Recessions always shake-up markets, exposing weaknesses and vulnerabilities: the slack go to the wall, and the robust survive. It has always been that way. And so it has been with this most recent deep and traumatic recession.

One issue within the global textile and clothing sector highlighted by the now (mercifully) completed slump is the relative benefit of manufacturing geographically near to key markets. When retailers and distributors are unsure of their income, they are less likely to order months in advance from factories thousands of miles away, no matter the relative costs and quality. Simply, in troubled times, it is safer to order small, often and close to home.

So Chinese exporters have lost orders to the US and Europe during this recession, giving the Turks, Mexicans and others a chance. But, the world is changing. China has prospered so much from its export strategy it has developed enough wealth to create a healthy domestic market. And it has been these sales that have helped the Chinese clothing and textile industry fight its way through the recession.

The question now is, as financial and economic stability return, will we see a return to the previous trading pattern of taking advantage of high performing manufacturers with low labour costs available in Asia, no matter the distance to market?

The big picture
World clothing exports declined in the fourth quarter of 2008 by 2.1% according to World Trade Organization (WTO) figures, dropping several more percentage points during 2009. The casualties were many, with millions of job losses and thousands of factory closures worldwide.

The downturn had an effect all along the supply chain. Downward price pressure, shrinking markets and a dive in consumer spending meant companies from the global to the local had to adapt to survive, accepting smaller profit margins, consolidating production and rationalising expenses.

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Yet the effects of the recession were by no means homogeneous. Fashion houses established for decades have filed for bankruptcy while others have posted respectable profits. Downsizing by some global manufacturers has been accompanied by gradual expansion by others and many are reflecting on which business model has proved the most robust.

A clear winner has been China, which has weathered the drop in orders from the United States to remain the dominant and most resistant player in the world market. This was partly because of its robust and large domestic market. Lower cost players Bangladesh, India and Vietnam actually increased export volume through 2008 and into the first quarter of 2009 although India’s gain of market share overall was less than expected in the post-quota marketplace.

Meanwhile, Mexico and Turkey, traditional suppliers to the US and the European Union (EU) have fared less than brilliantly, leading to much speculation about the importance of physical location in global sourcing. Just how important is it?

The value chain – the academic analysis
As the World Trade Organization predicts a small but steady turnaround by most manufacturing sectors in 2010, distance to market appears to have become just one of several important considerations for buyers and suppliers in the post-recession marketplace.

The complex interplay of factors helping clothing and textile buyers decide where they will buy product has sparked a series of studies in recent years. Indeed, there has been extensive academic interest of recent years in global sourcing and the impacts of globalisation on supply chains and their management.

This has been accompanied by an evolution in terminology from ‘supply chains’ (regarded by management specialists as linear progressions of raw materials to point-of-sale goods) – to the notion of ‘value chains’ (where a sourcing line is perceived as a matrix of interconnected relationships between firms and activities that can be geographically dislocated).

Southern England’s University of Sussex Professor Mick Dunford, in a 2006 paper on the Italian clothing and textile sector, describes this matrix as: “A wide range of activities, occupations and roles that extend from the production of raw materials to the sale of finished goods and that depend upon a set of ancillary industries and services.”

These relationships can be extremely complex, Dunford explains. They are based on cost effectiveness or physical proximity to other suppliers within a chain; plus access to a market, and the skills and infrastructure available in a particular industrial cluster.

Models try to explain these complex relationships and how they change. Gary Gereffi, a Professor at Duke University in the United States, has been at the forefront of value chain research for many years. In his recent 2010 paper for the World Bank co-authored with Stacy Frederick on the apparel industry’s resistance to the global crisis, Gereffi makes several important observations.

The first is the evolution of east Asian suppliers to cater to the demand of Europe and US-based producers. Since the 1970s, Gereffi points out, east Asian suppliers have progressed from CMT (cut-make-trim) suppliers to OEM (Original Equipment Manufacturer) full package contractors, able to manage the supply chain from sourcing raw materials to delivering a finished product.

The paper explains: “…logistics coordination and sourcing are frequently the first functional activities lead firms are willing to give up, and shift the responsibility to their first tier suppliers. The CMT model is unnecessarily complex and has finally become obsolete. The recession has accelerated awareness of the existing flaws in this model. Countries without sourcing capabilities are at a disadvantage moving forward.”

The second is the diversification of the dominant Chinese export market. Hong Kong and Japan accounted in 1996 for 65% of exports from China, while in 2008, 65% of Chinese exports were shared between Hong Kong, Japan, the USA and Europe. This, Gereffi points out, has insulated China from potential devastation when a single market like the USA crumbles.

Concurrently and equally importantly, the diversification of export markets has been accompanied with an increasing attention towards sales in China’s growing domestic market, mirroring efforts by textile and clothing manufacturers in India and Turkey.

The flow-on effects are clear, according to Gereffi: “This trend not only taps into the added purchasing power of those emerging economies, but it also allows them to accelerate the upgrading process associated with moving beyond assembly and full-package supply to original design manufacturing (ODM) and original brand manufacturing (OBM).”

The third essential observation Gereffi makes is showing the importance of low wage economies over geography as a determining factor for the location of suppliers. This is happening especially but not only at a country level.

The Turkish government for example, in a bid to make the domestic industry more competitive and regain EU market share that has been eroded of late, has launched a strategic plan to relocate industrial textiles and clothing clusters away from the centre of Istanbul to the Turkish provinces where wages are much cheaper.

This is a trend that has also been observed by Giuseppe Tattara, Professor at Italy’s University of Veneto, who has also written widely on the subject of global value chains and the apparel industry. He says that many northern Italian clothing and footwear enterprises are now looking to Tunisia and Morocco to establish their new factories, an inversion of the trend that saw them relocate to Romania some years ago but where rising wages and unfavourable conditions have led them to look elsewhere once again.

“Distance in this case is not so important, what is important is the offer of low wages and advantageous economic conditions,” he said.

By Lee Adendorff in Lucca, Italy; Wang Fangqing in Shanghai; and Paul Cochrane in Beirut.