The Crude Math of Geopolitical Risk

 


Summary
Electric vehicles may be the future, but oil is the present, and so long as the world runs on its production and sale, it’s a commodity that we’ll monitor. We’ve laid out our thesis on oil before: In a nutshell, shale oil, with its ever-decreasing break-even costs, has established a long-term ceiling on prices. That’s bad news for countries that depend on oil reserve for government revenue, especially Saudi Arabia and Russia.

But oil prices are now at highs not seen since 2014. Iran and Israel have exchanged blows in Syria, spooking the market in the process. And two of the world’s major oil producers, Venezuela and Iran, are facing domestic unrest (Venezuela) or domestic unrest and foreign threats (Iran) that put their ability to produce and export in doubt.

We’re still not in the business of forecasting commodity prices, but given these developments, it’s time for us to revisit our thesis. In this Deep Dive, we’ll expand upon two ways to analyze oil prices: fundamentals, as determined by supply and demand, and premiums generated by sometimes ambiguously defined uncertainty in oil-producing parts of the world. This should help us answer a fundamental question: If prices stay high enough, long enough, what would it mean for Russia and Saudi Arabia, two major countries that need the capital to transform their economies and militaries?
 
Supply and Demand
Global oil consumption has outpaced production since the beginning of 2017, a result of lower supply due to OPEC cuts and a dip in U.S. production. (The low oil prices of 2015-16 drove many U.S. shale drillers out of business and forced others to forgo drilling at wells with higher break-even points.) In the first quarter of 2018, global consumption stood at 99.52 million barrels per day, and production was 98.71 million bpd. The U.S. Energy Information Administration does not expect this trend to last, however. This is in part because U.S. shale oil production is on the rise again, a topic that will be discussed in greater detail below.
 
Consumption has also grown, primarily because of greater demand in North America and Asia – especially China and India. The net effect has been a decline in global inventories, which have fallen to 20 million barrels below the five-year average, a figure that OPEC uses to gauge its level of supply.
 
The trends are established and clear, but two situations could upset the balance: the effective termination of the Iran nuclear deal, and the quasi-anarchy in Venezuela. We’ll look at both in turn, but ultimately the amount of oil production at stake is not enough to radically decrease the global supply long enough to create a serious shortage.

Iran produces some 3.65 million bpd of crude oil and exports 2.4 million bpd. Some sources estimate that the reimplementation of sanctions could cut its exports by 1 million bpd. This time, however, the sanctions lack a united front, and some countries are looking for creative ways around them. One of Iran’s biggest customers, India, has effectively said it does not plan to stop buying Iranian oil, sanctions or not. Almost half of all Iranian oil exports go to China and India, so for the sake of establishing a baseline estimate, let’s assume that Iran’s production declines by 50 percent, from 2.4 million to 1.2 million bpd.
 
Venezuela produced approximately 1.4 million bpd of oil in April 2018. This represents a 32 percent drop from last April, and some reports anticipate that, with its domestic unrest and its decrepit machinery and production facilities, Venezuela’s production could fall by another 500,000 bpd. Together with Iran, that means a roughly 1.7 million bpd decline in global oil production is possible within the next year.
 
Now that we have an estimate of the potential losses, to truly gauge the effect on prices we need an estimate of potential production increases. And one of the regions that is poised to increase oil production most rapidly is the United States.

The U.S. produces approximately 10.7 million bpd of crude oil, about 84 percent of which comes from shale. (The remaining 1.65 million bpd comes from offshore drilling in the Gulf of Mexico. This is the most the Gulf has ever been recorded producing, and that figure is expected to increase through 2019.) Global production of liquid fuels (all liquid petroleum products, which include crude oil and refined products) is expected to rise by 4.67 million bpd between April 2018 and December 2019, according to the EIA. Increases in U.S. production will account for about two-thirds (roughly 3.11 million bpd) of this growth, followed by Canada (650,000 bpd) and OPEC (330,000 bpd). Total OPEC crude oil production is actually expected to decrease by 80,000 bpd over this time, but liquid fuels production is projected to climb by 410,000 bpd.

