But because the clothing industry has been so hard hit by the pandemic, it also leaves Bangladesh especially vulnerable. “It’s a problem for garment workers everywhere, but for Bangladesh it’s particularly bad because the economy is so one-sided,” says Jette Steen Knudsen, a professor of policy and international business at The Fletcher School at Tufts University.

Image for article titled Jean production shows how Covid-19 has devastated the fashion industry

How jeans get made today

This is how the garment business in places like Bangladesh works. Companies place orders with a factory, and the factory sources and buys the fabric, trims, and other materials necessary to make the clothes. Often they pay for the items on credit. They rely on the payments they receive from fashion companies for the cash flow to pay the suppliers who sell them materials, their bank loans, and their workers.

Without these payments, everything comes to a standstill and workers don’t get paid. Last month in Dhaka, Bangladesh’s capital city, hundreds of garment workers protested for unpaid wages. “I did not get my wages for the last two months,” a 21-year-old woman told the Associated Press.

Garments workers in Dhaka shout slogans as they block a road demanding their due wages
In Dhaka on April 15, garment workers blocked roads to protest unpaid wages.
Image: Reuters/Mohammad Ponir Hossain

Factories have been forced to lay off or furlough large numbers of workers, many of them young women who rely on their wages for survival. One study estimated as many as a million garment workers were unemployed in Bangladesh. Garment workers in countries such as Cambodia and Myanmar are dealing with similar situations.

Mostafiz Uddin is the founder of Denim Expert Limited, a factory in Chittagong, Bangladesh. It typically makes jeans for international clients such as Spain’s Inditex, owner of fast-fashion giant Zara, and Arcadia Group, the UK company behind brands such as Topshop. Uddin says when industrial activity in China stopped due to Covid-19, the impact on his business was significant.

“The biggest effect came from accessories,” he says, as in buttons, zippers, and leather patches. “All these accessories come from China.” As his supply of these items dried up, he was unable to make finished garments, putting business on pause, and creating delays delivering goods to his customers. He also buys denim from China, though it’s actually not his main source, even though China is the world’s lead denim producer. He gets a small quantity from producers there when the end product is meant to be very inexpensive, but for most of the products he makes he sources fabric from mills in Pakistan, Turkey, and Italy.

But the delays from raw materials haven’t been his biggest problem. Many clothing companies have now suspended or canceled orders outright with manufacturers like Uddin.

Covid-19’s spread through Europe and the US forced retailers selling non-essential items, such as clothing, to close in unprecedented numbers. Shoppers have simultaneously pulled back on discretionary spending, leaving fashion companies unable to sell the inventory they currently have. To avoid accumulating more unsold goods, many have suspended or canceled orders they already placed. In April, a trade group representing Bangladesh’s garment industry, the Bangladesh Garment Manufacturers and Exports Association (BGMEA), said 1,134 factories reported canceled orders totaling more than $3 billion.

Denim Expert has had $10 million in orders canceled, Uddin says, equivalent to all its work for March, April, and May. He says he made a commitment not to lay off workers and hasn’t so far. But he doesn’t have the cash to keep paying them either.

Uddin has been vocal about the problems he and others like him face in Bangladesh, speaking to international press and writing opinion pieces for Bangladeshi outlets. Canceled orders aren’t the only difficulty he and others in the industry are navigating. Clothing companies have refused to take delivery of products already finished to delay having to pay for them, he says.

Typically, the purchase orders that brands place with garment factories will specify that, after receiving the finished clothes, the company has a period of 30, 60, or 90 days to pay. Now, even companies whose orders are already fulfilled simply aren’t taking possession of the goods, so manufacturers aren’t getting paid.

“I have cartons from Arcadia Group with $2.5 million in unshipped goods,” says Uddin, who has called for an overhaul of payment terms. “All the brands and retailers, they don’t want to take the goods, so there is no cash flow.”

Some companies have publicly committed to paying for placed orders, but many others have not. A number are asking if they can delay payment for several months, or demanding discounts of 30% or 50% on orders. Uddin says his margins are already slim. About 80% of payments from the companies goes to the cost of materials. The remaining 20% is what Denim Expert uses to pay its 2,000 employees and all its other costs, such as utilities.

The factory has been closed since the end of March, when the government shut factories in an effort to halt the spread of the new coronavirus. It has been allowing some to reopen, but Uddin isn’t sure whether Denim Expert will resume work this month. The future beyond is even less certain. Right now he has no orders for June or July.

