For developing country suppliers, no other service may be more important than sourcing to compete in the post-2005 era.
The elimination of quotas has changed the global clothing industry forever, raising the bar for suppliers. The facilities that were needed to compete in the industry before January 2005 are no longer sufficient. The ability to ship a decent garment, on time every time and at a competitive price, is no longer an asset. It has become an entry-level requirement.
Without these basic facilities, the client will not even talk to a manufacturer. And with them, manufacturers will only be invited to go to the end of a very long line of other factories queuing up to face clients who ask: "What can you do for me?"
If the manufacturer's answer is only, "I can ship a decent garment on time every time and at a competitive price", they will be out of business because thousands of other factories are prepared to provide the same facilities, plus other services.
To survive in the new industry, producers must be able to reply, "Besides the product you need, I can provide the services you want." Sourcing fabric and trims is the single greatest service the factory can offer the customer. Few factories - even the largest - have developed the required skills.
How did this situation come about? Its roots lie in changes brought about by the evolution of the industry in recent years.
The 1974 Multi Fibre Agreement, and its consequent quota system, was the key factor shaping today's global garment industry. Developed countries used it to restrict sharply exports from traditional suppliers - the efficient garment producers of Hong Kong (China), the Republic of Korea, Taiwan (China) and, later, China. Customers developed relations with new garment-exporting countries such as Bangladesh, India, Pakistan and Sri Lanka in South Asia.
Other developing countries and least developed countries also attracted business by exploiting trade preferences such as bilateral free trade agreements and the Generalized System of Preferences, which exempted certain imports from these countries from duty.
The result was a shift in market share from more efficient to less efficient producers. Take the case of the United States of America, a major importer of textiles and clothing, where imports from the so-called "Greater China" (China, including Hong Kong and Macao) dropped in both quantity and value from 1990 to 2000. The market share in units shipped from Greater China dropped almost 60%, from 28.3% to 13.1%. South Asia's share rose from 9.6% to 13.1% in the same period.
Measured by value, the results were similar. Greater China's market share by value in the United States fell by 42%, while South Asia's share rose 49.3%.
Since these new garment-exporting industries could offer little more than cheap labour, garment sourcing degenerated into "nomadic sourcing" - the search for quota-free countries with the cheapest workforce, which spurred what is now termed the "race to the bottom".
This change shows the difference between relatively free market regions, such as South Asia, and those with comparatively restricted markets, such as Greater China. To maximize profit - and to keep their customers - the new garment suppliers in South Asia were forced into a constant struggle to lower prices by reducing costs and margins.
More efficient producers, such as Greater China, were forced in the opposite direction. Severely limited by quota, their ability to supply garments to their customers was fixed at a point substantially below demand. So they maximized profit by increasing prices, thus reducing demand to the point where their orders matched their quota levels.
The efficient garment producers culled their customers by trading upward. In the process, they were forced to increase their skills and facilities to meet the higher demands of their new customers.
The approach paid off. While import prices in the United States fell overall, the price of imports from Greater China rose a lot. From 1990 to 2000, the average square metre equivalent, free on board (FOB) price of imports from Greater China rose 22% from US$ 3.96 to US$ 4.22, compared to a 7% increase to US$ 2.99 for South Asian imports. Overall, the average FOB price for garment imports to the United States fell 2.4% to US$ 3.57.
Despite this price premium charged by Greater China and other efficient garment exporters, demand seldom fell below the available quota. Every year customers wanting to source garments from Chinese factories were forced to go elsewhere because of lack of quota.
New producers and large supply of products under quota protection. The new garment-exporting countries concentrated their production on the categories most restricted by quota (cotton T-shirts, jeans and other cotton trousers, and underwear). These were not only the largest import categories, they were also the easiest to produce.
Concentration on low-skill, low-value products. The new garment-exporting countries also took the course of least resistance and, with very few exceptions, continued to concentrate on these easier categories. They never traded upward, nor did they develop skills necessary to compete on any level other than cheap labour.
Efficient producers moved up value chain. China's garment exporters, effectively barred from these products, expanded their production to other products that, for the most part, require greater skills and facilities.
The move to new quota-free exporting countries resulted in unused garment-making capacity in the older, more efficient exporting countries. Eventually garment-making capacity reached twice effective demand, but the glut went unnoticed because of the quota limitation.
