How changes in Asia’s textile industry are affecting European importers
The pressure on Asia’s textile industry is mounting: civil unrest and terrorism in the Middle East, South and Southeast Asia are causing disruption, while rising wages and the weak performance of the Euro against the USD are scaring off buyers. So what does this all mean for European importers?
Asia is the world’s leading procurement and export region for textiles, garments and shoes. This is unlikely to change for the foreseeable future; after all, China and India alone produce more than half of all traded goods worldwide. But at the same time, the current issues faced by Asia’s textile industry should not be ignored, because the region’s economies are constantly evolving – and not always in favour of European importers.
So, what’s changing?
Economic changes within individual Asian procurement markets as well as shifting trends in the European market are driving factors in the changing landscape of Asia’s textile industry. Safety, currency and trade issues are also playing an increasingly important role. Here are 5 of the top contributing factors:
1) Rising demand for sustainable products
One of the most significant market changes is the increasing demand for sustainable products among Western buyers. European importers are unable to meet this demand with goods from low-wage countries such as Bangladesh, Cambodia or parts of India, which often have low labour and environmental standards. Such orders therefore tend to pass these countries by.
2) Rising prices without reaping the benefits
In contrast, some Asian countries are experiencing rising wages and price increases, primarily in China, but also in Indonesia and other parts of Asia. However, these wage and price increases don’t always lead to higher productivity or better labour or environmental standards, and they rarely improve the competitiveness of the individual procurement markets.
3) Political instability
Political issues also affect Asian textile exports. The unrest in Turkey and the Middle East has already prompted clothing manufacturers to reassess their local operations, and the risk of terrorism in South and Southeast Asia is putting pressure on exporters in Bangladesh, Pakistan and Indonesia.
4) Currency losses
Currency and trade policies further complicate international trade. The continued poor performance of the EUR against the USD makes procurement more expensive for European buyers throughout Asia.
5) Changing trade policies
China’s economic planning strategies, which are increasingly directed at strengthening its own domestic market, could negatively affect its own procurement market, at least in the medium term.
But it’s not all doom and gloom. The conclusion of the TPP free trade agreement, for example, would help Malaysia and Vietnam to export to the United States by eliminating customs duties, which can currently reach over 17 per cent of the value of the goods. And in Indonesia, a low-wage country, NGOs and trade unions are making initial progress in improving labour, social and environmental conditions, which could lead to it becoming a more attractive trade partner for Europe, at least in the medium term.
How much these changes will affect individual procurement markets naturally depends on their respective economic and industrial policies, which vary substantially from country to country.
Nearly all manufacturers in Bangladesh are still relying on low labour costs, and are able to offer lower prices than their global competition. Despite this, the country is becoming less and less competitive, with skills shortages, poor infrastructure and out-dated factories increasingly hampering operations, while the steadily growing terror threat from the so-called Islamic State also increases the risks for importers.
The Middle Kingdom is focusing hard on strengthening its textile industry, in particular by adding value through new service provisions such as design, storage and wholesale, as well as the modernisation of existing factories. As part of so-called “going west strategies”, many Chinese companies are relocating their contract manufacturing to inland China or even Africa, where wages are lower still.
For many years, India focused on the same low-wage strategy as Bangladesh, so it has similar drawbacks as a procurement market. In recent times, however, it has moved away from this approach, with both the government and private companies seeking investors, creating special economic zones and modernising existing industrial sites. Nevertheless, labour and environmental conditions are still poor in many places and infrastructure remains patchy.
Indonesia’s textile industry is currently taking its first steps away from a pure low-wage strategy. Small-scale victories of the workers’ movement have led to an increase in wages and improved working conditions; in some parts of the country, textile workers now earn more than twice as much as they did four years ago. Yet the country’s manufacturers still maintain comparatively low prices. The fact that companies still do not expect further growth is mainly due to competition from Vietnam. And this competition will become considerably more aggressive once the TTP free trade agreement enters into force and manufacturers from Vietnam can export their goods to the United States duty-free.
The Southeast Asian state could be the big winner in the next few years. Ever since it confirmed its participation in the TPP agreement, more and more investors have come forward, primarily from Japan and the USA. As a result, Vietnamese textile manufacturers can offer their employees higher wages and better working conditions than competitors from Bangladesh or Myanmar, and the country also has a relatively good infrastructure. The Vietnamese textile industry’s only weakness is in its depth of value creation: most companies are purely contract manufacturers and often have no design, marketing or sales skills.
New import strategies
These changes are very unlikely to cause individual importers to question procurement from Asia as a concept, but certain adaptations to existing procurement strategies could make it a necessity. For the region itself, it should mean a slowdown in the growth of textile exports.
China may soon be too expensive for value-minded importers, and cheaper countries such as India, Indonesia, Myanmar, Cambodia and Sri Lanka could topple the currently undisputed export market leader by market share. However, African countries such as Ethiopia could also be interesting for importers, with wages often below the average for Asia and the government investing considerable sums to develop and expand export infrastructures.
Buyers focusing on sustainability and higher environmental standards may consider remaining in China. However, they may also find everything they need in Southern and Eastern Europe, where prices are generally higher, but where there are more modern factories and larger numbers of highly trained specialists.
Whatever their strategy may be, importers should never lose sight of the structural challenges facing the region: working and environmental conditions throughout Asia are in need of improvement and virtually all of the factories and facilities are out-dated. Businesses should therefore take great caution when trading in areas where companies, and in some cases governments, are not taking corresponding countermeasures.
Author: Jan Hallen, Principal at INVERTO and Head of the Competence Centre for Fashion Retail