The consensus seems to be: don’t write off China just yet

The consensus seems to be: don’t write off China just yet

How is the sourcing landscape likely to shift in 2016, and what strategies can help apparel firms and their suppliers to stay ahead? While dramatic sourcing shifts are unlikely and China continues to dominate, optimism hinges on potential opportunities from trade deals such as AGOA and TPP. Improving productivity and collaboration across the entire demand chain are also seen as key. 

Colin Browne: VP and managing director of Asia Product Supply at VF Corp:
Although apparel imports from China into the US have remained largely flat, we are seeing a slow but steady shift away from China as businesses look to position their supply chains to take advantage of the forthcoming trade deals. Many vendors are looking at Vietnam due to the potential benefits from TPP (the Trans-Pacific Partnership).

However, don't write off China quite yet. Sourcing from China may be expensive but it has the only fully integrated supply model in our industry, and it still leads the world in product development and is investing in automation. There is also a large and growing local market that will need to be serviced.

From a geographical perspective, sub-Saharan Africa is finally becoming a reality, especially now that AGOA has been extended. We are seeing an increased number of vendors visiting the continent and a number of deals being done. It will be a long time before it rivals the Asian supply base, but the size and availability of resource will allow it to become a dominant player over the next 25 years. As brands venture into such new markets, doing so with known and trusted factories or partners will make the journey less arduous and reduce risk to both parties. These deep, symbiotic relationships will be key to long-term success.

The recent seemingly break down of law and order in Bangladesh is worrying. Although progress has been in the country following Rana Plaza, these new lapses in civility and stability add a new set of challenges which require close monitoring.

Marc Compagnon, president of LF Sourcing and executive director of Li & Fung Limited:
There will still be pressure, with margin squeeze affecting everyone in the supply chain. There is an opportunity for retailers to look at all aspects of their supply chain to unlock efficiency at every step. It cannot be price squeeze alone.

China will continue to play a key role. They compete at so many different levels and will continue to have a big part to play. China is so comprehensive you can't really think of it as one country. It's in all sectors, upstream and downstream, whereas other countries typically only play in one area. There is no other China – and there won't be. However, you don't make low-cost, basic products in China anymore, and so other countries will take advantage of that.

As for near-shoring, this will continue to grow. Recent currency changes have made a big impact and markets like Turkey, Portugal are more important for Europe now as the value equation looks better. They are not as low-priced as Asia but the differential is less, and it's quicker.

On the whole, and in the same way that chasing the cheaper needle doesn't work, it's about being important to your manufacturers and having an open relationship with them. Everybody wants to be more important to a few people, and everybody has to make a margin in that equation and be fair so it's sustainable. It needs to be a relationship that works for all parties.

Mr KL Lee, vice chairman of Esquel Group:
After the TPP conclusion in October, there are even more questions as to whether China will lose its leadership position in textiles and apparel.

For those who continue with the old ways of manufacturing and not transforming, there is no choice but to move operations to the so-called "low-labour-cost" countries. At Esquel, we are pursuing a different approach: with innovation and using technology in the form of automation and process improvements, we will increase productivity and therefore reduce unit labour cost while improving quality consistency. So while our workforce will earn more by sharing our economic success, we can remain competitive.

Of course Esquel is not only in China. We also have facilities in Vietnam and Malaysia that will stand to benefit from TPP.

Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA) and lecturer at the Wharton School at the University of Pennsylvania:
Manufacturing will continue to move away from China to TPP countries like Vietnam, brave new frontiers in Africa, and back on shore or closer to home. There will probably be no seismic changes, but a continued development in the existing trends.

The more forward-looking apparel companies will work with fewer and fewer manufacturers. Reliability, agility, and good value will drive placements.

Rick Helfenbein, president of TellaS Ltd, Luen Thai (USA), and chairman of the American Apparel & Footwear Association (AAFA):
The sourcing landscape is unlikely to shift dramatically in 2016. China may dip down a notch, and Vietnam up a notch, but the two combined will still hold a 49% market share of the US apparel business. In fact the top five countries – China, Vietnam, India, Bangladesh, and Indonesia – will likely have a 65% market share of the US in 2016. The best strategy continues to be the optimisation of the supply chain; with a focus on price, quality, and speed to market.

