Good darning, Vietnam

June 3, 2011
Source: economist

Rising costs in China are sending more buyers to South-East Asia

“FASHION is a form of ugliness so intolerable that we have to alter it every six months.” Oscar Wilde’s quip now sounds hopelessly out of date. Fashions change far more often than twice a year. And the rag trade is as footloose as its customers are fickle. It goes wherever clothes can be made cheaply and reliably. Until recently, that meant China. But as Chinese wages soar, buyers are looking elsewhere. South-East Asia could be the next big thing.

China still dominates the business. It supplies nearly half of the European Union’s garment imports and 41% of America’s. But more orders are shifting to lower-wage economies such as Cambodia and Vietnam, where garment factories are mushrooming. Vietnam is already the second-largest supplier of clothes to America.

The new tigers are still cubs. They often have to import fabrics from China to stitch into clothes, so their transport costs are high. For buyers in a hurry, it is hard to beat China’s mix of scale, speed and flexibility. Suppliers in South-East Asia “are all clearly behind [China],” says Pablo Isla, the chief executive of Spain’s Inditex, which owns Zara, a retailer of “fast fashion” (the rag trade’s equivalent of fast food).

One way to catch up would be to knit together textile and garment producers in the Association of Southeast Asian Nations (ASEAN) to create a regional supply chain. Vietnam does not produce denim, but Indonesia does, and its denim can be exported tariff-free within ASEAN to sew into jeans. This sort of partnership, promoted by USAID, America’s aid agency, is attractive to fashion buyers who prefer an integrated, one-stop service. It is also a step towards the single market that ASEAN is supposed to turn into by 2015.

The idea has been knocking around for a while, but has been given a jolt by China’s rising wages. Since mid-2010 the price of American garment imports has risen by around 10%, says Peter Brown of Kurt Salmon, a consultancy, partly because of high cotton and oil prices but also because of Chinese wage inflation.

Last year Guess, an American fashion retailer, vowed to cut the share of Asian goods it sourced from China from half to one-third, within 18 months. Other global brands are following suit. “Every company is pointed down this path,” says Jeffrey Streader, a former executive at Guess.

ASEAN manufacturers are forming alliances. For example, Phongsak Assakul, who owns a textile mill in Bangkok, ships his pre-dyed fabrics by road to neighbouring Cambodia, where another factory cuts and sews them into summer blouses for Benetton, an Italian brand.

To compete with China, ASEAN needs to make it easier to move goods around. New roads and railways, plus faster customs clearance, all help. But infrastructure bottlenecks can delay shipments. This is a no-no for fast fashion. Winter frocks delivered in the spring are worthless.

China still has plenty of cheap labour in northern and inland cities, far from the overheated coastal boomtowns. But as it grows richer, wages will rise in the hinterland, too. Its factories will continue to churn out clothes, but they will increasingly shun simple items, such as polo shirts.

Even Chinese firms are starting to outsource low-end clothes manufacturing to Vietnam and Cambodia, observes Peter Hevicon, a Hong Kong-based buyer for Debenhams, a British retailer. And when wages rise in South-East Asia, the rag trade will move again.