A squeeze on capital could be looming for Asian suppliers

A squeeze on capital could be looming for Asian suppliers

For many in the global garment supply chain the recession that 's been hanging over the West has scarcely caused a dent in most Asian countries' growth. But it now looks as if many in Asia are about to be hit by a new problem - a serious liquidity crisis among many textile and garment businesses.

In the apparel trade every silver lining, it seems, is always going to be someone else's cloud. And right now there's a real risk a great big cloud's about to rain on a lot of Asian suppliers.

What's more, it's going to be tough for Western buyers to know which suppliers are affected.

Around 2008 the Chinese government tackled concerns that its garment and textile industry was running out of steam. Faced with the risk of a catastrophic rise in unemployment if garment and textile exports fell when recession hit, the country poured cash into loans and numerous other ways of easing cash flow problems among small exporters. 

The strategy worked: China's share of the global garment trade soared in 2008 and 2009, avoiding any significant growth in jobless.

But in the eyes of many policy-makers, the strategy probably worked too well. China's economy has been in danger of overheating for some time, leading to high inflation and encouraging too many scarce workers into industries like garment making that add relatively little value.

Consumer inflation, though lower than in India or Pakistan, has almost trebled over the past 12 months, while it has fallen slightly in most other Asian countries.

So China has now started putting the brakes on. Its planners have instructed banks to reduce lending to smaller, or low-tech, businesses and to concentrate on financing sectors the State believes has a long-term future. 

As a result, many Chinese garment and textile businesses are in danger of running out of cash. And there is some indication that for many small businesses, interest rates and capital availability are becoming China's major point of vulnerability.

Even official interest rates - at 6.1%, still lower than in most of Asia - have increased sharply after decades in which businesses could generally obtain capital more easily and cheaply in China than elsewhere. But those rates apply only when banks are prepared to lend.

Lenders and investors are now beginning to regard garment making, shoe making and textiles as sunset industries. So state media have carried reports of cash-strapped smaller businesses borrowing from underground lenders at annualised rates of 60%.

Similar situations elsewhere
In India, it's a slightly different story - but with a similar result. The Confederation of Indian Textile Industry (CITI) claims textile businesses have lost around $2bn over the past three months - largely as a result of businesses making the wrong bets on fluctuating yarn prices. 

But many have incurred substantial interest and repayment on loans taken out to upgrade their facilities, and rising interest rates have made payments due to banks even more onerous.

The cash flow problems many businesses are suffering because of yarn problems, together with higher payments to banks, means CITI predicts a serious liquidity crisis among many textile and garment businesses over the next few months. 

And, as in China, the problem isn't uniform across the industry: it's unlikely to affect well capitalised businesses, businesses that don't have to rely on banks for funding, or businesses that have made the right bets during the recent yarn price rollercoaster.

And again, as in China, it's likely to be very difficult for buyers to know which suppliers are being affected.

In Vietnam, though not much noticed abroad, Vinatex (the state-controlled textile holding company) believes interest rates are the biggest threat currently facing the country's garment and textile businesses.

Indeed, the group's deputy managing director, Nguyen Tien Truong, seems to believe they may cause garment makers greater problems than raw material inflation, labour shortages and the current likelihood of minimum wages being set higher (and earlier) than expected.

"Garment exporters need large loans to buy materials for production, and so they can only afford to stock inputs for one month because of the high interest rates," he said at a recent ministerial meeting.

For suppliers, the basic problem is that most have found ways of wheeler-dealing their way around rising raw material or wage costs. But you can't do that with banks.

For customers, the problem is that there is no way of predicting which suppliers are likely to be damaged by rising finance costs or shortage of capital. 

If wages or yarn prices go up in a given country, the price rise is likely to felt by all factories there. But it's a lot more unpredictable which suppliers get hit by rising interest rates - and few are likely to tell their customers that their banks aren't prepared to lend money.

As so often in this industry, there's no easy solution.