Why your clothes may cost more in the UK in 2017 – Will profits fall as prices rise?

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When you walk down the High Street if you were to look at labels inside many of the clothes you buy you will see China, Bangladesh and Turkey prominent among others. Between them these three countries supply about 50 per cent of your clothing on the UK High Street, if not more. Prices have been low for the past decade and many retail brands have made substantial profits by sourcing product from these countries. Wage costs have increased in China and put pressure to increase prices charged to European and US Retailers. China itself has sought ways to lower its own cost base by managing complex supply chains with other countries such as Myanmar, Cambodia and Vietnam where labour costs are lower.  Bangladesh too has pushed up wage rates although they remain very low. Turkey pays higher wage rates than either of these two countries already but its quality and proximity to Europe with faster supply times keeps it competitive.

However, now it is not just labour costs but worsening exchange rates on imports that will impact the cost and of course push up the prices you pay at the checkout together with inflationary pressure. In future as BREXIT becomes a reality new tariffs may kick in too. The inflation rate measured by the Consumer price Index (CPI) stood at 0.6 per cent in the year to August 2016. The inflation rate for clothing was negative at 1.2 per cent. Is this about to change too, as China, Bangladesh and Turkey seek higher prices for their goods and the exchange rate against world currencies falls?

Figure 1 Consumer Price Index (CPI)

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Source: CSO, 2016

As for the GB Pound against the Chinese Yuan that has fallen to 8.21 from a high of 10 just over a year ago. The Bangladesh Taka has fallen from 120 to the pound to 95.5 in the year to September 2016. The Turkish Lira has also fallen from a high of 4.70 in September 2015 to 3.78 in September 2016. These shifts alone will push up UK cost of clothing from these supplier countries.

Smarter, Faster, Cheaper, Smaller…Moore is less!

 

8528745060_e4be045e42_z (1)Back in 1965 Gordon Moore the founder of Intel said that the number of transistors on circuits had doubled every year since the integrated circuit was invented. Thus, making miniaturization a possibility. The industry mantra since has been to make things smarter, faster, cheaper and smaller. Is all that about to end? Press reports suggest that miniaturization is at a cross roads. Photographic processes have until now been able to lay patterns on circuit boards increasing the number of transistors on a silicon chip. These chips are getting congested with the current method of achieving the necessary patterns to get more on less. There is a new way to do it using Extreme Ultraviolet (EUV). EUV requires more investment ($100 million) with the technology costing twice as much as the current machines used to photographically produce the chips.  This is a gloomy prognosis for continuing miniaturization from the industry.

However, is it all as gloomy as predicted by the industry? In the past few years smart phones have actually increased in size and other devices such as tablets which are larger have the potential to pack more into their 7 and 10.1 inch frames. Perhaps the industry has more time than it forecasts to innovate for the new era of mass manufacturing using EUV. Less is more through innovation and so perhaps Moore’s law prevails in the tablet market?