Breaking out of the cheap commodity garment trap | Apparel Industry Comment

Local industry and government must be committed to change if they are to move up to higher value added products

From basic commodities to high value added fashion, why do some industries develop while others remain forever mired in cheap garments? David Birnbaum takes a closer look.

All garment export industries begin by producing cheap basic commodities. This includes the original big three exporting countries – Hong Kong, Taiwan, South Korea – as well as China.

The question is: Why do some industries develop while others remain forever mired in the cheap garment swamp?

The most widely accepted answer is enlightened self-interest. At a certain point in time, management took the rational decision to move up the value-added ladder, which benefited everybody. We all like this answer because it presents proof positive that the classical economic concepts first formulated by Adam Smith in the 18th Century still hold true 350 years later.

The reality is different. Whatever enlightened self-interest existed was on the part of the workers, while management was pushed kicking and screaming into the new industry.

The industry changed for a number of reasons:

  • As the economies of the big three developed, the garment factories started losing workers to new industries able to pay higher wages. Their better educated children decided that being paid more money while working shorter hours sitting at a desk at a bank or property developer was a better deal than sewing garments in some sweatshop, ten hours a day, six days a week.
  • As early as the 1960s, some governments, notably Hong Kong, imposed social legislation limiting excessive overtime and outlawing child labour. At that time, the Hong Kong General Chamber of Commerce (HKGCC) stated categorically that this interference would result in the total collapse of the garment industry. 

Quota regime

As important as were these changes, it was the advent of the quota regime in 1963 that finally forced the industry to move up the ladder to higher value added fashion.

Quotas limited exports, and as direct result created a marketable capital asset. The factory required the quota to ship, and to obtain the quota had to pay a cash quota premium. Since the quota was divided into specific product categories, only the higher added value product in each category could afford the quota premium. For example, cotton knitted shirts and blouses (cat 338/339) included T-shirts. It also included sweatshirts, polo shirts, and fashion blouses. Clearly producing basic T-shirts was less profitable than producing sweatshirts, polo shirts or fashion blouses. A point was reached when the rising quota premium made T-shirts a money-losing business.

A second equally important result of the quota regime was to force the Hong Kong, Taiwan and Korea factories to move offshore to quota-free countries. Over the course of the next 43 years, when the quota regime was finally phased out, in an effort to evade the ever-encroaching quota regimes these same factory groups had opened operations almost everywhere in the world – from Mauritius in the Indian Ocean to El Salvador in the Caribbean. Today these same Hong Kong, Taiwan, and Korea factory groups are still the major garment exporters.

While will can see how and why Hong Kong, Taiwan and Korea moved from cheap commodities to more expensive high value added fashion, the question remains: Why them and not countries such as Bangladesh, Honduras, El Salvador and Nicaragua?

I suggest the remaining cheap commodity producers remain cheap commodity producers because they were never forced to change. To put it another way, while this is a case of arrested development, it is wrong to suggest that the move up to higher value added product is a natural development.

The move upward is not an evolutionary change. The factory producing cheap commodities is very different than the factory producing higher value added fashion. It cannot move seamlessly from one to the other. The management is different. The machinery is different. The layout is different. The workers are different. The entire culture is different. The only similarity is that both factory types consist of four walls and a roof.

More to the point, 50 years ago when the Hong Kong, Taiwan and Korean factories moved up the ladder, they had no competition. They were the only ones making the move. Today, moving up puts the commodity maker in direct competition with sophisticated engineered operations, with highly educated and experienced staff, the latest equipment and well trained workers. Under these circumstances competing head-to-head is in most cases a complex form of suicide.

There is an alternative

If a national industry wants to break out of the cheap commodity trap, it might encourage foreign operations to set up branch factories in its country.

This not a question of subsidies, but rather making the country attractive to the trans-national factory groups.

  • Better logistics;
  • Better worker training and better professional education;
  • Ease of doing business, such as the ability to import materials duty-free to produce garments for export;
  • Reduced corruption;
  • Inviting outside support industries to invest.

Most importantly, before anything is possible, local industry and government must be committed to change, particularly a culture of change. More than anything, this has to do with corporate social responsibility – a commitment to better conditions for workers and sustainability. This requires more than the right words.

At the end of the day, nothing is possible until people recognise they have no choice.

Our industry was not built by people who believed in enlightened self interest, but rather by people who recognised they had no choice.

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