Old New Yorker Charles Addams cartoon

This book is all about strategies – not a good way to begin a book for people in the garment industry. 

We in the garment industry — both the factory suppliers and the importer/retailer buyers — none of us like strategies. We are very good at tactics. We are masters at dealing with crisis. But long-term strategies are simply not our thing. At best, strategic thinking in our industry is a last resort. At worst, it occurs only afterwards. 

We all had ten years to create viable strategies to meet the challenges of the quota phase-out. We all knew the actual date that quotas would disappear on December 31, 2004. We all knew that the end of quota would bring the greatest change in the history of the global garment industry. Yet on January 1, 2005, we were all taken by surprise, unprepared. 

Talk to the average garment industry professional about strategies and the immediate comment will be, “Are you crazy? Who has time for strategies? For me, long term is the end of the season.”

To any non-garmento who has inadvertently picked up to this book, let me immediately say, the professional has a point. When garment people say fashion is seasonal, they mean seasonal! The garment industry operates with its own unique calendar and it’s got about eight seasons. Count them – we have Fall I, Fall II, Holiday, Resort, Spring I, Spring II, Summer and Transitional.

What is even worse is that those worried about seasons are already behind the times. We now live in a new world (in fact it’s about a decade old). It’s a world without seasons — just ongoing continuous change. 

We in the garment industry live in an extremely fast moving world, where long term is short term and where short term is immediate. It is all about NOW. And in the NOW, there is no time for strategies, only tactics. And, therein lies the problem.

Tactics provide short-term incremental change. Strategies provide something new. There is a difference between faster production or higher productivity and speed-to-market, just as there is a difference between reduced prices (whether FOB, DDP, wholesale or retail) and lower costs. Faster production and reduced prices are the result of applying successful tactics. Speed-to-market and lower costs are strategic. 

This concentration on the short term traps us in the world of competition, where local factories vie against other local factories for increased orders, and where regional and national retailers vie against other regional and national retailers for a greater share of the consumer market. The world of competition is a game of known players who operate within fixed rules. The winning factory is the one which offers acceptable quality and reliable delivery with the lowest FOB price. The winning store is the one which offers the best style, best merchandising and best marketing with the lowest prices. The world of competition is a world where everyone tries to provide more of the same with the ultimate winner being the one who provides the most of the same.

In tactics we seek to move forward, by improving what we do and how we do it. In strategy we start with a goal — what do we want to achieve. From there we move backwards — by determining the steps needed to reach that goal and then by taking those steps.

As you will learn in this book, speed-to-market has nothing to do with moving into faster or higher productivity, and lower prices actually have little to do with reducing costs. At the present time, there are approximately 250,000 garment export factories operating in 192 countries and yet we are competing with the guy down the block. That just doesn’t make sense. 

Imagine the following scenario. You have a T-shirt factory in Honduras. One day your customer shows up and says, “Sorry, I am moving my work to Ho Chi Minh City where the factory has offered me a better deal.” 

Why is my customer leaving? What is this better deal? Who is this factory? Where the hell is Ho Chi Minh City? 

Chances are the factory in Vietnam is not offering something better. What they are offering is something different. If you had a strategy then perhaps the other guy in Vietnam would be asking those same questions. Why is my customer leaving? What is this better deal? Who is this factory? Where the hell is San Pedro Sula (which is in Honduras but could be just about anywhere in the world where there are garment factories)?

Now imagine this. You are a giant retail operation in San Francisco. One day you look around and notice that your customer — the end consumer — is leaving and he or she says, “Sorry, I am moving my custom to these Spanish people who have offered me a better deal.”

Ask yourself the same questions as the guy in Honduras. Who are these Spaniards? From what I can see, their merchandising is nothing great. They have no marketing at all. Their prices are certainly not cheap. 

Again this is not a case of something better. It is about something different. This is all about strategy. Tactics is about competition — winning the game against your competitors. Strategy is about excellence. And, if excellence is a game, there is only one player ­— you.

The great Brand name importers and retailers past and present did not compete. Each supplied something new. More than the companies, our industry was built by people, each with a very special strategic sense: Strauss, Lazarus, Schwartz, Fisher, Ortenberg, Walton, Pinault, Arnault, Ortega, Green. These are but a few of the people that built the industry.

The names on the factory side are less well known. However, as the supply side consolidates and the $100 million regional factories expand into billion dollar transnational suppliers, their names will also become more familiar. As you would imagine, many are Asian: Lee, Yang, Sung, Fung, Fang, Sinivasan. The new up-and-coming names are more global: Arias, Omar. These are the legends of our industry. They come from different countries, different cultures, different classes, but they all share a common characteristic – a compulsion to achieve excellence.

