COVID-19 hit ‘the worst’ fashion trade has seen
The coronavirus pandemic has disrupted the entire cycle of fashion sourcing and orders have been slashed in the past several months, said Sunny Tan, deputy chairman of the Federation of Hong Kong Industries.
The textile-and-garment industry has been hard hit by the unprecedented public-health crisis, which erupted against the backdrop of the ongoing trade spat between the world’s two largest economies.
Generally, retailers and brands have cancelled orders for this year’s fall season, meaning they have few orders from April to July, Tan, who’s also executive vice-president of Hong Kong-listed apparel and accessories manufacturer Luen Thai Holdings, told China Daily.
“We’re still in the midst of the worse situation we’ve seen. We’re at the tail end of the fall production season and many of our factories are either closed or running at a low capacity.”
Normally, at this time of the year, brands are scouring for new product samples for winter. But the pandemic has brought everything to a delay.
According to the entrepreneur, many retailers are unable to pay for the orders in time as the COVID-19 crisis continues to escalate on a global scale.
These retailers, he said, are demanding credit extensions. As a result, the original 30 day repayment period has now been extended to 90 days or 120 days, and this has greatly hampered manufacturers’ liquidity and cash flow.
Some retailers’ accounts are in arrears, but they’ve continued to place new orders without having settled overdue payments. This has created problems for manufacturers who are at a loss as to whether they should accept new orders. If manufacturers were to take new orders, there is no guarantee they would get paid on time and, if they don’t, factories would lie idle and workers would lose their jobs.
“All factory owners now have to reexamine production locations and what capacity should be maintained,” said Tan.
In addition, some retailers have gone bankrupt, which would mean losses for manufacturers as well. The adverse impact on brands owned by private equity enterprises with highly leveraged balance sheets, such as the United States fashion label J. Crew, is even worse, he said. J. Crew Group filed for Chapter 11 in May amid the pandemic after having racked up massive debts prior to the outbreak. “It’s very difficult for the industry to cope with such a crisis. The situation may not be the same next time. For any company, the key is to always have a strong balance sheet and a good banking relationship. Internal risk assessment is also very important. Manufacturers should be mindful of what customers they should do business with and where to produce,” Tan reckoned. He advised manufacturers to buy credit insurance in advance so that banks could lend them money to alleviate cash-flow difficulties.
The Hong Kong Export Credit Insurance Corp launched a 100 percent credit limit top-up program in June to help exporters mitigate credit risks amid the volatile trading environment. All of its policyholders are eligible for the program and their credit limits will be increased by 100 percent, capped at HK$100 million ($129,024).
Tan hailed the move as good news for the industry as it will boost the confidence of factory owners.