(Published in Wearables magazine’s September 2010 issue.)
A perfect storm of circumstances has led to the largest inventory shortage in years, and some of its causes may be here to stay.
It’s tough to do business without product, but that’s what some companies are increasingly asked to do these days. An inventory shortage unlike any seen in years has hit the promotional products industry, forcing changes in how business is done and causing concern about whether it can be done at all. “It’s probably the worst I’ve seen in 10 years, as far as inventory available from suppliers,” says Jeff Hall, executive vice president of sales for NewClients Promotional Products in Richmond, VA. “With 80% of our pitches to end-users, we have to go in with two or three products. Because, odds are, the first one’s not going to be available.”
When the recent economic troubles hit, many suppliers cut back on inventory and orders, and their foreign manufacturers did the same. Now that marketplace demand has returned, some companies are having difficulty restocking inventory in a timely fashion because the system they’ve relied upon for so long has broken down. “We are seeing sporadic shortages across almost all suppliers,” says Mark Ziskind, COO of Caliendo Savio Enterprises, a Wisconsin-based distributor. In response, some suppliers have raised prices on the fringes. On June 15, Ash City, a supplier based in Kansas and Ontario, e-mailed customers notifying them of price increases on about 20% of its inventory (and used the letter to head off customer concern about inventory). Massive retailers like Walmart may not have trouble getting their orders filled, but top companies in the wearables industry aren’t immune, as they lack the same buying power or influence. “Retail really trumps our industry,” Hall says about factory priority.
A collage of factors has created a shortage of available inventory for apparel suppliers. A worldwide cotton shortage caused a spike in cotton prices. Shipping companies mothballed vessels and containers used for cargo transport in response to lower demand during the recent recession; now they’re not available as demand has picked up again. Chinese factories that shut their doors during the recession haven’t reopened. The employees who once provided a trained and cheap source of labor no longer want those lower-paying jobs, thanks to China’s economic stimulus plan, which has provided better-paying alternatives. “It’s really kind of the perfect storm, if you want, in terms of consequences that have led to the inventory shortage,” says Garry Bell, vice president of global marketing for Gildan Apparel. “The one undeniable fact is that demand is back.”
Some factors, like the cotton shortage, are fleeting. But others, such as the dramatic transition of labor in China, may be longer lasting, if not permanent. “This is not a one-time event, in terms of what’s going on in China,” says Jonathan Isaacson, CEO of Gemline, who has lived and traveled extensively in East Asia. “This is part of a long-term trend that we’re going to be dealing with for some time. For me, I have seen this movie before in Taiwan and South Korea.”
The Changing Face of Chinese Labor
Strikes, labor shortages and demands for higher wages – meet the new China. This summer, workers struck and won 47% wage increases at a Honda plant in the industrialized southern province of Guangdong. FoxConn Technology, which makes computer parts for Apple, Dell and Hewlett-Packard, gave 33% raises to employees after a spate of worker suicides this year prompted outcry over working conditions. With major companies like this having difficulty, others will follow. “It’s going to be more difficult to stop other strikes,” says Dan Viederman, executive director of Verité, a labor-rights organization that has advised companies such as Levi Strauss, Gap Inc., Nautica, Timberland and New Balance.
China is changing. A generation of people born after the 1989 Tiananmen Square protests has come of age in an era of plenty, with better access to education and no siblings due to China’s one-child policy. The World Bank estimated in 2006 that China’s middle class will grow from 430 million in 2000 to 1.15 billion in 2030, vastly expanding the populace’s total buying power. Not only are they demanding more (and getting it from a historically heavy-handed government), but they are wielding greater buying power. As a result, the country will increasingly look inward at a self-sustaining consumer base. “They are structured as an export-driven economy,” Isaacson says. “Long-term, they want to restructure as a consumer economy.” China’s cheap labor could be a thing of the past.
Of course, the demand for factory workers is lessened when the jobs aren’t there. Major Chinese factories had long subcontracted out to smaller factories to meet orders from Western companies – but stopped that practice cold when the global economic slowdown hit. Many subcontractors went under, though few abroad knew it. During the first half of 2008 alone, more than 60,000 Chinese factories shut down, according to research by the Chinese Academy of Social Sciences. “130,000 factories simply do not exist anymore,” says Gregg Emmer, chief marketing officer of Kaeser & Blair, an Ohio-based distributor. “When they shut down, they took $4 billion to $6 billion of deposits with them. They also failed to pay their workers and left them stranded in the cities.”