Rick Horwitch, VP Strategy & Solutions Business Development, Bureau Veritas Consumer Products Services:
Strategies need to be built around the big issue of Demand and Supply – speed/time, cost/efficiency, country balance and transparency. The days of "chasing the cheapest needle" are over. Collaboration, commitment and trust across the entire demand chain are critical.  

China for China is becoming a bigger issue. As their middle class continues to grow, production is being designated for local consumption versus export. This means new sources need to be found. TPP will help (assuming it is approved – I believe this will be tabled into the next administration), but this is not the only answer. Regional sourcing (local for local) closer to the consumer will expand.

To enable this collaboration, investment and trust between all players in the demand chain is critical. A perfect example of this has evolved in El Salvador where a "cluster" of manufacturers (fibre, yarn, knitting, dying, printing and cut/sew) all within a few miles of each other have been collaborating, successfully and profitably, to meet the needs of their retail and brand customers (who have made forward commitments). This commitment and trust has enabled significant investments in new technologies as well as facilities. With advances in technologies, proximity to markets, duty free status, flexibility in production (from a units perspective) Central America can be the perfect partner for the Demand and Supply economy.

Robert Antoshak, managing director, Olah Inc:
How does an apparel company carve out sales – and make a profit – when the overall market is flat or declining? One answer lies with "Fast Fashion" – that is, high unit turnover supported by razor thin margins. The industry these days doesn't have the luxury of an ever-expanding consumer market, particularly in the developed world; sales need to be generated in ever more creative ways to attract consumers with limited resources. As a result, sourcing will continue to chase low cost suppliers in an effort to maintain margins while providing a rapid churn of product in the stores.

Indeed, supply chains will become more complicated than ever as the geographic scope of sourcing expands. For example, the region of choice today is Asia; tomorrow it will be Africa. Hence, the distances required to support some supply chains will be longer as the geographic centres of production move to different parts of the world. In turn, the movement of raw materials – fibre, yarn, and fabrics – may come from different parts of the world only to be incorporated into a final garment produced in a low cost country or countries. The same may be said of dyeing and finishing. In this sense, cheap comes with the cost of complexity.

Dr Achim Berg, partner at McKinsey & Company and co-leader of McKinsey's Apparel, Fashion & Luxury Group:
Looking ahead, compliance and sustainability as well as end-to-end process efficiency and supplier development and cooperation will be the biggest challenges in sourcing, as in the recent past. We have seen some initial progress being made by a select number of players in these areas. However, industry-wide change will require even more cooperation in all stages of the value chain, a broader implementation base of existing technology and tools, and greater focus on what consumers really value. The apparel industry is still catching up to other industries in this regard.

Matthijs Crietee, secretary general at the International Apparel Federation (IAF):
The sourcing map is always changing and it will also change in 2016. Trends from 2015 such as a decline in volume of imports from China and an increase in imports from Vietnam, Myanmar and Cambodia and perhaps Ethiopia will continue. Bangladesh and Turkey will retain a strong position and imports from Indonesia, Pakistan and India will grow. Most likely, the trend of producing closer to the home markets will grow, although not in high volumes.

But even more interesting in 2016 will be the trends that don't necessarily show on the map. We will see that big manufacturing groups from China, Hong Kong, Taiwan, Korea and Turkey are more and more driving forces behind the changing sourcing maps. Certain tier-1 manufacturers will become more and more supply chain coordinators. And another 'non-shift' occurs as companies reduce costs by improving productivity rather than moving to lower cost locations.

With so many choices, the best CPOs are the ones with open minds and cool heads. It is important not to be restricted by engrained practices. In some cases investments in manufacturing partners are required which need longer-term relations. In other cases, relocation is still the best option. Decisions must fit the company, the product and the future.

