Asian clothing manufacturers hang by a thread from Covid-19

Garment makers in South and Southeast Asia face months of life-threatening factory closures and mass layoffs as European and American retailers shutter stores and suspend supply orders due to the Covid-19 pandemic.

Garment producers in Bangladesh, Cambodia, Myanmar and Vietnam had so far only seen dozens of factories close due to disrupted supply chains in China, the previous epicenter of the coronavirus outbreak. virus and the main supplier of raw materials for many garment manufacturers.

Vietnam, the world’s eighth-largest textile exporter, saw year-on-year garment export growth drop to just 1.7% in January and February, according to its textile industry group. This figure is expected to fall into the red now that the United States and Europe are in lockdown against the coronavirus.

The Cambodian government recently predicted that up to 200 factories employing around 160,000 workers could temporarily close their operations by the end of this month if they run out of raw materials imported from China.

On March 19, the Myanmar time reported that at least 20 of Myanmar’s 500 garment factories have closed while 10,000 out of a total of 500,000 garment workers have been temporarily laid off.

Although Chinese supply chains are starting to reopen, apparel manufacturers now face the even bigger problem of falling supply orders from distributors and retailers in Europe and the United States.

The opening of a Primark clothing store in Amsterdam, the Netherlands, on December 1, 2016. Photo: AFP via ANP/Remko De Waal

Primark, one of Europe’s biggest discount clothing retailers, last week canceled dozens of orders and advised its suppliers – many of them located in Southeast Asia – to “seriously consider putting a term to all current and future production and purchase of any materials in connection with any Primark order.

Associated British Foods, the conglomerate that owns Primark and other clothing outlets, also closed stores in France, Spain and Italy, as did Swedish company H&M.

Marks and Spencer, a British multinational, said last week it would cut clothing orders by at least $118 million in the coming months. Other major Western clothing brands, such as Zara, Mango, Macy’s and JC Penney, have also reduced orders or suspended them altogether.

Bangladeshi factories have so far lost an estimated $138 million due to canceled or suspended orders from international brands, Reuters reported.

Vietnamese authorities estimate that exports to European markets could decline by 8% or more in the first and second quarters of this year. Local reports suggest dozens of apparel companies have already lost European and US supply contracts.

But Asian textile mills are expected to suffer much more from lower European and US retail demand than they have in recent months due to virus-disrupted Chinese supply chains.

Europe and the United States have only recently taken more extreme measures to close borders, restrict public travel and impose quarantines, restrictions motivated by Covid-19 that could last for weeks or even months.

Shops closed at the Les Halles shopping center in Paris in a context of strict confinement in France to stop the spread of Covid-19, March 24, 2020. Photo: AFP/Philippe Lopez

This means that fewer Westerners will go to high streets and malls to buy clothes. “People don’t buy a new outfit to stay at home,” said Lord Simon Wolfson, CEO of international brand Next, which forecasts a $1.1 billion drop in global sales, last week.

This will hit export-oriented countries in South and Southeast Asia particularly hard. In Cambodia, clothing and footwear exports account for two-fifths of gross domestic product (GDP) and employ over 800,000 workers, making it the country’s largest employer.

In Vietnam, the garment industry generated more than $36 billion in revenue in 2018, which is the developing country’s third largest export.

At the same time, Covid-19 is spreading more widely across Southeast Asia. Many countries, including Cambodia and Vietnam, have recently closed their borders and restricted internal travel, but have not halted non-essential business activities, including garment manufacturing.

That could change, however, if the number of infections continues to rise and regional governments are forced to take more extreme measures, as the hard and soft shutdowns of Malaysian, Thai and Philippine capitals show.

The Economist Intelligence Unit recently predicted that global trade would grow by just 0.4% this year, a downward revision from its previous projection of 2.3% made before the Covid-19 outbreak hit. declared a global pandemic.

The International Labor Organization, meanwhile, estimates that in the worst-case scenario, 25 million jobs worldwide could be lost as a result of the Covid-19 crisis, compared to 22 million cut after the financial crash of 2008.

Whether most South and Southeast Asian apparel makers have enough cash to weather the storm is in question. Most apparel makers have two options for survival, industry analysts say.

A garment factory worker packing Bonobos brand shirts at a factory in Hanoi. Photo: AFP/Manan Vatsyayana

They can remain as operational as possible and stockpile goods for sale when the virus crisis ends and European and US consumer demand picks up.

Analysts believe consumption, including for clothes, will soar in the West after their populations are allowed to emerge from weeks or even months of quarantine and satisfy their literally pent-up demand.

This means that apparel manufacturers will have to continue to pay for raw materials and labor without orders or immediate underlying payments.

Stockpiling, however, could drive down the price of clothes once the crisis is over, as cash-strapped manufacturers scramble to ensure their stockpiled and aging goods are sold quickly.

The alternative choice is for manufacturers to shut down operations for several months, temporarily suspend workers, and save cash for when the global economy is definitely on the verge of recovery.

This appears to be the path taken by most regional garment makers, despite the impact it will have on ordinary workers who often live month to month on low hourly wages with no social safety nets.

“Garment workers are already earning poverty wages, with wages barely covering their basic needs, let alone anything extra to cover emergencies or periods out of work,” a statement from Clean said. Clothes Campaign, an international alliance of garment trade unions and non-governmental organisations.

The Cambodian government has promised workers 60% of the national minimum wage for six months if they are made redundant due to factory closures.

Cambodian Prime Minister Hun Sen irons clothes at a factory on the outskirts of Phnom Penh on August 30, 2017. Photo: AFP/Stringer

The state will contribute two-thirds and employers one-third under the program, which is part of a larger $2 billion Covid-19 emergency stimulus package.

Phnom Penh has also offered garment factory owners tax exemptions and possible rescue funds. Stimulus packages and similar tax relief measures are being prepared in Vietnam and Myanmar.

There is no clear indication how quickly regional governments will start distributing state relief funds to laid-off workers and struggling businesses, or how transparent and fair that distribution will be.

But as regional governments compete to protect their respective export-oriented and economically vital garment sectors, a race to the bottom could be on the cards, industry analysts say.

If Vietnam, for example, offers its garment factories more financial support and protection than Cambodia, then its companies will likely emerge from this crisis healthier and stronger thanks to a state-given competitive advantage.

The competitiveness of the garment sector in Cambodia was already in decline before the Covid-19 outbreak turned into a global economic crisis.

In February, the European Union opted to partially withdraw Cambodia from its Everything But Arms preferential trade regime, meaning that from November tariffs will be imposed on 20% of Cambodian exports, including clothes.

In November, Primark said it would ‘withdraw from production’ in Cambodia if the country lost trade privileges with the EU, which has now partially happened while H&M warned of a ‘substantial backlash ” for Cambodian manufacturers.

A worker at a garment factory in Yangon’s Shwe Pyi Thar industrial zone in a file photo from September 2015. Photo: AFP/Ye Aung Thu

Before Covid-19, international labor groups had called on major brands to stop buying goods from Myanmar garment factories linked to the military, which is accused of committing ‘genocide’ against the country’s Rohingya community .

In August, international clothing brand Esprit stopped sourcing from factories in two industrial estates owned by a Myanmar military conglomerate, Myanmar Economic Holdings, while suppliers H&M and Bestseller said they would reconsider their contracts.

Why it’s not yet clear which countries and apparel manufacturers are best positioned to survive the Covid-19 crisis, it’s a survival of the most appropriate inevitability that some will emerge stronger than others on a reduced competitive playing field.

Michael O. Stutler