Because of the rise in oil prices, more rigs are being deployed in the U.S. to drill new wells. Historically, it has not taken long for U.S. shale producers to drill more wells when prices increase. And once new rigs are in motion, it doesn’t take long for oil production to climb.
 
That said, the U.S. faces short-term obstacles that will limit how quickly it can increase production, the most substantial of which is that U.S. pipelines are almost at capacity and are expected to max out by mid-2018. In lieu of pipeline transport, producers of Permian and Midland crude have had to use rail or road transport. (Road is more expensive than rail, which is more expensive than pipelines.) Delivery delays and the increased transport cost force producers to offer their crude at a discount, reducing the price of Permian crude by nearly $11 per barrel and of Midland by up to $16 per barrel.

These constraints won’t last. A substantial amount of investment capital has been pouring into oil transport infrastructure in the United States. Petrochemical Update, a publication that covers the downstream industry, estimates that nearly $11 billion will be invested in pipeline infrastructure construction between May 2018 and May 2019 alone. The result will be a major increase in pipeline capacity by the end of 2019. Three of the largest pipelines under construction – Cactus II, Gray Oak and Epic – will add another 1.9 million bpd in transport capacity in the U.S. by the end of next year. Other estimates expect even more capacity – up to 2.5 million bpd – to be added over the same period. Meanwhile, the EIA projects U.S. crude oil production to grow from 10.7 million bpd to 12 million bpd by the end of 2019. In other words, based on the new pipeline capacity estimates, transport constraints should effectively be eliminated for new production by then.

It is worth noting that the EIA has often underestimated how much U.S. shale oil production will increase. Since 2010, historical growth in U.S. oil production has regularly been above 10 percent annually (and up to nearly 20 percent in a couple of years). The only time U.S. production experienced a sustained decline on an annual basis was during a period lasting a little over a year from late 2015 to early 2017. Past performance does not guarantee future results, but 10 percent annual growth for another two years would put U.S. production at closer to 13 million bpd by mid-2020.
 
What this means is that the growth in U.S. production alone should be enough to compensate for the potential lost production from Venezuela and Iran by the end of 2019. And this does not even account for increases elsewhere. Inventory levels in Organization for Economic Cooperation and Development countries have fallen below their five-year historical averages – a figure that OPEC often uses to gauge whether to cut or increase supplies – which means OPEC may also increase its supply of oil to the market in 2019.

Besides transportation issues, the other notable constraint on the growth of U.S. production is break-even prices. All this new oil pouring into the market should push prices down, and at a certain point it is more expensive for producers to extract the oil than it is for consumers to buy it, leading producers to stop extracting. But for U.S. shale oil, break-even prices continue to decline, due in part to technological advances that have increased the oil yield per new well drilled. Though break-evens vary widely depending on the region and company, several U.S. locations have average break-even prices of $45-55 per barrel.
 
For Saudi Arabia and Russia, the world’s other top producers of crude oil, the calculus is much more complicated than break-even prices. Saudi Arabia can produce a profitable barrel of oil for around $10-15, but its political needs go far beyond profit. To be able to continue supporting its social programs and subsidies, Saudi Arabia must generate enough profit to balance its fiscal budget, and its fiscal break-even price per barrel is far higher – around $84 in 2017, according to the International Monetary Fund. Russia claims that its fiscal plans are based on a price of $40 per barrel, but our own estimates place its fiscal break-even higher, closer to $70 in 2016. The key difference between Russia and Saudi Arabia compared to the United States, however, is that when oil prices fall below the break-even point of production in the U.S., the oil industry becomes less profitable; when oil falls below the fiscal break-even price in Russia and Saudi Arabia, the fates of the countries’ regimes are at risk.
Geopolitical Risk and Uncertainty
Though it is possible to make coherent predictions about the balance of supply and demand for oil, it is far harder to guess how markets will react to a particular development. Uncertainty worries markets, and when events in oil-producing regions increase uncertainty, the price of oil goes up irrespective of supply and demand. This is often vaguely described as “geopolitical risk.” The reinstitution of sanctions against Iran and the chaos in Venezuela are geopolitical risks, but the impending increase in production from the U.S. can match those countries’ contributions to the global supply. The place where it could go awry – the true geopolitical risk – is Saudi Arabia.

