By Anjum Altaf
This is the edited text of the keynote presentation at the conference on Teaching Textiles organized by the Textile Institute of Pakistan, Karachi, on December 2, 2005.
The textile and clothing (T&C) industry is the most interesting of the major industries to study at this time. Its natural development has been the most severely distorted by a system of global constraints that were only eased at the beginning of 2005. Many people expected the removal of quotas on January 1, 2005 to trigger a massive readjustment and the resulting cutthroat price competition to drive production to the lowest cost locations.
It is important to remember, however, that the quota regime was initiated over 50 years ago–the first long-term agreement was enforced in 1962–and 50 years is a very long time. Much has changed during this period that could lead to surprising and counterintuitive outcomes for the T&C industry in future. The very length of the quota regime makes it necessary to analyze the industry in the context of the major global trends that have defined the last quarter century or so.
It will surprise many that the transition in lifestyles is a driver for the most profound changes in the industry. Just one indicator can illustrate this point. Till the end of the 1960s, over 70% of men’s shirts sold in the United States were white. By 1986, this share was down sharply to 20%. The youth rebellion made the world a much more casual place. Now instead of a large quantity of white dress shirts retailers carry a dizzying combination of colors, sizes, styles, fabrics and price lines with a smaller quantity of each product type on their shelves.
At the same time, the consumer has become increasingly more fashion-conscious–even faddish as some old-timers complain–with rapidly changing tastes. A product that gets outdated or misses a particular selling period has to be disposed at a heavy discount. The proliferation of fashion design institutes and the frequency of clearance sales is evidence of this development.
The implication for the industry could be understood by thinking of the difference between the economics of selling dry fruit and the economics of selling fresh fruit. Unsold dry fruit lives to be sold another day; unsold fresh fruit at the end of the day is worth a fraction of its value. Errors in estimating demand are very costly in the fresh fruit business.
The bottom line of the change in lifestyle for the retailer of apparel is that many items of clothing (not all but many) are being transformed from staple commodities to perishable products. If they don’t sell fast they add to costs. As a consequence, the focus of attention of retailers has shifted from ensuring the cheapest supply to managing the demand side. The magnitude of potential loss of revenue on the sales side often overwhelms the cost savings from finding a slightly less expensive supplier. As early as 1985, losses associated with markdowns, stock-outs, and inventory carrying costs for US retailers were estimated to be $25 billion. In the changed environment, other variables, besides supply cost, have begun to have a crucial impact on profitability.
Continuing with the fruit analogy yields a pointer to one possible direction for the future. Relative to the US, fresh fruit and vegetables can be grown more cheaply in many other distant places. Yet the bulk of the demand is supplied from within the US itself or its immediate neighborhood–what used to be called ‘banana republics’ because US firms produced their bananas there. This proximity of supply to the consumer is a feature of the economics of perishable commodities.
The second major change that has occurred during the last quarter century or so is the truly amazing progress in information and communications technology. It is hard to recall now that only one generation ago there were no pocket calculators, let alone laptops or the Internet. University students used a slide rule for computation, a device that now belongs in the museums of science and technology.
It is not surprising that the first users of the new technology to assist with the problems of managing demand were the food stores–beginning in 1970–followed by the leading apparel retailers. The principal elements of this technology package were the uniform product code, bar codes, laser scanners, and electronic data interchange. Using these technologies, retailers gained access to real-time sales information collected at the register via bar code scanning. Today, the leading retailers collect information on the sales of particular products at the size, style and color level, compile it on Sunday night (after the weekend sales are known) and transmit an electronic order to the appropriate supplier the same night. By the following Thursday, they expect floor-ready supplies delivered to their individual stores.
The use of these technologies in the industry is spreading due to the dynamics of competition just as no bank today can afford to be without online services and ATM dispensers. One consequence is that the leading retailers have begun to exert much more leverage in the supply chain compared to the past. They now stock only the products on their shelves reducing expenses by pushing back the burden of inventory on to their suppliers; they are forcing distributors and suppliers to install expensive data processing technologies to comply with their requirements or risk losing their customer; and they are asking for floor-ready deliveries to individual stores in smaller quantities and in shorter delivery times. Industry analysts have highlighted the emergence of this phenomenon of lean retailing as a key component of the retail revolution in the apparel industry.
Similar to the distinction between fresh and dry fruit, apparel products are now split into what the industry has termed replenishable and non-replenishable items. Replenishable items are re-ordered many times in small quantities during a selling season, while non-replenishables are ordered a few times at best if not just once. Low-cost items like hosiery, underwear and men’s shorts are replenishables while high cost, fashion sensitive items like women’s dresses are non-replenishables. The replenishable segment is growing in importance. In 1988, 60% of the sales volume in the US was shipped on a non-replenishment basis; by 1992, this was down to about 20%.
