Economic Integration

Amazon.com, Inc., the largest internet retailer in the world, seems constantly to be adding to its list of goods and services offered on-line, and it has now focused on high fashion merchandizing.  An article in the New York Times detailed the latest effort in the company’s quest to broaden its product line.  

Amazon introduced clothing to its websites in the mid-2000s and has now turned its attention to higher-end fashions because of more attractive profit margins.  Starting with its own website as a base, Amazon has purchased fashion websites and started others.  The most recent is MyHabit, developed in 2011 using the latest in internet-based video technology, to allow consumers get a more realistic idea of what the item will look like before the purchase.

Moreover, the company is taking advantage of its capacity to collect and evaluate a wide range of consumer buying characteristics and shopping habits, in order to offer fashion items that are more likely to appeal to the individual shopper.

Meantime, the very advantage Amazon holds in the realm of internet merchandizing is viewed as cause for concern among manufacturers of some high-end fashion brands.  Foremost among those concerns is that with its huge customer base and turnover volume, there is the threat that Amazon will dictate prices, which will result in lower returns for the producer.

The company has acknowledged that it has taken that route in other industries, but insists it intends to abide by a historical schedule of price markdowns established by the fashion industry.

The entire article can be read here.

Questions:  Are consumers of ‘high-end’ fashion likely to be viable on-line purchasers of typically expensive products?

Can this latest effort by Amazon be viewed as simply the next step in the evolution of an internet merchandizer, or does its massive size pose a threat to competition?

Does the advantage of a large customer base engaging in fast and easy shopping, offset the potential for high fashion producers accustomed wide profit margins to see those margins squeezed?

As the World Trade Organization (WTO) awaits the Russian government’s approval of an accession package to make the country the group’s 155th member, an article published by the World Textile Information Network examines the pros and cons of an effort that was started in 1993.

Broadly speaking, the multi-lateral agreement shared by member states ensures trade on equal ground, which is a substantial benefit to developing economies.  However, as new members have  realized, accession to the ranks of the WTO often means giving up tariffs higher than allowed between members and the dismantling of trade barriers that have been erected to help less efficient industries survive in the global marketplace.

Russia’s textile industry is among those that will likely face a difficult period of adjustment once the country joins the WTO.  The duty on textiles, apparel and footwear imported from the United States, for instance, will have to be lowered to a range of 5 percent to 7 percent, compared the 10 percent to 20 percent duty that currently prevails.

Moreover, Russian manufactures will witness strong competition from other outside markets.  Relatively low-cost goods from Asia and the Indian sub-continent will be the stiffest challenge, forcing a realignment of prices for domestically-produced goods.

The entire article may be found here.

Questions:  It may be difficult to judge whether the benefits of WTO membership outweigh the initial detriments, but how long should it take Russia to begin realizing more benefits than detriments?

Considering membership in the trade organization affects Russia’s entire economy and may threaten the livelihood of many of the country’s textile and apparel manufactures, how long should it take learn which will survive global competition on an even playing field?  

In 10 to 20 years, what stands to be the size of Russia’s textile and apparel industry?  Will it have shrunken, expanded, or be about the same after only the most efficient have survived?

A respected international cotton trade publication is once again drawing attention to difficulties throughout the Chinese textile and apparel industry that threaten the underpinnings of the complex.

At the conclusion of 2011, Liverpool-based Cotlook Ltd. commented on how rising labor costs and an appreciating currency had taken their toll on the country’s competitiveness in export markets.  Latest business data out of China suggests outside pressure continues unabated, and the future may rest with domestic demand from a growing middle class.

The following report is found in the latest issue of the weekly Cotton Outlook:

“In China itself, however, cotton spinning, and the textile and apparel complex as a whole, are clearly experiencing difficult trading conditions, and may be approaching a period of quite significant structural change. Financial results for last year announced this week by the country’s largest spinning and weaving concern, Weiqiao, may be considered a bellwether for the fortunes of the industry as a whole. The group’s output of cotton yarn and grey cloth fell by over 14 and nearly 11 percent, respectively, last year. Although the much steeper fall in profits can be ascribed principally to the recent, damaging volatility in raw cotton and cotton yarn values, the company also refers to “the shifting of export orders to its neighbouring countries gradually due to production cost considerations”, amongst which finance and labour are specifically mentioned.

