In the current recession, factory owners are transferring business away from their marginal suppliers to their core operations, creating a major problem in countries where the garment sector is a lifeline. To survive and prosper in difficult times, these industries must radically change the way they work, who they work for, and what they produce, believes David Birnbaum.

Suppliers, whether factories or national export industries, can be divided into three groups.

At the top are the strategic suppliers. They are the inner critical core on which customers rely for the most important share of their production.

In good times they receive their fair share of business. In bad times, they receive more than their fair share as customers will pull business away from other suppliers to keep their strategic suppliers busy.

In truly terribly times their orders may fall, but their share of the market remains intact or rises. In our industry, Greater China, Vietnam and Indonesia are all core strategic suppliers.

Below the favoured few are the second line suppliers. These are still preferred suppliers, but they do not enjoy the same level of support.

In good times, they may do well. However, in bad times they do very badly indeed as their customers transfer work from them to their strategic suppliers. This group includes countries such as India, Pakistan and Sri Lanka.

At the bottom of the pile are the marginal suppliers. These are the national equivalents of sub-contractors.

When business is good, they have a surplus of work. But when business turns bad, they go into a state of crisis. When business turns very bad, they move from crisis to catastrophe.

In most industries, the marginal suppliers are the little people. Not so in the garment industry.

Once again, we are different. Our marginal suppliers include DR-CAFTA, the US' second largest supplier, as well as Cambodia, its eighth largest supplier.

What makes a region with a 10% market share or a country with a 3% market share a marginal supplier?

The answer is ownership.

The factories in both DR-CAFTA and Cambodia are, for the most part, foreign owned and in both cases those foreign owners also operate large factories located in other countries. 

To the Korean, Taiwanese, and Hong Kong factory owners, their Cambodian branch factories are strictly marginal operations - places to dump orders too cheap to produce in their main operation in China.

Even in the best of times in our industry there is never a shortage of orders too cheap to produce, so their Cambodian branch operations were fully booked.

However, in bad times when orders become scarce, the big-time strategic suppliers will decide that there are no orders too cheap to produce.

They will now send whatever orders they have to China, leaving their Cambodia branch factories with little or nothing.

DR-CAFTA faces a double whammy. On the one hand, those same Koreans, Taiwanese, and Hong Kongers own branch operations notably in Guatemala, El Salvador, and Nicaragua.

They look at DR-CAFTA the same way they look at Cambodia - a place to dump orders for low value-added goods.

In the current recession, just as with Cambodia, these Asian factory owners are transferring business away to their core operations.

On the other hand, many of the remaining operations - particularly the larger and more successful factories - are owned by American companies such as Hanesbrands, Gildan (Canadian), Fruit of the Loom, Russell Corporation etc.

These companies are facing reduced business and are therefore cutting down their orders. To make matters worse, many of these same companies are expanding away from DR-CAFTA to Asia and Haiti. 

Serious problem
The problem is very serious for the marginal suppliers.

In these countries the garment industry plays a vital role. It is the largest industrial employer. In Cambodia, Honduras, El Salvador and Nicaragua, garments are just about the only industrial employer.

Those employed in the industry are first-time workers, drawn from a non-monetary, subsistence farming economy.

Having entered the monetary economy through the garment industry, that sewer cannot turn back. Furthermore, each sewer supports four or more family members.

Added to that are the truck drivers, trim makers, and others employed in support industries.

Then include the multiplier effect - the wages received by the sewer are spent in stores where their income supports others.

Altogether that young woman sitting at a sewing machine is supporting on her shoulders perhaps 16-18 people who rely on her for the roof over their heads and the food on their table. 

To survive, the industries in DR-CAFTA and Cambodia must climb out of the marginal-supplier hole and become important in their own right.

The problem is not just foreign ownership. In fact with the exception of Korea, Taiwan and Hong Kong — the original garment-exporting countries — all national garment industries were built by foreigners, including China.

The problem facing both Cambodia and DR-CAFTA is one of arrested development.

These countries have failed to move from an industry dominated by foreign investors to one owned by local industrialists. 

Regional strategy
To make the move, an industry requires a national, and sometimes a regional strategy. But as a pre-requisite to creating such a strategy, the players must have some understanding of the global garment industry.

Unfortunately few players in either Cambodia or DR-CAFTA have any real knowledge of the global industry.

In the end, the result has been retrograde development.

Five years ago, major locally owned DR-CAFTA factories were exporting high value-added garments to department stores and up-market brand labels. Some were even considering moving from mid-market to designer jeans.

Today, with very few exceptions, those same factories are producing low-value products such as basic cotton knit briefs for mass-market brand importers.

When asked why they purposely went downhill, they reply: "That is where our customers want us to go."

In a sense they are correct. Their customers look to China, Vietnam and Indonesia to supply high-value fashion goods. They see DR-CAFTA as a marginal supplier of low-value mass-market items.

And, unfortunately, DR-CAFTA suppliers are more than happy to pander to their customers' prejudices, because those suppliers cannot understand that their industry with its well-trained multi-tasked sewers and its unique proximity to the US market is ideally suited to produce high-value added fashion goods. 

The giant marginal industry model will not survive.

To survive and prosper in these difficult times, the marginal industries in Cambodia and DR-CAFTA must radically change the way they work, who they work for, and what they produce.

David Birnbaum is the author of The Birnbaum Report, a monthly newsletter for garment industry professionals. Each issue analyses in-depth US garment imports of four major products from 21 countries, as well as ancillary data such as currency fluctuations, China quota premiums and clearance rates.