management briefing: Part IV - The winners and survivors
Looking at performance on a global market positioning basis, rather than geography, the last two years have been challenging for all global textile and clothing producers, as demand waned and customers put off purchasing decisions.
And the winners, perhaps not unexpectedly, have been global manufacturers who can quickly turn around fast and cheap garments in continuous cycles for their chains of branded retail outlets. The most successful according to analyst John Thoburn have been low-end chain retailers like Primark in the UK and Walmart in the US.
"Industry sources suggest that this is not simply a switch of consumers to cheaper products in times of economic hardship, but an upgrading of products at the lower end into more fashionable areas while maintaining low prices," writes Thoburn in his extensive study on the recession's impact for the United Nations Industrial Development Organisation (UNIDO).
But mid-range global brands have also succeeded, and the evidence shows this includes those with distance to market value chains that vary from the completely vertically integrated to the completely outsourced.
H&M turned in sales of SEK 119bn or EUR12.4bn in 2009, an increase of 14% year-on-year. The H&M motto 'Fashion and quality at the best price' has proved a winning combination with budget conscious consumers. H&M does not own a single factory and outsources its production completely to around 700 suppliers spread around the globe.
Managing Director Karl-Johan Persson, who took up the role on 1 July 2009, said in a statement that while the recession's bite had been felt, the H&M model had proved it was capable of not only surviving, but prospering during the downturn.
Uniqlo, like H&M, operates under a fast turnaround, low-cost model, linking research and development in New York and Tokyo (to capture and predict the earliest trends) to an integrated supply chain concentrated in Asia and a precision inventory system that is able to deal rapidly with re-orders.
One of its most successful products has been the HeatTech underwear range, made in conjunction with Toray chemical industries that uses nanotechnology like anti-odour in a range of colourful and cheap underwear lines.
Spain's Zara on the other hand, with its atypical supply model, has also had a relatively good year despite the challenging sales environment. Controlled by the Inditex group based in the Spanish industrial town of Corùna, Zara remains a vertically integrated manufacturer with the bulk of its production units still located in Spain.
Zara relies on a distribution network with high technological capacity where human intervention is critical. Store managers and customers are the fulcrum on which this system operates, feeding back opinions about collections and styles directly from the shop floor to the Zara HQ via a sophisticated electronic network.
This consumer-driven model is used as impetus to produce garments with fast turnaround times and eliminates costly advertising and markdowns.
And Zara too has weathered the economic crisis better than expected, with parent company Inditex posting net income in 2009 of EUR1.3bn, 5% higher than in 2008 and an increase of 14% in store sales from February to March 2010.
A less successful survivor
Not so successful, however, has been the Benetton model. Italy's Benetton is one of Europe's largest garment producers, and a traditionally vertically integrated producer, manufacturing cotton and wool garments for men, women and children.
It has built its consumer image on the ability to roll out basic styles in a range of different colours, controlling both the manufacturing process and its sales outlets directly. Historically this has all been kept close to home, with massive investments in special dyeing machinery and in a supplier network close to its headquarters in northern Italy's Ponzano, although even Benetton has now diversified to include foreign suppliers.
Benetton is a market-driven company, producing 150m garments a year with a central logistics operation at Castrette, also in northern Italy and another two hubs in China's Shenzhen (next to Hong Kong) and Mexico City.
Recently, and thanks to the challenges posed by like-styled European competitors such as Zara or even locals like Stefanel, the Benetton Group has begun to employ a dual supply chain strategy.
This essentially means fast turnaround goods are manufactured close to market and less time- sensitive garments are manufactured where the best profit can be achieved while keeping prices low enough to compete with other similar brands.
Professor Giuseppe Tattara has conducted numerous studies into the economic logistic models of Benetton. He believes that distance to market was once a factor in supply chain decision making but that this has now been superseded by the rapidity with which a supplier is able to respond to manufacturing needs.
"This has if anything been augmented by the recession where manufacturers must maximise their profits and streamline operations," said Professor Tattara. With this hybrid approach, 2009 was a "difficult" year for Benetton according to the group's annual report, with sales of just over EUR2bn in 2009, a 2.8% drop from 2008.