All these new variables affecting profitability, especially the inventory costs of distributors that vary directly with the lead-time needed by suppliers, place a premium on proximity to the end market as far as the supply of replenishable items is concerned. For the U.S. market, the average cycle time for a supplier in Mexico is four weeks as against eleven weeks for a supplier in China–a difference that translates into 100% increase in inventory costs for the distributor. For some products this more than offsets the lower costs of production in China where wage rates are less than a third of those in Mexico.
The consequences can be seen in the pattern of trade. In 2003, the top five suppliers to the US of men’s and boy’s denim jeans, a typical replenishable item, were Mexico, Costa Rica, Guatemala, Colombia and Honduras. China was 18th and Pakistan 19th on the list. For the same product category, of the top ten suppliers to the EU, six were neighboring countries. By contrast, for a typical non-replenishable item (women’s and girl’s cotton dresses), the top ten suppliers to the US were all Asian countries. This clearly indicates how the market for apparel is being segregated and how completely different considerations determine the sourcing of these different product types.
These developments are leaving their imprint on the geography of production. The production of low cost replenishable items is configuring itself in regional markets surrounding the major consumers–the US being served to a significant degree from Mexico and the Caribbean; the EU from Turkey, North Africa and Eastern Europe; and Japan from China. The production of high-value non-replenishable items on the other hand is following the more traditional path of migrating to the lowest cost producers most of whom are in Asia.
Five global trends are accompanying this new geography of production. The first is the huge wave of outsourcing of manufacturing and services from developed to developing countries. It is interesting to observe how the characteristics mentioned above are shaping the nature of this foreign investment in the T&C industry. For replenishable items, US firms are moving across the border to produce in Mexico and Japanese firms are investing in China. The most revealing example, however, is from Korea. Guatemala was the third largest supplier of men’s and boy’s denim jeans to the US. It turns out that of the 244 companies producing apparel in Guatemala in 1999, 130 (more than half) were from Korea. Clearly, proximity to the consumer and being integrated into the supply chain of the leading retailers is important enough for Korean firms to invest not only in China but also as far away as Guatemala.
The second trend is the proliferation of regional and bilateral preferential trade agreements. The pattern of regional markets in the textile and clothing industry is being reinforced by agreements that often tie tariff concessions to the use of inputs from the consuming countries (e.g., US origin textiles and fabrics). NAFTA, the Caribbean Basin Trade Partnership Act and the Euro-Mediterranean partnership are good examples. It is important to remember that after the elimination of quotas discriminatory tariffs remain as the major public policy instrument to redirect the flows of free trade. In South Asia, Bangladesh is a beneficiary having free entry into the EU due to its status as a ‘Least Developed Nation.’
The third global trend is the quiet emergence of the knowledge economy and the increasing importance of what is being called the creative worker, the worker that helps a firm to innovate, add value to its products, and move up the supply chain. It is not possible to produce high-value items in today’s economy without a large pool of creative workers. The implications have been realized quickly in East Asia where many countries, finding themselves unable to compete with China on costs, are investing heavily in innovation and in attracting the innovative worker. This aspect is important for apparel firms that wish to compete in the market for both replenishable and non-replenishable items and for textile firms seeking to find new industrial uses for their products.
The fourth trend centers round the rise of the efficient city as an entity almost independent of the country in which it is located. In South Asia, Bangalore is a good example. It is now linked directly, not through the national capital, to the global economy and investment is flowing to it quite irrespective of the poverty in Bihar, the unrest in Assam, or the hostilities in Kashmir. As long as Bangalore offers a stable environment with good business infrastructure and efficient logistics what happens in the rest of India remains virtually irrelevant to global business. And efficient cities have begun to compete with each other for outsourced work. Thus Hyderabad and Chennai, led by their public officials and chambers of commerce, are now competing aggressively against Bangalore for the software market. It is significant to note that the Indian government is not lobbying on behalf of Hyderabad and Chennai; the cities are out there marketing themselves on their own.
This competition between cities for global business has given rise to a new set of comparative indicators of business friendliness and efficiency. The time it takes from touchdown at the airport to checking in at a downtown hotel has become one of the benchmark metrics in this new competitive environment. It is no surprise that Shanghai has invested in the fastest and most modern train, the world’s first commercial magnetic levitation system, to link its new airport with its business district. The 30-kilometer journey is reported to take all of about eight minutes.
A related aspect of this phenomenon is that these competitive cities have realized they must become attractive for the global knowledge worker whose lifestyle is quite different from that of the industrial worker. Singapore has gone to the extent of relaxing its prohibition on chewing gum, is talking about creating a bohemian village, and becoming a Renaissance City. Shanghai is pouring millions of dollars into museums and an opera house. Dubai is transforming itself as a shopping and entertainment haven. Investment in culture, called ‘cultural capital’, has become just as necessary as investment in science and technology and in physical infrastructure to be globally competitive in the post-industrial knowledge economy.