Saudi Arabia is the largest oil producer in the Middle East. Any situation that disrupts the production or export of Saudi oil – whether due to unrest inside the country or conflict outside of it – would increase oil prices. The likeliest of these highly unlikely scenarios is a military coup.
Since Mohammed bin Salman was named crown prince last June, a rift has been widening between his reformers and religious conservatives. When heavy gunfire was reported outside the Saudi royal palace in late April, news outlets were quick to call it a coup attempt. (The government said the disturbance was caused by the downing of an unauthorized drone, but doubts remain.) In the event of a coup, oil exports may decline or be shut off for a time but would return quickly after the military regime came to power because it, too, would depend on oil revenues for its survival.

Another potential type of unrest would be the complete degradation of the Saudi monarchy. This is very unlikely in the next five years, but if reforms fail and the country’s foreign exchange reserves run dry, it could create a ground swell of disenfranchised young men who are angry at the regime. This would provide an opportunity for the Islamic State or another version of Islamist fundamentalist insurrection to take hold. After all, Saudi Arabia was formed by a religious uprising. If such an uprising toppled the regime or kicked off a civil war, Saudi oil exports would be in doubt. A civil war in particular could hurt oil production for a long time. Were an Islamic regime to come to power, it would no doubt also want oil revenue, but it’s unclear whom the regime would be willing to sell to and which countries would be willing to buy.

Then there is the risk of interstate conflict, whether between Saudi Arabia and Iran or just generally in the region, most likely between Iran and Turkey. No one seems ready for war just yet. Saudi Arabia and Iran do not share any borders, although they could always confront one another in Iraq or the Persian Gulf. Iran’s recent backing down from escalations against Israel is one indication that it does not feel prepared to take on another nation-state directly at the moment. Turkey, meanwhile, has enough problems at home with its mounting debt and falling lira.

Any confrontation with Iran also risks dragging in the United States. Iran has threatened in the past to mine the Strait of Hormuz if it’s attacked – a move that would hurt Middle East oil exports. This is a deterrent against a U.S. strike, but it is not a particularly convincing one. The U.S. Navy would not tolerate a blockade of the strait and would respond with de-mining operations.
 
Either way, the strait is not the only path through which Saudi Arabia exports oil – it can also export from the Red Sea through the Bab el-Mandeb strait to the south or the Suez Canal to the north. What really matters, though, is that Iran’s mining of the Strait of Hormuz would invariably spook markets and raise the price of oil, probably substantially.

The other threat posed by hostilities with Iran is that Tehran would retaliate by activating Shiites in the region. For example, Iran retains a potent fighting force in neighboring Iraq via its Shiite militias. If Iran were to order its militias to march on Basra or other oil-producing regions of Iraq, it would reignite hostilities in Iraq and decrease the available supply of oil, risking a spike in prices. Iran could also attempt to stir trouble in oil-producing Shiite areas within Saudi Arabia.
Fallout
Each of these events is unlikely, but if one were to occur it would have global implications. For one, if the U.S. were dragged into any sort of confrontation with Iran that forced it to redeploy forces and again get bogged down in the Middle East, Russia would benefit financially from the inevitable bump in oil prices and geopolitically from U.S. overextension. In the event of a Saudi civil war or military coup, the whole of Russian economics would change. Oil prices would stay high for at least as long as the fighting lasted, and possibly longer, allowing Russia to accumulate greater wealth, which it could invest in its own reforms or to upgrade its military. Our forecast on Russia’s decline is based on deep structural weaknesses that go beyond simply the price of oil, but if one of the largest oil-producing countries in the world was taken offline, it would seriously challenge that forecast.

Moreover, countries that try to avoid intervening in the Middle East but that depend on Iran or Saudi Arabia for their supply of oil would be forced to make some difficult choices. China, India and Japan are all major consumers of Iranian, Saudi and Iraqi oil. A regional conflict that risked shutting down their supply could paralyze their economies. This could be the moment Asia gets involved in the Middle East.

