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‘Escalating Situation’ Forces PVH Out of Ethiopia Factory

The owner of Calvin Klein and Tommy Hilfiger is closing up shop in Ethiopia, the result of the “speed and volatility of the escalating situation” in Africa’s second-most populous nation, where armed conflict began a year ago in the famine-struck northern Tigray region.

A spokesperson for PVH Corp. confirmed that the company will be shuttering its facility in Hawassa Industrial Park on Nov. 25, although it will continue sourcing from third-party manufacturing partners at the site.

PVH Corp. was already planning a “smooth transition” of the factory to a trusted supply chain partner following the sale of its Heritage Brands portfolio to Authentic Brands Group over the summer. The intensifying war in Tigray, which is threatening to spread as opposition forces move closer to the capital Addis Ababa, however, pumped the brakes on the scheme, leading to the “difficult decision” to close the facility. Earlier this month, the State Department advised all U.S. citizens in Ethiopia to leave the country as “soon as possible,” describing the security environment in Ethiopia as “very fluid.”

“PVH has worked for over five years with government, civil society and business partners in Ethiopia to make the Hawassa Industrial Park a leader in inclusive development. We are proud of the work we have done there,” the spokesperson said. The company will be compensating all local operators in accordance with Ethiopian legal requirements, as well as providing an additional payment of three months’ severance to all workers, a sum that was arrived at following its engagement with the Industrial Federation of Textile, Leather and Garment Workers Union of Ethiopia.

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PVH was one of the headlining names at Hawassa Industrial Park, one of several government-built plants that have attracted a slew of investments from China, Europe, India, South Korea and the United States over the years as Ethiopia sought to overcome its agrarian roots to become the next “world’s factory” for apparel and textiles. At one point, PVH harbored ambitions to source one-quarter of its goods from East Africa, which at the time accounted for 5 percent of its production.

“PVH has a particular responsibility because they were the pioneers for the apparel industry in Ethiopia, they set things up,” Dorothee Baumann-Pauly, director of the Geneva Center for Business and Human Rights at the Université de Genève and research director at New York University’s Stern Center for Business and Human Rights, told Sourcing Journal. “Thousands of workers and their families depended on this. They could lead a coalition and say, now is the time to double down on the commitment and the hopes they put in Ethiopia.”

Sofia Nazalya, Asia analyst at Verisk Maplecroft, a risk-analysis firm, doesn’t think a Tigray Defences Forces assault on Addis Abba is likely, and that its slow progress has allowed the Ethiopian National Defense Force to entrench a defensive line between them and the capital.

In the event of a full-blown incursion, however, the “humanitarian impact would be catastrophic” and include “acute violence with hallmarks of ethnic cleansing,” Nazalya told Sourcing Journal. If that happens, the Bole Lemi Industrial Park in Addis Ababa would be most exposed to direct and collateral damage from the fighting, with apparel and footwear exports to the United States and Europe facing the “highest risk of disruption.”

‘This apparel experiment will fail’

If the spiking violence isn’t enough to spook brands and retailers, the recent suspension of its African Growth and Opportunity Act (AGOA) status, which granted apparel exports duty-free access to the U.S. market, will. Ethiopian officials have warned that the disqualification will hurt as many as 850,000 direct jobs and 1 million across the whole value chain.

“If AGOA falls away, this apparel experiment will fail,” Baumann-Pauly said. “I think it will have really disastrous signaling effects for foreign investors that are already scared after the country was downgraded by large trading agencies because of the conflict in Tigray. If the industry falls apart, it’ll be hard to convince them to come back once things calm down, and the country might collapse without the foreign investors.”

Stephen Lamar, president and CEO of the American Apparel & Footwear Association, which sent a letter to Prime Minister Abiy Ahmed last month urging him to end the humanitarian crisis, agreed that the loss of AGOA puts the country’s sourcing future on shaky ground.

“As the crisis spreads—and if Ethiopia does lose AGOA eligibility—companies will increasingly be unable to source from Ethiopia,” he told Sourcing Journal. “This will hurt Ethiopia’s economy, particularly the women who comprise the bulk of the workforce in the country’s apparel industry.”

