Apparel makers in South and Southeast Asia face months of potentially fatal factory closures and mass layoffs as European and American retailers shut their stores and suspend supply orders due to the Covid-19 pandemic.
Garment producers in Bangladesh, Cambodia, Myanmar and Vietnam had until now only seen dozens of factories close because of disrupted supply chains in China, the earlier epicenter of the virus outbreak and the main supplier of the raw materials for many apparel manufacturers.
Vietnam, the world’s eighth-largest textiles exporter, saw year on year export growth for garments decline to just 1.7% in January and February, according to its textiles industry group. That figure is expected to fall into the red now that the US and Europe are locked down against the coronavirus.
Cambodia’s government recently predicted that as many as 200 factories employing roughly 160,000 workers might temporarily close their operations by the end of this month if they run out of raw material imports from China.
On March 19, the Myanmar Times reported that at least 20 out of 500 apparel factories in Myanmar have shut down while 10,000 of a total of 500,000 garment workers have been temporarily laid off.
Although China’s supply chains are now reportedly beginning to re-open, clothing manufacturers now face the even bigger problem of declining supply orders from distributors and retailers in Europe and the US.
Primark, one of Europe’s largest discount clothing retailers, last week cancelled dozens of orders and advised suppliers – many of whom are located in Southeast Asia – to “seriously consider putting a halt on all current and future production and the purchasing of any materials in relation to any Primark orders.”
Associated British Foods, the conglomerate that owns Primark and other clothing outlets, has also closed shops in France, Spain and Italy, as has Sweden-based H&M.
Marks and Spencer, a British multinational retailer, said last week it will reduce clothing orders by at least US$118 million in the coming months. Other big Western clothing brands, like Zara, Mango, Macy’s and J.C. Penney, have also cut back orders or suspended them outright.
Bangladeshi factories have so far lost an estimated $138 million due to cancelled or suspended orders from international brands, Reuters reported.
Vietnamese authorities reckon that exports to European markets could decrease by 8%, if not by more, in the first and second quarter of this year. Local reports suggest that dozens of apparel companies have already lost European and US supply contracts.
But Asia’s textile factories are expected to suffer much more from declining European and American retail demand than they have in more recent months because of China’s virus-disrupted supply chains.
Europe and the US only recently took more extreme measures to close borders, restrict public movement and enforce quarantines, Covid-19 motivated restrictions that could last for weeks if not months.
That means fewer Westerners will hit the high streets and malls to shop for clothes. “People do not buy a new outfit to stay at home,” Lord Simon Wolfson, chief executive officer of the international brand Next, which predicts a drop in global sales of $1.1 billion, said last week.
That will hit South and Southeast Asia’s export-geared countries especially hard. In Cambodia, garment and footwear exports account for two-fifths of gross domestic product (GDP) and employ more than 800,000 workers, representing the country’s largest employer.
In Vietnam, the apparel industry generated more than $36 billion in revenues in 2018, accounting for the developing country’s third most important export.
At the same time, Covid-19 is spreading more widely through Southeast Asia. Many countries, including Cambodia and Vietnam, have recently closed their borders and restricted internal travel but have not stopped non-essential business activity including garment manufacturing.
This could change, however, if infection numbers continue to rise and regional governments are forced into more extreme measures, as seen in hard and soft lockdowns of Malaysian, Thai and Philippine capitals.
The Economist Intelligence Unit recently predicted global trade will grow by just 0.4% this year, a downgrade of its previous 2.3% projection made before the Covid-19 outbreak was declared a global pandemic.
The International Labor Organization, meanwhile, estimates that in the worst case scenario 25 million jobs across the world could be lost as a result of the Covid-19 crisis, compared to 22 million erased after the 2008 financial crash.
Whether most South and Southeast Asian garment makers have enough liquidity at hand to weather the storm is in question. Most apparel makers have two survival options, industry analysts say.
They can remain as operational as possible and stockpile goods to sell when the virus crisis ends and European and US consumer demand revives.
The analysts believe consumption including for clothing will skyrocket in the West after their populations are allowed to exit weeks or even months of quarantines and satisfy their literally pent-up demand.
That means garment makers will need to continue paying for raw materials and labor without immediate underlying orders and payments.
Stockpiling, however, could drive down the price of apparel once the crisis ends, as cash-starved manufacturers race to the bottom to assure their stored and ageing products are sold quickly.
The alternative choice is for manufacturers to wind down their operations for several months, temporarily suspend workers and conserve cash for when the global economy is definitely poised to recover.
That seems to be the route most regional garment makers are taking, despite the impact it will have on ordinary workers who often live month-to-month on low hourly wages without protective social safety nets.
“Garment workers already earn poverty pay, with wages barely covering their basic needs, let alone leaving anything extra to cover emergencies or periods without work,” said a statement from Clean Clothes Campaign, an international alliance of garment labor unions and nongovernmental organizations.
Cambodia’s government has promised workers 60% of the national minimum wage for six months if they are laid off because of factory closures.
The state will contribute two-thirds and employers a third under the scheme, which is part of a larger $2 billion Covid-19 emergency stimulus package.
Phnom Penh has also offered apparel factory owners tax holidays and possible bailout funds. Similar stimulus packages and tax relief measures are being readied in Vietnam and Myanmar.
There is no clear indication how quickly regional governments will begin doling out state relief funds to laid-off workers and distressed firms, or how transparent and equitable that distribution will be.
But as regional governments compete to protect their respectively and economically vital export-oriented garment sectors, a race to the bottom could be on the cards, industry analysts say.
If Vietnam, for instance, offers its garment factories more financial support and protection than Cambodia, then its firms are likely to emerge from this crisis healthier and stronger from a state-given competitive advantage.
Cambodia’s garment sector competitiveness was already waning before the Covid-19 outbreak morphed into a global economic crisis.
In February, the European Union opted to partially remove Cambodia from its preferential Everything But Arms trade scheme, meaning from November tariffs will be imposed on 20% of Cambodian exports including garments.
In November, Primark said it would “pull out of production” in Cambodia if the country lost its EU trade privileges, which has now partially happened while H&M warned of a “substantial backlash” for Cambodian manufacturers.
Before Covid-19, international labor groups had petitioned top brands to stop purchasing wares from Myanmar garment factories connected to the military, which is accused of committing “genocide” against the country’s Rohingya community.
In August, the international clothing brand Esprit ceased procuring apparel from factories in two industrial zones owned by a Myanmar military conglomerate, Myanmar Economic Holdings, while suppliers for H&M and Bestseller said they would review their contracts.
Why it’s not clear yet which countries and apparel makers are best poised to survive the Covid-19 crisis, it’s a survival of the fittest inevitability that some will emerge more strongly than others on a diminished competitive playing field.