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Placing Apparel Production in Political Hot Spots

In their push to drive efficiency and lower costs, brands are manufacturing apparel in a host of politically unstable countries where they have to not only...

WASHINGTON — In their push to drive efficiency and lower costs, brands are manufacturing apparel in a host of politically unstable countries where they have to not only manage their supply chain, but the possibility of sudden and sometimes violent political change.

Pakistan, Indonesia, South Korea, Jordan and Israel are all political hot spots important to the fashion world. Then there's China, which accounts for about a third of apparel and textile imports and is run by an autocratic regime trying to maintain control as the country of 1.3 billion awakens to market forces with a series of sweeping demographic shifts.

A major disruption to commerce with any one of these countries would test the flexibility of brands' diversification strategies and ability to deliver goods to stores in a pinch.

Sometimes, change comes with little disruption. Last year, Thailand incurred its latest in a string of coups and switched to military rule, with little disruption of trade. Manufacturing in Israel also showed little deviation from the norm last year during its skirmish with Lebanon.

But producers have not always been so fortunate.

In 2001, a disputed presidential election in Madagascar led to violence and business in some areas of the country ground to a halt, costing the local economy hundreds of millions of dollars and forcing some producers to write off losses there.

Personal safety is also a big concern in some countries, particularly as sentiment about Americans around the world has shifted with the war in Iraq, the war on terrorism and other foreign policy moves.

The hottest of the hot spots right now is Pakistan, the second-largest apparel and textile importer to the U.S. In addition to sharing borders with Afghanistan and Iran, Pakistan used to be a part of India, with which it has had three wars, a nuclear arms race and an ongoing dispute over the Kashmir region. President Pervez Musharraf seized power in a 1999 coup and has been the target of several assignation attempts.

Despite the instability, David Ford, senior vice president of manufacturing for Caribbean Joe, said Pakistan offered "substantial" price savings and produces a lot of cut-and-sew knits.

"Unfortunately, the business is about price, so you have no choice but to go to these countries and to chase the price," said Ford, who has traveled the world to source apparel for various brands, including Kellwood Co.'s Sag Harbor, since 1982. "A lot of the time, it's what I call 'price and a prayer' because you pray you get the delivery at the price you negotiated. So it becomes very dicey, at best. I do as little business in Pakistan as possible because it's a country I won't go to."

Ford said he once had a problem with an order at a Pakistani factory and was promptly surrounded by 25 people who tried to intimidate him. He told the factory owner to send the goon squad away, though, or the order would never get shipped, and he was eventually able to resolve the situation.

Avoiding such confrontations is just one of the reasons Ford and other sourcing executives stress the importance of developing relationships with factories.

"This is what the life of the sourcing person is all about, coming up with the best opportunity, the best price, the best factory in a country and making sure you get your deliveries," said Ford. "It's a very difficult thing to do because the stores are just making things very difficult with the prices they require. It's a juggling act, at best."

Pricing pressures from retail behemoth Wal-Mart and the consolidation of several regional department store names into Macy's have made competition to nail down the best sourcing all the stiffer. Trying to get that advantage can mean looking to other dangerous places.

In addition to Pakistan, the State Department has issued travel warnings for Americans to avoid Colombia, Israel, Haiti, Indonesia and Sri Lanka, all of which manufacture apparel that's exported to the U.S.

To manage not only the personal risks of being in a dangerous country, but also have a handle on the day-to-day political situation, producers have developed multilayered sourcing strategies that make use of suppliers and experts throughout the world.

"You have to have boots on the ground," said Rick Darling, president of sourcing giant Li & Fung USA.

Those people on the scene cannot only handle the day-in, day-out aspects of business to get orders right, but also keep tabs on what's going on in the society to be better prepared for changes.

"Our presence today in Pakistan is greater than it's every been," said Darling, noting it is perhaps the most sensitive spot in which to source and one that some of his clients choose not to use. "It really

becomes corporate or personal preference."

The 2001 terrorist attacks in New York and Washington were a wake-up call on security.

"There's a heightened awareness of the potential for disruption to the supply chain caused by political issues," said Darling.

Still, there has not been any action or particular shift as a result of the risk, he said, noting that Li & Fung has stuck by its approach of keeping a balanced sourcing base.

China, which over the past five years has taken huge strides in market share, is generally seen as a good bet, or is at least one most apparel producers are taking readily.

"From a business standpoint, we don't weigh political risk in China as being a very important decision-maker in terms of placing orders," said Darling.

Li & Fung expects to expand its presence in the country from 19 offices today to closer to 50 in the next five years.

That said, there are a plethora of internal and external issues that could lead to trouble in China, from thousands of social protests a year over everything from labor and environmental issues to the mass migration of people into cities and a secretive, unelected regime competing for resources with other countries around the world. Tension over Taiwan, which China views as a province and countries such as the U.S. consider sovereign, also flares up periodically.

"Wherever there's not a democracy, there's always basis for some concern," said Brenda Jacobs, a trade attorney with Sidley Austin who works with fashion importers. "Even where there's a nascent democracy, there's some vulnerability."

Latin America is a convenient sourcing area, she said, but the emphasis on quick-turn fashions to meet up-to-the-minute demand leaves less time to adjust if something goes wrong.

In some cases, there might be some legal recourse if production were disrupted, but companies might want to simply limit their exposure and cut their losses.

"Arguably, the U.S. companies lose the ability to sell merchandise if they can't get replacements," said Jacobs. "It's the workers in those factories who are the biggest losers because they lose the work. They don't get paid because if the goods don't get shipped, the U.S. buyer isn't paying."

The march of globalization, which has stitched the world closer together economically, has also laid bare inequities in living standards and created a new set of tensions among countries. American companies have had to deal with factories that violate labor laws, where substandard working conditions are exposed by watchdog groups, such as a much-publicized incident in free-trade partner Jordan last year.

Apparel manufacturers in many ways were on the leading edge of this push abroad with a network of operations and dependencies around the world that need to be managed, come what may.

"On one hand, you can see it's doing business with a particular country, like Pakistan; on another, you can say it's doing business with a sentiment throughout the world that we're not particularly apprised of or comfortable with," said business consultant Edith Weiner, president of Weiner, Edrich, Brown Inc. "We've never shied away because of unstable governments. We've always shied away because we couldn't control those and we're not going to be able to. We're losing the ability to be the only ones in control."

There are also tensions between an anti-modern world attitude and technological and economic development, as well as stresses between Islam and traditional Western religions that complicate this global integration.

"For better or worse, the world becomes a little more alike even as people struggle to be different, and those different tensions are always going to be with us," said Weiner.

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