“China’s retail market for textile and clothing market is reckoned already to account for more than half of China’s cotton textile output, and commentators point increasingly to a future shift in the model that has seen China’s textile exports expand exponentially since the country’s accession to the World Trade Organisation in 2001. That model, based on low labour costs, a surge of both domestic and foreign investment in the sector and (at least until fairly recently) an undervalued currency, also gained impetus from the more liberal global market conditions that followed the final elimination of quotas in 2005. China’s dominant position as an exporter of clothing and textiles will not, of course, collapse overnight, but slowing global demand and rising domestic cost pressures would seem to signal the approaching end of an era.”

Questions:  If the future for China’s textile and apparel industry is in the domestic populace, is it bright or threatened with a slow decline?

What are the prospects for continued foreign and domestic investment into the industry?

With the value of the global textile market projected to jump by 32.5 percent between 2010 and 2015 to a total of $1,557.1 billion US dollars, Just-style.com is offering a report aimed at providing corporate decision-makers with a wide range of information and analysis for the industry.

It is intended to help recognize trends and future development, save time with “entry-level” research and help with more informed business decisions, says just-style.com.

The report, entitled “Textiles: Global Industry Guide”, contains extensive data on market size and segmentation (i.e. yarn, fabric, apparel, etc), as well as an analysis of important trends and top competition within the industry on a global, regional and country basis.

A more detailed description of the report reveals that it provides an executive summary and data on value, volume and segmentation, in addition to an analysis of industry prospects, competive landscape and details of leading companies.

In addition to the world as a whole, European and Asia-Pacific markets are covered (the latter accounts for almost 60 percent of international textile trade by value), and there are individual chapters on five major countries: the United States, Japan, Germany, France and the United Kingdom.

Just-style.com says the textiles market includes yarns, fabrics, apparel, and non-apparel finished products. The value of each segment is for consumption, defined as domestic production plus imports minus exports, all valued at manufacturer prices. The yarns segment covers yarns for sewing, weaving, knitting, etc, made of cotton, wool, artificial, synthetic, or other fibers, but does not include the production of the fibers before spinning. Fabrics cover woven, non-woven, and knitted fabrics (including knitted products such as sweaters). Apparel covers all other clothing except leather and footwear. Non-apparel products include technical, household, and other made-up non-clothing products.

Questions:  Which aspect of the report could prove the most beneficial to decision-makers?

Are there other areas that should be covered?

The first sector-specific initiative under the auspices of the United Nations Global Compact has been announced with the UN and the Nordic Initiative Clean and Ethical (NICE) joining in an effort to focus on environmental, social and ethical challenges worldwide.

In a report from the World Textile Information Network, technical textiles and nonwoven analyst Ms. Tara Hounslea, suggests that it is “no surprise that the fashion industry is the first sector under the spotlight, with issues such as low wages, migrant workers, corporate accountability and working conditions making the headlines on a daily basis. The textile and fashion industry’s impact on the environment no longer goes unnoticed either, as organizations such as Greenpeace raise awareness of big name brands and their more shadowy supply chains.” 

Ms. Hounslea said the solution is a supply chain that works harmony. She cautioned, however, that such a solution is not straightforward since the textile and fashion industry is characterized by a complex production network which spans countless businesses and crosses numerous international boundaries.

The following is taken from the WTiN report:

While speaking at the inaugural World Textile Summit held in Barcelona last year, Mr. (Kofi) Annan (former secretary general of the UN) urged textile and fashion companies to work with their local communities to help bring about a better quality of life for workers and ultimately help the industry.

To facilitate this, the new initiative will develop a platform to unite the small and medium-sized fashion companies across borders to help tackle the global challenges the industry faces. It will comprise a set of guidelines, based on those of the UN Global Compact, but with a specific focus for the textile and fashion industry, such as waste, water, chemicals and welfare.

The launchpad for this new code will be the Copenhagen Fashion Summit on May 3, described as the largest and most important conference on sustainability and CSR in the fashion industry.

“Fashion has historically had the capacity to affect the society as a whole, and therefore fashion is a great place to start building a new creative future aligned with the ecosystem we are all part of,” said Eva Kruse, chairman of the Nordic Fashion Association and CEO of the Danish Fashion Institute. “We look forward to engaging experts and leaders of international fashion companies in the work of creating a meaningful and ambitious tool for the global fashion industry.”

Launched by former UN secretary general Kofi Annan some ten years ago, the Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally-accepted principles in the areas of human rights, labour, environment and anti-corruption.

Mr Annan asserted last summer that: “sustainable, healthy communities and good environmental stewardship lead to a healthy environment that is beneficial to all the companies involved.” Those who concur, or at least those who have already signed up to the UN Global Compact include Nike, Puma, H&M, the Pentland Group, Mango, Gap, Inditex, Levi Strauss and Timberland.

