The elimination of quotas has changed the global clothing
industry forever, raising the bar for suppliers. The facilities
that were needed to compete in the industry before January 2005 are
no longer sufficient. The ability to ship a decent garment, on time
every time and at a competitive price, is no longer an asset. It
has become an entry-level requirement.
Without these basic facilities, the client will not even talk to a
manufacturer. And with them, manufacturers will only be invited to
go to the end of a very long line of other factories queuing up to
face clients who ask: "What can you do for me?"
If the manufacturer's answer is only, "I can ship a decent garment
on time every time and at a competitive price", they will be out of
business because thousands of other factories are prepared to
provide the same facilities, plus other services.
To survive in the new industry, producers must be able to reply,
"Besides the product you need, I can provide the services you
want." Sourcing fabric and trims is the single greatest service the
factory can offer the customer. Few factories - even the largest -
have developed the required skills.
How did this situation come about? Its roots lie in changes brought
about by the evolution of the industry in recent years.
Market shifts to less efficient producers
The 1974 Multi Fibre Agreement, and its consequent quota system,
was the key factor shaping today's global garment industry.
Developed countries used it to restrict sharply exports from
traditional suppliers - the efficient garment producers of Hong
Kong (China), the Republic of Korea, Taiwan (China) and, later,
China. Customers developed relations with new garment-exporting
countries such as Bangladesh, India, Pakistan and Sri Lanka in
South Asia.
Other developing countries and least developed countries also
attracted business by exploiting trade preferences such as
bilateral free trade agreements and the Generalized System of
Preferences, which exempted certain imports from these countries
from duty.
The result was a shift in market share from more efficient to less
efficient producers. Take the case of the United States of America,
a major importer of textiles and clothing, where imports from the
so-called "Greater China" (China, including Hong Kong and Macao)
dropped in both quantity and value from 1990 to 2000. The market
share in units shipped from Greater China dropped almost 60%, from
28.3% to 13.1%. South Asia's share rose from 9.6% to 13.1% in the
same period.
Measured by value, the results were similar. Greater China's market
share by value in the United States fell by 42%, while South Asia's
share rose 49.3%.
Since these new garment-exporting industries could offer little
more than cheap labour, garment sourcing degenerated into "nomadic
sourcing" - the search for quota-free countries with the cheapest
workforce, which spurred what is now termed the "race to the
bottom".
This change shows the difference between relatively free market
regions, such as South Asia, and those with comparatively
restricted markets, such as Greater China. To maximize profit - and
to keep their customers - the new garment suppliers in South Asia
were forced into a constant struggle to lower prices by reducing
costs and margins.
Trading up the customer ladder
More efficient producers, such as Greater China, were forced in the
opposite direction. Severely limited by quota, their ability to
supply garments to their customers was fixed at a point
substantially below demand. So they maximized profit by increasing
prices, thus reducing demand to the point where their orders
matched their quota levels.
The efficient garment producers culled their customers by trading
upward. In the process, they were forced to increase their skills
and facilities to meet the higher demands of their new
customers.
The approach paid off. While import prices in the United States
fell overall, the price of imports from Greater China rose a lot.
From 1990 to 2000, the average square metre equivalent, free on
board (FOB) price of imports from Greater China rose 22% from US$
3.96 to US$ 4.22, compared to a 7% increase to US$ 2.99 for South
Asian imports. Overall, the average FOB price for garment imports
to the United States fell 2.4% to US$ 3.57.
Despite this price premium charged by Greater China and other
efficient garment exporters, demand seldom fell below the available
quota. Every year customers wanting to source garments from Chinese
factories were forced to go elsewhere because of lack of
quota.
More market distortions
The quota restrictions caused other market distortions:
- New producers and large supply of products under
quota protection. The new garment-exporting countries
concentrated their production on the categories most restricted by
quota (cotton T-shirts, jeans and other cotton trousers, and
underwear). These were not only the largest import categories, they
were also the easiest to produce.
- Concentration on low-skill, low-value
products. The new garment-exporting countries also
took the course of least resistance and, with very few exceptions,
continued to concentrate on these easier categories. They never
traded upward, nor did they develop skills necessary to compete on
any level other than cheap labour.
- Efficient producers moved up value
chain. China's garment exporters, effectively barred
from these products, expanded their production to other products
that, for the most part, require greater skills and
facilities.
The move to new quota-free exporting countries resulted in unused
garment-making capacity in the older, more efficient exporting
countries. Eventually garment-making capacity reached twice
effective demand, but the glut went unnoticed because of the quota
limitation.
Impending crisis rears its head
The industry had its first inkling of the impending crisis in
2001.
