Stitch up: Power imbalances in global garment sector worsen in pandemic

New research has uncovered how global garment brands have been unilaterally cancelling orders, delaying payments and changing contracts to their betterment during the pandemic – leaving factories and workers to shoulder the burden

October 23, 2020
Stitch up: Power imbalances in global garment sector worsen in pandemic
Shoppers walk outside a Topshop store in central London. Photo: Ben Stansall/AFP

As casino dealers know, the odds always favour the house – and in the case of the garment sector, the odds have always slanted heavily to the benefit of global brands over local suppliers and workers. With the onset of the Covid-19 pandemic, this heavily tilted power dynamic has only become more pronounced. 

Recent investigations into the conduct of apparel brands during the novel coronavirus outbreak revealed a host of companies have been cancelling orders, even those completed on the factory line, delaying payments and unilaterally negotiating contracts in their favour.

Margins can be slim for garment manufacturers and so they locate where they can access cheap labour, generally in developing countries like Cambodia, Vietnam, Myanmar and Bangladesh. Major brands that supply to developed markets outsource production to independent factories in these countries and others. This globalised relationship is not always a happy one at the best of times, and has become even more fraught during the pandemic.

As detailed in a report released last week, the Center for Global Workers’ Rights (CGWR) and the Worker Rights Consortium (WRC) found 65% of garment suppliers surveyed said their buyers had demanded price cuts on new orders “that are bigger than the year-over-year reductions buyers usually ask for”, as well as stating that they must cut prices by 12%, “relative to last year’s price for the same product.” 

As a result, 56% of suppliers have been forced to accept some orders below the cost of production, and the majority anticipate having to continue to do so. Before the pandemic, on average suppliers had to wait 43 days after they completed and shipped orders to receive payment – now it’s 77 days.

“We did see relatively quickly at the onset of the pandemic an aggressive decline in demand and brands started to shift risk onto their suppliers,” said Ben Vanpeperstraete, a senior legal adviser at the European Center for Constitutional and Human Rights (ECCHR). 

Good old days: full employment at a garment factory on the outskirts of Phnom Penh
Before the pandemic, factories in Cambodia were working at capacity. Photo: David Axelrod

Brands cancelled orders already produced – at times even shipped – or attempted to negotiate contracts that would favour them, leaving suppliers having already invested capital and mid-production in a bind. 

“Some of these orders were all ready to ship and suppliers also had to pay their workers,” explained Vanpeperstraete. “The effects of the lockdowns were shifted from the brands in consumption countries, to the factories and workers in supplier countries.”

Pre-pandemic, the majority of Cambodia’s garment suppliers worked on slim margins, with factories squeezing workers to keep the Kingdom’s wages low to remain attractive to Western brands – and consumers – demanding low prices for fast-fashion.  

As the wider industry’s move towards automation threatens more Cambodian jobs in the medium-term, and with the Kingdom already reeling from the partial loss of the EU’s Everything But Arms trade privileges in August which saw tariffs slapped on $1 billion in goods shipped to the 27-member bloc, this concerted squeeze from Western brands during the pandemic has further compounded operational fragilities.

In September, a different investigation led by the ECCHR and WRC found the Covid-19 pandemic had “dramatically exposed the pre-existing fragilities and inequities in global garment supply chains”. 

As demand dropped on the high streets in metropolises around the world, brands reacted in kind by suspending or cancelling orders with their suppliers. In order to cut costs further, many brands refused to pay for completed orders – some already shipped – or those in production, or demanded better payment terms and sharp discounts on agreed contracts in order to accept orders. 

In Cambodia, where the garment sector employed close to a million workers pre-pandemic, the backtracking has had a tangible effect. Approximately 130,000 workers in Cambodia’s garment and footwear industry lost their jobs due to the global economic downturn. The Ministry of Labour has stated that 450 factories had suspended operations as of June due to the pandemic, a number amounting to 40% of all apparel producers in the country. Some factories have since reopened but with reduced operations and uncertainty over orders and job security for workers. 

Ken Loo, secretary general of the Garment Manufacturers Association in Cambodia (GMAC), said that since the onset of the pandemic, it is not uncommon for payment to suppliers to be made as long as 180 days after shipment, affecting cash flow and wage payments. But Loo also explained this power imbalance is nothing new. 

“That’s always been the case in the market for the last 35 years,” he told the Globe. “The balance of power has always been with the buyer.”

Last year, garment exports from Cambodia totalled $9.3 billion in sales, with the majority going to the United States and Europe. Western brands have been trying to mitigate the decrease in demand in the West by cancelling orders or renegotiating contracts with suppliers, said Ath Thorn, president of the Cambodia Labour Confederation (CLC).