The fifth global trend is the emergence of the environmentally and ethically conscious consumer in the developed countries. While we might consider this a phenomenon promoted by protectionist industry lobbies, we still have to deal with the fallout. The soccer ball industry has already found itself vulnerable to the charge of exploiting child labor. For the textile industry, the plight of the cotton pickers might turn out to be its own weak spot.
It was mentioned earlier that the production of high value non-replenishable apparel items was migrating to the lowest cost producers not the lowest wage countries. Jobs are moving to low wage countries with the largest and most productive talent pools, the most desirable locations, and the most efficient delivery logistics. Thus Indonesia, which in 2002 had an average hourly labor cost in apparel manufacturing lower than that in China, is still losing market share to the latter.
One can understand now why China is in such a sweet spot and emerging as a manufacturing powerhouse. It is next door to the very large Japanese market and also has the most competitive shipping times to the west coast of the US averaging between 12 and 18 days compared to as much as 45 days from its ASEAN competitors. It has almost 100% literacy and a large pool of highly trained technical workers. It has proactively identified a number of universities that it intends to raise to the highest global standards within years. It has increasingly efficient cities, is investing heavily in the infrastructure of business, and is pouring money into cultural capital to become attractive for global capital and the demanding knowledge worker.
Let us now see Pakistan in the perspective of these developments in the industry and the global trends that have been highlighted. Is it possible that Pakistan would fall between two stools–not being close enough to the large markets to be competitive in the low-value replenishable products and not having the creative talent pool or the efficient cities to be competitive in the high-value non-replenishable products? In the worst case, could Pakistan find itself reduced to a provider of raw materials to producers elsewhere who have equipped themselves to add value and be competitive in the global economy? And could the degradation of the cotton pickers emerge as a new barrier to trade, further reducing its limited role in the global economy?
Of course, this need not be the case. If one can see far enough down the road, one can identify the potholes, steer accordingly, and chart a successful direction. The industry has already invested in modernization to be ready for the post-quota world. In future, Pakistani firms could invest in countries like Turkey, Tunisia, and Morocco that are proximate to the large EU market. Bangladesh is also a candidate for investment because of its tariff advantages. Pakistani firms could also explore niches in the large developing country markets of India and China that are becoming more open under the WTO regime. The most important industry in the country could spearhead efforts to reclaim the cities and to make them more efficient for business. It could lobby for reform of the public school curriculum to move the country beyond the stage where 50 percent of the population is still illiterate and the rest is getting an education that provides few skills to integrate into the global knowledge economy.
Most of these are changes where the industry needs to convince the various levels of government to support its growth and development. This is no doubt a difficult challenge but one that has to be faced sooner rather than later in the self-interest of the industry. But there are areas where the industry is much less constrained and can act on its own. This space for voluntary initiative provides room to demonstrate forcefully the industry’s commitment to change.
Establishing the Textile Institute of Pakistan is an excellent example. There are some other possibilities. The industry could be proactive in offering incentives to growers to improve the conditions of work and incomes of the cotton pickers. The industry could also conceivably lead the way in the sphere of education by further raising the standards of the Textile Institute to match the best in the world. It is here that the importance of being located in an efficient, safe, and culturally vibrant city would be realized. Attempts to attract leading academics and professionals for significant periods of time would flounder because of the poor image of Karachi. Therefore, it would be in the interest of the industry to contribute to making Karachi a more attractive place to live and work in. Little things can often set the ball rolling and make a surprisingly big difference.
On the T&C industry:
• A Stitch in Time: Lean Retailing and the Transformation of Manufacturing–Lessons from the Apparel and Textile Industries. 1999. Frederick H. Abernathy, John T. Dunlop, Janice H. Hammond, and David Weil. New York: Oxford University Press.
On the knowledge and creative economy:
• The Rise of the Creative Class: And How it is Transforming Work, Leisure, Community and Everyday Life. 2002. Richard Florida. New York: Basic Books.
• The Creative Economy: How People Make Money from Ideas. 2001. John Howkins. 2001. London: Allen Lane.
On global cities:
• The Global City: New York, London, Tokyo. 2001. Saskia Sassen. 2001. Princeton, NJ: Princeton University Press.
• Cosmopolitan Cities and Nation States: Open Economics, Urban Dynamics, and Government in East Asia. 2002. Thomas P. Rohlen. Stanford University: Asia/Pacific Research Center. http://iis-db.stanford.edu/pubs/12074/Rohlen_cosmopolitan.pdf