COMMENT: What are the great apparel industry issues for 2009?

23 December 2008 | Source: just-style.com

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Amid the welter of articles looking ahead at trade and business prospects for 2009, three issues dominate the apparel industry. Will anyone stop the slowdown in Western clothing markets? Will the collapse of input prices mean cheaper clothes? And what about US and EU protectionism? Mike Flanagan wonders just how important they really are.

Will anyone stop the slowdown in Western clothing markets?
Will President elect Obama be able to stimulate US demand once he's been inaugurated? Will other rich countries see growth or further decline?

This obviously concerns the marketing departments of many Western retailers and brands. But does it affect sourcing much? Not as much as you might expect.

The world market for clothing actually grew this year, in number of pieces - and therefore in the volumes that factories have been producing, because:

• Sales in China, by far the world's single biggest apparel market if measured by the number of garments bought, continue to go through the roof; and

• Demand in the rich world - measured by retailers' sales - kept on growing until October 2008.

The evidence seems to be that the world bought about 10% more clothes this year than last. Yet, throughout the world, there's been carnage among garment suppliers.

Reports include 700,000 garment and textile workers in India losing their jobs, and dozens of Koreans closing their Vietnamese factories and returning home without paying outstanding taxes.

And Chinese prices are now going through the floor, despite soaring at the start of the year.

Why's that? Four reasons, all hitting more or less simultaneously:

1: Many garment suppliers were seriously weakened financially even before Western demand slacked off.

Chinese suppliers had slashed their margins to keep US customers when the US dollar fell; and Indian suppliers had incurred huge losses on forex derivatives they'd bought to hedge themselves when the rupee appreciated against the US dollar.

Demand from some buyers - such as many in Japan - fell away much earlier than in the US, hurting their suppliers.

And suppliers everywhere had been hurt by the inventory reduction many US buyers started in late 2007.

2: As US fears mounted, a number of buyers collapsed, leaving massive debts. Others, panicking, started finding any conceivable excuse to cancel orders. The carnage among many suppliers was like introducing a cholera virus into a starving population: the weakest fell.

3: This whole cycle was then intensified as credit institutions got increasingly antsy about lending any money at all to garment suppliers.

4: Then, the weakest buyers came under even more pressure as some started doing surprisingly well.

After Japan's sales fell 10% year on year in October, Uniqlo announced a 32% increase in same-store sales on the back of sharp product innovation and marketing.

US general merchandise retailers saw annual sales growth even in November, as consumers realised there were lots of clothes they had to buy (it's looking like a very cold winter in the northern hemisphere), and the discounters were selling them very cheap.

Economists call the problem liquidity: whether sales get better or worse, the number of developing market suppliers running out of cash is going to keep on growing.

The New Year is certain to bring a crop of bankruptcies among some Western buyers , and any upturn later in the year will be too late to save any of their suppliers hit by those bankruptcies.

It scarcely matters to weakened vendors whether garment sales in 2009 fall 10% or 20%. If sales fall a further 20%, the world will be buying about as many clothes as it bought in 2005.

We didn't have mass bankruptcies in 2005: but I'll bet we will in 2009 even if sales grow 20%.

Will the collapse of input prices mean cheaper clothes?
Virtually everywhere in the world, practically every input price factories have to deal with - energy, raw materials like wool or cotton, transport - is collapsing faster than any of us have ever seen before.

But all of this is irrelevant when:

• You can't cut wages. Some wage pressures might ease though. Romanian factories, for example, haven't been able to get staff as people living nearby have moved to better-paying jobs in European countries to its west. There are now signs the recession is sending them home, and recruitment is getting easier.

• Real interest rates, charged to businesses by banks, aren't declining. Even with official rates in rich countries close to zero, banks around the world are still mostly charging higher rates for working capital and trade finance than a year ago.