Oil prices have reached highs not seen since 2014, but there has not been a fundamental shift in the dynamics of the global oil market. As expected, shale oil drilling and production have already begun ramping up in response to higher prices – so much so that existing distribution infrastructure in the U.S. is nearly tapped out. This has forced U.S. producers in some regions to heavily discount their oil while they ship via road or rail until new pipelines come online in 2019. Once that happens, if Iran and Venezuela are unable to export as much oil as they have been, U.S. production will make up the difference.

But pricing oil is more complicated than just looking at market fundamentals. It’s not enough to say that “geopolitical risk” is responsible for higher prices. We’ve mapped out some of the likelier geopolitically risky scenarios, but ultimately, Saudi Arabia should be stable enough not to affect production in the short term, and a prolonged war in the Middle East that severely disrupts exports appears unlikely for now. The markets’ biggest fear is fear itself.


Thursday’s Summer Solstice and the Search for Life in the Galaxy

As you mark the longest day of the year, consider the debate among astronomers over whether Earth’s tilt toward the sun helps make life on our world and others possible.

By Shannon Hall


An artist’s rendering of an Earthlike exoplanet orbiting another. Scientists haven’t been able to measure an exoplanet’s tilt yet, but some suspect that a planet’s tilt is key to supporting life.CreditEuropean Southern Observatory



On the summer solstice Thursday, the Northern Hemisphere will dip toward the sun and bathe in direct sunlight for longer than any other day of the year. That will cause the sun to rise early, climb high into the sky — sweeping far above city skylines or mountain peaks — and set late into the evening.

The solstice occurs because Earth does not spin upright but leans 23.5 degrees on a tilted axis. Such a slouch, or obliquity, has long caused astronomers to wonder whether Earth’s tilt — which you could argue is in a sweet spot between more extreme obliquities — helped create the conditions necessary for life.

It’s a question that has been brought to the forefront of research as scientists have discovered thousands of exoplanets circling other stars within our galaxy, bringing them closer to finding an elusive Earth 2.0. Is life only possible on an exoplanet with a tilt similar to ours? Or will life arise on worlds that spin straight up and down like spinning tops or on their sides like a rotisserie chicken? And what if a world swings between two axial tilts? The answer is far from simple.

Although astronomers have yet to detect an exoplanet’s tilt, they suspect that they will vary wildly — much like the planets within our own solar system. Mercury at 0.03 degrees hardly slouches, while Uranus leans on its side at 82.23 degrees. Those are two extremes that are far from habitable, even if those worlds looked like Earth in all other regards, said René Heller, an astronomer at the Max Planck Institute for Solar System Research in Germany.


If the planet had no slouch, it wouldn’t have seasons. The hemispheres would never dip toward or away from their star. Instead, the poles (which always point toward the frigid depths of space) would be so cold that carbon dioxide would be pulled from the sky, an effect, Dr. Heller argues, that would cause the planet to lose its precious greenhouse gas so that liquid water could never form.


Two views of Uranus, including one false-color image that shows one of its poles. The planet leans at an angle of 82.23 degrees.CreditNASA/JPL



But if the planet spun on its side, life might also be hard to come by. There, the poles alternatively point directly toward and away from the host star, causing one hemisphere to bathe under the sun both day and night during that long summer, while the other hemisphere experiences a frigid and dark winter — before the seasons flip. Although such a planet might not necessarily lose its liquid surface water, any life would have to adapt to a world that permanently switches between boiling and freezing.

Dr. Heller argues that the optimal tilt runs from 10 to 40 degrees. As such, there are several knobs that must be tuned to allow life and, Earth’s mild obliquity is one.

Rory Barnes, an astronomer at the University of Washington, disagrees. “There’s nothing special about 23.5 degrees,” he said. “You could have any obliquity and you could still have habitable conditions on the surface of the planet.”

The caveat is that such a planet must have a thick atmosphere that can transfer heat toward those frigid regions.