This is a book about achieving excellence in the 21st century garment industry.

Material costs are normally 70% of the total FOB price. If the factory has the customer’s material, the customer is trapped. If the factory is late, the customer must accept late delivery. If the finished garment quality is not up to standard, the customer must accept poor quality. The customer cannot just cancel the order as the factory has already received the equivalent of 70% of the order’s value. Any cancellation leaves the factory with a 30% loss but the customer with a 70% loss. In the pre-2005 world where cheap labour and low FOB were the sole determinants of cost, some customers were willing to take this risk. In the post-2005 world, any customer who continues to hand over raw materials to a CM factory is simply inviting disaster.

Factories all over the developing world already know their only road to real profits is in full package production where they pay for raw materials. However, paying for fabric is not the same as sourcing material. In fact, there are three levels of material purchase. Each is different; each provides the customer with different levels of services; and each puts a different level of responsibility on the factory. The greater the level of service, the more important the factory becomes to the customer. At the same time, each increase in services creates greater potential risk to the factory.

The operating instructions for FVCA are very simple. There is only one instruction: Forget everything you ever thought you knew about garment costings. You and I, brought up in the very bowels of the international garment industry, have for years accepted certain unshakeable ‘laws’ of product costs. Dredge them up and throw them up.

Unshakeable Law #1: The lowest cost garments come from places with the lowest wage rates.

There exists no direct correlation between labor rates and manufacturing costs. I realize that to tell you, a professional international garment-sourcing specialist, that cheap labor does not equal cheap garments is like telling the pope that Jesus was not crucified, but pushed in front of an oncoming subway train.

 I will return to this mystery later on. For the present, it is enough to say that the unaccounted for money does not wind up in the factory’s pocket. The fact is that for most Third World factories, wage rates are not the most important component of total manufacturing costs.

If you think about it rationally, the conclusion seems almost obvious. Low labor rates do not determine garment cost. If they did, we would all be working in Somalia, North Korea, New Guinea, Cambodia, or any of the other twenty-plus countries where wage rates are six cents an hour or less. Few importers work in the truly low-cost-labor areas simply because the final costs of the products made in these countries are too high.

Unshakeable Law #2: The lowest FOB cost comes from factories with the lowest manufacturing (CMT) costs.

There exists no direct relationship between CMT and FOB costs. I know this is a little hard to swallow. It was for me. Like you, I was taught that the whole purpose of traveling to the ends of the earth to make a five-pocket jeans was to take advantage of cheap manufacturing costs. Yet the figures simply do not support this premise; in fact, sometimes they prove that the entire effort may almost be a waste of time.

Consider this example.

Unshakeable Law #3: The lowest FOB cost results in lowest actual product cost.

There exists no relationship between FOB or landed-duty-paid (LDP) costs and the actual cost of the product. I realize this is difficult to accept. I appear to be saying that costs are not costs. In fact, the real problem is that many—if not most—of the factors that determine costs are not even included in professional buyers’ cost calculations. Yet all importers do use these hidden costs to make their decisions.

Here is just one example of an important cost not included in the cost sheet.

Most garment professionals can work out that in the case of the Sri Lankan factory, direct labor counts for only 10% of CMT. These same professionals know that as in the case of the five-pocket jeans, total CMT in a Third World factory seldom exceeds 30% of the FOB price. That means the total cost of direct labor in these factories is a negligible 3% to 4% of FOB, which in turn works out to 2% of the LDP price or about 0.75% of the retail price.

Yet despite these ratios, I and almost every other garment professional around still looks at direct labor as the prime factor in determining total garment cost. Take, for example, a senior executive for one of the world’s largest manufacturers of active sportswear and footwear in April 1997 commenting on a 10.7% pay rise recently won by their Indonesian factory workers, who stated, “Indonesia could be reaching a point where it is pricing itself out of the market.”

At that time, an Indonesian line worker was paid about $1.80 for a tenhour day. A 10.7% wage increase equals 1.9 cents per hour—adding a cost of a little more than a nickel on each pair of shoes retailing for about $100, or about 0.06% of its retail price. This is an amount so small that it is not even worth including in the costing. Yet the American company spokesperson stated that the problem of rising wages was so serious as to cause the company to consider relocating its production.

