Global Garment industries value chain

1. Chapter 2 Global Garment industries value chain By tewodros.t

2. Major global players in garment manufacturing business Two main trends in shift of apparel market share: • A shift within Asia with the Big Three’s share being reduced, first by China, then by Southeast Asia and South Asia • A growth in non-Asian imports, particularly from Central America and the Caribbean, which nearly doubled its contribution from 8 percent in 1990 to 15 percent in 2001 moreover Mexico multiplied its share nearly fivefold from 3 per cent to 15 per cent.

3. Major Exporter countries • The number of major exporters from more developed nations among top 15 dropped from 11 to 6 (from 1963-1996). This indicates the shift of garment manufacturing to other parts of the world. • In 1996, China was in top 15 exporters but it was not in 1963. The top 15 apparel exporters accounted for 75% of world exports in 1963 but only 65.9% in 1996.

4. Export share

5. Fast growing apparel exporters (2005-2011) • Despite the fact that Asia had taken the role as the principal exporter of apparel, export growth outside Asia has also been positive

6. NB:This decline of the figure reflects for the entry of the newly developing countries joined in apparel production business.

7. Major importer countries All major importers are developed nations where 12 out of 15 major importers are in the list of 1973 and 1996. Top 15 absorbed a large proportion of all world apparel exports. The most dramatic change was the increased proportion of world apparel exports absorbed by US and Germany, particularly US. Only US absorb 17 % and 26.5% of the world apparel exports in 1973 and 1996 respectively.

8. Apparel import markets

9. Factors that influence the sourcing and investment decisions in the textiles and apparel value chain • They include, • Institutions • Skills and productivity • Market access

10. Institutions • Labour cost • Ability to meet quality standards • Labour skills and productivity • Production cost • Order delivery time

11. Skills and productivity • Protection of intellectual property • Labour standards • Customs procedures • Flexibility of contract arrangements • Quality of infrastructure • Business environment • Other border procedures

12. Market access • Proximity to final market • Preferential market access schemes • Logistics performance

13. Adding value to the textile and apparel value chain • Involves economic upgrading • This can be achieved by, • Process upgrading: • Product upgrading: • Functional upgrading: • Inter-sectoral upgrading:

14. Process upgrading - Apparel value chain • Improving the efficiency of the production • Can be achieved by applying new technology or rearranging existing production systems • Innovation in production technology occurs mostly in the pre-assembly stages such as pattern making and fabrics cutting • Sewing operations remain labor-intensive as substitutability between labor and capital is limited

15. Product upgrading - Apparel value chain • Improving the quality of the products or adding new product lines that are of higher value • It involves a shift into higher value-added product lines. • Such products are normally more difficult to produce because of differences in technical specification and input materials • For example, a supplier may upgrade product-wise by shifting from the production of casual woven shirts to expensive suits • The suppliers’ ability to produce products of higher value-added is highly correlated to the extent of upgrading in production processes.

16. Functional upgrading - Apparel value chain • Taking new functions which are of higher skills and knowledge intensity • Example, a business can decide to move into more complex functions in a particular value chain (smart fabrics) • Functional upgrading has to do with shifting towards, more knowledge and skill-intensive functions in the global value chain • In the apparel industry, such functions include product design, material sourcing, branding, and marketing • When product design functions are integrated by suppliers, this is referred to as original design manufacturing (ODM) • When suppliers further integrate branding and marketing functions, it is called original brand-name manufacturing (OBM).

17. Intersector upgrading - Apparel value chain Involves switching to a different sector which final products are more technologically sophisticated and of higher value-added

18. The need for value chain • The value chain approach presents a good picture of the process of creating value. For one thing, it shows clearly that production is not the only way to create value. • A product is brought to market through a combination of activities, all of which contribute to its final value..

19. International economic networks • Industrial and commercial capital have promoted globalization by establishing two distinct types of international economic networks: • Producer-driven commodity chain • Buyer-driven commodity chain

20. Producer-driven commodity chain • This type of commodity chain is controlled by industrial firms at the point of production • The manufacturers exert control over backward linkages with raw material and component suppliers, and forward linkages into distribution and retailing. • Involves large, usually transnational, manufacturers play the central roles in coordinating production networks

21. This is characteristic of capital- and technology-intensive industries such as • automobiles, • aircraft, • Profit is derived from scale, volume, and technological advances

23. Buyer-driven commodity chain • Refers to those industries in which large retailers, • branded marketers, and branded manufacturers play the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically • located in the Third World. • The buyer-driven chains is controlled by retailers, marketers, and manufacturers through their ability to shape mass consumption via strong brand names and their reliance on global sourcing strategies to meet this demand. • Characterized by high competitiveness, at locally owned, and globally dispersed production systems.

