Sourcing Peril Looms From Strife Over Food, Energy Prices

Labor unrest over soaring food and energy prices could soon trigger a spike in global apparel sourcing costs, forcing companies to raise wages to stave off...

WASHINGTON — Labor unrest over soaring food and energy prices could soon trigger a spike in global apparel sourcing costs, forcing companies to raise wages to stave off starvation and rioting.

This story first appeared in the April 21, 2008 issue of WWD.  Subscribe Today.

U.S. importers that rely on countries such as Vietnam, Bangladesh and Pakistan for their product are trying to navigate in volatile and politically unstable environments. Their decisions are being played out as U.S. and international organizations scramble to provide emergency relief to millions of people who are struggling to feed themselves because food prices have surged an estimated 40 percent since mid-2007.

The exposure is high for U.S. apparel firms that imported 53 billion square meters equivalent, valued at $96.3 billion, of apparel and textiles for the year ended Feb. 29. The volume of imports was up 1.03 percent compared with the same period a year earlier.

“Obviously, we can’t control civil unrest when it comes to food prices, but we are impacted if those people are not coming to work because they can’t feed their kids or they’re being blocked from going to work,” said Kevin Burke, president and chief executive officer of the American Apparel & Footwear Association. “It’s a hard situation.”

The intensity of the problem is magnified because pressure for higher wages is occurring as U.S. consumer spending weakens.

Rising salaries are “only one part of the equation” for U.S. apparel importers, said Gary Ross, former corporate vice president of global manufacturing and sourcing for Liz Claiborne Inc. and now president of GERoss Consulting LLC.

“Raw material and energy prices are also rising,” he said. “The deflationary price advantages that companies enjoyed have dissipated. Apparel prices have firmed.”

Nike Inc. has felt the full brunt of protests over wages and inflationary pressures in Vietnam, where tens of thousands of workers have staged 159 strikes in recent months, two of which took place at Nike contract factories, said Erin Dobson, director of corporate responsibility communications for Nike.

“It hurts everybody,” said Dobson, adding that Nike has sought to counsel the Vietnamese government.

In the most recent walkout this month at a Nike contract factory, Ching Luh, 19,000 workers struck for two days, demanding higher wages. A government-sponsored union group representing the workers successfully negotiated with the factory’s management for a 10 percent salary increase and a fully paid lunch for each employee, Dobson said.

Although Nike was not directly involved in the negotiations because it does not own the factory in Vietnam, Dobson said the company sought to educate all of the involved parties on how to resolve a strike.

The salary increase for the Ching Luh workers came in addition to a national minimum wage boost of 13 percent in Vietnam in January, she added. While the strikes have abated for now and the workers are back in the Nike contract factories, Dobson said there is still cause for concern.

The root of the problem: Vietnam’s annual inflation rate was up 19 percent in March compared with the previous year and food prices have been rising by about 40 percent since mid-2007.

“The challenge is how often these strikes will happen, how broad will the sweep be,” Dobson said. “We don’t know that yet.”

Rising inflation and civil unrest are reaching such a scale that the sole option can’t simply be to source from a different country, experts noted.

“It’s in so many places that it’s a problem all the companies have to deal with,” said Brenda Jacobs, a trade attorney with Sidley Austin who is the main counsel for the U.S. Association of Importers of Textiles & Apparel and some foreign governments. “You can’t move away from it.”

Companies are clearly going to face increased prices, she said. Most firms contend their margins can’t absorb major supply chain increases.

“Unfortunately, for the suppliers in Asia that are facing real price increases, the demand from our customer in the U.S. and their other customers in Europe is down,” said Jeff Streader, president of Kellwood Global, the corporate supply chain of Kellwood Co. “It’s a counterbalance to these price pressures. We cannot pay more.”

As inflationary pressures and the potential for instability rise in Southeast Asia, some sources said nations geographically closer to the U.S., like Colombia or countries affiliated with the Central American Free Trade Agreement, offer an alternative. Although many said the Democrats’ move to indefinitely delay a Congressional vote on a bilateral trade agreement with Colombia limits their options.

“We are currently closely monitoring the situation and it factors into our long-term sourcing decisions,” said Mark Jaeger, senior vice president and general counsel at Jockey International. “One area we would like to see expanded trade with is Colombia. We would like to see that free trade agreement move forward so we can keep some of the production in our backyard. In the end, there’s only so many countries you can source apparel from.”

