We need a new model for creating sustainable value chains if we are to align the apparel industry with environmental, social and competitiveness expectations. Impact Economy’s Dr. Maximilian Martin introduces a new series.
Series Summary : Myanmar’s garment industry is booming. It earned more than $917 million in exports in 2012 and could easily employ more than 100,000 people by 2015. Garments are already the country’s most important manufactured export and numerous new factories are being built accordingly. The revival of the industry following the lifting of most international sanctions could yield important development dividends as the country modernizes.
But there is an important twist to this story. The growth of the country’s garment cluster comes at a time when the global textile and garment industry faces a watershed moment. Apparel is a $3-trillion industry that encompasses the manufacturing and selling of textiles, apparel and luxury goods, and it has long had both a shiny and an ugly face: the industry is a catalyst for national development and industrialisation while also being a persistent repository of poor labour conditions and heavy environmental pollution. The advent of fast fashion has added further pressure on producers with respect to cost and speed. The collapse of the Rana Plaza factory in neighbouring Bangladesh in April 2013 has set in motion probing scrutiny of the industry, and led to the creation of two buyer-led initiatives to improve fire and building safety: the European lead Bangladesh Accord on Fire and Building Safetyand its US counterpart, the Alliance for Bangladesh Worker Safety. Greater supply chain sustainability is gradually becoming a requirement to compete in all sourcing locations, and this has implications for the industry in Myanmar as well.
Myanmar has a lot going for it: a strategic location bordering China and India (among others) and about 500 million people living in relative proximity; a youthful population with over 30 percent below the age of 18 (thereby leading to an additional10 million people for Myanmar’s largest cities to absorb by 2030); a growing domestic demand that is creating a huge potential market with an estimated 19 million members of the consuming class in 2030 from 2.5 million in 2010; potentially tripling spending by 2030 from $35 to $100 billion; and abundant natural resources such as petroleum, timber, precious stones, natural gas, and hydropower, and an ambitious reform program under way. The country has environmental protection legislation on the books covering air, land and water pollution, and similar regulation around environmental degradation including industrial waste water and sewage, which are traditional hotspots in the textile and garment industry. National labour legislation regulates topics such as compensation, minimum wages, and working conditions, even though Myanmar currently boasts the lowest minimum garment wages in Asia, averaging just $30-35 per month. However, skilled workers’ wages are higher and stand at $85-110 per month, including overtime and other bonuses.
Critical to unlocking the sector’s full potential is determining how growth and the ability to compete with other sourcing countries can be reconciled with better social and environmental performance. What’s more, the process of creating higher in-country value added and sustainable supply chains needs to be linked to enabling the country’s aspiring apparel cluster to graduate from competing mainly on cost and providing only very basic value added.
To sort through the wide range of viewpoints, challenges and opportunities facing the global apparel industry, Impact Economy– a global impact investment and strategy firm – has released a new report titled “Creating Sustainable Apparel Value Chains,” authored by Dr. Maximilian Martin, its founder and global managing director.
The report is based on an industry survey reaching out to over 730 stakeholders as well as a screening of more than 200 reports, and provides an evidence-based assessment of the prospect of sustainable value chains in the textile and garment industry. The report outlines four key framework conditions that are currently shaping the opportunity for creating sustainable value chains in apparel that apply to Myanmar as well as internationally:
Poor safety and working conditions have become increasingly visible, so much so that they are triggering far-reaching stakeholder responses; solutions exist that are working on a limited scale and producing vastly better working conditions and environmental performance, and the overall importance of resource productivity is rising; fast fashion and industry restructuring are adding to the importance of a sustainable growth model for the industry; and components of an industry-wide solution have come into view but have thus far failed to add up to industry transformation. While the problem is systemic, a response at the systemic level as opposed to simply treating symptoms does not yet exist.
In this exclusive series in Myanmar Business Today, Dr. Maximilian Martindiscusses the key findings of the report and teases out the implications for sustainable apparel value chains in Myanmar. The opportunity is massive: Asia’s new apparel frontier could take steps based on best practices that would enable the industry to leapfrog others in terms of competitiveness, and social and environmental achievement, thereby avoiding the slow path of trial and error that many sourcing countries have followed.
Part I: Grasping the Opportunity. We need a new model for creating sustainable value chains if we are to align the apparel industry with our environmental, social and competitiveness expectations. Impact Economy’s Dr. Maximilian Martin introduces a new series.
Part II: Building Human Capital and Improving Working Conditions. Part II of this series on creating sustainable apparel value chains examines how human capital and improving working conditions can enable progress toward sustainability.
Part III: Riding the Power of Total Resource Productivity. Part III of a new series on creating sustainable apparel value chains explains the possibilities of greater total resource productivity and transparency across the supply chain in a world gradually heading toward a circular economy.
Part IV: Getting the Job Done. Part IV of this series on creating sustainable apparel value chains explores how to practically catalyze the shift toward sustainable value chains via investing for financial return and social impact.
Myanmar is one of Asia’s last frontiers, a fact that is both exciting and daunting. Developing countries can move from the agrarian to the post-industrial age within just a few decades and offer massive business and investment opportunities. Internet penetration in Myanmar stands today at around 1 percent of the population, and mobile phone penetration at 10 percent. Annual per capita income in Myanmar is forecast to rise from $1,300 at purchasing power parity to $5,100 by 2030, and the tastes and aspirations of the country’s consumers will undoubtedly change in the process. The apparel industry has the exhilarating potential to be an important catalyst, enabling Myanmar’s graduation to the group of middle-income countries – just like in many other countries that have followed a similar path since the textile industry kicked off the UK industrial revolution 250 years ago.