The industry had its first inkling of the impending crisis in 2001.
World Trade Organization member countries had agreed in 1994 to phase quotas out over the next ten years. The Uruguay Round agreement called for an incremental elimination with specific categories to be phased out during each period through to the end of 2004, when all quotas were scheduled to disappear. The United States "back-loaded" the schedule, with the early phase-outs consisting of unimportant categories. The penultimate phase-out was set for the end of 2001. At that point, having exhausted all the trivial categories, the United States was forced to begin to phase out such strategic categories as babywear, bras and robes.
The result was a sea change in imports to the United States from Greater China. From 2001 to 2004, Greater China's US market share, measured in units, rose 59% from 13.4% to 20.8% compared with South Asia's market share, which fell 5.1%, from 13.2% to 12.5%.
Market share by value showed a similar change, with Greater China rising by 23.9% from 17.6% to 21.9%, compared to South Asia, where market share fell 3.4% from 11.1% to 10.6%.
The most important change, however, was in the average FOB price. The average FOB of all garment imports into the United States fell 7.4% from 2001 to 2004, from US$ 3.51 to US$ 3.25. During the same period, South Asian imports fell 6.2%, from US$ 2.95 to US$ 2.77, compared with imports from Greater China which fell 25.7% from US$ 4.60 to US$ 3.42 per unit.
The contrast between Greater China and the rest of the world is particularly striking, given that South Asia is now the world's second most competitive region after Greater China.
Drastic as these changes were, they simply presaged the events after 1 January 2005. From 31 December 2004 to 30 June 2005, the global garment industry saw the full effect of the quota phase-out.
On January 2005, the global garment industry was freed from quota restrictions. For the first time in 43 years, customers were free to buy wherever they wanted and from whomever they wanted. Meanwhile, the enormous overhang of garment-making capacity, previously locked away by the quota system, became available.
With capacity twice the size of demand, the global garment industry entered the greatest buyers' market in its history. To compete, factories and entire national garment export industries will have to satisfy customers' ever-increasing demands.
Factories and industries must determine what those demands are and take the necessary steps to meet them.
The lesson of history is that the solution is not to lower FOB prices. Despite restrictions and the resulting higher prices, Greater China succeeded quite well before 1 January 2005. In fact, clients waited in line to buy Chinese-made garments and were willing to pay a premium to import those goods. Customers were willing to exchange higher price for better service.
To compete, factories in other regions must offer these better services. To put it another way, the post-2005 global garment industry will be a service industry.
Many of the services will require greater resources than are available to most factories. Even now, customers are demanding that factories ship garments "landed duty paid" directly to branch stores, open account (where transactions are made with no formal debt contract other than the receipt) and with 60-day credit.
At the same time clients are also pushing factories to open full merchandising overseas offices in the customers' cities. Clearly only the largest factory groups will be able to meet these demands.
Customers are also demanding more assistance in the pre-production process. Under the old system, the client was responsible for the entire design process. In a 101-step manufacturing process, the customer brought in the factory at step 86, after the garment had been designed, patterns made and graded, and fabric and trim sourced. Even before the quota phase-out, customers were demanding that factories have in-house pattern-making and sample-making facilities.
With the quota phase-out, customers now require factories to enter the pre-production process at step 1 - fabric selection. The ability to source fabric transforms the factory from being one of a number of dispensable contractors to being a major player. The factory that sources fabric becomes the designer's partner.
Chinese garment exports have once again been restricted by quota. However, on 1 January 2008, these "safeguard" quotas will be phased out.
Factories or exporters hoping to compete with China have a 30-month window of opportunity. It may be their last.
Source-it: Global material sourcing for the clothing industry is a survival guide.
It is an easy-to-read guide for garment factory owners and managers wishing to learn how to source fabrics and other materials, which helps firms acquire skills they need to compete in the textiles and clothing market.
Material sourcing, including how it differs from fabric and trim purchasing and how a firm develops sourcing skills.
Processes, including a breakdown of processes involved.
Country of origin regulations that affect the material sourcing process.
Fabric tests required by customers.
National and regional sourcing strategies.
What to do when things go wrong.
The book also includes case studies and glossaries.
David Birnbaum has worked in the textiles and clothing industry for over 40 years, managing factories all over the world. He wrote ITC's new book on sourcing, Source-it: Global material sourcing for the clothing industry.