Raw material advantages
In terms of raw materials, cotton is a good example of how the best-priced, most flexible suppliers - who are able to find the right market unfettered by particular trade barriers - are winning the value chain game.
The US Department of Agriculture figures show that India has displaced the US for the first time as the prime source of Chinese cotton imports. The US has traditionally been a dominant supplier of cotton to the Chinese market, and was supplying 60% to China last year but its share fell to just 25% in 2010's first quarter, well below India's current position as the number one supplier.
Importantly the report points out: "Underlying these short term market changes are India's ongoing improvements in ginning practices and export logistics, which are enhancing its long term competitiveness vis-a-vis US cotton."
The importance of cost and efficiency together with quality guarantees was echoed by Rob Martin, sourcing manager of UK's Cavendish Textiles, in an interview with the National Cotton Council's website in the US.
"In recent years, as more retailers have moved the sourcing offshore, the market has become very competitive and prices and margins are continually under pressure...the availability and quality of integrated factories in the Far East has improved hugely. Qualities that were previously only available from European suppliers are becoming much more readily available from other sources," he said.
This adaptation has become critical in the world of fast fashion and has mutated the historical importance of distance to market to some extent, as analyst John Thoburn has pointed out: "...commentators have argued that the trend to nearby producers is weakening as 'fast fashion' does not necessarily imply short lead times, only a continuous flow of new products. Such a flow of new products can be planned somewhat in advance, and buyers can still look for the lowest prices from more distant countries."
Can ICT make a difference to Europe's competitive edge?
The textiles and clothing sector in Europe employs 2.6m people with exports of around EUR80bn a year according to 2006 World Trade Organisation data, but it is still a highly fragmented industry, dominated by small and medium-sized enterprises (SMEs) highly vulnerable to credit tightening during a recession.
SMEs also have limited access to consumers, a relationship nearly always mediated by distributors or lead firms.
European manufacturers have also been slow to adapt to the demand for integrated networks with fast turnaround and logistics capabilities.
A new European Union-funded Ebiz project is seeking to homogenise the communication channels between enterprises, making the fragmented industry more competitive with Asian suppliers.
The project essentially seeks to increase the take-up of e-business, standardising terminology and creating a broad reference architecture for clothing and textile ICT (Information and Communication Technologies) platforms that is easy to use, even for very small enterprises.
The project has so far produced a guiding document for inter-operability in the supply chains of the European textiles and clothing sectors, a document which has been the subject of trials in several companies.
Progress so far has been limited to pilot projects, but the take-up for schemes like this one could be accelerated by the recession, according to project manager Mauro Scalia.
"The importance of efficient eBusiness digital communication seems to have even increased in the current tough economic phase. This has been often confirmed to us throughout 2009 by feedback from both SMEs, interested in cost-saving achievable with eBusiness and larger companies interested in the increase of efficiency and time-to-market response," he said.
The effect of a growing social responsibility movement
No discussion of global value chains would be complete without mentioning the growing importance of Corporate Social Responsibility (CSR).
Shoes and garments produced in sweatshops by children have evoked consumer outrage and seriously damaged the brand image of global players in the past and it is clear many CEOs are unwilling to take the chance of exposure to this kind of bad publicity. Most regularly audit their supplier factories and many have even pre-empted criticism by publishing the at-times negative results of the audits.
Uniqlo for example published the results of its June-August 2009 audit of factories showing that 54 factories had been caught with one or more major violations and 16 with one or more severe violations of the company's code of practice.
One factory's contract had been terminated because of child labour violations.With millions of unemployed and skilled workers however, and factories eager to get production back up to pre-recession levels, the environment is ripe for significant setbacks to the CSR gains of recent years.
Thoburn for example, after numerous interviews with buyers in Asia, concluded that suppliers were ready not only to accept smaller orders but also to undercut prices, with clear pressure along the value chain to maximise profits.
Giuseppe Tattara is also sceptical that the CSR movement will grow in the post-recession environment. "All the importers and distributors have their certification in place. The problem is the vast number of subcontractors behind these distributors that are very difficult to monitor," he said.
By Lee Adendorff in Lucca, Italy; Wang Fangqing in Shanghai; and Paul Cochrane in Beirut.
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