The Global Search For Profitability And Its Costs

Friday, November 08, 2013

With the recent announcement of a pay hike for garment workers in Bangladesh, I got to thinking about how labor costs affect the price of clothing, as well as how the global expansion of textile and apparel production has brought jobs to many thousands of otherwise unemployable people. In turn, the global expansion of textiles and apparel hastened the demise of traditional manufacturing in the United States, Europe, Japan and other developed countries. There are two sides to globalization – a winning side and a losing side. Change brings about winners and losers. Those who adapt will survive; those who do not will perish. It may sound harsh, but it is the economic reality of our times.

The Current Industry: A Model To Behold

It is curious for me to consider the current state of sourcing in the global industry. Consumers around the world now enjoy low-cost clothing featuring a wide range of fabric designs, finishes and styles. Not all that long ago, that was not the case. In fact, there was a time when the global trade in textiles and apparel was restricted to such a degree that product innovation and consumer choice were second to the edicts of textile mills. Whereas today, the true power of the industry has migrated closer to the consumer, there was a time when the middle of the textile supply chain dictated what apparel brands and retailers were able to off to consumers. Moreover, such control of textile output was reinforced by a system of quotas that not only clamped down on the availability of products, but also hindered product innovation and helped to keep prices for textiles and apparel artificially high.

Today, of course, we benefit from free trade. Prices are low; product development is extensive. There is a lot of variety. For sure, creativity typifies the apparel business in ways not seen before. Entire product segments are now possible because of the free flow of products from country to country. In turn, this movement of product and direct benefit to consumers throughout the world is supported by the hard work of laborers in developing countries. In the past, quotas helped to prop up inefficient textile companies, limited choices for consumers and kept innovation away from a consumer starved for new products. The grey-flannel suit gave way to casual shirts, sweaters, khakis and jeans – all possible for the first time on a global scale thanks to the elimination of the closed systems of the past.

Even so, the tyranny of old has given way to the tyranny of the new. Market distortions caused by quotas and inefficient production has given way to the whims and implicit desires of consumers. Whereas in the past, quotas limited consumer choice, today consumers enjoy freedom of choice as never before – but with a new stipulation. Consumer choice today comes with real costs: For example, impact on the environment, labor strife and product complications throughout the supply chain. Hence, we have gone from a world of restrictions and limited choices to a world full of choices, but now with new costs -- and with new responsibilities. Mass consumption comes with massive costs. The implications of such consumption need to be understood through the prism of social responsibility.

Historical Lessons: Identifying Old Mistakes That Never Seem To Go Away

Early in my career, I worked for the now-defunct American Textile Manufacturers Institute (ATMI), a lobbying group responsible for representing the American textile industry in Washington, DC. I was a young lobbyist and idealistic industry representative on quota negotiations conducted by the U.S. government with other governments to regulate imports of textiles and apparel into the American market. By the time I joined ATMI in 1986, imports of textiles and apparel had grown into a thorny political problem for the Reagan Administration. Much of financial support for the Republican Party and Ronald Reagan’s march to the presidency came from the domestic textile industry. The Democratic Party was a beneficiary of the financial support of the domestic textile industry, too, although in a slightly different form. The textile industry was one of the largest American employers at a time when most manufacturing workers were unionized. Two main unions represented the interests of cut-and-sew and mill workers throughout the country: The International Ladies Garment Workers Union (ILGWU) and the Amalgamated Clothing and Textile Workers Union (ACTWU). Today, these unions are consolidated under the auspices of UniteHere!, an amalgamation of a variety of previously independent trade unions. At any rate, these unions were vast financial supporters of Democratic politicians throughout the country.

Together, the textile owners along with their workers formed a potent force. At the time, this alliance formed one of the most powerful industries in the country, as well as one of the most influential lobbying forces in Washington. Thanks to the textile industry’s political and economic heft, it was difficult for any politician in Washington to resist the will of textile mills and apparel manufacturers -- or their workers, for that matter. From New England, to Brooklyn, to the Carolinas, to Georgia, Alabama, Tennessee and Louisiana, textile producers and their workers endeavored to halt a growing tide of imports from Asia and elsewhere. The industry modernized, invested in the most efficient spinning, weaving and knitting equipment. New factory practices boosted the productivity of assembly-floor workers throughout the industry. It was the hope of many in the industry that improved productivity could offset a cost advantage enjoyed by manufacturers outside of the United States. For example, unionized garment wages in New York City were perhaps ten times that of those in Hong Kong. Even so, owners of the garment plants, along with their colleagues in the textile industry, looked to technology, as well as better management practices, to offset a growing gap in the cost of production.