Apparel is one of the world’s oldest industries but has often turned a blind eye toward its environmental and social impacts and an overall sustainable vision for the industry is still lacking. In a world of increasing resource scarcity and population growth, awakening consumer awareness, radical transparency, and fast technical progress, the challenge now facing the industry is to determine what needs to happen to build sustainable supply chains – where humane working, environmental and cluster conditions are the norm rather than the exception. The industry plays a key role in many emerging economies. Neighbouring Bangladesh has over 5,600 readymade garment factories and is home to almost 160 million people, with apparel now accounting for almost 20 percent of GDP, 80 percent of total export earnings and over 4 million direct jobs. Other countries in Southeast Asia such as Indonesia, with about 2,450 factories, Vietnam with about 2,000, and much smaller regional neighbours Cambodia and Laos all face similar social and environmental challenges.
The Role of Sustainability in Developing Myanmar’s Apparel Cluster
Large Western buyers and internationally oriented Asian buyers such as Uniqlo demand that producers in sourcing countries comply with their increasingly stringent social and environmental requirements. As a result, Myanmar’s apparel industry has several challenges to address as it seeks to realise its potential:
As the industry grows, how can the industry find effective responses to social and environmental challenges including working conditions and topics such as child, migrant and forced labour; living wages; worker safety; and the environmental footprint of manufacturing?
How can it finance greater sustainability on a long-term basis by achieving greater in-country value added as opposed to conducting limited and reactive damage control whenever a problem has hit the headlines?
Hence the focus of the new report released by Impact Economy – a global impact investment and strategy firm – titled ‘Creating Sustainable Apparel Value Chains,’ which provides an evidence-based assessment of the prospect of sustainable textile and garment value chains and the levers needed for sustainable industry transformation.
An Incomplete Domestic Upstream Supply Chain
Myanmar has a long tradition in textile and garments and is known for excellent craftsmanship. A traditional Burmese proverb from the times when every household had a handloom and women were weaving longyis for the family themselves goes like this: “men who cannot read are like the blind; women who cannot weave are like the cripple”. Those days are long gone, but women still make up 80 percent of the garment workforce and bear the brunt of poor working conditions and pay. Today, the country has an incomplete domestic upstream textile and garment supply chain.
Raw material is transformed into a final product through a number of value added activities along the textile and garment supply chain. These activities are organised into five main segments, including:
Raw material supply, including natural and synthetic fibers; the provision of components, such as the yarns and fabrics manufactured by textile companies; the production networks composed of garment factories and their domestic and overseas subcontractors; the export channels established by trade intermediaries; and the marketing networks at the retail level.
Upstream and supporting industries remain underdeveloped in Myanmar at present. This means that domestic garment factories have to typically import all raw materials and most other supporting inputs, with the exception of packaging materials that can be procured domestically. After sewing and assembling, most products are then exported. Domestic upstream and downstream industries are helpful for enabling the development of apparel clusters.
Contract Manufacturing is the Norm
Key problems in the industry include working conditions, pay, and worker health and safety. I will discuss them in greater detail in my next post. The most logical way forward to enable a leap in social performance is to achieve higher domestic value added. For this, we must understand value creation, the full supply chain, its competitive dynamics, and the points of leverage to influence the industry’s social and environmental performance. There are three types of common international production systems in apparel:
Assembly is a form of industrial subcontracting in which garment sewing plants, most commonly located in export processing zones (EPZs), are provided with imported inputs for assembly and contract manufacturing (CM).
Original equipment manufacturing (OEM) is a form of commercial subcontracting. The supplying firm manufactures a product according to a design specified by the buyer. The product is then sold under the buyer’s brand name (i.e., the supplier and buyer are separate firms and the supplier lacks control over distribution).
Original brand name manufacturing (OBM) is the upgrading by manufacturers from the production expertise of OEM to first the design and then the sale of their own brand products. An intermediate step is original design manufacturing (ODM), which is when the supplier produces according to the specifications of the buyer, but partially develops the product itself.
Orders placed by international buyers to garment factories in Myanmar are currently executed as contract manufacturing based on a Cut, Make, and Trim (CMT) approach. Myanmar aims to upgrade its production systems over time from contract manufacturing, which currently prevails in more than 90 percent of national factories, to Original Equipment Manufacturing (OEM) and Original Brand Name Manufacturing (OBM) in order to increase value added. This shift will need to be supported by an adapted legislative framework; estimates for export potential are about $5-6 billion even without major manufacturing upgrading.
The Solution Path toward Higher Value Added
Myanmar’s garment cluster could well graduate even beyond $6 billion in garment exports if it manages to routinely produce in ways that are socially and environmentally compliant. To raise the social and environmental performance along its textile and garment value chain, there are two main upgrading options for generating more value added. These options also provide scope for improved social and environmental performance and can drive growth in the industry:
The industry can engage in product upgrading. This means producing more complex products, which requires increasing the capabilities of the firm by learning. With more experience, the industry can aim to move to higher value-added fashion goods.
The second option is process upgrading, reducing costs and improving flexibility by enhancing production methods and lean manufacturing. This requires capital investment and more highly skilled workers to operate new machinery as well as more complex logistics technology.
Human capital and better working conditions hold some of the keys to achieving the transition to sustainable apparel value chains. I will explore next week how these components can contribute to this shift.
About the Author
Dr Maximilian Martin is the Founder and Global Managing Director of Impact Economy. He also serves as Founding Faculty in Residence at Ashoka U and Lecturer in Social Entrepreneurship at the University of St Gallen. He previously served as founding global head and managing director of UBS Philanthropy Services, head of research at the Schwab Foundation, senior consultant with McKinsey & Company, instructor at Harvard’s Economics Department, and fellow at the Center for Public Leadership, Harvard Kennedy School. He holds an MA in anthropology from Indiana University, a MPA from Harvard University, and a Ph.D. in economic anthropology from the University of Hamburg.