Decisions like this are not only illogical, they are insane—especially coming from one of the smartest management teams in the entire industry. A better solution would be to fire the man who made the statement and use his $250,000 salary to pay the wage increase. This way the buyer could increase the direct wages of 4500 workers by 10.7% and still come out saving money.

We were told that these are the variables in the selection formula.  Customers will favor higher quality over lower quality, faster delivery over slower delivery, and lower price over higher price.

We were told that these variables are interrelated in some sort of trade-off.  If the customer wanted lower price, he would have to accept lower quality, slower delivery, or both.  Conversely, if the customer were willing to pay a higher price he could have faster delivery, higher quality, and sometimes even both.

That must have been a much simpler and easier time.  But I am not too sure that time ever existed.  I can assure you of one thing: That is not how the garment industry operates today.

Today, with the exception of price, these factors are not variables and there is certainly no trade-off.  It is a myth that the customer will pay more money for higher quality or faster delivery.  Today, each customer expects his orders to meet a specific quality standard and to be produced to a specific quality level. The customer expects each order to be shipped on or before a specific date.  If the factory cannot perform, the customer will not place orders at any price. Conversely, if the factory performs better than expected, the customer will not pay a higher price.  This is the reality.  You can take it or leave it, but you would be very foolish to think you can change it.

This reality gives rise to some interesting questions:

• If quality and delivery are absolute standards, just how does a customer judge which is the better factory?
• Is FOB price the only variable?

Before we try to answer those questions, let us consider that these days, the previous trio of criteria has been replaced with a new triad – PRODUCT, SERVICE, PRICE.

These are all variable factors.  The customer places different values on different products because the number of factory suppliers differs with each product.  For example, the customer will pay less for casual trousers than for tailored trousers, not only because tailored trousers have higher costs, but also because there are fewer factories capable of producing tailored trousers.  The simpler the product, the more the customer can squeeze the factory.

Service is becoming an increasingly important variable as senior management at importers and retailers work to reduce costs by outsourcing processes from their home countries to overseas factories.  The differential in the higher FOB prices paid to these full-service factories are minor compared with the far more substantial savings achieved by the importers and retailers.  Naturally, U.S. and EU managers, technicians and specialists are fighting rearguard actions in attempts to delay the move where their very livelihoods will be at stake.  But the cost savings of shifting more work to overseas factories are simply too great to hide.

Price has remained the constant variable, particularly among the old generation buyers who still measure success solely in terms of FOB savings.

These factors – PRODUCT, SERVICE PRICE – are interrelated.  The factory that makes the special product and the factory that offers new services is paid a higher FOB price than the zero-service factory that can only deliver the FOB garment.  This is unarguable.  The zero-service factory can increase value only by reducing FOB price.

Furthermore, the factory that produces the special product must be able to provide special services simply because the customer and/or his agent is only able to provide the level of support given to a T-shirt or jeans factory.  The buyer and his agent can give specific instructions and corrections to simple products.  But correcting the fit and pattern of a tailored jacket or overcoat is much more difficult than correcting the fit of a T-shirt.

At the other end of the spectrum, if you own a T-shirt factory, you had better learn to provide special services, because without those services, your only value is low price.

If you ask professionals where the center of the global garment industry is located, most would say China.  After all, China is by far the world’s largest garment exporter and is growing larger every year.  Furthermore, just about every major garment importer and retailer has a China-based buying office and these too are growing larger every year.

However, there is something wrong with those arguments.  China might have the sewing machines, but that does not make China the center of the global garment industry, for the same reason the center of the global mining industry is not located in Chile, Bolivia, or central Africa, even though that is where they dig the stuff out of the ground.  Furthermore, the enormous size of China-based buying offices is due to the large numbers of inspectors that customers require to police their orders.  Everywhere else customers are phasing out garment inspection and trusting their suppliers to ship quality garments on time.   In this sense, the elephantine buying offices still operating in China are symptomatic of the country’s failure to develop a professional industry.

A better argument can be made for Hong Kong.  Global industries are centered in global commercial centers such as New York, London and Hong Kong.  These are the places with developed support industries such as banking, insurance and logistics.  These are also the places with developed legal systems.  At the same time, Hong Kong is home to the oldest and some of the largest transnational garment suppliers.  Furthermore, Hong Kong is home to the Hong Kong  Polytechnic University’s Textile and Clothing Institute, a world leader in advanced garment industry education.

