US downturn hits Asian garment makers

US downturn hits Asian garment makers
Financial Times, UK
By Raphael Minder, Amy Yee, Amy Kazmin, Tom Mitchell and Robin Kwong
Published: February 10 2014 17:36 | Last updated: February 10 2014 17:36

An expected downturn in US clothing demand is adding to the woes of Asian garment makers already struggling because of rising costs and stronger currencies.

In China, which just three years ago was entangled in a trade dispute with the US and the European Union over export quotas, concerns have switched to the spiralling costs that are eroding its competitive advantage.

“Costs are hitting us,” says Henry Tan, chief executive of Luen Thai, a large Hong Kong-based manufacturer with operations in China. “Sales to Europe are not so bad because the euro is strong, but sales to the US are very difficult.”

Chinese manufacturers have been facing double-digit annual wage increases over the past few years. More recently their headache has come from the renminbi’s appreciation, which Beijing has allowed to gather pace this year as it seeks to curb inflation.

Manufacturers now “have to compete on brand rather than on volume”, says Chen Wenjiang, president of Haining Grand Double Eagle Garments, a leather-jacket maker based in China’s eastern Zhejiang province.

Garment makers face a similar challenge in India, where an appreciation of the rupee that started last year has seen an estimated 500,000 jobs – out of a total workforce of 55m – cut in the textiles industry, the country’s second-largest em-ployer after agriculture.

Since September Indian exports to the US have slowed by 5-6 per cent. This makes it likely the government will miss its initial $160bn (€110bn, £82bn) export forecast for the fiscal year ending in March, according to G. Bujpal, at the commerce ministry.

The slowdown has emboldened the clothing industry in its calls for government relief. A proposal to give tax refunds to exporters and reduce interest rates on loans is under consideration, as is a government plan to create special investment regions for textiles and open more training institutes.

The difficulties are also spreading to smaller Asian garment producers such as Cambodia and Bangladesh, which until recently had been riding a textiles boom.

And some observers are predicting the troubles will yield a shake-out in the textiles sector.

More factory closures will cause pain in the short term, but will help ensure that “the balance of power will shift and we may get more bargaining position”, says Ken Loo, secretary-general of the garment manufacturers’ association in Cambodia.

Furthermore, a switch away from the old quota system, under World Trade Organisation rules, has allowed buyers to move to what has become known as “reverse bidding”, where factories in different countries compete for orders by offering the lowest price, says an official from the International Labour Organisation.

The export downturn is affecting working patterns. In the Indian textile hub of Tirupur, which has as many as 800 export-oriented factories that have already introduced steep job cuts, the working week is now down to four or five days, from the traditional six, because of falling orders, says Arumugam Sakthivel, vice-president of the Federation of Indian Export Organisations (FIEO).

Orders are shifting from India to Asian rivals such as Sri Lanka, Bangladesh, Vietnam and Thailand, according to the FIEO.

US buyers could accelerate this transfer of production to lower-cost centres, according to executives, as any downturn in domestic retail demand will force them to reconsider their cost structures.

“China’s costs are going up, so perhaps some US companies will take a closer look at Vietnam and other Asian countries and decide to get less of their supplies from China,” says Barry Chan, a partner in a manufacturer that has annual turnover of $100m, 70 per cent of which gets exported to US customers such as Liz Claiborne and Old Navy.

But not everybody can afford to switch overnight, especially for more upmarket brands, where quality controls are almost as important as costs, warns Ricardo Carreira, a Los Angeles-based partner in Chesler & Associates, a supplier of Chinese textiles to US companies.

While Wal-Mart and other general retailers could reduce orders from China by a few percentage points this year, he believes that kind of reduction is unfeasible for design or contemporary fashion suppliers.

“Sure, everybody is now worried and trying to squeeze down the factories for lower prices. But eventually there’s a limit,” Mr Carreira says. “Retailers have solid partnerships and real infrastructure in China, and you can’t just walk away from that.”

Asian garment producers, meanwhile, are trying to wean themselves from US demand and the dollar by targeting instead stronger economies such as Australia and denominating trade to Europe in euros.

But relief for producers may be most likely to come from domestic markets, especially for Chinese producers that can start supplying more affluent consumers at home, rather than abroad.

Haining Grand Double Eagle exports 80 per cent of its output, says Mr Chen. But “in five years’ time we will be exporting only 20 per cent overseas and selling 80 per cent in China”.

Reporting by Raphael Minder, Amy Yee, Amy Kazmin, Tom Mitchell and Robin Kwong

The impact in Cambodia

Impoverished Cambodia depends heavily on its garment industry, which accounts for 96 per cent of exports and 13 per cent of GDP, writes Amy Kazmin in Bangkok. And the industry relies heavily on US consumers, the market for about 70 per cent of output.

But after growing about 17 per cent in the first half of 2014, Cambodia’s garment exports plummeted 22 per cent per cent in the fourth quarter, in part because of a precipitous 49 per cent drop in exports to the US market in December.

With a slowdown expected in the US, manufacturers are braced for tough times ahead. “It’s going to be down,” Ken Loo, the secretary-general of the Garment Manufacturers Association in Cambodia, said of the industry’s export prospects. “It’s a question of how much, rather than whether it’s going to be a downturn.”

The industry, which employs about 360,000 of Cambodia’s 13m people, has been a big driver of impressive growth in the past decade, as exports have expanded rapidly. Yet as global competition in the industry has become fiercer, prices have come under heavy pressure. Mr Loo said although Cambodia’s export volumes had been rising, prices per piece had been dropping since 2005.

Industry players say the sudden sharp December drop may merely reflect buyers’ caution about the US, rather than a decisive shift from Cambodia. But it highlights the vulnerability of Cambodia’s economy to the changing needs of US consumers, or the actions of a handful of western brands.

“It’s not going to cause a recession, but it’s not going to drive the whole country as it has been doing for the last five to 10 years,” says Stephane Guimbert, chief economist at the World Bank in Phnom Penh.