The Global Economic Crisis and the Changing Pattern of Sourcing

8/7/2013
As the world's biggest textile and apparel market, the United States generates a great deal of interest amongst global textiles and apparel suppliers, many of whom seem to catch a cold when America sneezes.  Not surprising, therefore, suppliers around the globe are closely watching the state of the U.S. economy, which is still recovering from the great recession of 2008.

Many suppliers are encouraged by the higher sales reported by U.S. apparel and textile retailers, including Macy's, Columbia Sportswear, American Apparel, Nordstrom, Gap, Ralph Lauren, Ann Inc. and others.

Leading U.S. retailer Wal-Mart's recent announcement about its willingness to invest $50 billion in 10 years for the nation's textile manufacturing industry, was applauded by foreign garment and textile suppliers.

India's apparel industry, for example, has been "very excited" about the positive developments in the U.S.   

A. Sakthivel, the chairman of the Apparel Export Promotion Council of India (AEPC), has been highlighting the significance of the U.S. market for India's garment and textile exports, which account for some 8 percent of total U.S. apparel imports.  India's apparel exports to the U.S. amounted to $ 3.3 billion, according to the AEPC.

Egypt's textile industry anxiously watches U.S. market
Despite its continuing political unrest, Egypt remains a force in the textile and garment industry, and its major players have been closely following the economic recovery process in the U.S., its biggest export market.

Dalia Rady, the executive director of the Egyptian Textile Export Council, Cairo, acknowledged that Egypt's 2012 exports of fiber (synthetic) yarn had declined by 8 percent in value terms over 2011. Egypt, she said, had faced labor unrest in Egypt even before the political revolution had begun.

"We had a heavy flow of foreign direct investments (FDI), mainly, from Turkish, Chinese, Italian and other investors who set up factories in the past five years," she said. "Yes, we are currently facing challenges but I am optimistic … people have invested a lot in the past and they cannot just abandon their investments."

Egyptian exporters are now aggressively trying to enter European markets.  For the home-textile products, the major markets were the U.S. and Europe but Egypt's yarn and fabric fiber are shipped mainly to Turkey, Portugal and Italy.  The latest data on Egypt's garment and home-textile exports was not available as this article was submitted for publication.

Egypt's textile industry has been calling for national cotton policy reform, including the establishment of a hedge fund for farmers when international prices are low, according to Rady. But many Egyptian experts say that the country currently has other urgent priorities, including restoring political stability. 

Amit Dayal, assistant vice president, marketing, of the Aditya Birla Group, which has factories in Egypt and Thailand, said that the company's Thailand plant manufactured white fiber while the Egyptian plant produced dyed fiber.

Dayal said that the market was not growing and price variations had been volatile. "The seasonality factor is changing, with lead times becoming shorter. Although the first quarter of 2013 was challenging, we expect some stabilization in the second quarter, followed by a possible rebound in the third and fourth quarters," he said, adding that China and India could help mitigate the effects of the decline as wages in emerging markets rise.

U.S. suspends GSP privileges for Bangladesh
While Bangladesh may be worried by energy shortages and rising raw-material prices, Dhiraj Chakma —  the general manager of the Dacca Dyeing & Manufacturing Co. Limited in capital city Dhaka, which supplies fabrics, bed linens, cotton tablecloths and towels — recently told Apparel Magazine that energy shortages and rising raw-material prices had adversely affected the nation's textile production. The April 24 catastrophic collapse of a large building complex housing garment factories, has delayed textile and garment shipments, with some importers looking for alternative sources of supply.

The U.S. administration, reacting to the poor working and safety conditions in the country's garment industry, announced on June 27 the suspension of its General System of Preferences (GSP) program which allowed duty-free imports of Bangladesh products.  The poorly-constructed floors which were illegally added to the building and the use of heavy equipment caused the collapse.  Bangladesh's garment sector has had many accidents in the past but the latest was the most egregious and devastating.

Justifying the sanction, U.S. Trade Representative Michael Froman said that the intention was to "see Bangladeshi workers in safe, appropriate work conditions." However, some experts say that the U.S. sanction will affect only a fraction of Bangladesh's exports to the U.S. because the GSP program did not cover garments. Apparel products account for more than 90 percent of Bangladesh's exports to the U.S. and these products will continue to have an average tariff of 15 percent.

Stung by criticism for ignoring what is described as the "sordid combination" of low wages and inadequate safety precautions for garment workers, many big importers of Bangladesh garments are reviewing their sourcing policies. Walt Disney, for example, has said it is pulling out of Bangladesh while other big companies are also reportedly considering similar moves or restricting their imports from the Asian country.