Hong Kong is a notable commercial center but so too are other cities.  Furthermore, Hong Kong’s other advantages are more suited for the industry as it existed five or ten years ago, not as it exists today and certainly not as the industry will evolve tomorrow.  It is true that Hong Kong is home to many transnational garment companies.  But these days other, newer transnationals are appearing all over the world — from Sri Lanka to Latin America.  In addition,   these new companies seem to be moving faster than the old-generation Hong Kong giants.  At the same time, while none can deny that Hong Kong-educated merchandisers and designers are world-class, many other countries have built their own industry-specific tertiary institutions.  We must also consider that  today’s global garment industry requires more than educated merchandisers.  It requires a whole range of professionals from engineers to industrial psychologists, disciplines not offered in Hong Kong.

Finding the center of any industry is no longer a simple matter.  In today’s world, centers continually shift particularly in the mature industries.  For years, the center of the steel industry was located in Pittsburgh.  From there it moved to Tokyo and more recently to Amsterdam — home of Mittal.  The automobile industry follows a similar track from Detroit to Stuttgart to Tokyo.

A better model might be computers.  That center is still located in Silicon Valley (San Francisco).  What makes computers an applicable comparison is that like the garment industry, the center of the computer industry is not where the products are actually manufactured.   Like Silicon Valley, the center of the global garment industry should be where the brains are located, where the skilled professionals are located and, most important, where the leaders of the industry travel when they want to meet one another.

At present, the global garment industry has no center.  That position is up for grabs and the rewards for the winner are quite substantial.  The importance of the global garment industry is far more than the $250 billion in annual sales.  The garment industry is a major prerequisite for economic development and the single most important entry to international trade.  Furthermore, the industry has become highly politicized.  Today a meeting of industry leaders must include not only senior government ministers from exporting and importing countries and blocs but also the heads of supranational organizations such as the World Bank and the WTO, as well as leading academics and NGOs.

A city looking to become the center of the global garment industry will also be a  center of high-tech research and education because that is the direction the industry is moving in.  That city must also be a center for engineering and the social sciences because those are the skills the garment industry most requires.

Equally importantly, that city must have international political clout — a place where world leaders would feel comfortable meeting.  In fact, the first step towards becoming the center of the global garment industry would be to host a world conference of leading stakeholders to determine the direction in which the industry is moving and the steps that players who wish to compete successfully must take.

How do you get the CEOs of the major exporters, importers and retailers in a room with China’s Minister of Trade, the USTR, the EU Commissioner of Trade, the heads of the WTO and the World Bank?  In my experience, you need something more than an engraved invitation.  You need a place where people would feel comfortable meeting.  That excludes both Shanghai and Hong Kong, the former perceived by many to be representative of a country which is trying to take over the industry, the latter tainted by association.  You simply will not get government officials from countries who feel the threat of such potential domination to travel to these venues.  I do believe that the venue must be in Asia because that continent is indeed the general geographical center of the garment industry.  A good place might be an ASEAN city.  ASEAN includes many important exporting countries, and with the notable exception of Myanmar, these are all countries with which both the U.S. and EU are anxious to increase trade and friendly relations.   Most importantly, ASEAN has clout.

If you look at the list of qualities required, the field narrows down to just one:  Singapore.  This is a high-tech city-state with excellent educational facilities.  Singapore is clearly an important and growing commercial center.  Besides these  obvious advantages, there are two further advantages which are at least as important.  Singapore sees itself as a 21st century center of development.  Most significantly, Singapore respects all countries and all countries respect Singapore.  If Singapore held such a conference, the key stakeholders would come.

Something to think about.

1. Design is provided by the customer.
2. All design takes place in the country where the goods are to be sold.

In accordance with these two iron rules, the customer and the factory carried out a series of set procedures.  First, the customer’s designers completed the following procedures:

1. New fabrics were sampled.
2. New garment designs were sketched.
3. The best sketches were selected.
4. Original samples were made and corrected.
5. Samples were approved, patterns corrected, and spec and tech sheets drawn up.

It was only at this point that the factory was brought into the process to carry out the following steps:

6.  Sample, sample yardage, patterns, tech sheets and spec sheets were sent to the factory.
7.  Factory produced a duplicate.
8.  Duplicate was sent to the customer’s designer who returned the corrected duplicate.
9.  New duplicates were produced and corrected, and yet more duplicates were produced.
10. Final duplicate was approved and pattern corrected.

This was the ten-step ritual which everyone was expected to perform.

In fact the rules were never followed 100%.  There have always exceptions.  Full-fashion knits are outside the rule.  Customers simply do not have the facilities to produce a sample.  Ornamentation such as beading and embroidery are also excluded, for the same reason.   All full-fashion knit and all ornamentation is and has always been carried out in the factory.

