One Economic Unit
In this exclusive piece for Clothesline, Mr. Ram Sareen emphasizes that globalization is not new and has been happening ever since the Second World War. The clothing industry is feeling its heat only after the WTO was signed. He suggests the ways of overcoming the pressures in a competitive global market.
Mr. Ram Sareen is the founder and CEO of Tukatech Inc., one of the fastest growing CAD companies. He has a global experience of over 25 years in the clothing technology business. His company also acts as an advisor/consultant in the IT driven manufacturing solutions in the sewn product industry worldwide.
Despite protests in the US and Europe by anti-globalization elements focused upon the imagined dark side of economic integration, countries and businesses continue to pursue globalization. The idea is not new. The pioneer was Singer, a New York based sewing machine company. Founded in 1851, Singer was the first company to become a truly multi-national company. For singer and other companies like it, the advantage of scale and access to markets, suppliers, customers and, of course, new ideas, was simply too good to pass. This was earlier than most realize. It came to an end by the First World War and the Great Depression and the high tariffs that followed.
Since the Second World War, a new wave of economic globalization has swept the world. It has almost peaked as advances in digital technology have shrunk the world significantly. The world’s biggest corporations have become heavily involved outside their traditional domestic markets. Some of them have more than three quarters of their sales in foreign markets. One example is Nokia, the mobile phone maker domiciled in Finland. 64% of Nokia’s total sales are in ten countries outside the home base of Finland. Nokia may well be an American company-55% of the company is owned by US investors.
An American customer buying a German car may not be aware that the car was designed in Southern California and assembled in South Carolina with parts made in Canada, Japan, Mexico, Germany and some other countries. The automotive industry adapted globalization in the early fifties itself. Even the American giants, who controlled the automotive world, were forced to retool their strategies in the seventies when they started losing market share to Japanese and European competitors.
Over the past decade, prices of apparel have declined 40% at the consumer level and yet, margins haven’t changed much. Prices may decline further in the next decade by as much as 50%. Sounds absurd? Not really. Take the example of Tadashi Yanai, President of Japan’s Fast Retailing. Single handedly, he has managed to push down the national price index, as well as the trade surplus of the entire nation. Yanai has successfully cut the complicated distribution system for selling high quality clothing at a third of what the Japanese consumers had been paying. Yanai’s Uniqlo stores often sell at 30% of prices charged by other retailers and yet they earn a margin of $12 on a $24 jean jacket. The same jacket sells at Japanese Gap outlets for $58 to $66 and up to $175 at the Matsuya department stores. With his fortune surpassing $5 billion, the 52 year old Yanai has plans to open stores in Europe and the US.
Wal-Mart created a similar frenzy in the USA in the eighties when the big department stores and some of the many specialized chains compared it (Wal-Mart) to discounters like Woolworth’s and K-Mart. However, excellent distribution, low gross margins, efficient sourcing, stringent quality standards, a whole new and different breed of buyers and merchandisers and many other innovative ideas and concepts literally forced upscale manufacturers to re-align their businesses because they couldn’t do without Wal-Mart. Yanai’s model isn’t much different. He sent the craftsmen from Japan to China to teach the latest production technology and styles to the Chinese. China’s labor costs are five percent of Japanese labor. Goods are shipped directly to Uniqlo stores, cutting out the traditional distribution channels and the incumbent costs.
The world has become so small that it is difficult to know whether the telemarketer on the other end of the telephone is calling from the same city, same country or the same continent. There are two ways to be anywhere by telephone or being there physically. Communication costs have dipped hugely and further declines are expected. Call centers in India routinely handle customers residing in the US and the customers believe they are talking to somebody in the same city? The growing globalization of services like medical transcription, development and testing of software, airline reservations, technical support for software and hardware and other services are pulling costs down.
Globalization is a win-win situation for all, narrowing the gap between people, cultures, living standards, and most of all, educating each other by sharing knowledge and information. For decades, apparel firms have traveled the world in search of cheap(er) labor. Trade lobbyists have fought for tariffs and quotas for protecting domestic industries. Some exporters and importers have become millionaires selling quotas in black markets. And some are in jails for having resorted to false labeling. Some have set up dummy fabrication units in non-quota countries.
