Worker productivity depends on factories, infrastructure and business culture

Worker productivity depends on factories, infrastructure and business culture

The issue of productivity in garment making countries around the world refuses to go away. But as Mike Flanagan writes here, there's no point in asking where the most productive workers will be in five years' time. It's the environment they're working in, and how that compares with other locations, he explains.

Last month Walmart convened a US Manufacturing Summit "to advance American renewal in manufacturing" - and to promote its pledge to buy an additional $50bn in US products over the next ten years.

Now I'm all in favour of retailers encouraging local manufacture, as I believe there's been a "buy anywhere than here" mentality infecting many US and UK buyers over the past 20 years.

But at that Walmart summit, Hal Sirkin, managing director of the Boston Consulting Group (BCG), repeated a commonplace about sourcing that can delude buyers as much as the "China's always the answer" myth that got so widely touted over the past decade.

His example was about America, but consultants and some economists often come out with a similar myth about German, or British, or French workers.

I'll explain where Sirkin's example led up a blind alley, but the same criticism applies to most generalisations about where to make things. I'm not bashing Americans here, just the use of a wholly irrelevant, but widely misused, piece of data.

Chinese workers, he said, are just 32% as productive as Americans, and their wages are exploding, so that round the Yangtze Delta in 2015 wages will be more than double their 2010 level. American workers' wages are scarcely rising: by 2015, says Sirkin, they'll be about 10% higher than in 2010.

So in a few years' time, other commentators have argued, once you factor in freight costs (which, they imply, only ever move one way) and import duty, making things in China will cost pretty much the same as in the US.

Sirkin's historical data, if you understand it properly, is accurate. But for most of what Walmart sells, it's completely insignificant.

The productivity gap
One reason, of course, is that China's just one foreign supplier, and workers in China's competitors haven't had China's wage rises. But the bigger problem is what consultants mean when they say American workers are more productive than Chinese.

In fact, garment workers in China are more productive - as most English speakers understand the word - than their peers in the US, and that productivity advantage is widening.

The "China's getting uncompetitive" obsession started around 2009. But in June 2013, the value of garments the US imported from China was 23.2% greater than in June 2009. In contrast, the value of apparel shipments from US manufacturers was 7.4% lower than in 2009.

That's not because US manufacturers were slashing their prices. The US Bureau of Labor Statistics Producer Price Index- which tracks only prices charged to retailers for US-manufactured goods - shows 8.9% apparel inflation between June 2009 and June 2013. Inflation in apparel imports from China was just 5.6% over the same period.

Those ever-escalating freight costs? Freight costs per square metre of clothing imported from China were 5.3% lower in the first half of 2013 than in the first half of 2009. Overcapacity in the container-ship market and bigger, more fuel-efficient, ships have dragged ocean freight costs down a lot faster than energy prices have pushed them up.

So where's all this superior American productivity?
When economists say that Chinese productivity in 2010 was a third of America's, they mean that the average manufacturing worker in the US added about three times as much value as one in China.

It's easy to see that a worker at a Rolls Royce or Pratt & Whitney plant making jet engines adds a lot more value in a day than someone sewing jeans, and a far smaller proportion of factory workers in China make jets or planes than in the US. American factory workers, overall, spend their time making things that cost more than Chinese workers do.

But when a buyer asks about a factory's productivity, she means something like "how many jeans a day does a worker sew?" A worker in a New York or LA sweatshop (they exist, and their owners are constantly being prosecuted) makes about as many jeans an hour as one in Guangdong - and a lot fewer than a worker in a new, automated, factory outside the congested parts of Shanghai or Shenzhen.

Often, of course, US workers do make more of the same item than workers in poorer countries. They're often trained and incentivised better, have better equipment, or work in a more organised and professional environment. But a growing proportion of Chinese garment workers have even better incentives to work both harder and smarter, in better-equipped factories, linked to ports by efficient, uncongested, highways.

So while, wages in apparel factories around Shanghai have roughly doubled since 2009, their prices have hardly changed. Wages in US garment factories haven't increased much, but they've still gone up - and with them, factories' prices.

Continuing competitiveness
One reputable economics consultancy, Dragonomics, says output per worker in Chinese garment factories has doubled in five years - but others have different explanations for China's continuing competitiveness.

Critics of China talk about "distorted" exchange rates, for example, or "unfair" government subsidies. But since 2009, the Chinese yuan has strengthened against the US dollar - and at Walmart's Manufacturing Summit, officials from 32 US States were keen to disclose "the resources" they had to offer for anyone contemplating an investment in a new factory.

China certainly doesn't have a monopoly on subsidies to attract jobs, though they probably apply to more aspects of a firm's operations than they would in the West. But Chinese local authorities have used all kinds of excuses to channel cash to local job-creating firms, so it's been easier for Chinese factories to raise money for better equipment.

Some Chinese garment makers have relocated to cheaper parts of the country, or forced suppliers' prices down (higher volumes of sales means more buying clout). Some have used immigrants from poorer countries - just like some US garment makers - or seem to have used poorer material.

Recently, many have discovered a new way of driving productivity up. According to the country's National Bureau of Statistics, Chinese garment makers with sales of $3.2m or more grew 11.2% on 2012 during the first six months of this year, and their profits grew 11.4%.

But the profits from their "principal activity" grew just 0.2%: they were using income from property developments, foreign exchange dealing or whatever to prop up their garment making.

Environmental impact
Will we ever know the truth about this? Can Chinese garment making keep getting more productive?

Possibly "no" to both, and that's my point. It's not something in Chinese garment workers that make them more productive than their peers in America or Bangladesh: it's the environment they're working in, and how that compares with other garment making locations.

Those environments are changing all the time. Inflation, currency rates, the cost of capital, infrastructure availability (like roads, ports and reliable power), workforce and political stability, and ease of recruiting and keeping staff: all are changing constantly, in different ways in different countries.

I don't believe asking "where will the most productive workers be in five years' time?" makes much sense. They may well be the 100 new employees hired as a result of Kayser-Roth's $29m investment in North Carolina, announced at Walmart's Summit - but they aren't going to affect the average productivity of American workers.

Sirkin's spot of "we've got the world's most productive workers" tub-thumping probably helped restore confidence among retail suppliers that the US is a good place to invest in. But he'd be the first to agree that any workers can only ever be as productive as their support and working conditions let them be.

Future stars
Over the past few months, just-style has run predictions about future stars in garment-making, with such unlikely places as Moldova, Madagascar and Ethiopia featuring alongside the perpetual nominees like India and Burma.

What matters, though, isn't about what workers are paid, or how hard they're prepared to work, but the factories, infrastructure and business culture those workers will be dealing with in five years' time.

And that's unpredictable.

The Bangladesh inspection, closing and upgrading programmes might well produce hundreds of highly efficient new factories. But for workers to realise their full potential, Bangladesh's chaotic politics, industrial relations, energy supply and transport all need to change.

A factory won't be productive if raw materials can't get to it because strikers elsewhere are blockading the roads, or workers are intimidated into staying away because some political party wants to make a point.

We don't know whether the current surge of inflationary wage demands elsewhere in Asia will price Indonesian, Cambodian and Vietnamese garments out of the Western market - or trigger similar advances in output per worker to those we've seen in China.

But we do know that the only way a buyer will know the best place to source a specific garment in 2015 is by factories quoting prices, and buyers inspecting where that garment's going to be made. Not by using data about the average value all Indonesian workers added in 2010.