In the past, thousands upon thousands of employees would make their annual pilgrimage after the Chinese New Year from their rural homes in the west into China’s coastal cities for factory work. After learning that paychecks weren’t always waiting for them, many no longer make the trip. And why should they, now that there are suddenly better jobs? China’s economic stimulus plan created thousands of new jobs that many say are higher paying, more stable and closer to home. “The Chinese stimulus package was so good,” says Marty Lott, CEO of SanMar, which regularly works with Chinese factories. “They put money to roads, dams and power lines. They took all those people who left those factories and put them to work in construction jobs. When the New Year came around, they didn’t return to the factories. They had found better jobs.”
The changes, according to Issacson, are just part of the natural economic evolution of countries. As a result, the so-called “labor shortage” in China isn’t a labor shortage at all. Rather, it’s a growing refusal to work under poor conditions. The expectations that suppliers had of China – cheap production at lightning-quick speeds – may be no more. “I think that maybe China has fooled us into believing that other countries can match that level of organization,” says Viederman. “It feels to me that we’re not talking about a shortage of workers as much as it’s having the right workers in the right place at the right time.”
What’s patently clear is that China doesn’t exist in its own bubble; its changes reverberate around the world. Manufacturers will seek out alternatives in other countries, where increased demand will strain their capabilities, as well. Companies like Ash City have been in Bangladesh for years, and now demand there is increasing. Similarly, Honduras, Vietnam, Thailand and other developing countries have provided a source of inexpensive labor, though like any third-world country, they are not without difficulties. Sure, some companies like Gildan and Anvil Knitwear have expanded their presence in Honduras and run their own facilities. But, with inventory levels sagging across the board, other factors are in play.
Cotton’s Premium Price
Apparel suppliers crank out millions of cotton garments a year – and right now they’re paying a premium to do it. Cotton prices have shot up to 85 cents to 90 cents per pound, whereas a year ago it would’ve cost about 60 cents, says Gary Adams, chief economist for the National Cotton Council. “These prices that we’re seeing are the highest we’ve seen in the last 10 to 15 years,” he notes.
There’s a simple explanation for that: Growers planted less cotton last year, and drought and flooding in China and Pakistan, respectively, further cut production. In 2006, worldwide production was at 122 million bales. (One bale equals roughly 500 pounds.) In 2008, it was just 107.5 million bales, and last year, it was down to 102.5 million, according to the U.S. Department of Agriculture. That production cut may not have had such an impact at first, but with demand for garments increasing, it’s more noticeable. “Demand recovered,” Adams says. “It’s exceeded production.” Growers in China, India and the U.S. – the world’s three biggest cotton producers – cut their cotton production in part because of the lesser demand for garment materials, but that wasn’t the only reason.
Corn prices spiked, fueled by a short-lived ethanol boom, and many farmers switched from cotton to corn on some of their land to fetch the higher prices. In 2005, corn sold for a market year average of $1.90 per bushel, according to the National Corn Growers Association. By 2007, it had more than doubled to $4.00. Over those two years, the number of acres planted with corn in the U.S. increased by about 15%, reaching a 20-year high. All of that came at cotton’s expense.
With cotton prices high, production is expected to recover this year. India, which instituted a self-imposed ban on cotton exports, is set to resume by the end of the year. The USDA predicts that 116 million bales will be harvested this year, and a leveling of prices will most likely follow.
Stranded at Sea
When demand for cargo shipment dropped, some companies simply took their containers out of circulation and put them into storage. In many cases, that’s where they remain today, sending some shipping prices upward as demand for the more limited containers has increased. “There’s a shortage of containers, and vessels are taking longer to make the trips,” says Chris Clark, vice president of sales for Ash City.
The increase isn’t small, either. “Normally it takes 45 days to produce something,” says Randy Chen, president of Impex International, a New Jersey firm that buys from China and sells in North America. “Now it’s up to 45 to 90 days and 30-day transit time.” How long this will last is unclear. Higher demand means more profitable transit for cargo companies.
The need for lead time causes other problems, and manufacturers are increasingly demanding more time for production. “No matter who orders product, it still takes time to manufacture fabric, trim and accessories, and then go through the cut-and-sew process, followed by the transport, customs clearance and delivery,” says Arlene Battishill, CEO of ScooterGirls, a Los Angeles company that produces riding gear for female motorcycle and scooter riders. “As a result, it is near impossible to deliver on time.”
Rothco averted the recent shipping problems and inventory shortage by warehousing heavily in the first place. “One of the things we were always convinced of is we can’t sell if we don’t inventory,” says John Ottaviano, Rothco’s director of sales and marketing.
In the end, the grand lesson may be this: You’re less likely to get stuck without inventory if you have it in the warehouse. That would mean a heavier financial burden for distributors, who will now have to rely on timely payment from clients in a recovering economy. Distributors will have to seek out factories closer to home to maintain speed, or simply accept the fact that “just in time” will be a thing of the past. “It is not just the problems in China that are causing problems for American companies,” Battishill says. “The shift from ordering in advance to ‘just in time’ is creating a problem for the entire supply chain.”