Outlook 2020– Key Issues to Shape Apparel Sourcing

2020

In January 2020, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2020–Key Issues to Shape Apparel Sourcing Management Briefing. Below is my contribution to the report. All comments and suggestions are more than welcome!

What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2020, and why?

In my view, uncertainty will remain the single biggest challenge facing the apparel industry in 2020. The rising trade barriers and geopolitical tensions, from the evolving U.S.-China trade tensions, social instability in Hong Kong, to the Brexit and U.S. election-year trade politics, could make it particularly difficult for companies to plan their businesses in both the short run and long term. As an alarming sign, the World Trade Organization (WTO) recently reported a 37% increase in restrictive trade measures taken by G20 members in 2019 compared with a year ago.

Amid the rising protectionism, the economic outlook in 2020 is also a mixed picture, at best. The latest forecasts by the World Bank and International Monetary Fund (IMF) show that, while developing economies as a whole are likely to drive much of the growth, leading apparel consumption markets in the world, including the United States, China, Japan and members of the European Union, could ALL experience slower GDP growth in 2020 than in 2019. This casts a shadow on companies’ plans for new investment and their pace of global expansion.

Meanwhile, at the micro-firm level, several issues will present as both challenges and opportunities for apparel companies in 2020. For example, moving sustainability to the next level, from product design, selection of raw material, sourcing practices to collecting and recycling used clothing, will require substantial financial investments and other resources from companies. However, as one of my recent studies indicate that sustainable apparel market has experienced particularly rapid global growth in the past few years worldwide, meaning it could be a promising growth area for apparel companies too. Likewise, more and more apparel companies are using big data and business analytics tools to gain new insights into consumers’ purchasing behaviors, competitors’ pricing practices, and even forecasting next season’s fashion trends. (As a scholar, I can also recall my studies in recent years increasingly leverage inputs from big data and business analytics tools). That being said, companies that cannot afford an in-house team of data scientists or getting access to these powerful big-data tools, unfortunately, will be at a significant disadvantage in the market competition. To a degree, the apparel business is becoming more resources-intensive in the 21st century with an ever-higher market-entry barrier.

What’s happening with sourcing? How is the sourcing landscape likely to shift in 2020, and what can apparel firms and their suppliers do to stay ahead and remain competitive into the future?

The big-landscape of apparel sourcing in 2020, interesting enough, seems to be quite similar to the “quota era” 30 years ago. Even though physical quota is no longer in place, how much products apparel companies can source from a particular country is still largely capped—except this time the quantitative restriction is imposed by a more complicated sourcing matrix, which includes factors ranging from souring cost, speed to market, production capacity, flexibility to compliance risk.

Like it or not, apparel sourcing in 2020 could become even more diversified and fragmented because of two interconnected consensuses among companies.

First, it is no longer a secret that Western fashion brands and retailers are reducing their exposure to sourcing from China, given the current business environment. For example, according to the 2019 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association in July, a new record high of 83 percent of respondents expect to decrease sourcing from China over the next two years. Meanwhile, for the first time since 2014, China is found no longer always the top supplier for U.S. fashion companies. In fact, around 25 percent of respondents indicate that they source MORE from Vietnam than from China in 2019, an emerging trend that could continue in the years ahead.

Second, no single country has emerged to become the “next China” for apparel sourcing. I have been examining the patterns of world clothing trade and specific apparel sourcing trends in key markets such as the US, Japan, and the UK. One common finding is that China’s lost market shares have to be fulfilled by a group of countries altogether, primarily because of capacity issues. Even though it remains a question mark how much and how quickly sourcing from China will continue to drop in the next five years, it is for sure that the population in Vietnam, Bangladesh, and other countries deemed as China’s alternatives will NOT double. This explains why many fashion brands and retailers both in the US and EU say they will continue to maintain a “relatively diverse” sourcing base, and in the context of the apparel industry, it actually means sourcing from more than 20 or even 50 different countries or regions.

Third, while companies are sourcing from more countries, many of them are working with fewer vendors. The primary considerations include reducing cost, driving compliance, improving operational efficiency and strengthening the relationship with strategic supply chain partners.

Additionally, we may pay attention to the reaching or implementation of several free trade agreements (FTAs) in 2020 that involve important apparel importing and exporting countries. Notably, FTAs not only offer preferential duty treatment but also play a critical role in shaping new supply chains and maintaining existing ones. For example:

  • The potential reaching of the Regional Comprehensive and Economic Partnership (RCEP) may strengthen further the regional textile and apparel production and trade network among Asian countries. The agreement could also accelerate China’s transition from being an apparel exporter to a critical textile supplier for many Asian-based apparel-exporting countries.
  • Hopefully, the EU-Vietnam Free Trade Agreement (EVFTA) will be implemented in 2020. However, EU and US apparel companies may have to compete more intensely for sourcing orders from Vietnam then, resulting in higher sourcing costs and potentially greater risks in social compliance.
  • The U.S.-Mexico-Canada Free Trade Agreement (USMCA) is on the track to be ratified by all parties and go into force in early 2020, but with no 100% guarantee. However, the newly added 16-year “sunset clause” and the “6th-year” review mechanism could open new debates and controversies on the agreement. Further, as the new agreement includes higher labor and environmental standards and stronger enforcement mechanisms for these rules, how will these provisions affect the apparel industry, from production cost to compliance risk, is worth watching.
  • Under which terms the UK will leave the European Union (i.e., Brexit) could also result in a shift in apparel sourcing. In the no-deal Brexit scenario, in particular, the temporary tariff regime is likely to result in overall lower tariff rates for products sourced from countries like China that currently do not have a free trade agreement with the EU. However, UK companies could face a higher tariff when they source products from the EU, Turkey or countries that currently have a free trade agreement with the EU. As always, there will be both winners and losers in a delicate way.