World Trade Organization member countries had agreed in 1994 to
phase quotas out over the next ten years. The Uruguay Round
agreement called for an incremental elimination with specific
categories to be phased out during each period through to the end
of 2004, when all quotas were scheduled to disappear. The United
States "back-loaded" the schedule, with the early phase-outs
consisting of unimportant categories. The penultimate phase-out was
set for the end of 2001. At that point, having exhausted all the
trivial categories, the United States was forced to begin to phase
out such strategic categories as babywear, bras and robes.
The result was a sea change in imports to the United States from
Greater China. From 2001 to 2004, Greater China's US market share,
measured in units, rose 59% from 13.4% to 20.8% compared with South
Asia's market share, which fell 5.1%, from 13.2% to 12.5%.
Market share by value showed a similar change, with Greater China
rising by 23.9% from 17.6% to 21.9%, compared to South Asia, where
market share fell 3.4% from 11.1% to 10.6%.
The most important change, however, was in the average FOB price.
The average FOB of all garment imports into the United States fell
7.4% from 2001 to 2004, from US$ 3.51 to US$ 3.25. During the same
period, South Asian imports fell 6.2%, from US$ 2.95 to US$ 2.77,
compared with imports from Greater China which fell 25.7% from US$
4.60 to US$ 3.42 per unit.
The contrast between Greater China and the rest of the world is
particularly striking, given that South Asia is now the world's
second most competitive region after Greater China.
Drastic as these changes were, they simply presaged the events
after 1 January 2005. From 31 December 2004 to 30 June 2005, the
global garment industry saw the full effect of the quota
phase-out.
A historic buyers' market
On January 2005, the global garment industry was freed from quota
restrictions. For the first time in 43 years, customers were free
to buy wherever they wanted and from whomever they wanted.
Meanwhile, the enormous overhang of garment-making capacity,
previously locked away by the quota system, became available.
With capacity twice the size of demand, the global garment industry
entered the greatest buyers' market in its history. To compete,
factories and entire national garment export industries will have
to satisfy customers' ever-increasing demands.
Factories and industries must determine what those demands are and
take the necessary steps to meet them.
The lesson of history is that the solution is not to lower FOB
prices. Despite restrictions and the resulting higher prices,
Greater China succeeded quite well before 1 January 2005. In fact,
clients waited in line to buy Chinese-made garments and were
willing to pay a premium to import those goods. Customers were
willing to exchange higher price for better service.
To compete, factories in other regions must offer these better
services. To put it another way, the post-2005 global garment
industry will be a service industry.
Many of the services will require greater resources than are
available to most factories. Even now, customers are demanding that
factories ship garments "landed duty paid" directly to branch
stores, open account (where transactions are made with no formal
debt contract other than the receipt) and with 60-day credit.
At the same time clients are also pushing factories to open full
merchandising overseas offices in the customers' cities. Clearly
only the largest factory groups will be able to meet these
demands.
Customers are also demanding more assistance in the pre-production
process. Under the old system, the client was responsible for the
entire design process. In a 101-step manufacturing process, the
customer brought in the factory at step 86, after the garment had
been designed, patterns made and graded, and fabric and trim
sourced. Even before the quota phase-out, customers were demanding
that factories have in-house pattern-making and sample-making
facilities.
With the quota phase-out, customers now require factories to enter
the pre-production process at step 1 - fabric selection. The
ability to source fabric transforms the factory from being one of a
number of dispensable contractors to being a major player. The
factory that sources fabric becomes the designer's partner.
Chinese garment exports have once again been restricted by quota.
However, on 1 January 2008, these "safeguard" quotas will be phased
out.
Factories or exporters hoping to compete with China have a 30-month
window of opportunity. It may be their last.
A survival guide to sourcing textiles and clothing materials
Source-it: Global material sourcing for the clothing
industry is a survival guide.
It is an easy-to-read guide for garment factory owners and managers
wishing to learn how to source fabrics and other materials, which
helps firms acquire skills they need to compete in the textiles and
clothing market.
Among the topics covered:
- Material sourcing, including how it differs from fabric and
trim purchasing and how a firm develops sourcing skills.
- Processes, including a breakdown of processes involved.
- Country of origin regulations that affect the material sourcing
process.
- Fabric tests required by customers.
- Payment methods.
- National and regional sourcing strategies.
- What to do when things go wrong.
The book also includes case studies and glossaries.
To order a copy of the guide online, visit ITC's e-shop at http://www.intracen.org/eshopDavid Birnbaum has worked in the textiles and clothing industry
for over 40 years, managing factories all over the world. He wrote
ITC's new book on sourcing, Source-it: Global material
sourcing for the clothing industry
.