COMMENTARY ON HOURLY LABOR COST IN THE PRIMARY TEXTILE INDUSTRY 2014

INTRODUCTION The hourly labour cost comparison in the primary textile industry for 2014 covers over 85% of the textile production worldwide. Since 1969, Werner International has been providing this service to our clients and is based on data supplied by a panel of Werner clients in each of the participating countries. The average labor costs shown in this table might not always check with the official statistics of the respective countries for the textile industry. They are based on data collected and made available to WERNER and are a realistic representation of the actual labor costs. As we already did for previous editions, we would like to stress that the hourly labor cost is but one of the many factors which impact the competitiveness of the textile industry. A factor for labor productivity has to be introduced in each case to arrive at a more meaningful unit labor cost. But even then, it can only give a limited view of the total competitiveness of the primary textile industry since total competitiveness depends on a wide range of other cost and non cost, external or internal factors such as exchange rates, raw material and energy costs, interest costs, inventory turnover, throughput time, quality, supply chain positioning, value adding capabilities, etc. The Werner International Labor Cost Comparison covers all primary textile industry sectors, consisting of spinning, weaving and dyeing & finishing. Cut & sewing operations are not part of these comparisons. Labor cost in the clothing industry is in fact much more difficult to compare since the industry is highly fragmented, with large fluctuations within same geographical regions and size of company. In many countries the informal sector is still occupying a significant position. At Werner we are particularly proud to once again offer this survey to the global industry, fully aware that labor cost remains a dominant factor in driving the dynamics of this Industry. We are also pleased to see the overall rise of labor costs across all developing countries, proof of the capability of this industry, within the globalization revolution, to act as a strong wealth distributor playing a fundamental role in the development path of developing countries. Mr. Constantine Raptis President Werner International Werner International, Inc. 2014 1

GENERAL OBSERVATIONS When looking at the future position of a country s textile & clothing industry, it is important to keep a perspective on potential factors impacting both the consumer markets and industrial environment. With China accounting for over half of the world s production and combined with India, Turkey, Pakistan and a few other countries accounting for over 85% of global production - concentration in textile manufacturing is high. A regional breakdown of production, consumption, trade and installed technology base, all show a highly concentrated picture with China taking over 50% of the world mill consumption, followed by India. High labor cost countries still account for 15% of total world mill consumption. India has consistently kept a 9% global market share since the mid-nineties. This is in contrast with China which has increased market share from around 25% to over 55% in the same period. Major relocation shifts have been experienced during the last few decades. Future relocation is still important (towards Africa) but we believe this will never have the same impact as the development and relocation to Asian countries, since we do not see the capabilities to make similar investments in new countries. While labor costs in industrialized countries were more than ten, twenty or even thirty times than that of Asian countries, investment in relocation paid off. The difference in labor costs between African and Asian countries is much lower. However, with the clothing industry being more labor intensive in the mid-term future, some further relocation may take place. Within this changed supply environment, global competitive performance for textile companies in both developed and developing countries is much more than a matter of a company's ability to take advantage of the new opportunities offered and its strategic alignment (focusing on either low cost production or off-setting cost factors against product and process specialization, operational efficiency, technological superiority and market proximity). Labor costs, both in industrialized and developing countries remain therefore a serious factor influencing a company's strategic position. Werner International, Inc. 2014 2

HIGHLIGHTS 2014 Switzerland is still in first place with the highest hourly labor cost in the textile industry, a position it has held almost continuously since 1987. Amongst a wide range of countries, several of the positions have changed - most of this is due to changes in the exchange rate to the United States Dollar (see exchange rate movement in graph). The USA is occupying 11th place. While in 2000 the USA ranked higher than Italy and France, the actual strong Euro has altered the classification. There is not much movement in the lower part of the ranking: the lowest labor costs continue to be noted in Asia - Bangladesh, Pakistan, Vietnam and Indonesia. However, it is remarkable that the continuous increase in labor costs are in China which is rapidly approaching the 3 U$ per operator hour (up from 2.1 US$ in 2011 and up from only 0.69 US$ in the year 2000). The hourly labor cost in China now reaches about the same level as important regional players like Mexico (USA supply), Morocco/Tunisia (Europe supply) and a range of South-American countries. LABOR COST EVOLUTION 2014/2000 % CHANGE IN US$ ARGENTINA INDONESIA S. AFRICA JAPAN BRAZIL INDIA TURKEY TUNISIA PAKISTAN AUSTRALIA CZECH REP. THAILAND PERU MALAYSIA VIETNAM LATVIA MOROCCO TAIWAN USA COLOMBIA BULGARIA EURO CHINA SWITZERLAND MEXICO POLAND ISRAEL UK S. KOREA EXCHANGE RATE MOVEMENT 2014/2011-20% 0% 20% 40% 60% 80% 100% INCREASE/DECREASE LOCAL CURRENCY AGAINST US$ CZECH REP. CHINA AUSTRALIA INDONESIA IRELAND POLAND SPAIN SWITZERLAND FRANCE AUSTRIA PORTUGAL TURKEY TUNISIA S. KOREA INDIA THAILAND UK MALAYSIA BELGIUM ISRAEL PAKISTAN COLOMBIA MOROCCO GERMANY S. AFRICA PERU ITALY TAIWAN MEXICO USA BRAZIL JAPAN ARGENTINA The hourly labor cost in India increased from 0.58 US$ in 2000 to 1.12 US$ in 2014, which is clearly at a much lower rate than in China. Although India is the second largest textile producer in the world, the structure and performance of the industries are very different. India s market share of global exports is still low and the share in clothing exports has seen little growth over the last decades. For India to maintain and grow its market share, it is an absolute prerequisite to be able to produce at a global competitive operating cost. In theory, India should be in an ideal position to so, however we see that two other cost factors are not within control: financing and energy costs. The graph on the left is showing the evolution in labor cost in US$ from 2000 to now. As stated above, we see that China s cost has been increasing considerably. -50% 0% 50% 100% 150% 200% 250% 300% Werner International, Inc. 2014 3

TEXTILE INDUSTRY LABOR COST - 2014 WERNER INTERNATIONAL SWITZERLAND AUSTRALIA AUSTRIA BELGIUM FRANCE GERMANY IRELAND JAPAN UK ITALY SPAIN USA ISRAEL TAIWAN S. KOREA PORTUGAL SLOVENIA ESTONIA CZECH REP. LATVIA POLAND TURKEY ARGENTINA COLOMBIA BRAZIL TUNISIA MOROCCO MEXICO S. AFRICA PERU CHINA BULGARIA THAILAND MALAYSIA INDIA INDONESIA VIETNAM PAKISTAN BANGLADESH - 10 20 30 40 50 60 US$ PER OPERATOR HOUR Werner International, Inc. 2014 4

Management consultants to the world textile, apparel & fashion industry Werner International is a management consulting practice specialized exclusively in the fiber, textile and fashion industry globally active since 1939. Werner s services range from industrial and technology support for setting-up, improving and restructuring textile and clothing manufacturing operations to strategy and marketing services for new market entry, new product development, supply chain management, branding, retailing, partner search and future strategies build-up. Werner is unique among world leading consulting companies in being able to combine specialized expertise in the technical areas with global marketing and strategy know-how and supply chain integration. Werner International, Inc. 12801 Worldgate Drive Suite 500 Herndon, VA 20170 USA Phone + 1 703 871 3938 Fax + 1 703 871 3901 www.wernerinternational.com info@wernertex.com Werner International, Inc. 2014 5