At the same time, everyone acknowledges that not all design had to originate in the country where the garments were to be sold.  Garments designed in London could be sold in New York or Paris and garments designed in New York or Paris could be sold in London.  Of course, most customers still believe it inconceivable that garments designed in Colombo,  Djakarta or Dhaka can be sold anywhere.  And so the rule was modified to read that garments created in design centers were saleable in other markets.
The Iron Rules of Design have been followed for the past 50 years which is an exceptionally long period particularly when you consider that the rules never really worked for the following reasons:

• The process is unbelievably costly.  Work that could be done equally well at the factory in Colombo, Djakarta or Dhaka at local prices is carried out in New York, Los Angeles or London at their “local prices”.
• The process becomes a series of compromises.  The factory duplicate never really looks like the original and the stock never looks like the duplicate.
• The process is unbelievably time-consuming.  The customer most often requires three months from first sketch to approved sample plus an additional one to two months before the factory’s duplicate can be approved for production.

The situation is finally changing.  The Iron Rules of Design are still enforced but the definition of design has transmogrified.  Design is now recognized as a process which includes both design and design assists.  In accord with the iron rule, design must still take place in a design center, but design assists may be transferred to the factory.

The question now becomes just what constitutes design.  Different customers have different answers.  But, as a whole, the industry is gradually moving to the point where design is defined as the original sketch, with everything else defined as design assists.  This revised definition goes a long way to making the system more rational for the following reasons:

• The costs which had previously been U.S. or Europe-based overheads have now become Asia-based product costs.
• By using the factory facilities as a design/samplemaking department, the customers’ designers are more able to ensure that the factory sample more closely resembles the designer’s original concept.  And, because the factory produces the approved design sample, the customer has a right to expect that the stock will more closely resemble the sample.
• The time required can be reduced to three weeks, from the previous four to five months.

Only very qualified full-service factories are capable of providing the complete range of design assists.  The problem is that for the past 50 years, most buyers have been trained to consider only FOB prices and are working with factory suppliers who are simply unable to provide the necessary services.

In a more rational world, the decision to trade up to more qualified factories is based on relative cost.  If the cost of higher FOB can be offset by the savings provided by the additional factory service, the customer would trade up.  Unfortunately, many of us in the garment industry live outside the rational world.  Only the more rational realize that in an increasingly competitive business, reducing real cost is the difference between operating a successful business and operating no business at all.

I understand these projections are based on consumer trends, psychological studies and many other sophisticated factors where my level of knowledge approaches zero.  My problem is, I cannot understand where all these additional garments will come from.

I look at the data and I think retail sales are heading south.  Approximately 88% of all garments sold in the U.S. are imported.  The graph below analyzes garment imports from 1989 to YTD April 2006.  The blue line represents U.S. imports measured in units and the red line U.S. imports measured in dollars.  Where the red line is higher than the blue line, FOB prices rise and where the blue line is higher than the red line FOB prices fall.  You will note that while the general direction of the two graph lines is upward, there are three pauses — 1989-90, 2000-01, and the year to date as of April 2006.  At those times U.S. garment imports either increased more slowly than normal or increased not at all.

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If you look at the same data from the point of view of year-on-year changes, the differences become more pronounced.  The blue line still shows units, the red line value.  As you can see from the chart below, unit import growth in 1990 was  negative, 0.7% lower than in 1989.  During the same period, imports calculated in dollars rose by 4.2%.  This means fewer garments but more money spent on garments.  Prices rose.

The next big-time downturn occurred in 2001 when imports in dollars fell by 1.3% while at the same time unit imports rose by 0.4%.  This means more garments but less money spent on garments.  Prices fell.

Now look at the last big-time downturn.  In the first four months of 2006 (the latest period for which we have data), imports in units fell by 3.2% compared with the same period in 2005.  During the same period, imports measured in dollars fell by 1.6%.  This means both fewer garments and less money spent on them.

January to April 2006 was the only period in the past 17 years when imports measured both in units and dollars fell.  Call me crazy, but I think this does mean something.

One last point: the curved white line is the trend — ironing out all the peaks and valleys.  It appears from this line that we are slowly approaching the time when U.S. garment import increases will approach zero.  Imports, and possibly as a result, garment retail sales, will increase either very slowly or not at all.

What about FOB prices?  Here I definitely agree with the association’s conclusion.  Between 2005 and April 2006, average FOB prices actually rose, albeit by a modest 0.1%.   We lost sight of that when quota was phased out in 2005 and FOB prices fell by 3.4%.  But in the YTD April 2006 data, FOB prices were up 1.7%.