The fashion industry clearly stands to benefit from a universal set of guidelines for environmental, social and ethical practices, but what remains to be seen is whether the extended and complex supply chain will recognize what Mr Annan claims, that “doing good is good for business.”

Comprehensive information about the UN’s Global Compact may be found here.

Questions:  Is the fashion industry a satisfactory starting point for the UN’s Global Compact implementation of fair practices throughout the supply chain?

What other issues might be logical areas upon which to focus in the effort to establish economically sound, yet fair, business practices?

Recent extreme price volatility in the cotton market, both physical and futures, has produced an unprecedented number of contract defaults, according to the International Cotton Association.  

With a record range in prices in the past year of approximately $1.25 per pound - from a low of around 70 cents to a high of around $2.25 per pound - the industry is still seeing parties failing to honor their contractual obligations, the ICA reported in its January 12 Newsreel. 

In 2011, we received 242 requests for technical arbitration - over five times our normal yearly average and more than double the prior record high of 2008, said the Liverpool, England-based organization, and the pace does not seem to be slowing down.

Consequently, contract sanctity, always important, has become the most critical issue facing the industry today.  In view of basic economic uncertainty around the world, traders are no longer afforded a few mistakes along the way. Global lending institutions, facing their own restrictions, have become unwilling to extend their clients the financial leverage offered just five years ago.  Therefore, the financial well-being of a company is even more dependent on the honesty of its trading partners.

The concept of contract sanctity centers on the general idea that once parties duly enter into a contract, they must honor their obligations under that contract.  When markets undergo a period of extreme fluctuation, however, buyers who purchase cotton often try to delay or refuse shipment, if prices in the interim have fallen appreciably.  Moreover, it is not uncommon for sellers to do the same, if prices have risen sharply from the point of sale.

A general idea exists that parties should feel free to breach a contract and pay damages, if it is more economically efficient than performing under the contract, thus the record number of arbitration requests last year. The cause for the defaults are many – a weakening consumer market, cancelled orders, price drops. The impact of these actions can be felt along the entire supply chain and put many supply chain actors at risk. 

“The ICA's major guiding principle is the fulfillment of contracts,” said ICA President Antonio Esteve.  The organization works to ensure and promote equitable cotton trading practices through its bylaws and rules, and provides an impartial and effective dispute resolution service through arbitration, which has been upheld by courts around the world.

If a company fails to honor an arbitration award brought against them, it is placed on the "ICA Default List". Defaulters' names are posted and circulated across the cotton community so that they are marginalized from the normal course of business. ICA members are not allowed to trade with counterparties on the default list and, if members do not fulfil their contractual obligations, they face being expelled from the association.

In a move to improve the economic sustainability of the cotton supply chain, the ICA has expanded its outreach by working with organisations that can reinforce its efforts, such as other global cotton associations, the Better Cotton Initiative, the International Textile Manufacturers Federation, major retailers, banks, insurance companies and rating agencies, the ICA president said.  We have also developed a training course for spinners and agents to promote "responsible contracting", which focuses on the behaviour of the cotton market, the use of risk management tools and the ICA Bylaws & Rules. The cotton supply chain is very long, but by reaching out in this way we know we can help promote a safer trading environment.

"The cotton industry is at a crossroads,” said Mr. Esteve. “Our attitudes towards contract performance will shape the industry for years to come. The cotton industry needs to stand united. If not, it will suffer the consequences. 

“It is easy to succumb to the attraction of short term gains, but history shows that this will create irreparable damage that will affect the long term economic sustainability of the cotton supply chain."

Questions:  Is education and partnering with allied organizations an effective way to guarantee the execution of contracts?

What other efforts might be made to ensure sanctity of contracts?

The second of three scheduled research projects by the University of Arkansas has revealed benefits for apparel suppliers using radio frequency identification (RFID), according to study sponsors the American Apparel & Footwear Association (AAFA) and GS1 US.

A mid-month news release from AAFA reported that the year-long project found the potential for suppliers to realize both top- and bottom-line improvements via increased inventory accuracy, cycle count reductions and minimized chargebacks. 

“The University of Arkansas report ... offers a greater understanding of the many uses of RFID technology for the apparel industry particularly in the area of inventory accuracy,” said AAFA Special Advisor Mary Howell.  “By exploring these use cases, apparel and footwear brands can begin to see the full range of benefits RFID can provide when working to remain competitive in the global market by streamlining the supply chain and continuing to deliver quality, safe, and affordable clothes and shoes to American consumers.”