Paul Forman, group chief executive, Coats Plc:
Looking at the sourcing landscape as a heat map of the world, places like North and Eastern Africa and Turkey have now moved from 'medium' to join the existing 'hot' areas of South Asia and South East Asia. The rapid growth markets look to be Bangladesh, Cambodia, Central America, Mexico, Pakistan, Turkey and Vietnam, with Ethiopia and Myanmar also figuring.

Looking ahead there could be some shifts caused by demands for smaller batch sizes. Quick response brands and manufacturers looking for smaller but more frequent orders will play to the advantage of near sourcing, which is already benefitting countries like Turkey and also regions like Central America, the European rim and Africa.

In terms of strategies the importance of knowing your supply chain cannot be underestimated, wherever in the world it is. Ethical sourcing and corporate responsibility is increasingly becoming a competitive advantage for industry players. Consumers quickly punish weak unethical behaviour and increasingly reward outstanding performance, so there must be continued improvements in standards worldwide. The sourcing landscape is increasingly as much about the 'who' and the 'how' as much as the 'where'.

Sue Butler, director, Kurt Salmon:
Sourcing executives surveyed for our latest Global Sourcing Reference said their key concerns were: increasing labour costs, unfavourable development of currency exchange rates and continual price pressure on margins. These were in addition to the need to develop ranges closer to their markets to maintain competitiveness in a fast paced environment with quickly changing trends and low predictability. The problem is that this all needs to be achieved without sacrificing product innovation, quality and social compliance for pure speed and margins, which would put the uniqueness and character of the brand at risk.

This is forcing apparel companies to look at making major changes to their traditional sourcing strategies, taking a holistic view of their entire operating model and not just considering which countries and what cost. The creation of differentiated supply chains that create the ability to flexibly prioritise speed, cost and innovation based on a 'true' range that reflects actual consumer needs are the key tools for successful product development and sourcing operations.

As a result we will see businesses enter new high-potential sourcing regions, shorten transport routes and reduce the dependency on China as the number one production country.

It has become evident that China is not a low cost production country anymore. While wages have tripled over the last decade, productivity gains were less and less able to level out the effect on overall production costs

While some of the shifts away from China have been down to pure cost considerations, to countries such as Bangladesh and Pakistan, there have also been significant moves to markets with higher production costs but faster reactivity and capability – and also with the ease of monitoring ethical and environmental performance. For instance, Turkey, Tunisia and Poland have increased their share of sourcing in the denim sector despite their cost structures being higher; brands have learnt that they can offer excellent technical capabilities to help with product innovation and have shorter lead times, which result in better product and often improved final margins.

China has become the middle ground for sourcing, stuck between both ends of the continuum of fast or cheap. There is no doubt that the high level of capability in China means it will continue to play a major role in apparel sourcing for many years, but a balanced portfolio will include China alongside a mix of low cost and high speed countries.

Emerging markets such as Africa and Cambodia will grow in importance as supplier capabilities mature.

Julia Hughes, president, United States Fashion Industry Association (USFIA):
Sourcing trends remain stable. China remains dominant, Vietnam is on the rise, and after a dip last year, we're seeing Bangladesh rebound, probably thanks to the ongoing activities by both brands and retailers that source in Bangladesh as well as by the Bangladeshi industry and government officials. The industry commitment to improve conditions for workers, as well as remediation plans to guarantee safe buildings, offers support for sourcing in Bangladesh.

The shifts that we see with sourcing mainly focus on continuing diversification. USFIA's smaller member companies source from about 6-10 countries, while large brands and retailers source from 20 or more. We don't see this diversification fading. If anything, companies will continue to diversify their supply chains to find the best product at the best price, and especially to prepare for potential risks to the supply chain. With the completion of the TPP negotiations, we expect companies will continue to investigate new sourcing opportunities from the TPP partners (especially Vietnam and Malaysia). And now that we have more certainty with AGOA duty-free benefits guaranteed until 2025, we also expect companies to take another look at the region.