• The currency markets are in chaos. Although most supplier-market currencies are falling against the US dollar and yen, they were appreciating against the euro when I started writing this piece, and going through the roof compared to the British pound. Since then, the euro's strengthened.

So, as always, pricing will be all over the place. Suppliers who can self-finance, or improve their productivity or hedge currencies cannily, will get cheaper. Especially if they're Chinese. Many others, whatever they do, will look damn expensive to retailers - especially in Britain.

What about US and EU protectionism?
In my view, this is nothing like the big deal many people make it out to be. Whether Obama or Bush is in the White House, US trade policymakers - just like their peers in the EU - have to balance anything that influences textile trade with China against the facts that:

• There are just about as many votes wanting more sales of Boeings or Airbuses to China as there are wanting textile jobs to be protected in Tuscany or the Carolinas;

• Keeping consumer prices down never hurts a western politician;

• Enacting trade protection measures, such as anti-dumping duty, is a lengthy and rule bound process in the EU and US;

• Whatever accusations people might make against the Chinese, making life tougher for China doesn't make life easier for Americans or Europeans: it just sends the orders to Bangladesh or Cambodia;

• They owe China more money than any nation has owed any other nation. Ever.

These considerations just don't apply in many poorer countries. The heads of the Chinese, Indian and Indonesian governments were among the 20 countries who, on 16 November, announced they wouldn't pass any new measures unfairly stimulating their own trade at other countries' expense. All three got off the plane home to find intense public pressure for protectionism.

And they face political pressures unimaginable to Europeans or Americans. The current generation of Chinese leaders is the first for a century to have got their jobs without killing or imprisoning their unsuccessful rivals - because China's had 25 years of falling unemployment.

If Obama, or Brown, or Merkel mess things up, the worst that's likely to happen to them is a lifetime on the conference circuit explaining how they got it right really, but everyone misunderstood.

A serious rise in China's unemployment is likely to prove very dangerous indeed to Hu Jintao's health.

The really important question isn't what Obama or the EU are going to do to trade rules. Whatever the US or EU might want to do has to conform to treaties, be negotiated through a thicket of people with different views, and take a long time.

Their plans will likely be signalled a long time in advance. What might catch traders unaware is if an exporting country breaks the rules with its protectionism - as India and Indonesia recently have.

The EU and US are unlikely to conclude many - or possibly any - new free trade, or zero-duty, agreements (though even with all the current pressures, the EU has just granted duty-free access to Armenia, Azerbaijan and Paraguay).

But any instant invention of new protectionist rules is more likely from Jakarta, Delhi or Beijing than from Washington or Brussels.

So they're the things that don't matter. What does?
1: As always, what's essential is having the right customers and suppliers. However well a business knows its customers and suppliers, there really is no way of predicting whether their finances are awful - though meticulous analysis of their filings is essential.

There's no way of being sure currencies won't go the wrong way again - so hedging (or at least a very well-thought through reason for not hedging) stays essential.

2: Having the right supply chain. The problem with a supply chain is if one link goes, so does the whole chain. With raw materials suppliers in trouble, freight ships laid up, and banks iffy about lending anything to anyone, it's more important than ever to understand your supply chain intimately

3: And understanding means having a good idea of what can go wrong. So far as protectionist threats are concerned, for example, it's not speculating whether or not the US might slap on anti-dumping duties. It's about being aware of the procedure and timescales for bringing anti-dumping petitions, and acting on the basis of known information.

4: Don't assume anything except the worst. In the past year, we've seen more fluctuation - in raw material prices, fuel, currencies and demand - than even the oldest of us can remember. So it's unlikely 2009 will be as totally unpredictable. But not much is going to get better.

Amid all this gloom, let's remember that the number of clothes being bought in rich countries in 2009 will be about the same overall as in 2004 or 2005.

Making a decent profit isn't going to be easy - but for many of us, whether buying or selling, it's not going to be impossible either.

Whatever you call this time of year, try to enjoy it. And may next year be at least close to prosperous.

Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.