However, despite their best efforts, it proved to be inadequate to meet the competitive challenge. Slowly, the industry banner of competitiveness turned shrill. The rallying cry of the song of the ILGWU – “Look for the Union label!” – gave way to “Look how they have taken our jobs!” American producers had to struggle to compete, but it was the fault of workers in faraway Asia. Even more, the American industry condemned importing as somehow dishonest. Of course, the major reason why American competitiveness waned in the 1980s was due more to poor American management than to the accomplishments of foreign workers. Also blamed for the decline in U.S. textile industry prowess was the rise of the American importer, a new form of garment company -- the sourcing company – became a nimble player on the global scene by outsourcing manufacturing in favor of high design and good prices.

The American textile industry in the 1980s was predicated on a simple model of mass production that grew out of 1950s manufacturing practices. Each unit of production was manufactured at the lowest possible cost but product variety was often limited. In the case of textiles, one could buy denim fabric, but only with one or two finishes and in only one construction. Textile mills commanded control of the industry as they would dictate which fabrics were made and at what price. Particularly after World War II, there were few options. Industry was decimated in Europe and Asia. U.S. mills enjoyed little foreign competition. If a retailer or apparel brand wanted to venture beyond what was produced by the mills, then they were out of luck. In time, that model was forced to change, with serious implications for mills throughout the country.

As a management consultant, I was once asked to speak to the Executive Committee of a very large, now bankrupt, apparel manufacturer about what they should do to compete in the rapidly changing world of sourcing and product development. The head of manufacturing summed up their attitude towards their company: “We can make our product for the lowest cost of any garment company in the world.” In fact, they were the cheapest. No one could beat them on price. So, why, he asked, “did they have problems selling against imported products?” Boldly, I suggested the answer was simple: They did not produce anything that consumers wanted to buy! Many of the folks in the meeting blew gaskets; furious that I would suggest they made products no one wanted. Yet, it was the truth. They focused so much on unit-cost manufacturing that they lost track of their customers. I did not get fired on the spot, but I was labeled a heretic until the company collapsed a few years later.  

Here is a related story. At a staff meeting, my old boss at ATMI once asked the association’s employees: “Why are our member companies in business?” Most people really could not come up with an answer. Some tried, but unsuccessfully. Typical answers ranged from “to make fabric” to “employ people” to “support their local communities.” If only reality was so socially engaged. In response to answers like these, my boss, a hard-ass, barked: “To make money, numb nuts!” A former employee of some long-gone textile manufacturer, he understood the importance of not only making money, but to make a profit. However, in the burgeoning world of globalization, the rules of the game were changing. Profitability was increasingly difficult for American textile manufacturers to maintain, as their traditional business model crumbled around them. The means to profitability had changed.

Hence, the crux of the issue for textile companies at the time: How would they make money in this new world? They were not in business to be a charity. But they were in business to make profits. What was the best way of doing that? For importing companies, the answer was straightforward: source offshore. There were lots of producers in Asia and elsewhere willing and able to provide products to exacting specs at good prices. Importing companies ceased the market opportunity. Unfortunately for most American textile companies they continued to embrace the past, as we have seen, with tragic consequences. But there is more. They also got behind an international trade agreement called the Multifiber Arrangement (MFA), which was a multilateral system of quotas designed to regulate global trade in textiles and apparel.

The MFA As Metaphor For Today’s Consumer Society

For readers unfamiliar with the MFA, here is a little history. The MFA operated from 1974-1995 and was managed under the auspices of the General Agreement of Tariffs and Trade (GATT) in Geneva, Switzerland. As a condition of the establishment of the successor organization to the GATT, the World Trade Organization (WTO), the MFA was terminated January 1, 1995. Upon its termination, the agreement was gradually phased out until all quotas were eliminated by 2005. Indeed, the MFA was a high-profile exception to the principles of free trade and operation of the GATT. As such, the MFA was supposed to be a temporary measure. However, the agreement was renewed four times and became a political pariah for all those involved. Although the agreement was meant as a tool for the regulation of global trade in textiles and apparel, the politics supporting the agreement ultimately caused it to unravel. Although the MFA stood out as an exception to the principles of free trade, it also had a significant role in setting the stage for the globalization of the world economy, as the agreement helped to expand production of a major manufacturing industry all around the globe.