The research – titled “Supplier Return on Investment Use Case Data Collection and Analysis” – is the second phase in a three-phase study commonly referred to as the “Many-to-Many study.” It focused on three supplier use cases.

AAFA said researchers measured the benefits that apparel suppliers can achieve by adopting RFID based on GS1 Electronic Product Code (EPC) standards.  The effects of EPC-based tracking on improving the suppliers' inventory accuracy were quantified, along with the effects on their productivity, costs, and revenues.

In one use case, increased inventory accuracy, researchers discovered that suppliers’ estimates for their outbound shipments were much higher than the actual shipment count accuracy, in part because the companies were auditing very small percentages of those shipments, said the trade organization. The costs of incorrect shipments, including chargebacks, are very high, it noted. With EPC-based RFID enabling audits on 100 percent of shipments, the frequency of incorrect shipments can drop to zero, creating savings equal to the cost of implementing the RFID system.

“The research captures the first efforts of retail suppliers to shift their focus from just playing ‘catch up’ to retailer source tagging requirements, to truly leveraging the full value of item level tags by discovering the benefit and the value in their own supplier operations,” said Justin Patton, Managing Director, ITRI/RFID Research Center, University of Arkansas.

“The simple concept behind the study is to answer the question, What happens when suppliers move beyond EPC tagging just for their retail partner’s sake, and begin to internally capture and use EPC data from their tagged items?” said Patrick Javick, vice president, industry engagement, GS1 US. “Retailers use standardized RFID technology to improve inventory accuracy, and now with EPC, suppliers can also feel confident of the high level of accuracy in their shipments.”

In addition to the key findings, the research highlights the critical relationship between apparel suppliers and retailers and encourages continued collaboration in the widespread adoption of RFID.  

The American Apparel & Footwear Association (AAFA) is the national trade association representing apparel, footwear and other sewn products companies, and their suppliers, which compete in the global market. 

GS1 US, a member of GS1, is a not-for-profit organization that brings industry communities together to solve supply-chain problems through the adoption and implementation of GS1 standards. More than 200,000 businesses in 25 industries rely on GS1 US for trading-partner collaboration and for maximizing the cost effectiveness, speed, visibility, security and sustainability of their business processes. They achieve these benefits through solutions based on GS1 global unique numbering and identification systems, bar codes, Electronic Product Code-based RFID, data synchronization, and electronic information exchange. GS1 US also manages the United Nations Standard Products and Services Code® (UNSPSC®).

Questions:  What other areas of the supply chain lend themselves greater use of RFID technology?

Considering the incorporation of RFID is less than 10 years old, which sectors across the cotton supply chain, from field to consumer, have been quickest to implement the new technology?

Which sector stands to benefit the greatest from the use of RFID for long-term planning purposes?

China celebrated the 10th anniversary of its accession to the World Trade Organization last month, and according to Liverpool-based Cotlook Ltd., its vast penetration into global textile markets has been remarkable.  Despite the achievement, however, the same considerations that brought textile dominance in the United States and Europe to an end, are now weighing against the Chinese industry, and countries, such as Bangladesh, are waiting in the wings to succeed the Asian giant.

In its 2011 year-end edition of Cotton Outlook, Cotlook noted:

“In 2001, China accounted for less than 7 percent of imports of textiles and apparel into the United States. During the first ten months of 2011, that proportion was over 46 percent. However, the period of strong export growth is thought to be nearing an end, and the acknowledged aim of policy henceforth will be to lessen reliance on exports in favour of a shift toward domestic consumption, as rising labour costs and an appreciating currency take their toll of competitiveness in export markets.

“From an international perspective, the prospect of a fundamental shift in China’s role raises issues of great significance to garment retailers who habitually source their products from that market. A report by consultants McKinsey and Company confirms that significant numbers of buyers already foresee a reduction of orders placed in China. The same report highlights the potential for Bangladesh to emerge as the major beneficiary of China’s relative decline.

“Provided challenges can be met, for example in the areas of transport and energy infrastructure, as well as compliance with labour and environmental standards, McKinsey anticipates that Bangladesh’s garment exports can grow threefold over the next decade. Reference is made to the price competitiveness of the country’s garment sector, which has contributed to its ‘strong starting position’ for future expansion.