The question being asked in the global garment industry is if — and to what extent — other rival suppliers, particularly Pakistan, India, Myanmar, and Vietnam, will benefit from the diversion of garment sourcing from Bangladesh. Sakthivel, who is also the president of the Tirupur Exporters' Association, acknowledged that "few enquiries" had been received though it would take a couple of months before a "realistic assessment" could be made.

Tirupur, in South India, is India's major garment production center. More than 40 percent of India's exports of knitwear garments, a third of which is shipped to the U.S., originate from Tirupur.

But Bangladesh's garment exports could be badly hit if the European Union also follows the U.S. example of imposing restrictions on Bangladeshi garment exports, because 60 percent of its exports at an estimated value of $12 billion are bound for the EU. If the EU does take the U.S.'s lead, it would be the "final nail in the coffin," as one visiting Bangladeshi businessman at Frankfurt's recent TechTextil show said on the condition of anonymity.

Is Myanmar, the new kid on the garment block, an alternative to Bangladesh?
As Myanmar's government pushes reforms, aimed at transforming the country into an attractive destination for foreign direct investments, the country's textile and garment eyes the possible diversion of some business from Bangladesh. But labor-rights groups urge Myanmar to first provide appropriate working conditions for its garment factory employees.  Working conditions in Myanmar's garment industry are "as bad if not worse" than those in Bangladesh, according to some experts who say that the country's  long isolation has made it insensitive to minimum international labor and safety requirements.  The labor rights group Clean Clothes Campaign (CCC) fears that in a rush to attract foreign entrepreneurs, worker protection conditions may be put on the back burner.

The U.S.-based International Labor Rights' Forum has cautioned that the Bangladesh situation should serve as a warning to those who may rush to Myanmar to place garment orders after the deficit caused by the Bangladesh catastrophe.  Steve Marshall, who works for the International Labor Organization in Myanmar, says that he is confident that Myanmar will avoid becoming the next notorious sweatshop of the garment industry.

Myanmar's garment exports soared in the early 1990s, and by 1997 the country's exports amounted to $200 million, rising to more than $800 million in 2001 when garments became the country's largest export.  However, the garment industry exports nosedived following international boycotts and U.S. sanctions in 2003. Meanwhile, exports have begun to slowly rise again, with Japan and other Asian markets compensating for the decline in Western demand.

According to Myanmar Garment Manufacturers' Association, textile exports had reached $860 million in 2012, and are expected to reach $1 billion this year as barriers to Western markets continue to fall.  While admitting that Myanmar still has some way to go before it can become a viable alternative to Bangladesh, Asian experts envisage the EU lifting restrictions against Myanmar, except for an embargo on arms' exports, and the U.S. gradually relaxing the sanctions against the country. Indeed, they believe that Washington will grant Myanmar the GSP status allowing duty-free imports of more than 5,000 items including many garment products. Myanmar also enjoys a GSP status granted by the EU.

Bangladesh not completely written off
Although Bangladesh's garment industry has suffered a major setback following the disastrous April 24 collapse, it is not being completely written off; indeed, even competitors Pakistan and India, which could benefit from the shortfall in Bangladesh's supplies, believe its garment industry will bounce back.

Mustafa Ahmad Zamin, general manager of the Lahore, Pakistani-based Sarena Dyeing & Embroidery Mill, which supplies woven fabrics and is now also manufacturing garments, told Apparel Magazine that some Pakistani suppliers may have increased their production capacity to respond to the increased demand resulting from the Bangladesh shortfall.

But Jehanzeb Sherwani, marketing manager of Master Textile Mills Limited of Dist. Kasur, Lahore, Pakistan, which supplies textile-related work apparel and protection wear using flame-retardant, military camouflage fabrics, did not see any "significant shift" in business from Bangladesh.  "I personally don't think that the [Bangladesh] calamity has diverted any substantial business away from Bangladesh," he said.

Mohsin J. Bokhari, general manager, marketing for the Lahore-based spinning factory Sapphire Finishing Mill in Lahore, said that his company had not benefited from the Bangladesh shortfall in supply "but our customers are concerned over the situation in that country."

"Besides, Bangladesh is a big garment supplier and one incident is not likely to impact the overall supplies," Bokhari said.

India's Ambattur Clothing, a Chennai-based garment supplier that has a huge manufacturing facility in Bangladesh, has also echoed similar sentiments. Managing director Vijay Mahtaney said that despite the current caution against Bangladesh's garment supply capability, the manufacturing business in that country was "not likely to be impacted much." 

He believed that the industry would get its act right and "bounce back in a year's time," though some orders have been given to suppliers in India, Vietnam and Cambodia.  According to Mahtaney, business may decline by five percent this year but Bangladesh will "get its act together."

