When the news broke that the E.U. granted Pakistan GSP Plus status, I knew it was a monumental victory for this, often, media-abused country and a potential game-changer for its textile and garment industry. Still, I couldn’t figure out why such a big story has made for such little news in the U.S. Why aren’t American retailers and brands more concerned over the potential for increased prices and capacity?
When the news broke, the first issue that came to my mind was the considerable impact Pakistan’s duty-free access to E.U. markets could have on the lower end of the retail market and the off-price channels in the U.S. It’s these buyers who are the most sensitive to price fluctuations and require extremely competitive prices to service their retail base. If a more attractive alternative suddenly emerges, what will happen to their ability to negotiate with factories?
While Bangladesh largely offers mammoth factories, only suitable for comparably enormous orders, Pakistan boasts plenty of smaller factories that can service medium-sized runs, allowing it to handle the kind of fashion programs which demand smaller unit buys. Pakistan’s specialization in small to medium-sized orders has never required its factory owners to build colossal facilities to churn out millions of pieces of core basics a month. And many of their factories, even before GSP Plus status, have already established solid relationships with top-tier clients.
Yesterday, wanting to take the pulse of the market, I called five of the key denim suppliers I’ve worked with for years. I was pleasantly surprised to learn four of them already starting expanding capacity, months ago, in preparation for the E.U. granting GSP Plus status. One of the owners, in anticipation of a surge of new business, reclaimed a manufacturing unit he had leased out when the economy slipped into recession.
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When I presented the subject of increased prices to my suppliers, the response was pretty consistent across the group; Pakistan has long relied on the American market to feed their factories and the major retailers who offer consistent business and scale will continue to find open arms and stable pricing. The Pakistani suppliers don’t feel GSP Plus is a means to attract higher prices, but rather a way to increase total exports and attract better brands.
However, the penny-pinchers, the ones who prey on idle capacity, or have made a business of taking advantage of the factories when they were at their most vulnerable, may face some new competition for capacity. With a chance to save 15 to 20 percent now on the table and Bangladesh no longer the only option for this duty-free access, more E.U. buyers will naturally start inquiring and placing orders. Pakistan factory owners are confident their savings will fetch higher prices from these new prospects than they would from lower-tier American clients.
Is it possible this is all strategic propaganda fed to a publisher in hopes he peddles it to his readers? Was this a business tactic intended to prevent me from advising my own clients to fight over every penny? It’s certainly possible on both counts. Nevertheless, it’s simply true as a matter of economic principle that duty-savings will attract new buyers and, since there is limited capacity to absorb the new business, factory space is going to fill up fast.
My principal advice to retailers is to think long-haul: strengthen partnerships with your key vendors; do not think merely transactionally. Saving five cents today is not worth losing the capacity and loyalty of a key vendor tomorrow.
I’ve been in Pakistan for less than thirty-six hours and, clearly, GSP is the talk of the town. Our idea at the Sourcing Journal to quickly arrange a conference on the subject was immediately validated by an overwhelmingly enthusiastic response. I knew we needed to get key trade leaders together to discuss the impact this would have on the textile and garment industry and I’m very excited we’re doing precisely that. I’m quite curious to hear how the government is handling the energy crisis in the north, what investments are being made to build new factories and, more importantly, in the short term, what efforts are being made to re-open factories shuttered during the recession. I’m also interested in the impact this will have on capacity, compliance and pricing. (I’ll report back on this Thursday after the round table discussion.)
Personally, I feel it will take time for Pakistan to realize the full potential of this new trade agreement; and Pakistan does still suffer from some product limitations. I doubt they will start opening sweater factories, or manufacturing fancy, hand-embellished, ladies dresses. Still, at least with respect to the core areas of competence, GSP Plus status should act as a catalyst for growth. I hope this leads to more jobs, improved infrastructure and, ultimately, helps to dampen persistent civil unrest.
Off to bed. Meeting with trade authorities tomorrow to prep for Thursday’s conference.
Signing off,
EMH