Newsletter: March 2006
Story of Gildan Challenging China
Since China joined the WTO in 2001, it has been accepted wisdom that low-priced Chinese labour will undercut western manufacturers, driving them toward extinction. The rule is, you cannot beat the China Price.
Consider the case of Gildan Activewear Inc., a Montreal-based company competing in an industry that many assumed would be dominated by Chinese manufacturers. Gildan makes T-shirts. In 2005, it manufactured almost 400 million of the things. Textiles is labour-intensive industry. How could a company headquartered in Montreal ever survive?
Predictions of Gildan's extinction, however, have proven to be more than a little premature. The company is doing quite well in the face of the China threat.
Benchmark Global Clothing Price
The textile-and-clothing sector is a big part of the global flow of goods, accounting for some 7% of the total value of goods traded around the world.
Gildan had begun mapping out a defence to the end of quotas nearly six years ago. The company sent a team of employees around the world to study the global price of clothing. The economic emissaries returned with a wealth of data that executives used to determine the benchmark prices Gildan would have to achieve to stay in business as a global producer. In other words, they figured out what was going to be the new price of a cotton T-shirt, and then they developed a corporate strategy based on that price.
"The first thing we did from Day 1 was to make sure that we benchmarked ourselves against the global market," says Glenn Chamandy, the CEO of Gildan. "We said, 'This is where we need to set our selling price,' and every year from then on we started declining our selling prices in anticipation of getting ready for more of a global market. A lot of our typical North American competitors were dissatisfied with us, but we weren't viewing them as price setters anymore. We were looking at the foreign competitors."
Based in Canada, Gildan's executives realized that if the company was going to be successful, it was going to have to reduce costs--by going offshore.
It did that in 1998 by relocating some of its sewing facilities to Honduras, followed by Mexico, Haiti and Nicaragua. Gildan also built massive state-of-the-art textile processing facilities in Honduras and the Dominican Republic starting in 2001. The company employs some 10,000 workers, most of them sewers, but also local managers who oversee the operation of each hub, which produces some 375 million garments a year. (The company's facility in Honduras is the largest such operation in the world.) Wages in Gildan's factories are still higher than those paid in Chinese factories: the average wage of a garment worker in Honduras is about $100 a week--four times what a Chinese worker makes. But the combination of still relatively low wages and advanced technology has allowed Gildan to lower its price per shirt to below that of Chinese manufacturers. "Today, if you look at our basic wholesale product--a white 100% cotton heavyweight T-shirt--we're selling it for just over a dollar," says Chamandy. "The costs for a similar landed product from China today would be 10% to 15% higher."
Take Advantage of Trade Pacts
But it's not just inexpensive labour and advanced technology that have allowed Gildan to beat the Chinese on cost. Also important for the company has been a close reading of the mass of bilateral and regional trade agreements. By strategically locating its production facilities in certain jurisdictions, Gildan has been able to ensure that it can ship duty-free anywhere into North America, the EU countries and Australia.
Today retailers don't like to hold stock. Inventory is expensive, and it takes up time and labour. As a result, retailers have pushed that responsibility onto suppliers. The supplier who can deliver it closest to that date and at the right price is the one who gets the contract. Proximity to the U.S. market is an important advantage for Gildan.
In fact, shipping from China adds about 75¢ to every dozen shirts. To fulfill the requirement for fast response, Gildan has built a network of distribution centres in each of its markets, allowing it to quickly fill client orders. The company has vendor management inventory systems that can ship to customers in 24 hours from the time they place their order. "Our cycle time from offshore is three weeks; from China it's three months in a container," notes the company. That fast response time is the company's secret weapon : "Low labour costs are no longer sufficient to ensure competitiveness in a quota-free market. You have to be close to your end user, and you have to have a good logistics pipeline. Lead time is more important than labour cost."
A western manufacturer beating the Chinese competition, in one of the most labour-intensive industries on earth, at a time when regulatory barriers have just been pulled down? It can't be done--except, of course, when it is. In fact, by selling to Australia, where Gildan's market share has been ramping up, the company is now competing in China's own backyard. It's a complete reversal. Gildan--in "something of a show of bravado"--has actually contemplated exporting to China.