Apparel suppliers, retailers and importers face countless challenges in the months ahead, including political uncertainty on global trade, increasing costs in China, intensifying logistics pressures, and escalating environmental concerns. How they tackle these issues is likely to make the difference between success and failure, as Leonie Barrie heard at the Prime Source Forum in Hong Kong earlier this month.

Is it better to source from China or other low-cost countries? Are other trade barriers likely to fill the place of safeguard quotas on China? And how does the apparel industry reconcile speed to market when its timeframes still run to months rather than weeks?

These are some of the major issues the industry is dealing with right now, and which came under the spotlight at the Prime Source Forum in Hong Kong earlier this month. 

As far as sourcing is concerned, nowhere comes close to China, delegates were told. It has created the manufacturing capacity and supply chain to meet the apparel industry's needs, and there is no real alternative production base.

But China has its share of problems too, including labour shortages in the industrial regions along the coast, rising inflation and a lack of raw materials - all of which are leading to higher costs.

Rising inflation
Felix Chung, chairman of the Hong Kong Apparel Society (HKAS), pointed out that the majority of apparel factories are in China's Pearl River Delta area where the average inflation rate is as high as 15-20%, far exceeding the country's average of 6.8%.

He also said the RMB currency has appreciated by 26% in the last three years - including an expected 8-10% hike in 2008, which is a huge problem for companies exporting to the US market.

This is further compounded by a 12.9% increase in the minimum wage in the Pearl River Delta region, and expectations of another reduction in the export tax rebate this year.

Another problem is that government policies don't favour the apparel industry. Not only is it trying to reduce the country's high trade surplus by discouraging exports, but it is also keen to balance the disparity of wealth between the inland provinces and coastal areas where the export zones are located.

"The government in China has made it clear that it wants apparel companies to relocate to the western part of China," Chung said. "If they stay in the Pearl River Delta they must upgrade production to high value added items or create their own brand."

The next three years, therefore, will see the relocation of factories within China, with some undoubtedly going out of business.

While nowhere else comes close to China as a supply base, buyers can also create opportunities elsewhere. Quick response, for instance, favours sourcing countries like Turkey which are located close to consuming markets such as the EU.

Vietnam, Bangladesh, Indonesia, Thailand and the Philippines were also singled out as countries to watch, as was North Africa and the former Soviet states like Uzbekistan and Kazakhstan.

But perhaps the most important competitor to China is the Indian sub-continent with its supply of cotton, product development capabilities, and a government that is aligning to the needs of the industry.

Trade barriers
Apparel trade in the future, however, is unlikely to depend solely on an efficient supply chain.

Even though quotas and import tariffs are coming down, it is clear that other trade barriers will fill their place.

Access to the US market, for example, is now affected by outside issues like human rights, environmental and social responsibility matters. There are also big concerns about the way the trade agenda is panning out in the current US election campaigns.

Also alarming is the abandoning of multi-lateral forums to resolve problems in favour of bilateral agreements with individual countries.

Both Scott Quesenberry, special textile negotiator in the office of the US Trade Representative, and Rufus Yerxa, deputy director general of the World Trade Organization (WTO) confirmed that US safeguard quotas on Chinese textile and apparel imports will finish as scheduled at the end of this year.

But they admitted there are still certain provisions where a country can impose temporary safeguard measures, or instigate anti-dumping and counterveiling duties.

Quesenberry also acknowledged that the threat of anti-dumping duty on US apparel imports from Vietnam "is causing some companies to leave the country."

But he added: "If the evidence [from monitoring] warrants Vietnam is not dumping, we will not bring the case."  

Logistics limitations
Another possible limit to the growth in world textile trade is a poor logistics infrastructure.

George Goldman, vice president and managing director for Hong Kong/South China, at APL Logistics, warned that while two-thirds of containerised traffic either leaves or terminates in Asia, "the rest of the world does a poor job in accepting these goods."

"Congestion at US ports will increase in the near term," he said, citing estimates that by 2012 every port in the US will be at or near full capacity.

Alternative gateways need to be found into the US, such as routing via Canada, and investment is needed in the EU as well.

Companies sourcing from manufacturers moving to inland China will also need to factor in transportation time and cost.

Not only does the country's rail network fall short - just 3% of railroad volume is in containers - but the distances involved could increase logistics time by around four hours, Felix Chung estimates.

Prepared for change?
The fashion industry is all about change, but is it prepared?

Speed to market and two-week turnarounds are what customers require, but these benchmarks are still only benchmarks. In reality, the industry's timeframes still run to months rather than weeks.

One of the biggest costs for suppliers is the markdown when they have made products their customers no longer want.

As supply chains continue to get more complicated, Bob McKee, fashion industry strategy director at Lawson Software, stressed the right systems are key to assimilating and sharing all the data to make good sourcing decisions, from cotton field to consumer.

This can help suppliers to the retail industry curb their markdown risks, he said.

"Why make 1,000 dozen garments and ship them all at once? Look for ways to work as supply chain partners to push an assortment of merchandise to the consumer. Instead of time to market, look at time to consumer."

CSR and compliance
Corporate social responsibility (CSR) issues like labour rights, ethical issues, corporate governance and compliance are seen as a necessary evil.

Suppliers/vendors regard them as oppressive, while retailers generally feel under pressure to comply. But most acknowledge that compliance needs to happen.

The driving force, according to Ted Sattler, group executive vice president - foreign operations, at Philips-Van Heusen Corp, is that it's profitable.

He points out that consumers are buying the concept of environmentally-friendly companies, and that a number of funds are investing in corporations with good citizenship and social responsibility.

One of the challenges is to get common standards in place. But to do this requires everyone to agree and share their information - which is likely to be difficult. So while it's a nice vision, it's also likely to be a long way off.

The fourth edition of Prime Source Forum is scheduled to take place in Hong Kong from 31 March to 2 April 2009.