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Consumer brands' global worker army faces financial shock from lost orders

Millions of supply-chain workers who make clothes, shoes, toys and electronic gadgets for western brands are facing an unprecedented financial crisis as orders worth billions of dollars are canceled overnight and local factories are forced to close.

In response to the coronavirus pandemic, a raft of western brands have temporarily shuttered tens of thousands of retail stores, triggering a sharp drop in demand and the termination of many orders from Asian and central American factories that supply the products to western markets.

H & M Hennes & Mauritz AB (publ) recently said it had closed 3,441 of the group's 5,062 stores, while German sportswear-maker adidas AG said it would temporarily shutter stores in North America, Canada and Europe to help stop the global spread of the coronavirus. Similar shop closures have been announced by others, including Apple Inc., electronics retailer Best Buy Co. Inc. and Primark, the discount clothing company owned by the U.K.'s Associated British Foods PLC.

The closures are sending shock waves thousands of miles to developing markets where many of these products are manufactured. Initially, those factories were hit when the coronavirus outbreak in China impeded the delivery of raw materials.

Now the problem is disappearing orders. While, for instance, many western brands continue to pay their employees, very few factory workers in Bangladesh, India, Cambodia, Mexico and elsewhere have equivalent support either from factory owners or their governments. As a result, millions of workers who barely earn a living wage, and their families, are suddenly in dire financial straits.

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"Supply chains don't stop at the border," said Scott Nova, executive director at the Worker Rights Consortium, a labor rights group in Washington, D.C. "Either brands and institutions in wealthy countries step up and help pay these workers or we'll see a human catastrophe across the supply chain and thousands of businesses will close, never to return."

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The fear is that brands will now refuse to honor orders already placed. The IndustriALL Global Union, which represents 50 million workers in 140 countries in the mining, energy and manufacturing sectors, described the COVID-19 outbreak as an "existential crisis" for the garment industry.

"Not only are major brands and retailers canceling future orders, they are refusing to take responsibility for garments that have already been produced, using emergency provisions in contracts to stop shipments and avoid paying for the goods they ordered. This leaves factories holding the goods, unable to sell them to the customer that ordered them, and in many cases unable to pay the wages of the workers who made them," the union said.

In Bangladesh alone, orders for ready-made garments worth $1.5 billion have been canceled or put on hold, according to local media reports citing data from the Bangladesh Garment Manufacturers and Exporters Association. In a recent letter posted on the association's website, its president, Rubana Huq, urged German brands to make good on their commitments. Huq wrote, "While the businesses in Germany receive government support and address their losses, at our end we have an existential problem as we have to pay our workers." The Garment Manufacturers Association in Cambodia has made a similar plea to brands.

Workers are especially vulnerable in the key export markets of India, which has 4 million clothing and textile workers, Bangladesh with 3.5 million, Cambodia with 600,000 and Myanmar with 250,000. According to Dutch nonprofit organization Clean Clothes Campaign, workers at a factory in Gazipur, Bangladesh, recently began a sit-in protest to demand due wages. "The factory was supposed to pay recently laid-off workers, but now refuses because of buyers canceling orders," the Dutch group said.

While many western brands are providing financial assistance to their employees, these offers do not appear to have been extended to workers in their supply chain. "Demand had dropped to zero or near zero, and factory owners are scrambling to stop production as quickly as possible to minimize cash commitments and inventory," Nova said.

Adidas and H&M declined to comment on the issue. In an emailed response to S&P Global Market Intelligence, Primark said, "The company is of course paying for inventory that is on the sea in transit, or delivered to distribution centers in each country of origin. The company is also engaged in one-on-one discussions with the suppliers in order to explore other forms of mitigation."

But some factory owners have stepped up to the challenge. According to the Worker Rights Consortium, at least 25 apparel factories in Honduras have shut down for two weeks through March 29, with full pay for workers.

The COVID-19 outbreak, nonetheless, poses a risk even to those garment workers who are working, often in close proximity and crowded conditions. "Of the factories that are open, you start to wonder: should they be open?" said Christie Miedema, campaign and outreach coordinator of the Clean Clothes Campaign. "It's where the disease could be transmitted, putting lives at risk."