Most specialists believe that 2006 was a glitch caused by the re-imposition of quota and the resulting return of China quota premiums.  The accepted wisdom is that in 2007, China quota is scheduled to increase by 12%.  At that point average FOB prices will resume their downward march. (Sooner if Chinese makers get smart and cut out the quota premium).

I take a different view.  I agree with the association report.  I think the days of FOB price deflation are over and that going forward, FOB prices will stabilize and eventually begin to rise.

Traditionally importing countries try to protect their local industries against competition. This starts when politicians, labor unions and local factories band together to limit imports.  They argue that in most cases imports come from developing countries with low labor rates, poor working conditions, and where industry receives special government assists, all of which they perceive to be unfair advantages.  They argue that any benefits to consumers through lower retail prices are far outweighed by the disadvantages to the importing countries’ economies through downward pressure on wages and job losses.  The protectionists’ solution is import restriction.

We in the garment industry have intimate knowledge of import restrictions.  Our products are subject to quota and at the same time face the highest tariff rates of any major industry.  After fighting for the past 45 years we are finally moving towards a freer market.  Most quotas were phased out in 2005 and import duties are slowly being reduced. I would like to think that the move away from protection comes from the realization that protection has failed but, unfortunately, this would be wishful thinking.

As so often in the global garment industry, the move towards garment trade liberalization is simply a matter of politics.  Textile and garment lobbies in both the U.S. and the EU are losing clout while at the same time, the more sophisticated industries are gaining clout.  Consequently, politicians in both the EU and the U.S. have decided they are no longer willing to sacrifice exports of commercial aircraft, telecommunications or banking, insurance and other services to prop up bras and briefs.

I am not complaining.  I am not proud and I will take success regardless of the source.  If Boeing and Airbus want to join the fight for a freer T-shirt market, G-d bless them!

However, just as one garment protectionist lobby has lost power, another seems to be rising up from the ashes to take its place.  A diverse group of exporters, economists, and politicians are now coalescing.  This includes such academic luminaries as Joseph Stiglitz (late of the World Bank) and Joseph Charlton, as well the signatories of the Istanbul initiative.  These neo-protectionists no longer argue that garment importing countries should protect their market against competition from imports.  Their argument is: ‘Garment exporting countries should be protecting their exports from exports.’

f this sounds a bit confusing, do not worry.  I guarantee, the more deeply you go into this, the more confusing it will become.

The argument goes something like this: Developing countries and particularly LDCs (least developed countries) have higher macro costs and therefore should receive special trade advantages to permit them to compete against the more efficient productive countries.  Let me begin by saying, I am grateful that economists and politicians recognize that macro costs (the garment producing country costs) are far more important than direct costs (fabric + CMT).

But the fact that many developing countries have high macro costs does not automatically lead to the conclusion that protection from competition is either reasonable or beneficial.  At the very least, export protection raises many questions.

Assuming that overall imports remain stable, why should the U.S. or the EU care which exporting countries win and which lose?  Is Washington or Brussels supposed to prefer India over Indonesia?  Protection does increase costs and some may argue that the consumer in California should pay more for a T-shirt in order to protect a worker in North Carolina.  But arguing that the same consumer in California should pay more for that T-shirt in order to protect a worker in Pakistan is a little unrealistic.

Furthermore, even if Chinese garment exports are restricted (and let’s face it, this is all about China), why assume that unproductive countries would benefit?  The experiences of 2005 have shown that the quota phase-out did not harm countries with efficient industries and that the re-imposition of quota did not benefit those with inefficient industries.  Yes, China definitely benefited from the quota phase-out, but so too did India, Bangladesh, Cambodia, Indonesia, Peru and Vietnam.  At the same time, the re-imposition of safeguard quotas failed to reduce the market share losses from Mexico, the Caribbean countries, and Sub-Saharan Africa despite the fact that all three losing regions had already received special trade benefits from the U.S.

Besides the arguments above, there is a fundamental problem with export protection. There are two assumptions underlying the argument for export protection:

• Protection affords a country time and opportunity to reduce macro costs and thereby make their garment industry more competitive;
• Countries will use that time to reduce macro costs.

The first assumption is not only correct, it is obvious.  The second assumption is neither correct nor are the underlying problems obvious.  To understand the difficulties here, first we have to define the macro costs and then analyze the proposed remedies.