David Ferreira, an oceanographer at the University of Reading in England, invoked a similar argument. In 2014, he and his colleagues found that even an Earth 2.0 with a slouch as low as Uranus’s could potentially support life — so long as the planet had a global ocean.

An ocean will absorb heat during summer, then when winter arrives it will release that heat, allowing the planet to stay relatively temperate.

“It’s a bit like when you put a stone in the fire and it gets really hot,” Dr. Ferreira says. “If you take that stone out of the fire, it’s going to release that heat slowly.” That allows the water world to experience balmy springlike temperatures year-round.



Spring in the northern hemisphere of Mars. Mars shifts back and forth between 10 degrees and 60 degrees over millions of years, which can wildly change the planet's seasons and climate.CreditNASA/JPL/Malin Space Science Systems



The result paints a hopeful picture of a planet that could be habitable in spite of extreme seasons. It also suggests that there is nothing special about Earth.

But what if a planet’s seasons weren’t constant?

Mars’s slouch, for example, is currently akin to Earth’s at 25.19 degrees, but it shifts back and forth between 10 degrees and 60 degrees over millions of years. That means that the seasons and climate of the red planet — which is currently experiencing an extreme dust storm — vary wildly. That could create conditions that make life impossible.

Take Earth as an example. Although our planet’s obliquity is relatively constant, it does change by a mere few degrees. Such slight variations have sent vast sheets of glaciers from the poles to the tropics and entombed Earth within a frozen skin of solid ice. Luckily, Earth has managed to escape these so-called snowball states. But scientists are not sure whether the same will be true for planets like Mars with larger variations in their tilts.

In 2018, a team of astronomers argued that wild variations could push a planet toward an inescapable snowball state, even if it resided within a star’s habitable zone — that goldilocks band where liquid water can typically exist.

As such, a stable tilt just might be a necessary ingredient for life. It’s an interesting finding given that the Earth’s tilt never changes drastically thanks to the Moon. And yet astronomers don’t know how common such moons are within the galaxy, said John Armstrong, an astronomer at Weber State University in Utah. If they turn out to be uncommon across the galaxy, it could mean that such stability — and therefore life — is hard to come by.

The finding makes Dr. Armstrong both hopeful and nervous about the prospect of finding life.

“This planet is really on the verge of destruction all the time,” he said. Although Earth is considered stable, it has still suffered global glaciations and meteorite impacts — and yet life has survived. That could mean that life is hardier than you might expect. But it could also mean that further variations would push it over the edge.

Either way, Dr. Armstrong’s research has made him quite thankful that life — even intelligent life — somehow managed to gain a strong foothold on our pale blue dot.


China Goes All In On Blockchain Tech With $100M Deal

By Alex Kimani

BTC

Huobi Group--China’s crypto conglomerate that invests in digital assets including blockchain incubators, mining pools and research--has announced plans to invest $100 million to build the country's first public blockchain, the Huobi Chain.

Interestingly, Huobi has already raised $300 million for the project through token sales with the extra funds to be pumped into the company's $1-billion blockchain fund that it launched in May. The fund will be used to invest in blockchain companies.

And so the world indeed seems a strange place considering that China has made several rabid attempts to completely stamp out cryptocurrency trading by its citizens not only within its borders but also on offshore platforms .

And now the country suddenly seems to have developed a new fondness for blockchain technology.

It all began about three weeks ago when, in a rather strange move, Beijing's Center for Information Industry Development released a cryptocurrency index that's supposed to rank public blockchains. The index rates blockchains using parameters like usefulness of the application, innovativeness of the project and technological capability.

About week ago, government-controlled main broadcaster, CCTV, touted the value of blockchain technology declaring it was “10x that of the internet”, as SafeHaven reported recently.

But with the Huobi deal, China is putting its money where its mouth is.

Yes To Blockchain, No To Crypto

China's stance of embracing blockchain but rejecting cryptocurrencies is meant to inspire its citizens and corporations to come up with blockchain-centric projects of their own.
Related: Technical Flags Suggest Trouble Ahead For Gold

That much is evident going by some of the claims made during the show, including by the country's academia and corporate leaders that blockchain is capable of creating companies 10x bigger than Google or Facebook.