“Some brands told suppliers they had no more orders for them and that they wouldn’t accept previously agreed orders,” he explained. “Some of the existing contracts they also wanted to postpone, modify or cancel altogether.”

Athit Kong, president of the Coalition of Cambodian Apparel Workers’ Democratic Union (CCAWDU), told the Globe that many brands have acted with their own interests in mind, adding the abrupt cancellation of orders during the pandemic has caused workers to suffer.

“When the brand illegally or unreasonably cancels the orders or unilaterally changes the terms, they say it is because it is unfair on them,” he explained. “They say that it is them who is the victim – this is rarely the case.”

Despite the drop in consumer demand during the pandemic, the cancellation of orders by Western brands represent a significant distortion of the usual parameters allowing parties to be excused from fulfilling a contract.

A young garment worker in Yangon, Myanmar. Photo: Sai Aung Main/AFP

Vanpeperstraete, one of the authors of ECCHR’s investigation into the global apparel sector, explained that brands had been pointing to the legal doctrine of “force majeure” – whereby unforeseeable circumstances prevent someone from fulfilling a contract – to wriggle out of standing commitments to suppliers. 

The doctrine has often been used at the direct expense of manufacturers.

“It’s a fancy sounding legal term, but that does not mean that you can essentially use it as a get-out-of-jail card,” Vanpeperstraete said. Force majeure looks to share risk between parties, when an event renders the fulfillment of a contract impossible. “What you can’t use[force majeure] for is when obligation just becomes impractical or inconvenient to you.”  

In the garment sector, many contracts are ‘take-it-or-leave-it agreements’, requiring the supplier to accept the deal or risk losing the order. 

“It is clear that many brands are cancelling contracts primarily because they can, not because it is justified,” the authors of the ECCHR’s September report wrote. “Brands know that their suppliers will rarely, if ever, seek to hold them legally accountable, even when the brand is clearly in the wrong.” 

The Covid-19 Tracker, a website run by the WRC that pinpoints which brands have and have not been honouring commitments showcases the good, bad and the ugly of the industry – meaning, those brands that have, and have not, kept their word.

U.S. department store Kohl’s Inc. cancelled $150 million worth of orders on 22 March without consulting or negotiating with long-term suppliers. The cancellation clause found in the standard purchase order used by Kohl’s Inc. contains provisions they can cancel any order at “Kohl’s sole and absolute discretion in the event of acts of God”, such as a natural disaster like a pandemic. Kohls did not respond to a Globe request for comment. 

Similarly, Arcadia – the British group that owns Topshop and Topman – told its suppliers in April it would be cancelling orders under their “Right to Cancel” in its terms of trading with suppliers, when something is outside the company’s control.

“If we suspend or cancel an order, we will not be legally responsible for any direct or indirect damage or loss this may cause you,” Arcadia stipulates in its terms of trading.

Arcadia, too, declined to provide comment.

The WRC noted British retailer Mothercare has also made no commitment to pay in full for orders already completed or already in production with the retailer telling the Globe only that they “have been working closely with our manufacturing and franchise partners since the beginning of the crisis to mitigate the impact on their businesses during these unprecedented times”.

But not all brands have been reneging on contracts. David Sävman, head of production at H&M, told the Globe the Swedish brand wanted to be a fair and a trusted business partner to its suppliers and is standing by its contractual agreements.

“We all depend on having a sustainable textile industry and we will continue to tackle future challenges together with our suppliers,” Sävman said.

That’s always been the case in the market for the last 35 years. The balance of power has always been with the buyer.

Andrew Tillett-Saks, a senior union specialist at Solidarity Center specialising in Myanmar, told the Globe that those expecting the majority of brands to put people over profit were wide of the mark.

“The problem is that getting the brands to actually care has been a monumental struggle,” Tillet-Saks said. “The brands hold 95% of the power in terms of determining the wages and working conditions. And it’s the brands who demand certain prices for the production and if the suppliers refuse, the brands simply take their orders elsewhere.”

Because of this power imbalance between Western brands and suppliers, when brands see demand drop, they hold the means in which to dictate contracts with suppliers.

Relationships, dealings and contracts in the sector aren’t borne out of fair negotiation on a level playing field, but are instead waged on a steep hill. Vanpeperstraete said the big brands not only have the high ground but are dealing from the summit itself.

In the garments sector, before and especially during the Covid-19 pandemic, not all contracts are created equal.

“Two centuries ago, in contract law, people thought contracts are just the emanation of free will between two equal parties,” Vanpeperstraete said. “But as industrialised societies evolved, not every contract was created between equal parties.” 

Read more articles