Macro costs can be divided into two categories: hard and soft.  The hard macro cost factors are physical, mostly infrastructure including roads, ports, electricity.  Clearly, poor infrastructure raises costs considerably.  But all developing countries start with poor infrastructure.  Twenty-five years ago, the Chinese garment industry was a joke.  Roads were at best poor and more often non-existent.  Hong Kong people planning factories had to provide their own back-up generators.  Turnaround time at the port of Shanghai was measured in weeks.  So how did the Chinese solve these problems? They brought in foreigners.  The Chinese Government encouraged Hong Kong, Korean, Taiwanese, and Japanese companies to build the infrastructure on a commercial basis and both sides did well.

The hard macro costs are not the problem.  The problem is with the soft macro cost factors which include corruption, bureaucratic delay and education.  These will not improve because an industry is protected.  But until these soft macro cost factors are reduced, the industry cannot improve.  China developed infrastructure because foreigners invested.  That investment was based on a reasonable return and the knowledge that corruption would not interfere with the development projects.  The entire SEZ program was created to ensure that special zones would be free of bureaucratic interference and unlimited corruption.  In the final analysis, everybody won because everybody profited.

Besides macro costs, we also have to look at the remedies.  Here too there are two types:

• Export benefits:  Free trade agreements, GSP and other trade advantages are becoming increasingly more common in the international garment industry.  With regard to the U.S., these have not been successful.  Paradoxically, the quota phase-out, which was supposed to benefit developing countries, took away their greatest free trade advantage.  Look at Mexico: after a period of great success, Mexican exports have been declining.  Since 2001, Mexico’s U.S. garment import market share has fallen by over 50%.  Caribbean market share is now following the Mexican model.  The quota phase-out has all but destroyed Sub-Saharan Africa’s U.S. market share, despite AGOA’s unsurpassed benefits.  Of all the U.S.’ preferred partners, only Jordan has been successful, due to the great efforts made by the Jordanian government coupled with the very liberal terms offered foreign investors.
• Import benefits:  This is the latest idea.  Here developing countries should be permitted to restrict imports while being granted unrestricted market access to their more developed customers.

In the final analysis, playing with the trade playing field by giving one group a special advantage over another invariably gives rise to unexpected results which are often counter-productive.  The history of foreign trade is littered with well-motivated plans which ultimately achieved disastrous results.  The imposition of quota was supposed to provide garment makers in the industrialized countries with a short-term breathing space during which time they would take the steps necessary to be become more competitive.  That short-term breathing space ended up lasting some 44 years and culminated with totally destroyed domestic industries.

Exporter protection is but a more up-to-date version of the already failed quota system.  It will not stop the efficient exporters and it will certainly not lead to the investments so desperately needed by garment industries in LDCs.

Hong Kong factories were reliable and they provided good quality.  They seldom made serious mistakes.  They understood what their U.S. customers wanted and gave it to them.  Working with a top Hong Kong factory was like dying and going to heaven.

Chinese factories were different, more like a coming attraction of hell.  At that time, most Chinese factories were state-owned enterprises.  To the SOE reliability and quality were alien terms, often lost in translation, and mistakes came in all sizes and colors.  Customers did not worry that delivery would be late – they knew that all deliveries would be late.  As far as putting in a claim. . . that was like asking for central heating for your room in the gulag.

The Chinese factories were not completely to blame. They had their own problems.  Infrastructure had remained unchanged since 1949 and electric blackouts were endemic.  Logistics were terrible.  Most importantly, the Chinese  were saddled with an ideology where profit was synonymous with exploitation.  Work stoppages were common either because needed materials had failed to arrive or because when the needed materials finally did arrive, there were no workers.  They were all busy attending Communist ideology meetings.  Twenty-five years ago, everybody’s dream was the Hong Kong factory located in China.

At the same time, Hong Kong factories were facing their own serious challenges.  Hong Kong was the world’s largest garment exporter.  There is limit to how many garments can produced in a city of five million people, and by 1979, that limit had been reached many times over.  Factories resorted to advertising for workers in the cinemas.  Workers were paid a bonus for working two continuous weeks of full days.  Workers were paid a bonus if they brought a friend to work.  The bonuses were substantial.  Hong Kong factories were ready to go across the border.  Every factory wanted to build their vision of the great Hong Kong-Chinese factory, despite the risks and serious challenges of working there.

Into this scenario appeared a new character, at least as far as the West was concerned.  Deng Xiaoping became China’s new messiah.  His message was:  “China is now and will forever be socialist, except for some small and  unimportant areas directly adjacent to Hong Kong, Macao, and Korea.  They will be capitalist.”

