The Garment Industry Land Rush: Sourcing

| Nov 20, 2012 | BY rjowell

I’d like to begin this blog post with a tale from American history. On the morning of April 22, 1889, thousands of people from all walks of life were lined up along the border of what was then known as “Indian Territory”, an area now part of present-day Oklahoma. Most of them had their entire families in tow, along with all of their possessions. They were anxiously waiting for the clock to strike high-noon and for a cannon to sound, signaling the end of a long-standing embargo on settlement of that land. When that moment finally came, those thousands of people flooded across the border and hastily staked their claim to untouched tracts of land. The area’s population swelled exponentially in just a matter of hours, giving rise to several of the state’s major cities. The event was called the Oklahoma Land Run, and it’s being replicated today within the global apparel industry, only on a much larger scale. Economic troubles in  Europe and the United States coupled with shifting national priorities in countries like China have prompted a worldwide “apparel land rush” where garment makers are hastily working to claim fertile new ground on which to both make and sell their products. This post is the first in a two-part series that takes a closer look at this phenomenon and what it means for the industry.

Let’s begin with sourcing. China is the world’s top apparel exporter, staking claim to about 30% of the global market. But China’s position at the top is growing more vulnerable every day. Two inevitable consequences of the country’s economic prosperity have come to fruition; higher labor costs and a move to re-evaluate their domestic economic agenda. China’s growing middle class has realized the benefits of their growing disposable incomes; they have been able to command higher wages from their employers and are spending more of those dollars on non-essential consumer goods. In fact, Nils Smedegaard Andersen, CEO of shipping giant Maersk, says China will evolve into a consumer nation within 10 years. To meet the growing demand, Beijing has called for an economic shift away from exported products and toward consumer goods, which is making them less attractive as a sourcing destination and more attractive as an export destination (which we’ll talk about in the next post!)

As China’s economic ship changes course, however, it’s coveted garment industry may be left adrift. Those rising labor costs have forced many textile firms to shut their doors and many other countries to cut their investments. The effects of this decline were most recently seen at the autumn China Import and Export Fair. Viewed as a good indicator of the country’s standing on the global market, attendance at the Autumn 2012 fair was significantly down from past events.

China’s fall from atop the apparel-sourcing mountain leaves a lucrative opportunity for another country to take its place, a seat many countries are already vying for. The leader of this pack is arguably Bangladesh, where rising product quality and growing investment from both the government and outside companies are giving the country increasing confidence that they will nab the top spot. This confidence is well-founded; a group of two-dozen Hong Kong-based global buyers recently indicated that Bangladesh is now their first choice for garment sourcing. Bangladesh’s Financial Express newspaper also recently reported that the CEO of H&M, the world’s second largest apparel retailer, commended the country’s efforts and has agreed to increase its purchases from the country by 10-15% each year. Significant investments in safety and training are also being made; WRAP has implemented a comprehensive factory fire safety course in the country and several retailers, like Gap Inc., implementing their own similar programs. British retailer Tesco has launched an “Apparel Skills Foundation” in the country. Furthermore, government officials are actively courting new markets for their goods; a high-level delegation from the Export Promotion Board (EPB) recently visited Moscow to gage the viability of the Russian market and a delegation from Russia says it also plans to visit Bangladesh in the coming months.

Bangladesh is facing some stiff competition for the top spot however. The ASEAN nations are becoming increasingly competitive in apparel manufacturing. Vietnam, Cambodia, Laos, and Indonesia all have strong garment-making communities that are only projected to get stronger in the coming years. Myanmar is also coming into play.  In a historic move, the United States recently lifted trade sanctions on Myanmar ahead of President Barack Obama’s historic visit to the country. This marks the first time in almost 10 years that Burmese-made goods will be allowed in the U.S. Coined “the Last Frontier” in economic investment by Forbes, Myanmar has several lucrative advantages for apparel makers. Besides having geography on its side (Myanmar shares borders with Bangladesh, India, China and Thailand and is less than 500 miles from Cambodia and Vietnam), there are 13 million people between the ages of 15 and 28, the minimum wage is lower than most other countries in the region, and an ever-stabilizing government is offering lucrative incentives to manufacturers (like a 5-year holiday on tax and duty exemptions on imported equipment). A top U.S. National Security Advisor even says Myanmar could even serve as an example to North Korea about the benefits of opening up to the rest of the world. Outside of Southeast Asia, China’s neighbor Kyrgyzstan has reported substantial growth in its garment manufacturing sector.  Competition is brewing outside of Asia as well; Honduras has reportedly overtaken India in apparel exports to the U.S.  and Georgian apparel manufacturers are aiming to increase their international reach, most notably to neighboring Turkey.

You may have noticed that we haven’t talked about India yet. While India is still one of the world’s top apparel exporters, I would argue that their future competitiveness as a sourcing destination is in jeopardy and that they have started down a similar path as China. High production costs, relegated regulations, and slow transportation are putting the country’s productivity at risk. In fact, the Hindustan Times recently reported that September factory output in India was down 0.4% from the previous month after increasing 2% in August. Apparel exports for that month also failed to break the US$1billion dollar mark as they had done in 4 prior months. Simultaneously, as in China, several retailers are jockeying to meet growing consumer demand; Lacoste says it has opened a new store in Mumbai while IKEA is one step closer to opening in India after the government relaxed a local sourcing requirement.

So what will this land rush mean for garment sourcing? Primarily it means increased choices for garment makers and increased competition between the countries providing those choices. Garment producers will have to choose along a spectrum that runs between untouched new land and well-established locations. On the one end, countries like Bangladesh offer well-established garment-making communities that offer a wide-range of support services and established government regulations, yet real estate is growing ever more precious in Bangladesh. On the other hand, so-called “newcomer” countries, like Cambodia and Vietnam and to a greater extent Georgia and Myanmar, offer abundant room for growth, but their support communities may not be as well-established and the relationship between government and industry is still being forged. Rest assured, the sourcing land rush is well underway. Stay tuned for part 2, where we’ll look at the rush for new export markets!