Touting Southeast Asia’s Potential

Participants at the Prime Source Forum cited rising costs in China and other countries as reason to feel the region’s sourcing potential is on the rise.

JAKARTA, Indonesia — The opportunity for Southeast Asia to challenge China as the apparel industry’s workshop of choice is growing.

This story first appeared in the February 5, 2013 issue of WWD.  Subscribe Today.

Participants at the first Southeast Asian edition of Prime Source Forum cited rising costs in China and other countries and upcoming regional economic initiatives as reason to feel the region’s sourcing potential is on the rise.

“For the last 10 years, China has powered itself ahead with huge economies of scale,” said Mark Lee, chief executive officer of Singapore-based apparel firm Sing Lun Holdings. “But inflation [in China] seems to be picking up and buyers are pushing 25 percent of their sourcing dollar out.”

Ade Sudrajat, chairman of the Indonesian Textile Association, said, “This shift in the global value chain is a major growth opportunity for Southeast Asia. It is in part due to rising costs in China, but we also have the skills and downstream industry. The integrated supply chain [Southeast Asia offers] will ensure our competitiveness.”

The 10-member Association of Southeast Asian Nations, or ASEAN, saw the value of its collective apparel exports grow 10.4 percent in 2012 to $38.1 billion, according to figures from the Source ASEAN Full Service Alliance, an industry group.

“ASEAN is here to stay,” said Prabakaran Kesavan, project manager of SAFSA. “The industry here was bigger than Turkey and Bangladesh in 2010 and it will grow bigger and bigger.”

In coming years, the region’s supply chain should become even more streamlined with the birth of the ASEAN Economic Community. This unification of 10 countries’ markets, loosely similar to the European Union, is slated to come into place by 2015.

The 10 ASEAN countries forming the union are Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Under the AEC, tariffs on moving most goods within the group of countries would drop to zero or near-zero levels. It will take place alongside initiatives like the ASEAN Single Window, a system that will allow businesses to shift products throughout the region by submitting documents to just one regulatory authority.

“In a weird scenario, you could have yarn from Indonesia transferred to Malaysia for dyeing, before being made into garments in Cambodia, all [processed] through the single window,” said Kesavan.

The effective merging of these markets will also allow manufacturers to leverage various free-trade agreements with Southeast Asian countries to their benefit and import or export accordingly.

For example, the EU, Japan and the U.S. consider Cambodia one of the lesser-developed countries in their Generalized System of Preferences. With this classification, the country pays significantly reduced tariffs on many of its exports, about 90 percent of which are garments.

Apparel industry representatives also talked up the potentially positive implications for other trade agreements and partnerships linking Southeast Asian countries.

“The negotiation of the Trans-Pacific Partnership should also reduce some tariffs and create investing opportunities for apparel in this region,” said Sudrajat, referring to the U.S.-led agreement that will establish a free-trade zone in the Asia-Pacific region between 11 countries. Singapore, Vietnam, Malaysia and Brunei are members of the TPP, which excludes China.

Sudrajat and Kesavan both said they expected an expansion of the ASEAN Common Competency Program as the region continues to integrate. The program, which was initiated in May 2009, provides certification to workers that allow them to be recognized as skilled labor in states that recognize the program.

Such a program could help alleviate the chronic labor shortages that afflict the industry in Cambodia and Thailand, countries with small supplies of garment workers. As currently projected, the AEC would only provide for the free flow of skilled labor, as opposed to the free movement of all people codified in EU treaties. Six countries — Cambodia, Indonesia, Laos, Malaysia, Thailand and Vietnam — currently recognize the Common Competency Program, which will apply to garment workers.

Discussion also turned to worker safety. Compliance monitors said factory conditions are generally better in Southeast Asia than in the Indian subcontinent, where recent factory fires have claimed the lives of hundreds. Bangladesh has been the site of two of the most recent disasters.

Jean-Pierre Haug, general secretary of the International Association for Research and Testing in the Field of Textile Ecology, noted that while factories in Southeast Asia held only 4 percent of the certificates issued by his organization, those certified were compliant with 97.2 percent of the tests his organization carried out. He said that most of the failures for ASEAN factories were in noncritical areas and that the compliance rate was “significantly lower” in the Indian subcontinent.

Still, Haug warned that when factories grow too quickly, they tend to accept bad conditions as they focus on costs.