24. Production is generally carried out by tiered networks of Third World contractors that make finished goods to the specifications of foreign buyers. • Profit is derived from unique combinations of high-value research, design, sales, marketing and financial services that allow the retailers, branded marketers and branded manufacturers to act as strategic brokers in linking overseas factories with evolving product niches in the main consumer markets • The garment trade is an example of a buyer-driven commodity chain

26. The apparel industry is identified as a buyer-driven value chain that contains three types of lead firms: • retailers, • marketers and • Branded manufacturers.

27. The apparel value chain is organized around five main parts: • raw material supply,including: natural and synthetic fibers; • provision of components, such as the yarns and fabrics manufactured by textile companies; • production networks made up of garment factories, including their domestic and overseas subcontractors; • export channels established by trade intermediaries; • marketing networks at the retail level

28. International manufacturing systems 1.Assemblyis a form of industrial subcontracting, in which garment sewing plants are provided with imported inputs for assembly, most commonly in export processing zones (EPZs). 2.Original equipment manufacturing (OEM)is a form of commercial subcontracting. (Full package manufacturing) • The supplying firm makes a product according to a design specified by the buyer; • the product is sold under the buyer’s brand name; • the supplier and buyer are separate firms; • The buyer lacks control over distribution.

29. Original brand name manufacturing (OBM)is the upgrading by manufacturers from the production expertise of OEM to first the design and then the sale of their own brand products. • The key to East Asia’s success was the move from assembly of imported inputs (traditionally associated with export processing zones or EPZs) to a more domestically integrated and higher value-added form of exporting known as full-package supply or OEM (original equipment manufacturing) production. • Innovation in the global apparel value chain is primarily associated with the shift from assembly to full-package production.

30. Global shift of garment Industries to developing countries • Expanding manufacturing sector is often considered as a necessary stepping stone for economic growth in least developed countries (LDC’s) because manufacturing generates value-adding activities based on the existing economic resources of the country. • Recently, some developed countries, such as EU and US have provided preferential tariff and non-tariff treatment of the products made by low-income African countries to allow more favorable access to their markets, particularly for manufactured products.

31. Since textile and garment industry has served as the engine and groundwork for industrial development, it has been one of the industries which were confidently subjected to dynamic changes of world economy or global shift. • Concerning the changing pattern of demand; demand is the fundamental influence on the level and location of the textile and clothing industries. • Production cost and technology level in the sector are other reasons for the global shift. In garment manufacturing capital intensity is generally low; the average plant size is small and the technology is relatively unsophisticated. Thus, there is no doubt that labor cost is the most significant production factor.

32. Low unit of labor cost of developing countries has enormous advantages over developed market economies, even if there is the advantage of low labor cost for producers in developing nations, they remain in the production of basic Garments due to lack of design competitiveness and lower productivity of labor.

33. The main reasons for the global shift in garment manufacturing are: • The changing patterns of demand, • Industry structure • Increase in Production cost of developed nations • Technology level • The increased importance of the clustering concept for competitiveness in developing nations industrial development strategies.

34. Globalization in clothing industries What is globalization? • It is increased trade in goods and services, increased international movement of capital, increased international migration All of which imply increased economic interdependence among countries • Does it help low income countries? No single answer for it. • The poor in many countries benefit from • Increased jobs • Cheaper consumption • Opportunity for education, savings, entrepreneurship • In other cases • Workers will be displaced by imports from all over the world and lose jobs • Poor consumers pay more, not less, for what they need

35. On average • Countries that welcomed globalization have done better, overall, than those who have not • Within those countries, economic growth has raised incomes at all levels, including the poor • Some countries have done especially well by exporting • S. Korea • Other Asian countries

36. The global nature of the apparel/garment industry causes the sector to flow across borders linking countries, governments and economies of developed and developing nations together. • Globalization creates employment opportunities for millions of employees in garment industry worldwide. Most countries’ Export and employment level depends on the textile and clothing industry. • WTO figures showed the impact of globalization on growth of global apparel trade and its contribution for worldwide employment opportunities. • According to 2006 WTO estimates, the clothing industry has a share of 3.8% from total worldwide trade of manufacture trade. This figure is substantial amount of money especially the amount of job it provides.

37. Table: Individual countries’ share of global apparel trade

38. assignment How to stay competitive in the international garment trade? According to: • Quality • Fair prices • Working conditions