But there is still some level of schizophrenia coming out of Beijing. While cryptocurrency is not blockchain in itself, Beijing rejection of cryptocurrencies means that it is at least rejecting some of the fundamentals of blockchain technology.

These include the concept of tokenization, which is the main currency used in blockchain projects as well as free movement of assets and decentralization (non-government controls).

In fact, it's quite disingenuous because Huobi itself has raised millions of dollars by selling tokens at $5 a pop.

To give you a further glimpse into Beijing's rather twisted view of crypto--the country's central bank is trying to build a centralized cryptocurrency.

So, this is really all about control, as it nearly always is with the Beijing government.

Emerging economies like China stand to benefit the most from blockchain where the technology could streamline inefficient service delivery systems, property registrations, government and corporate record keeping systems and smart contracts to name a few. As long as every aspect of it is controlled by Beijing …


Latin America’s socialist support system is crumbling

Economic collapse will eventually break the Cuba-Venezuela-Nicaragua axis

John Paul Rathbone


Nicaraguan demonstrators protest against President Daniel Ortega's government in Managua on Sunday © Reuters


A domestic flight crashed in Cuba last month, killing more than 100. The next day, President Nicolás Maduro held mock elections to seal his grip on Venezuela, a country that thousands of his citizens flee from every day. In Nicaragua 10 days later, 19 died after gunmen opened fire on a Mother’s Day march against President Daniel Ortega.

As well as these costs to life, Venezuela, Cuba and Nicaragua have much in common as members of a gaseous project that Hugo Chávez called “21st century socialism”.

For many years, they provided mutual support and learnt from each other’s systems of social control. Suborning the courts and electoral authorities, destroying the opposition, making national parties personal fiefs, they turned their countries into elected dictatorships. That kept them in power, but did nothing for their economies, which are now crumbling — perhaps decisively so.

That is especially so in Venezuela. The Cuban advisers employed by Mr Maduro to maintain political control have no economic expertise, especially in such a corrupt country. Despite the world’s largest energy reserves, Venezuela is wracked by hyper-inflation, shortages and default.

Crucially, oil output has collapsed to a 33-year low. This has sapped Caracas of the oil it once sold to feed its population, and the funds it once sprayed around to buy regional support, including to Cuba and Nicaragua.

Cuba’s Soviet-style economy is also on the ropes. A partial reversal by US president Donald Trump of the detente begun by his predecessor has damped foreign investor interest and curbed tourism. But Venezuela’s inability to supply Havana with subsidised oil has hurt more.

To help its closest ally, Caracas has reportedly spent $440m of scarce foreign reserves to buy crude on international markets, which it then shipped to Havana on soft terms. But that will not reverse years of economic dilapidation: the plane that crashed tragically was an old Boeing 737, leased because much of Cuba’s fleet is grounded for lack of spare parts.

Nicaragua’s economy is in better health — although, ironically, that may make Mr Ortega the weakest of the three.

Rather than nationalise businesses, the 72-year-old Mr Ortega let the private sector be, so long as it stayed out of politics. He implemented a US trade deal, which attracted investment and turned Nicaragua into a low-cost textiles exporter. He also bought billions of dollars of subsidised oil from Venezuela, which then returned the funds as loans funnelled through a bank owned by the ruling party.

But Venezuela can no longer provide cheap oil, so Mr Ortega cannot buy the same domestic support he once did. Since April 18, when protests against the president first erupted, business has also worked to see him go. “Nicaragua needs as early an exit as possible,” said José Adán Aguerri, head of the largest business chamber, last week.

Crucially, although Mr Ortega heads the police and armed forces, the military has stayed neutral and could play a central role in a transition. It is less co-opted than the Venezuelan army. It is also more independent than Cuba’s military, where the revolution is deeply institutionalised.

“Nicaragua’s army is in many ways the opposite of Venezuela’s,” said Evan Ellis, professor of Latin American studies at the US Army War College. “It began as a revolutionary force and has gradually become more institutionalised and professional. The Venezuelan army was once professional and institutionalised but has since become corrupt.”

