Asia garment industry faces Africa as emerging competitor

Workers assemble shirts in a garment factory in Hong Kong, China.

2014 was a turbulent year for Asia’s textile industry: Soaring labor wages in China, violent workers’ protests in Cambodia, and collapsing factories in Bangladesh were just some of the bad news that made it into headlines. The events, however, are pointing to the fact that the entire textile industry in the Far East appears to be in transition.

China has already lost its appeal as a cheap textile-producing country – with current wages at around $500 a month in major industrial hubs along the country’s coast and $250 in the interior – and foreign apparel retailers have turned to factories in Bangladesh and Cambodia in recent years.

Bangladesh’s textile industry has grown to a $25B industry that employs 4.4M people. The textile industry in Cambodia has grown to a $5.5B industry with more than 650,000 factory jobs.

However, workers in Bangladesh and Cambodia are increasingly agitating for better pay. Bangladesh last year raised the minimum wage for garment workers by 77% to $68 a month, following serious labor disputes. In Cambodia, the labor ministry in November 2014 set the new monthly minimum wage for the country’s garment workers at $128, up from some $75 a month just a few years back and now almost double the minimum wage in Bangladesh.

For big global textile brands sourcing from the Far East; such as Swedish chain H&M, Spain’s clothing giant Inditex, or US-based Walmart; the wage increases have, so far, only marginally affected the business models of such large manufacturers. Labor costs in the global textile retail industry make up not more than 2% or 3% of the entire production costs, including expenses for marketing, transportation, sales, duties, and taxes.

Wage increases have mostly just squeezed the profits of local textile production companies.

However, textile retailers are already finding production alternatives to Asia.

H&M, together with Tesco and Primark, have begun sourcing clothes from Ethiopia, a country without industrial minimum wages where unskilled garment workers receive $35 to $40 a month, clearly undercutting labor costs in Bangladesh. Foreign textile investors are highly-welcomed and benefit from an abundance of cheap labor – with urban unemployment rates close to 20% – cheap energy, and locally-produced cotton. In neighboring Kenya, the textile industry is also expanding. Monthly salaries for textile workers in Kenya are at around $120 but the government is trying to lure manufacturers with generous incentives.

Observers say that East African countries could have the potential to become a serious alternative to East Asia in terms of textile manufacturing.

In addition to lower labor costs, shipping textile products from East Africa to the main markets in Europe and the US is quicker and cheaper than from the more distant countries in the Far East.

African countries also have duty-free access to the US textile market under a special trade agreement signed in 2000. By utilizing and expanding native cotton production, producers could avoid expensive import by using local materials and aggregate the economic value of the industry in the respective countries.

Source: Asia garment industry faces Africa as emerging competitor.