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What's The Fallout From Sourcing's New Reality?
China's grip on apparel production is loosening. Manufacturing is spreading across countries, continents and oceans. What's the fallout from sourcing's new reality?
When it comes to producing and exporting apparel, China is emperor of the world. With its massive factories and skilled labor resources, the People's Republic cuts, sews and supplies more garments to the United States than any other nation. In 2012, for example, China accounted for 38% of total U.S. apparel imports – some $29.1 billion worth of threads.
But while the Asian nation's supremacy is clear, a perceptible shift in the garment sourcing landscape is underway. As production costs rise in China and transportation prices teeter on exorbitant, apparel brands are increasingly looking to factories beyond Chinese shores. Some sourcing industry insiders say this is only the beginning – that, in the years ahead, the movement toward an even wider global distribution of stitching and sewing work will accelerate.
"China is still the dominant player, but it's not as dominant as it used to be," says David Bebon, CEO at DBEBZ Apparel, a manufacturer of woven and knit sport shirts. "In the years ahead, they'll be making fewer garments in China than they are now."
That momentous change leaves a lot of considerable questions. Which countries are apparel companies turning to for production? How will apparel prices and quality be affected? And in the wake of the collapse of a building in Bangladesh that killed more than 1,100 apparel workers in April (as well as last year's tragic garment factory fires in Bangladesh and Pakistan), is that shift causing a dangerous lapse in social compliance – and a potential PR nightmare for anyone who doesn't exercise due diligence?
Beyond the Great Wall
In 2000, Chinese garments constituted just 8% of all U.S. apparel imports. That miniscule number seems like a lifetime ago. In the decade that followed, Chinese apparel exports to the U.S. grew 522% as the nation became the most dominant manufacturer of apparel in the world.
Those days of explosive growth are coming to a halt, though. Chinese imports have increased by 24% since 2009, but that's a far cry from the previous decade. And in fact, the country's exports to the U.S. decreased from 2011 to 2012, which was the first time that happened in 15 years.
What's the cause of the slowdown? Labor prices are rising rapidly – 10% in the first two months of 2013 alone and tripling over the last decade. Workers who once would have flocked to garment factories are now migrating to better-paying industries, including high-tech manufacturing. And, while still undervalued, China's currency has strengthened.
Add up those and other factors, and a clear reality emerges: China is a less attractive destination to produce labor-intensive goods like apparel and footwear. "Many U.S. and European companies are finding that the cost of doing business in China is not as competitive as it used to be, and they're looking elsewhere," says Leeton Lee, a sourcing expert who works as vice president of regulatory compliance and general counsel at Top 40 supplier ETS Express (asi/51197).
Released last September, the quarterly Global Retail Manufacturers and Importers Survey found that 26% of importers of retail goods surveyed had moved some of their manufacturing out of China; 40% at the time were considering removing some production. Instead, apparel importers are turning to Vietnam, Bangladesh, Pakistan, the Philippines and the seven countries within the United States-Dominican Republic-Central America Free Trade Agreement (CAFTA).
In fact, figures from the U.S. Department of Commerce show that U.S. apparel imports from CAFTA-DR countries (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and the U.S.) grew tremendously over the 2009-2012 period, rising 27% to $7.8 billion – about 10% of total imports. Elsewhere, garment imports from Vietnam skyrocketed 40% during the same period, rising to $7.1 billion. Bangladesh's share of the U.S. apparel market increased from 5% in 2009 to 6% in 2012.
Going forward, CAFTA countries could play an even bigger role as the Department of Commerce actively promotes sourcing in the Western Hemisphere. "The reason that we are promoting regional sourcing is because, through trade programs and free trade agreements, it allows for mutual benefits for both the U.S. and the partner country," says Tim Truman, commerce department spokesman. "The majority of the yarns and fabrics exported from the U.S. to Western Hemisphere countries are converted into apparel that returns to the U.S. Sourcing from Central America is attractive because of the proximity to the United States. Transportation costs are lower and turnaround on orders is quicker."
For similar reasons, some apparel companies are also re-evaluating the U.S. as a viable center for limited apparel production. The same global manufacturers survey found that 31% of respondents were considering moving some manufacturing operations to the U.S. And, thanks in part to cheap labor and ports that are 10 days closer to America's eastern seaboard than Asian garment factories, West African nations are popping up on the radar of apparel sourcers, too. Ghana, by way of example, is home to factories that specialize in assembling scrubs, aprons and lab coats.
Ad specialty industry apparel suppliers have gotten in on the act in Africa as well: Ash City (asi/37143) sources from nations like Botswana and Lesotho. "There are a tremendous number of Asians who have expertise in apparel manufacturing that are running the factories in Africa," says Ash City founder Garry Hurvitz.
Despite all that movement, manufacturers are not abandoning Asia. In the continent, Burma (Myanmar) may emerge as a new center for apparel production as the easing of trade restrictions opens the nation of approximately 60 million people to the international market. "I was in Hong Kong recently and had about 30 meetings," says Greg Gardner, president/CEO of Arche Advisors, a corporate social responsibility advisory firm that evaluates supply chains. "In every one of those meetings, Myanmar came up. It's one of the last places to open up, and labor will be very cheap. There's a lot of interest."
As the tectonics of sourcing shift, questions emerge about what consequences that flux will have on garment prices. The consensus among industry insiders like Gardner and Bebon is that price tags aren't going to be significantly affected – at least not as a direct result of sourcing redistribution. In fact, many apparel companies are moving beyond China in part to keep prices down. "The move from China to other countries will not necessarily create a big price difference in terms of an increase or decrease," says Bebon.
At least in the short term, feedback from ad specialty industry apparel suppliers appears to bear out that assessment. Stitches magazine, Counselor's sister publication, recently surveyed the industry's 25 largest apparel suppliers about their perceived ability to raise prices in 2013 and 2014. About 75% of respondents said they have no plans to raise prices, while 13% said they would struggle to raise prices. None indicated that a price hike was imminent.
Prices can still be prone to increasing, much like they did two years ago. Back then, soaring costs for commodities like cotton and ballooning transportation fees compelled industry suppliers to increase what they charged for certain apparel items. If a price hike is necessitated by things like increasing fabric costs (which have a greater effect on garment price than things like labor expenses), industry suppliers say they'll strive to minimize the impact. "We plan to absorb price increases as long as possible without passing them on to our customers," says Eric Rubin, president of Blue Generation (asi/40653).
When it comes to the influence sourcing destinations may have on garment quality, opinions vary. Some say that in a general sense China and Vietnam offer superior needlework. ETS Express' Lee goes further, asserting that there are elevated quality concerns in sourcing from Third World nations outside China, a country that he maintains has developed the ability to produce comparatively better products more efficiently. "There are higher levels of best practices and quality in China from a steady trend of continual process improvements made over the past 15 years," says Lee. "Much of this has come from international retailers that have put QA people on the ground there."
Others like Bebon have fewer concerns about moving away from China. "The relevant point for distributors," he says, "is that I don't think we will notice a visible downgrade in product quality because some production may be leaving China."
Nonetheless, often it is not so much a question of country, as it is of factory. "All apparel is made to specifications, and if the factory has the correct equipment and correct quality control, then the quality can be the same all over the world," says Bruce Berton, COO/executive vice president at Roochi Traders Inc., a California-based activewear sourcing firm and the parent company of Cotton Heritage (asi/46778).
Adds Bebon: "There are bad factories in China, Pakistan and Bangladesh. And there are good factories in China, Pakistan and Bangladesh. You have to do your homework and partner with the right people regardless of the country."
–E-Mail: email@example.com; Twitter: @chrisr_ASI