Made in America is part of the diversification story. In our 2015 benchmarking study, 53% of members said they source from the United States. Meanwhile, 39% of members expect to increase sourcing from the US in the next two years, with 80% of those already sourcing from the US expecting to do more. Digging into the numbers, we find that larger companies with more diversified sourcing strategies are more likely to source in the United States. Those who said they source in the US also source from 22 other countries – and 100% from China and 100% from Vietnam. There is an interest in making it in America, especially when it comes to "smart" apparel and accessories and technical textiles, as well as samples and products that need to hit the market immediately – but the conversation around Made in America should change to become part of an overall, complex, global strategy for niche products, not reshoring product that is currently made overseas.

To stay ahead, it's important for companies to get involved in the policy process. Companies should participate in benchmarking studies to ensure we have accurate data, and participate in advocacy efforts, either on their own or through their associations, or both. Government officials need to hear from the brands and retailers who are creating high quality jobs in the United States, creating new technologies, and creating the products that consumers need and want. In particular, they need to hear from companies why it's important for trade agreements to recognise the realities of their business practices and the supply chain, and understand how you make decisions, and especially how your sourcing model leads to quality products for American consumers and supports quality jobs in the United States.

Mike Flanagan, CEO of apparel industry consultancy Clothesource:
With cost pressures on retailers from domestic overcapacity, internet unprofitability and international sales operations, some bit of the business has to reduce costs. Retailers and most brands can't expect much benefit from moving their selling operations abroad – so, as always, they're going to need more from their (almost all overseas) suppliers.

Crucial issues:

– Right now, the state of their own operating currency (US$, £, €, Yen or Kronor) conditions how retailers and brands see the sourcing landscape more than the sourcing-country fundamentals.

– Overall, though, worries about supplier-country wage inflation are misplaced. China's wages are five times what they were in 2000, but Chinese apparel, when landed in the US, is 15% cheaper than it was in 2000. Partly due to competition stopping supplier profiteering, partly productivity gains, partly dramatic price drops in energy, freight and raw materials over the past five years (which, admittedly, can't be guaranteed into the future).

– But, stuck with the legacy of expansion and service decisions over the past decade, buyers are still going to be under pressure to drive costs down – so they'll go on looking for Shangri-Las.

– The "flight from China" is a phenomenon of non-Chinese companies. Hong Kong, Taiwanese and Korean manufacturers are moving operations to elsewhere in Asia; Chinese companies aren't, though a handful are exploring overseas investment. Even here, announcements are a lot thicker on the ground than new factories actually delivering garments or shoes

– No demonstrable short-term alternative to East Asia/Bangladesh is emerging:

  • The volume of Ethiopia's minimal apparel exports fell 13% year-on-year in the nine months to September.
  • Myanmar's apparel exports grew 27% in the same period – but still accounted for just 0.4% of rich-world apparel imports, with few serious projects for new capacity.
  • Onshoring is going nowhere: the apparel-making workforce in the US and Europe kept falling throughout 2015.
  • Vietnam's possible duty-free access to the EU and US is at least two years away, even according to the most optimistic forecasts from the US Trade Representative and the European Commission. It's highly likely we won't even know whether the US Congress is prepared to vote on ratifying the TPP until after the November 2016 election – and possibly not until Obama has left the White House in 2017. And it's impossible to predict how that vote will go if it ever takes place.
  • India's alleged Textiles Plan – promised now for 18 months – is simply a chimera promoted by the BJP government.

– Meanwhile, legislative creep threatens to add new sourcing costs:

  • Though so far unsuccessful, activists are still trying criminal or civil action in a number of jurisdictions against buyers they believe to have committed allegedly illegal compliance infractions, or to be legally responsible for paying compensation
  • Activists keep trying to extend the definition of "modern slavery" in the UK's Modern Slavery Act beyond the United Nations' official guidelines. The German government is quietly succeeding in signing up more European buyers – and Asian manufacturers – to the tight guidelines of its "voluntary" Partnership for Sustainable Textiles. And PETA is trying harder than ever to ensure the death of the world's sheep population.

This makes real improvements in productivity more important than ever. Garment workers, factory owners and buyers all prosper – and create a tax regime allowing governments to build adequate transport, education and social-security infrastructures – when factory productivity grows.

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