China, Western Retailers Drive Change For Textile Companies
August 23, 2013 When challenging times hit the cotton value chain, no one escapes completely unscathed. Every sector gets a share of the hard times. But it often seems like spinning mills get hit a little harder than most other links of the supply chain.
First and foremost, they are caught in the unenviable position of being vulnerable to the whims of consumers around the world. When economies are thriving and people are confident about their financial futures, they spend freely and often look to higher-end products – such as 100% cotton clothing. But when the economic outlook takes a downturn, non-necessary expenditures are the first to be cut from the budget.
Entire industries have been built in an attempt to understand consumer behavior, and if companies that spend 100% of their time trying to research and predict what fickle shoppers will want in the future can’t always do it accurately, expecting textile professionals to be able to do it is unrealistic. It becomes doubly difficult when looking at consumers globally, due to their widely varying cultural, regional and economic situations.
Unfortunately, that’s only half of the challenge for mill owners. As if the downstream part of their business wasn’t difficult enough, they are also under tremendous pressure from the upstream players in the supply chain, as well. By a large margin, the biggest expense in a spinning mill’s ledger is the cost of raw materials, so when cotton prices fluctuate, it puts an enormous amount of pressure on business’s cash flow. And while the International Cotton Association does an excellent job of promoting contract sanctity, that protection ends with the spinning mill. Retailers and integrated textile mills are not contractually bound the same way merchants and mills are, so they can place large orders and then cancel them without penalty if consumer tastes move in another direction.
Finally, the electricity and water that textile mills need to operate put them under pressure from power shortages, wildly fluctuating energy costs, and environmental groups.
As one veteran spinner tells Cotton International, “The price of cotton fluctuates dramatically and frequently. The Quantitative Easing (QE) monetary policy also results in a lot of money flowing into financial markets, which will then lead a new group of speculators into the futures markets. Further, the global financial crisis isn’t over. Concerns about the world’s economic outlook still affect consumer markets, making them sluggish because buyers are taking a wait-and-see attitude toward their purchases.”
Textile professionals who rely heavily on cotton also face serious competition from chemical fibers, whose price is both cheaper and more stable than cotton. They need to enhance the value of their yarn products by using blends of cotton and chemical fibers, but finding the right mix is no easy trick. The line between managing costs (blends that use less cotton) and remaining as desirable as possible to shoppers (blends that use more cotton) is constantly shifting and virtually impossible to predict very far into the future.
A New Player Has Skin in the Game
Earlier this year, the collapse of a six-story garment factory in Bangladesh left 1,129 people dead, a tragedy that shocked not only the textile industry, but consumers all across the globe. In the days immediately afterward, details began to emerge about the terrible conditions that workers at the factory were forced to endure. Even more disturbing is the fact that the employees had notified managers about the many cracks that had appeared in the walls, but workers were told to continue working “business as usual” and no steps were taken to fix the building’s structural flaws. Less than a week later, it collapsed.
Engineers from the Bangladesh University of Engineering and Technology recently inspected 66 garment factory buildings in Dhaka, where the April tragedy occurred. Less than 10% of the buildings (6) were deemed to be structurally sound, with the other 60 displaying evidence of structural flaws ranging from minor to severe.
There is at least one positive development to come out of the tragedy, however: Consumers have been energized and are demanding that retailers take greater responsibility for the conditions in which their products are made. Retailers might not face contract defaults when they cancel orders from spinners and textile manufacturers, but activists have stepped into that void and are making their voices heard.
Social media around the world exploded when people learned about the shoddy working conditions and dangerous structural flaws in the factories where retailers had their products made.
The impact was almost immediate: Less than three weeks after the building collapsed, an agreement was reached in which retailers would be much more active and responsible for how and where their products are made.
According to a legally binding agreement announced in July, the companies announced that they would take immediate action when safety issues were discovered in garment and textile mills – and most importantly, issued a statement that they would “ensure that sufficient funds were available” to pay for renovations and safety improvements. In the weeks after the tragedy, about 30 companies had signed on. That number has more than doubled and now includes more than 70 retailers.
To date, most of the retailers singing onto the agreement are from Europe, with most U.S.-based companies delaying a decision while they look into the legal risks and obligations of joining the coalition.
It remains to be seen whether the tragedy will have a long-term impact on textile companies. Some experts believe there will at least be a few benefits for them, at least in the short term:
• Loss of business for factories that refuse to make the necessary upgrades and improvements (benefiting those who maintain good working conditions for employees),
• Possible funding from retailers to shore up decrepit facilities, and
• European and U.S. brands and retailers might look to establish a backup supply chain “closer to home,” which would benefit spinners in the Western Hemisphere.
But the cost pressure will remain, and the millions “pledged” by those retailers will need to be regained at some point. In the longer term, countries such as Bangladesh, Vietnam and Cambodia likely will continue to gain market share.
As one veteran spinner tells Cotton International, “This tragedy might have a minor impact. Perhaps the working conditions will improve for a while.
“But as long as consumers want to buy cheap clothes, nothing much will change, other than new labeling that says, ‘We only buy from safe factories with good working conditions!’”
The 800-lb Dragon in the Room
It’s a given that China is the single most important player in the cotton universe, and that influence extends to the spinning and textile side. The impact of its decisions has multiple facets:
1. The domestic spinning market. China’s national cotton reserve has announced that its recent purchasing policy trend will continue in 2013/14, meaning it will continue to pay 30 cents per pound or more to domestic growers, over and above the international price. When you combine that uncompetitive price with a heavy tariff on imported cotton – but no tariff at all on imported cotton yarn – it has crippled China’s spinning mills and made it very difficult for them to compete.
2. The Asian spinning market. The high raw material costs caused from the actions outlined above, combined with rising labor costs and a shift of the working population off of farms and into cities, has resulted in a lot of idle spinning equipment in China – and thus the relocation of the spinning equipment to Southeast Asia and Africa. In addition, India, Pakistan and Vietnam have all been expanding their spinning capacity continuously. If that trend continues and overcapacity continues to build, the cutthroat competition will lead to eroding profit margins and, eventually, the bankruptcies of many spinning mills around the world.
GET THE NEWSLETTER TODAY!