Bangladesh has a program to help pay workers, but it only makes up about half their wages and has been slow rolling out. Reducing wages by that amount is enough for many workers to go hungry or be unable to pay their expenses. The program also doesn’t help factory owners like Uddin with their other costs.

Uddin’s worry is palpable. He is genuinely uncertain whether his business will survive. “We need help from our clients,” he says. “They are the only ones who can help.”

The scenario has underscored Bangladesh’s dependence on its garment industry, as well as how much that industry—and the international fashion companies that benefit from it—rely on low-cost labor. Knudsen says she has been traveling to Bangladesh for about five years, and in her conversations with government officials she has repeatedly heard them say they want Bangladesh to move up the “value chain” to manufacturing more complex products. But low costs are what attract all Bangladesh’s international clothing customers. There hasn’t been any need to invest in more automated production or advanced manufacturing. “The incentive hasn’t really been there because the workers are so cheap,” she says.

It’s unclear what the aftermath of the Covid-19 crisis holds. In Bangladesh, the calls to diversify exports from before the crisis may grow louder. Other economies that are highly dependent on garments, such as Cambodia, might see the same sort of response. Fashion companies, meanwhile, recognize their sourcing practices need to change.

Image for article titled Jean production shows how Covid-19 has devastated the fashion industry

How clothing supply chains could change

The Covid-19 crisis has forced brands and retailers to reexamine how they produce their goods. A lot of companies still work by placing large orders several months in advance. They don’t operate with the flexibility to adjust in a crisis and are now struggling as a result. A large number are also still dependent on China for most of their manufacturing.

Many companies were working to change these paradigms before the crisis, especially as costs kept rising in China and the trade war between China and the US escalated. But now those shifts are likely to accelerate.

In a May report, McKinsey looked at some of the ways fashion sourcing is set to change in response to the pandemic, surveying 116 sourcing executives at fashion companies and retailers, predominantly in North America and Western Europe, and talking to other industry stakeholders. Among its findings were that companies plan to shift more of their production from China to Southeast Asian countries that Covid-19 has disrupted less.

The shift could help rebalance the risks, costs, and flexibility of their supply in case of future disruptions, be they new outbreaks or new trade disputes between the US and China. Vietnam stands to be one of the bigger beneficiaries. Bangladesh, however, may actually see a decline.

Companies are also looking to increase the flexibility of their supply chains, in part to help manage the risk of major disruptions in their supply. One way they might do so is by moving some production to areas closer to their biggest markets. Companies that sell in the US might look to source goods in Mexico and Central America, while those that sell in Western Europe could consider Turkey, Morocco, and countries in Eastern Europe.

By producing closer to their customers and avoiding the long shipping times from Asia—what’s known as “nearshoring”—companies can produce smaller quantities of clothes on shorter lead times, making them less likely to get stuck with a mountain of inventory they can’t sell in a crisis. Though it can cost more to produce in those countries, it can still end up being more cost-effective overall. About 46% of the executives surveyed said they expect such nearshoring to increase in the next year.

There’s one problem with this option, though, and it goes back to the reason China’s coronavirus shutdown froze supply chains in the first place. Factories that assemble clothes in these countries still get many of their raw materials from China, especially synthetic fabrics such as polyester and specialized materials used for products such as activewear and outerwear. For a truly diversified and resilient fashion supply chain, these other countries need to develop their textile industries too.

Many of those McKinsey spoke to expect the crisis will drive this process, though it won’t happen overnight. Even as many clothing companies prepare to shift production out of China, a significant share also intend to maintain or even increase manufacturing there. That way they face fewer challenges in getting raw materials to manufacturers than if the materials need to cross national borders.

Other trends sourcing executives anticipate include more digital processes, and closer ties with their suppliers. They say they want to move away from transactional relationships to genuine partnerships, where they share strategic goals, and which could include companies co-investing with manufacturers to upgrade facilities and processes. Companies such as Nike, Adidas, and H&M have been moving in this direction, forging long-term ties with their best suppliers.

Many others, however, are still just looking for whoever will do the work fastest and cheapest. And companies of all kinds are likely to cut back on production as economic recessions in the US and Europe dampen spending on items like jeans. All indications are that millions of garment workers and people like Mostafiz Uddin will be left to fend for themselves.

“We should together solve the problem so that our poor workers should not suffer,” Uddin says, referring to the factory owners and international brands. “We both should consider how we can find a way to take care of these workers. I think this is very important, and this is not what happened this time.”

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