Change may well not come any time soon. After all, Caribbean dictatorships are historically long-lasting. The Cuban regime has endured for almost 60 years, Venezuela’s for 19, and Mr Ortega’s latest spell as president is 11 years so far. But international condemnation is growing, especially of Venezuela, which is being investigated by judges in The Hague for possible crimes against humanity.

Perhaps the only silver lining to this desperate situation is that it is that increasingly rare thing in the hemisphere: an issue in which much of the region and US have common cause.


The Garment Industry’s Technology Challenge

Heshika Deegahawathura

Woman working on silk spinning machine


COLOMBO – For many years, discussion of the global garment industry has been dominated by the following question: Where were your clothes made, and by whom? But today, there is a more relevant question: How were your clothes made, and by what?

What you wear is going high-tech, whether you know it or not. After decades of labor-intensive production by workers in the Global South, artificial intelligence (AI) and robotics are replacing humans on the factory floor. But, while these shifts will bring new benefits to consumers – such as faster delivery and custom clothing – they will come with costs. Changes to the garment industry’s business model are threatening the livelihoods of millions of people in low- and middle-income countries, and how these economies adapt will have far-reaching implications.

Today, more than half of the world’s textile exports, and about 70% of its ready-made apparel exports, come from developing economies. In Asia, some 43 million people are employed in the garment, textile, and footwear industries, with women accounting for three-quarters of the workforce. From China to Bangladesh, textile and apparel manufacturing has facilitated female empowerment and lifted entire generations out of poverty. Simply put, the end of these jobs would be devastating.

But keeping them will not be easy. To understand what businesses in the Global South are up against, consider the competition they face. For example, last year the online retailer Amazon was granted a patent in the United States for an “on demand” apparel manufacturing system that can customize orders and optimize production from anywhere, for less. The company has already won permitting approval for its first production plant, which will be in Norristown, Pennsylvania.

These moves come two years after Amazon announced its own clothing line. And, with futuristic inventions like AI analysis of fashion trends and even a “blended-reality” mirror to dress online shoppers virtually, Amazon’s engagement in – and influence on – the clothing business will only deepen.

In many ways, these innovations will be good for the textile and apparel industry. Not only will they make shopping more fun; they will also increase production efficiency and lower costs. Major brands will eventually be able to respond more quickly to consumer tastes while keeping inventories low and limiting the production of excess clothing. In fact, it may be only a matter of time before high street fashion brands swap the “made in” labels from developing countries for “Made by Amazon Manufacturing Services.”

The trouble is, all of these changes will mean fewer jobs for many people. As factories face closure, communities will lose income and economies will teeter. The question now is what policymakers should do about it.

For many industries, navigating what the World Economic Forum’s Klaus Schwab has called the Fourth Industrial Revolution means regulating technology. But in the textile and apparel trade, that alone will not solve the problem. Instead, the industry must adopt a more human-centric, globally conscious approach to business. New technologies should be evaluated with human costs in mind – measured in terms of lost incomes, shattered livelihoods, and uprooted families.

Moreover, technology companies must do better at collaborating with apparel manufacturers to manage future platforms. As traditional factory jobs evolve, technology-servicing roles will become more important. Just as sewing machines break and need calibration, so, too, will the apparel printers and packaging systems of the future.

Finally, to help ease the transition from manual to modern manufacturing, businesses and governments must begin improving current employees’ tech literacy. If today’s workforces are to remain relevant in the economies of tomorrow, employees will need the skills to contribute.

And yet, to make any of this possible, leaders in developing countries must come to terms with a hard truth: large pools of cheap labor are no longer a strategic advantage in the global economy. Industrial reinvention is urgently needed. Governments should advocate for trade agreements that cushion the impact when manufacturing jobs are lost, while laying the groundwork for the transition to more tech-heavy industries.

From factory floors to government offices, bold measures are needed if the Global South is to remain relevant to the global garment industry. Change is not coming to the world of apparel manufacturing; it is already here.



Heshika Deegahawathura is a business consultant at MAS Holdings, one of South Asia’s largest apparel manufacturing companies.