The entire turn of events has left a “sour taste” in the mouth of Jacqueline Brown, founder of African Fashion Guide, a sourcing and production platform that promotes African manufacturing.

“The fact that as soon as things are challenging in African countries the U.S.A. wants to pull out its support bothers me,” she told Sourcing Journal. “​​This is bigger than fashion; it’s about the lives of a country of people, ultimately. The pandemic has caused all nations and economies to shift backward in any growth. AGOA, when it arrived in 2000, helped create over 200,000 jobs in Sub-Saharan Africa through rising exports. Removing this policy can only negatively impact economic growth.”

Ethiopia exported $245 million worth of goods to the United States under AGOA in 2020, much of it apparel, according to William Reinsch, Scholl chair in international business at the Center for Strategic and International Studies and the former president of the National Foreign Trade Council. He told Sourcing Journal that the bigger problem isn’t the loss of AGOA but rather the reasons for the suspension.

“The presence of armed conflict and human-rights violations on both sides would be a significant deterrent to investment and trade regardless of AGOA, and the situation is not likely to improve until the conflict stops,” he said.

Two other Hawassa Industrial Park mainstays—H&M and The Children’s Place—are so far staying the course. H&M, which sources from eight factories outside Tigray, said it’s following all developments carefully but has “no further comment at this point.” A spokesperson for The Children’s Place, which is building an early childhood development center in Hawassa Industrial Park and sources from 17 facilities, none of them in Tigray, told Sourcing Journal that Ethiopia is an important part of its long-term source strategy and that it “remains committed” to its vendor partners and their workers there. Other companies known to source from Ethiopia, including Decathlon and JCPenney, did not respond to requests for comment.

Whether brands and retailers will flee Ethiopia for less contentious climes is hard to say, Reinsch said.

“In the short run, companies might simply suspend their activities in Ethiopia and wait to see what happens rather than committing to another location, particularly if they have a larger interest in maintaining a physical presence in the African market,” he said. “On the other hand, in some sectors, apparel being the most obvious, where timely deliveries are necessary to meet shifting seasonal demands, waiting could mean a permanent loss of business as buyers look elsewhere. In those cases, companies might look immediately for other locations, although if I were in their position, I would look for another African location in order to maintain AGOA benefits.”

Bangladesh to benefit?

Baumann-Pauly said that since volumes of apparel are still “relatively small” in Ethiopia, moving production elsewhere won’t be hard for most companies. Bangladesh could be one beneficiary, since the South Asian nation is a “preferred supplier country for a number of buyers,” as Shadullah Azim, vice president of the Bangladesh Manufacturers and Exporters Association, told the Business Standard in early November. Many Bangladeshi apparel manufacturers, which had planned to invest in Ethiopia because of its low production and labor costs, will also be discouraged by the AGOA suspension, he said.

“Among the main characteristics which brands look for when entering a sourcing destination are political stability,” Mostafiz Uddin, direct of Denim Expert, a manufacturer in Bangladesh, told Sourcing Journal. “Stability brings confidence and certainty and allows brands and retailers to plan long-term. Ethiopia has been suffering from intense political instability.”

While Bangladesh has dealt with obstacles of its own—a recent two-day trucking strike over rising fuel prices, for one—they’re nothing compared with Ethiopia’s woes, he noted.

“It is fair to say that Bangladesh is pretty stable right now and has been for many years,” Uddin said. “Full-scale safety remediations after the tragic Rana Plaza [have] transformed Bangladesh into probably the safest apparel sourcing country. The country also has the highest number of green garment factories in the world. It has an abundance of trained workers, strong backward linkage, infrastructure, logistics and entrepreneurial know-how. And of course, Ethiopia’s loss of AGOA will add to the speed of the buyers’ [choosing] Bangladesh over it.”

Still, countries such as Bangladesh and Cambodia may not necessarily clean up from this development, Nazalya said. “As apparel brands seek to diversify their supply chain production to minimize pandemic-related disruption, either from coronavirus resurgences or increasing freight rates, companies are increasingly likely to move production away from Asian sourcing countries to Latin America and the Balkans,” she said.