Apparel and Textiles: Risk
The dynamism of the clothing activity and upstream textile industries rests entirely on household spending, directly and via other sectors (automotive, air transport, and so on). But consumption is only expected to grow weakly in industrialized countries in 2010 (persistence of unemployment, high level of private debt, replenishment underway of emergency savings). As in 2009, buyers and specialized distribution networks will give preference to emerging Asian subcontractors from China, India, Vietnam, and Bangladesh.
Industrialized countries: the search for the best price by specialized distributors will result in the disappearance of the weakest companies
The United States, Western Europe, and Japan combined represent 85% of sales in the sector. Although the sector activity remained more or less stable in volume terms in 2009, it declined considerably in value (down between 10% and 20%). And this trend will likely persist in 2010. Operator margins will again be under pressure resulting in longer payment times, greater reluctance of financial partners to increase their exposure, increased recourse to discounting and promotional campaigns, and growing competition between private sale specialists, factory outlet malls, and traditional retailers via the Internet. Some specialized chains will be likely to proceed with further shop closures, cut back warehouse capacity, and reduce costs, notably marketing. Others could, however, adopt a very different strategy and open new points of sale, running the risk of undermining their profitability. Among technical textiles (traditionally linked to the construction, automotive, and air transport sectors), only healthcare textiles will grow.
In 2010 growth in the United States will not return to pre-crisis levels. With unemployment at historically high levels, households are expected to continue to pay down debt and save more. They will tend to make spending trade-offs on clothing in favor of entry-level products largely to the benefit of mass distribution outlets whose profits will likely continue to grow. In subcontracting out entry-level products, buyers will tend to switch from Central American and Caribbean subcontractors to Asian and Chinese, especially with the quotas on some clothing articles eliminated since 1 January 2009.
And conditions will also be rougher for Western European operators. Exports, largely intra-EU, will decline due to the slowdown of demand in member states. The drop in the consumption of clothing articles and textiles will be particularly significant in Spain and the United Kingdom, with unemployment high in both countries in 2010 exceeding respectively 20% and 10%. The VAT increase in the United Kingdom (effective from 1 January 2010) will also be a drag on consumption. And the depreciation of the pound sterling since 2008 will, if it persists in 2010, increase the cost of articles imported from dollar zone countries. In the euro zone, however, the appreciation of the single currency will enable companies operating there to benefit from favorable exchange rates on their supplies. Early January, Italy is expected to suffer a new wave of bankruptcies with companies among the most solid and specialized in the high end forced to reduce prices. Highly export oriented, the sector will suffer from the euro appreciation. In Germany, consumption will remain sluggish despite a low rate of debt and abundant savings.
In Japan, production fell sharply in 2009 and stocks did not decline much due to the sluggishness of household consumption, already weak before the crisis. Chains specialized in the low end have fared relatively well thanks to stocks imported from China, which, although contracting in the 2009 first half, still represent 83% of Japanese imports clothing imports. Fears of deflation becoming entrenched in 2010 poses a threat to the already weak margins of sector companies.
Emerging Asia alone has withstood the crisis.
Subcontracting companies in emerging regions will contend with a sharp decline in demand from customers in industrialized countries and their production will thus continue to fall with the notable exception of Chinese, Indian, Vietnamese, and Bangladesh subcontractors.
In China, many sector companies failed in 2009 with many factors putting pressure on manufacturer margins (huge stocks of clothing that have driven prices down, appreciation of the renminbi in the 2009 first half, and environment-related investment constraints for example). Some of these factors will persist in 2010. To keep their product range competitive, suppliers will be more inclined to relocate production facilities to neighboring low-cost countries offering large wage differentials, like Vietnam, with wages 45% below those prevailing in coastal China, and Cambodia. For identical reasons, such low-cost countries - Vietnam, Bangladesh and India - have already captured a portion of Western demand.
Subcontractors in Morocco, Tunisia, and Turkey will be in critical situations. The shock will hit Morocco head on. The fall of exports to the European Union continued in 2009. And the contraction or, at best, sluggishness of consumption in Spain and France, its two main client countries (market for 73% of sector exports), will continue to be a handicap in 2010. Both Tunisia and Turkey will suffer from the contraction in consumption by German households. And the severe pound sterling depreciation will undermine Turkish and Morocscan exports to the United Kingdom. They will maintain a stream of business on higher value added articles but prices will likely be driven down. The performance of regional companies is thus expected to be poor. That will also be the case in Central European countries, especially Romania, Bulgaria, and Serbia. In Russia, the most promising emerging country for European clothing articles before the crisis, demand will also suffer from the fall of household consumption.
Central America and the Caribbean, traditional trading partners of the United States and heavily dependent on economic conditions in that country, have suffered a further decline in their clothing exports that reflects the decline previously recorded in imports of textiles needed in producing clothing articles. In Brazil, cotton exports will be undermined by the decline in demand from the United States and Argentina. Government stimulus measures to boost consumption could, however, spur Brazilian imports from Asia, which already represent 78% of the country's clothing purchases abroad.
Grading and description are forecasted for 2010. Updated on globalEDGE April 2010.