World Bank president Robert Zoellick recently warned that 33 countries are at risk of civil unrest because of higher food and energy prices, including Egypt, India and Indonesia.

Increases in freight rates and high oil prices, along with food being channeled into making biofuels, rising food demand in fast-growing emerging economies, such as China, and adverse climate conditions such as droughts and floods, have combined to spur the soaring prices, according to the United Nations.

“What is at stake is, of course, people starving — that’s the first problem, maybe the biggest one — but then it’s also all that has been done trying to help development in the last decade,” Dominique Strauss-Kahn, managing director of the International Monetary Fund, told reporters as the IMF closed its meeting here last week. “And what is even more at stake is the political stability of a lot of countries.”

The U.N.’s Food & Agriculture Organization, in its latest crop prospects and food situation report, projects the import bill for the world’s poorest countries for the purchase of vital food commodities will increase 56 percent this year.

In Haiti, the site of violent clashes in recent days between protesters and government forces, food prices are reported to have gone up 50 to 100 percent in the last year, the U.N. said. In the Philippines, rice prices shot up 50 percent in the last two months, and in Bangladesh they increased 66 percent compared with a year ago. In Pakistan and Thailand, “troops have been deployed to avoid seizing of food from the fields and from warehouses,” the report said.

“Here you have all countries experiencing the same thing, and my view is it will get very bad if we see eruptions in some of the really big population countries, such as China, India or Indonesia,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington. “I would expect some governments to fall over this.”

While the governments of many countries have taken aggressive steps to quell the protests — implementing measures to dampen inflationary pressures and periodically raising the minimum wage — labor and human rights organizations contend the reforms are undercut because excessively low wages have not kept pace with inflation.

“Even where there has been an increase in the minimum wage in a country, those increases have been decimated by the huge increases in prices for basic foodstuffs, so that workers are making even less in real terms than they were before,” said Kevin Thomas, director of advocacy for Maquila Solidarity Network, a labor rights nongovernmental organization.

“What we’ve seen around the world is a pattern — the price of food is soaring, but the workers’ wages are already too low for the cost of living — and this is having a terrible effect,” Thomas said.

In Bangladesh, after riots and demands for higher salaries, about 20,000 apparel workers from four factories in Narayanganj were given a pay hike of about $3.50 a month, which amounts to an 8 to 9 percent increase, said Neal Kearney, general secretary of the International Textile Garment & Leather Workers’ Federation.

Workers in Bangladesh’s apparel industry have continued to stage protests on a daily basis, with some demonstrations escalating into violence in Dhaka and other industrial clusters, according to the two main garment associations.

“We feel for the workers, but garment manufacturers are unable to increase wages parallel to price rises of foodstuffs,” said Anwar-Ul-Alam Chowdhury Parvez, president of the Bangladesh Garment Manufacturers & Exporters Association, which represents 4,500 apparel factories with 2.5 million direct workers.

Parvez said the apparel sector implemented minimum wage increases in most factories three months ago. Under the current minimum, workers make about $30 to $35 monthly. Staple food prices have doubled in the past six months following monsoon floods, cyclones and tidal waves that devastated crops, driving up demand for imports.

Double-digit inflation and exorbitant rice prices in the world market have exacerbated the situation. Parvez said his association has urged the Bangladesh government to subsidize distribution of rice and other essentials to the garment workers.

Parvez and Fazlul Hoque, president of the Bangladesh Knitwear Manufacturers & Exporters Association, which has 1,500 member factories representing one million workers, said it will take more than the government’s intervention.

“The workers’ wages can be increased to meet the existing higher prices of foods, if the buyers in the developed countries raise their offered import prices,” Hoque said.

Demands for wage increases are also being made by workers in textile and apparel factories in Egypt, Indonesia and the Philippines. Workers in Egypt’s textile-producing city of Mahalla al-Kobra have spearheaded protests in that nation.

For the industry to avoid more labor disruptions, Kearney said factories will have to raise wages, and apparel brands and retailers will have to pay more.

Charles Kernaghan, executive director of the National Labor Committee, a labor rights watchdog group, said the crisis has been building.

“In every way before this…these workers were on the edge and barely surviving, so when the food prices go up, especially in the basics that workers rely upon, they are thrown into the extreme,” he said.

With contributions from John Zarocostas, Geneva, and Jahir Ahmed, Dhaka, Bangladesh