NAFTA and other trade pacts have changed things drastically but the biggest effect is likely to be felt after December 2004, when GATT kicks out the quotas altogether. Only the best of the firms would win.
What does it take to be a global player? Is it the cost of labor, management, skills, technical know-how, and local laws, or is it a combination of all? Cheap labor by itself is unlikely to be enough success and growth.
The biggest labor pool available is in Asia (China, India, Indonesia, Vietnam, Bangladesh, Pakistan, Sri Lanka, Thailand, and Malaysia) and in the Americas (Mexico, Guatemala, El Salvador, Ecuador, Dominican Republic, Haiti, Peru, Brazil and Argentina) with vast human resources. Most African nations are likely to become a threat to the existing players quite soon.
One thing is for sure-low price tags will not be enough to ensure business. Buyers are going to look at the total landed price, quality, efficiency of production planning, turnaround time and even communication costs at pre-, during, post-production stages.
For example, if the cost of labor, quality and other intangible factors are the same in India and China but transportation from China takes three days less (than India), you can bet that the order will go to China. And once the Chinese capacity is booked fully, the evaluation process will begin again. With internet and so many B2B services, the process of sourcing has become easier and yet more challenging. The so-called buying houses that have created their own networks of chosen suppliers will be threatened the most. AS mentioned earlier, only the best will remain in business. The rest will pay the price of being inefficient.
In order to become world class, apparel firms would have to content with several factors. Some of these are:
Strengths and Weaknesses
Identify your strengths. Is it fabric, embellishments, cutting, sewing, embroidery, packaging, delivery, styles ore whatever factor separates you from others. Then build on those strengths. Identify the weaknesses and correct them step by step.
At the end of the day, people buy people. If your customers like you or your organization, they will buy from you. They will be demanding but would also be forgiving at times. If there is no personal relationship, you can be that price alone will not get you the business.
Shifting blame to others is always easier than taking responsibility for mistakes. You may win the battle but you will lose the war. If we consider our buyers to be our partners and work towards the common goals, it will create a long lasting relationship. There has to be a common objective.
World Standards in Production Time
One of the most difficult things but mandatory. Almost all jobs can be measured in time, specially manufacturing and assembly of products. Commonly known as SAM or Standard Allowed Minutes. For example, a basic t-shirt should take an average of 7.5 AMs for spreading, cutting, sewing, examining, and packing. For calculating the cost, all that the buyer has to do is find out the cost per minute of the country and multiply with a factor of 2.5 (1.0 for direct labor + 1.0 for overheads + 0.5 for gross profit.) The fair labor laws allow the formula to be 2.0 to 2.5 of the SAM, multiplied by the local cost of labor per minute. In the USA, the cost per t-shirt will be $0.11 x 7.5 = $.0825 in direct labor, if manufactured in-house and $1.65 or more if sent out to a contractor. Any deficiency on part of the manufacturer will not be the responsibility of the buyer. On the other hand, an efficient producer stands to gain not only from lower costs but also longevity in business.
It is absolutely the most crucial element in our business. Simply stating that we will start delivering faster than other will not suffice. The complete cycle time has to be reduced. To achieve this, we need to examine each and every step of the complete process, from product development to packing and shipping.
While globalization is opening up new opportunities in hitherto closed or restrained markets, the challenges too are growing. Indian exporters would have to move on many fronts, if they are to convert globalization into more of an opportunity than a challenge.
Tukatech is a Los Angeles-based company that provides 2D and 3D software solutions and manufacturing equipment to garment producers. It also provides web-based product development services and PDM/PLM systems, supported by brick and mortar centers strategically located in garment hubs worldwide. With over 12,000 systems sold and about 3,500 competitive systems replaced, Tukatech is the fastest growing garment CAD/CAM company in the world. Tukatech has been ranked by Apparel Magazine as the #1 Apparel software company in the world.