Thus was born Shenzhen, today the largest agglomeration of garment factories in the world.  Hong Kong factory owners, their U.S. customers and the Chinese workers had reached nirvana: the Hong Kong-Chinese factory was born.  Thus was born the Greater China garment industry, which with its center in Hong Kong, has dominated the global garment industry ever since.  The rest is history.

There is now a second 1979 China, this time located in South Asia.  This new South-Asian China has many of the characteristics of its archetype – outdated infrastructure, terrible logistics, electric blackouts and at least the remnants of an ideology where profits are synonymous with exploitation.  Unfortunately, South Asia has yet to discover its own Deng Xiaoping.

On the other hand, everybody wants to work in South Asia, particularly India and Bangladesh.  They just do not want to work with Indian or Bangladeshi factories.  The question is, “Where is South Asia’s Hong Kong?”

The answer is found in Sri Lanka.  Customers may not want to work with Indian, Bangladeshi or Pakistani factories, but Sri Lankan factories are an altogether different story.  Everybody wants to work with them. The largest ten Sri Lankan factories are reliable and provide good quality.  They seldom make serious mistakes.  They understand what their U.S. customers want and give it to them. The big three — Brandix, MAS Lanka, and Hirdaramani — are in the same class as any of the big Hong Kong operations.  (Look at the graphs below to compare Greater China exports to the U.S. with South Asia over the past five-plus years).

These groups are moving aggressively into South India, thus repeating Hong Kong’s move of a quarter of a century ago.  Once again, there will be problems and risks.  The required capital investments are enormous.  But in a world searching for alternatives to China, there is much to commend the Sri Lankan strategy.

In the end, there are two questions that need to be answered:

1.    Will tomorrow’s South Asia become the new Greater China?
2.    Is today’s Greater China the same Greater China of the past?

To: Schmata Knits Factory
From: Schmidlap Stores

Dear Frank:

As you can see from the readouts, your style 1145 is doing very well.  I would like your people to design 6 to 10 more styles in the same fabric with a similar look.  We want them to retail for the same price as 1145 - £9.00.  We need delivery in-store by the end of next month.

Today is Wednesday the 13th. Our next style selection meeting is a week from tomorrow, the 21st. Please ensure your samples are in our offices for that meeting.

We are looking for 10,000 dozen for the group.  We will confirm on the 22nd.  The colors will remain the same except for the following:

Discard: Lime 146 and Chocolate 171
Add:     Slate 66 and Teal 112

Best regards,
Fred

Let’s look at what is happening here:

• Product development has been moved from the customer to the factory.
• Time allotted for product development and all preproduction has been reduced to a matter of days.
• Negotiations over CMT, FOB and LDP are no longer relevant.  The factory is given the retail price.  The factory knows the store markup.  It is the factory’s job to work out the sub-costs.
• Orders are placed within hours of the store’s selection meeting.
• The entire manufacturing cycle – from first design to in-store delivery is less than 40 days.

At the same time, a second conversation is talking place, albeit on a higher level.

To:   CEO Schmata Knits Factory
From: CEO Schmidlap Stores

Dear Paul:

As you know, the figures for the year ending Dec 2005 have been circulated and Schmata came in with a 4.77% markdown rate.  What you may not know is that Schmata was 1st in class (cut & sew knits) and 3rd overall.  You and your people are to be congratulated.

Normally, I would have waited until our annual strategic suppliers’ meeting in March before giving you the good news.  However, some issues have cropped up which may be of interest to you.  For some time now, we have been less than satisfied with the performance of our number two shirt supplier, currently exporting to us 80,000 dozen monthly.  We have now decided to seek a replacement.  Based on your performance, Schmata is our first choice.  I realize  that woven shirts is not your current product.  I also realize that you would have to locate the new factory in a new country.  I personally like North Africa, but the choice will be yours.

We would like to finalize our decision at the annual meeting.  Please come prepared.

All the best,
Philip

Now let’s see what is happening here:

• Profit (in this case markdown) is the sole determinant of the success of the buyer/seller relationship.
• For the important suppliers, the important decisions are made at the strategic level.  Units are decided on multi-year bases.
• The factory product and the factory location are secondary to the relationship.

To some, the important question is: Will the industry be moving in this direction in the future?

My answer is: That question is irrelevant. I am not discussing a strategy for the future.  These and similar emails are part of current sourcing practices.

My question to both buyers and suppliers is: Do you insist on operating in the past or do you want to move into the here and now?