The quantitative restrictions imposed by the MFA, and how those restrictions were implemented by importing countries, skewed the trade resulting in significant social and economic costs for both importing and exporting nations. From an economic perspective, the MFA quota regime helped to raise costs for consumers in importing countries while limiting employment opportunities for workers in exporting countries. Further, importing companies in the United States and Europe made efforts to circumvent the quota program by scattering sourcing to non-quota countries around the world in a search for cheaper production not affected by quotas. By sourcing cheaper goods, importing companies hoped to build market share with consumers. The result was that some cheaper clothing was imported during the years of the MFA, but the real impact of cheaper production was not fully realized until the end of the MFA in 1995 when imports, unhindered, soared and prices plummeted.

From a social perspective, workers in exporting nations had the opportunity to gain employment in the textile and apparel industry, but those job opportunities were often temporary, as importing companies would frequently shift sourcing strategies to avoid tight quota restrictions. As such, new industries seemingly grew up over night in countries that had not previously maintained apparel industries. Women and other second-class citizens of the Third World, as a result, had the chance for employment, though they lacked job security. Also, the drive on the part of importing companies to buy cheaper products set the stage for labor abuses in exporting countries as the competitive pressures placed significant burdens on both management and labor in those countries.

For readers unsure of what we have today, here is a little reality: We have globalization, instant communications and intricate supply chains that web all around the world. We also have more variety than ever. We have cheap prices, but we also have fast fashion and high-carbon fashion. There may be a preponderance of products and lots of companies engaged in the design and production of those products, but at what cost? Is speed sourcing worth fouled air, polluted water and inadequate working conditions in poor countries? In so many ways, the consumer has triumphed in the globalized world. In many ways, the desire of consumers has become a surrogate for a new MFA. In fact, the whims of sixteen year olds have more impact on the supply chain than all of the lobbying and money spent in the past. Yet, what is the cost? Make no mistake -- these whims come with costs. A new wardrobe every season? What does that mean?

Many economists champion the successes of free trade and globalization. For sure, there is a lot to cheer: cheaper products, more variety and better employment for workers everywhere. A higher standard of living for many. Yet there are costs. With success comes responsibility. I only hope today’s industry can come to grips with its responsibilities and not repeat the mistakes of history. In the past, we could hold a few responsible for market distortions. Mills, governments, some lobbyists and a few wealthy individuals determined to maintain the status quo. For consumers, this was stifling. However, eventually the consumer won out. Quotas evaporated, trade increased, production proliferated, as did innovation. Variety came to be the norm. What is more, the very desires of victorious consumers have also brought a world driven be razor-thin margins, fast fashion, cheap products and a new form of tyranny. Consumer tyranny.

Contending with Consumer Tyranny

So, I would like to suggest that a new responsibility has befallen apparel brands and retailers: The responsibility of education. As retailers often go to great lengths to articulate complicated products in streamlined terms for their customers, it also falls on today’s retailers and brands to explain the benefits and shortcomings of consumer buying decisions. Made in USA? Explain what that really means -- higher prices, but higher U.S. employment. Low prices … what does that really mean? What does the tragedy at Rana Plaza really mean? Should fault be assigned, and, if so, to whom? Retailer, brands, as well as local garment factory owners should share responsibility, take steps to ensure worker safety and living wages. Hence, the consumer-spirited model of consumption needs to be tempered with some reality. Of course, there are ethical issues at stake. Beyond ethics, however, there are also business considerations to be made. How much longer will sourcing companies be able to traverse the world in search of the lowest cost of labor? Eventually, the industry will run out of places to produce inexpensive clothes using cheap labor. Moreover, as so many developing countries succeed to raising their collective standard of living, cost of production will undoubtedly rise in tandem. What does that mean for the sourcing models of today? Labor costs make up only a small share of the cost of a garment sold at retail, yet to talk to many sourcing people, an increase of labor costs in Bangladesh is the end of the world. Why?

Back in the 1980s, the apparel retail business responded to the tyranny of American textile mills by simply bypassing them, in effect embracing mills’ competitors while nurturing a new way of business. Today, we have tyranny of the consumer. Cheap prices at all cost? Is that what our business has become? As the industry has evolved and supply chains expanded, water supplies have become depleted, pollution more commonplace and labor strife more intense. Consumer demand, on the other hand, has only become more fickle as economic uncertainty and changing demographics influence purchasing decisions. For all of the benefits of globalization, the costs are significant and will only become more pressing in the future. In response to these challenges, I suggest that you ask questions, educate your customer, support your supply chain, but, above all, acknowledge the implications of consumer demand and how that demand can be met in the future in a smarter, more responsible way. Take the lead. It’s good business.

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