“An intriguing question, assuming that such optimism is justified, concerns the future of the country’s spinning industry. Currently beleaguered by high-priced raw cotton import contracts, intense competition from cotton yarn imports, and the resultant, acute financial pressures, spinners may nonetheless be encouraged by the buoyant outlook for the downstream industry they serve.”

Questions:  Is there general acceptance that China’s dominance of the world textile market is nearing a peak?

If it is to maintain its position as the leading global exporter, what broad policy changes must occur?

The US and China have announced separate initiatives to help improve the cotton sector in four major African nations.  China’s commerce minister, Mr. Chen Deming, along with African trade ministers and representatives, announced earlier this month their agreement on a US$20 million three-year scheme.

An article published by the Chinese Xinhua News Agency suggested that the program may be just the first step in a longer term effort that could result in the eventual presence of Chinese textile manufacturing interests in Benin, Burkina Faso, Chad and Mali (C4), which account for about 40 percent of the continent’s raw cotton output.

Initial efforts, according to Xinhua, are aimed at the transfer of technology, along with the provision of machinery, planting seed, fertilizer and pesticides.  China also will share research  technical assistance and its experience with cotton cultivation.

Mr. Chen said that the initial three-year program could be renewed, and that over the longer term, China could eventually move a portion of its textile and apparel industry onto the continent, as part of what he called an “aid for trade”.

The full Xinhua article is here.

Meantime, the US Trade Representative’s Office has announced its intention to extend the West African Cotton Improvement Program for an additional four-years at a cost of US$16 million, when the current program expires in April 2012.

Introduced in 2005 with an initial investment of US$27, the program focuses on a number of key activities described by the US Agency for International Development, such as:

• supporting policy and institutional reform for private management of the cotton sector;
• improving the quality of cotton;
• establishing regional training programs for cotton ginners;
• strengthening a cotton biotechnology program;
• expanding the use of good agricultural practices in cotton-producing areas, including soil degradation and pest management; and
• improving relationships between the US and West African agricultural research organizations.

Questions:  Given China is not the first country to put money, services and expertise into Africa to improve the continent’s cotton industry, what are the chances of success?

How successful have previous attempts been?

The World Trade Organization (WTO) concluded its eighth biennial ministerial conference in Geneva, Switzerland, on December 17, with what Director General Pascal Lamy described as “constructive dialogue among Ministers which has improved the WTO's atmosphere and outlook”; however, accomplishments on the Doha development round remained elusive.

Among the ministerial’s accomplishments were the accession of Russia, Montenegro and Samoa, a government procurement agreement and seven specific decisions that included, among others, a work program on small economies, accession of least-developed countries, preferential treatment to services and service suppliers of least-developed countries and a Trade Policy Review mechanism.

To the dismay of a large number of ministers, however, virtually no forward movement was achieved in the WTO’s Doha Development Round.

In a report to its members, the National Cotton Council of America said that at the conference’s opening session, Mr. Lamy pressed WTO members to address the primary question causing the impasse in the negotiations, specifically: What contribution major emerging markets, such as China, India and Brazil, should make towards the further opening of global markets?

The Council noted that efforts to re-start the Doha negotiations earlier this year, following the collapse of the talks in July 2008, were unsuccessful, in part, because the United States insisted that Brazil, China and India increase access for goods and services. This effort was followed by an unsuccessful attempt to secure a “deliverables” package in favor of least developed countries (LDCs) for the December ministerial. That package would have included concessions on cotton.

The United States refused to include a commitment to 100 percent duty-free/quota free market access for exports from LDCs without additional initiatives that would benefit developed and developing country exporters. To facilitate the discussion of a way forward, Mr. Lamy said he would convene a “panel of multi-stakeholders of the WTO” to analyze all these elements and report back to the WTO membership by the end of 2012, said the Council.

Meantime, US Trade Representative Ron Kirk told the Bureau of National Affairs early this month that he was encouraged that more and more WTO members were coming to the realization that the Doha talks could not go on with “business as usual.” He said, “We can't go back to the same formula and think we'll magically produce a different result. At least we've acknowledged we're at an impasse.”

In his remarks, Mr. Kirk said that the WTO also must lead the way to examine the issues of vital importance to a “healthy global trading system.” These include establishing new market access, disciplining fisheries subsidies leading to stock depletion, food security, trade facilitation and regional trade agreements, he insisted. He said members should celebrate the organization's “day-to-day work” through its standing committees and monitoring functions, as well as the contributions of the dispute settlement system and existing rules. 

Question:  What are the chances that China, India and Brazil will agree to more liberal market access in order for the Doha Development Round to move forward?