Commercial relations between brands and suppliers in Europe have become volatile, risky, and imbalanced.
- Widespread small and fast orders characterise the European garment manufacturing sector with already dramatic business-to-business power imbalances, giving buyers even more influence in defining terms and conditions than elsewhere.
- The conclusions are from a report released Tuesday by the Fair Trade Advocacy Office (FTAO) and based on field research undertaken by Clean Clothes Campaign (CCC) Europe.
- Based on interviews with suppliers, experts and trade union representatives in six EU member states—Bulgaria, Romania, Croatia, the Czech Republic, Italy and Germany—the report Fast Fashion Purchasing Practices in the EU: Business relations between fashion brands and suppliers paints a grim picture of the tenuous trade relations between brands and manufacturers.
The European Landscape: In the EU, the garment industry is dominated by small and medium-sized enterprises (SMEs).
- The average size of a garment factory in Europe is likely to be smaller compared to Asia due to the focus on niche and high-quality products, which typically require a more artisanal and labour-intensive approach to production.
- The report lays emphasis on outward processing trade (OPT), a trade mechanism used by companies to take advantage of lower labour costs and more favourable production conditions in other (nearby) countries while maintaining control over their production processes.
- OPT works by sending raw materials or semi-finished goods from a company to a processing company in another country for further processing and manufacturing. The processed goods are then returned to the original company for sale in their home market or other markets.
- In practice, clothing brands send raw fabric to a processing factory for cutting, sewing, and finishing. The processed goods are then returned for sale under the buying company's brand, providing significant cost savings and increased competitiveness.
- The OPT equations between post-socialist countries in Central and Eastern Europe (CEE), Eastern Europe (EE), and South-eastern Europe (SEE) and their consumer markets in Western Europe has been the prevalent mode of production and trade in the clothing sector since the 1970s.
- But OPT can be used to avoid trade barriers and tariffs that would otherwise apply to the finished goods. By processing the goods in another country, the original company can take advantage of lower trade barriers and tariffs that apply to raw materials and semi-finished goods.
- In Europe, the export and re-import of garments were exempted from customs duties and enjoyed streamlined border formalities. Therefore, most of the garment production in the CEE, EE, and SEE regions is carried out and exported under this system.
- Since work is mainly limited to assembly, OPT production does not generate much value-added, as wages are almost the only production cost needed.
- As a result, producers are often left operating ‘from hand to mouth’ without any financial leeway for investment. They are totally dependent on the ‘customer’, who is economically and factually the principal employer. To survive, manufacturers must work with sub-subcontractors and home-based workers to keep costs low and remain flexible for clients.
Disturbing Trends: The report shows a general trend of lowering prices, shortening lead times, increasing order changes, lengthening payment terms, and increasing shares of "hidden" costs, such as the production of initial samples, being shifted to manufacturers.
- This leaves suppliers in financial trouble, unable to make investments and pay wages.
- The field research also found that written contracts between buyers and suppliers are rare, and when they do exist, their terms are heavily skewed in favour of brands and retailers.
- Pricing is key, but it typically begins with the brand or retailer estimating the desired retail price; material, labour and other costs of production are only considered after that.
- The research found gaps between what suppliers are paid for labour and what would be required to cover the employers’ costs, including mandatory social security contributions and taxes.
- At times, suppliers accept low prices just to maintain the relationship or to survive, sometimes without making any profit.
- Moreover, where suppliers rely heavily on one buyer, the risk of bankruptcy is very high. One such example is the Orljava factory in Croatia, which was forced to close when the German brand Olymp withdrew orders in 2020.
- The COVID-19 crisis has further exacerbated the negative impacts of power imbalances between buyers and suppliers, with many brands having cancelled or suspended orders. This ultimately left workers without income, especially in countries with weak social safety nets.
The Way Out: The report also contains a set of recommendations to eliminate unfair trading practices: the payment of orders within 60 days; prices that cover production costs and guarantee living wages for workers; compensation for changes of orders; and a clear definition of the terms of risk and ownership of goods.
- Recommendations also include a call for the European Union to adopt a directive that would ban unfair trading practices in the garment sector such as late payments and prices below production costs; ensure effective enforcement; and provide detailed guidance on how brands and retailers can ensure and uphold freedom of association, collective bargaining, and living wages throughout their supply chains.