Ambattur Clothing, which has two manufacturing facilities in Bangladesh, also supplies to brands such as Zara, Gap and Taylor.  Mahtaney claimed that his business in Bangladesh had not been affected by the crisis because the company had put in place compliance standards, while adding that labor and factory laws, which already existed in Bangladesh, had not been adequately enforced by local garment manufacturers.

Bangladesh annual exports currently amount to $20 billion, up from just $8 billion six years ago.

Pakistan's textile industry faces energy shortages
Pakistan, another major supplier of textiles and garments, has for years faced chronic energy shortages, attributed to the government's lackadaisical approach to the issue of energy supply, which is badly needed to sustain the textile industry's development.

Many Pakistani exhibitors at recent textile trade shows in Frankfurt have complained about getting less business at such events because some big buyers were reluctant to place orders with Pakistani suppliers fearing they would not be able to make timely deliveries of the goods because of production breakdowns caused by energy shortages.  Similar sentiments were also echoed by the Pakistan Textile Exporters' Association (PTEA) in Karachi.

Asif Ahmed, export manager of Fateh Textile Mills Ltd., of Hyderabad, Pakistan, urged the Pakistani government to address the energy crisis as a "national priority." 

"Energy shortages have been hurting Pakistan's textile and garment industry since years," Ahmed said, blaming many Pakistani companies for illegally tapping energy by installing unauthorized connections. "If these illegal connections are removed, half of the country's energy needs would be resolved," he explained, fearing that competitors in other countries stood to benefit.  Pakistani textile and garment exporters lament that more than 15 to 20 percent of orders intended for Pakistan's textile exporters were diverted to competing nations in Asia last year.

The outlook for 2013
Olaf Schmidt, the vice president for textiles and textile technologies at Messe Frankfurt GmbH, the organizer of a number of textile trade fairs, said that he remained optimistic about 2013.

"It may not be an ideal business climate but there are unmistakable signs of recovery this year. Take Europe, whose textile industry has completed its consolidation process.  Germany's economy is strong and this is also showing itself in the textile trade and industry.  Some textile and apparel suppliers in China are quietly moving at least a part of their production to some of the low-cost labor and production countries in Southern Europe which also, incidentally, enjoys duty-free access to the European Union," Schmidt said.

While China may have become "inward looking," implying that more and more Chinese textile companies will discover a lucrative domestic market as prosperity, and along with it, consumer earnings grow, Chinese companies want to set up manufacturing operations in low-cost sites not only in Europe but also in Vietnam, Laos, Cambodia and other countries.  India will also play a crucial role not only as a textile supplier but also as a buyer of high-end quality textiles and, particularly, textile machinery.

Schmidt believes that the future trend will be "de-cycling" – or the further processing of materials into different base or full products, contrary to recycling. in which used products are completely rehashed to produce the same or a different product.

"However, energy conservation, be it in textiles or apparel production, will be crucial for the industry," Schmidt said.

U.S. textile and apparel market "right on track"
European textile experts have also been saying that the U.S. textile and apparel market is "right on track," as demand rises, aided by several factors, including subsidized cotton and favourable production costs as well as more expensive imports in the market. 

A spokesman for the Textile Machinery Division of the Frankfurt-based German Association of Machinery and Industrial Plants confirmed that the association members had discerned a positive trend in the American textile sector which, besides China, India and Turkey, is a big market for German textile machinery.

As manufacturing costs in places like China rise, the Made-in-USA label is gradually gaining popularity once again. Moreover, U.S. textile and apparel companies find it much easier to maintain their strict quality control at home than in distant China.

If at one time the mantra was outsourcing almost everything – from sheets, blankets, pillows, comforters to apparel and other knitwear – American products are now becoming increasingly visible on the shelves of big retailers such as Wal-Mart and Target.

According to industry sources, U.S. textile mills are expected to produce around $55 billion in goods this year, making this the fourth consecutive year that these figures have remained stable or even moved up.  The combined total value of both textiles and apparel shipments should reach $71 billion. 

The increased clothing consciousness amongst men — men's outerwear grew by nearly 6 percent in 2012 and posted a higher growth rate than women's wear – is also likely to benefit the overall apparel purchases in the U.S. 

Furthermore, the creation of a gigantic Trans-Atlantic market through the finalization of the much-touted free trade agreement (FTA) between the U.S. and the EU, characterized by free trade, is expected to have a major impact on the clothing and textile trade. The European Textile and Clothing Industry Association (Euratex) has welcomed the start of FTA talks between the U.S. and EU, which will remove import duties and would make European textiles and apparel more competitive.
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