Textile and Apparel Products Covered by the U.S.-China Tariff War Reference List (updated January 2020)

(You may also download this post in PDF)

US China tariff war reference list (Jan 15, 2020)_Page_1

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Appendix: Links for the Product List (updated January 15, 2020)

by Sheng Lu

Interview with Modaes.es on the Latest Trends of Apparel Sourcing and Trade

The original interview (in Spanish) is available HERE. Below is the translated version.

Question: Is there a reversal in the globalization of fashion?

Sheng Lu: The fashion industry is becoming more global AND regional — the making and selling of a garment “travel” through more and more countries. Just look at the label of a Gap sweatshirt: it is an American clothing brand, but the product is “Made in Vietnam,” and the label includes the size standards in six different countries. The business model of the fashion industry today is “making anywhere in the world and selling anywhere in the world.”

Q .: What do you mean the industry is becoming more “regional”?

Sheng Lu: The trade flows of textiles and apparel today are heavily influenced by regional free trade agreements (FTAs). For example, while China is known as the world’s largest apparel producer and exporter, nearly 50% of the clothing consumed by European consumers are still produced by EU countries themselves. Notably, consumers have different expectations for clothing: many are price-sensitive, but others prefer more trendy items, which requires “near sourcing”—this explains why fashion companies have to adopt a more balanced sourcing portfolio.

Q .: Is the price still the most important factor in fashion companies’ sourcing decisions?

Sheng Lu: Sourcing is far more than just about chasing for the lowest cost. Sourcing decisions today have to consider a mix of factors, ranging from flexibility, speed to market, sustainability, to compliance risks. In fact, few companies “put all eggs in one basket.” My recent studies show that both in the United States and the EU, fashion companies with more than 1,000 employees, typically sourced from more than twenty different countries—sometimes even exceed forty. Behind such a diversified sourcing practice is the necessity to strike a balance between so many different sourcing factors.

Q .: Is apparel sourcing becoming more diversified today than a decade ago?

Sheng Lu: From my observations, fashion companies are souring from more countries and regions than a decade ago, but not in terms of producers. Especially in the last two or three years, I see some large companies are consolidating their supplier base to build a closer relationship with key vendors. The reason is the same as mentioned earlier: a very competitive price is not enough for apparel sourcing today.

Q .: How has the tariff war between the United States and China affected apparel sourcing?

Sheng Lu: The trade war between the United States and China is having big impacts on apparel sourcing that go beyond the two countries. Notably, American fashion brands and retailers are moving sourcing orders from China to other Asian countries such as Vietnam and Bangladesh. However, finding China’s alternatives is anything but easy. Despite the tariff war, China remains a competitive player in apparel sourcing. The unparalleled production capacity that can fulfill orders nearly for any products in any quantity, and the ability to comply with complex sustainability and social responsibility regulations are among China’s unique competitive advantages. Understandably, companies are not giving up sourcing from China, as there are few other “balanced” sourcing destinations in the world. That being said, it is important to recognize that the big landscape of apparel sourcing is evolving. Even in Europe, which is not having a trade war with China, apparel “Made in China” is seeing a notable decline in its market share.

Q .: How is China adapting?

Sheng Lu: The textile and apparel industry in China is undergoing a structural change. Partially caused by the tariff war, apparel producers in China are increasingly moving their factories to nearby Asian countries (especially for big-volume and/or relatively low value-added product categories). Meanwhile, China itself is changing from an apparel producer to become a leading textile supplier for other apparel-exporting countries in Asia. This is NOT a temporary move, but a permanent transition, which has happened in many industrialized economies in history. Somehow, the tariff war has accelerated the adjustment process, however.

Q .: Will Africa be the next hub for apparel sourcing in the near future?

Sheng Lu: As textile and clothing trade is turning more regional-based, Africa is facing significant challenges to become an attractive tier-1 sourcing base for Western fashion brands and apparel retailers.

Q .: Why is that?

Sheng Lu: In general, there are three primary apparel import markets in the world: the United States, the European Union, and Japan—as of 2018, these three regions altogether still accounted for as many as 70% of the world apparel imports. Surely, Asian countries are important apparel suppliers for all these three regions. However, each of these three markets also has its respective regional suppliers—Mexico and Central & South American countries for the United States, China, and a few Southeast Asian countries for Japan and Eastern European countries for the EU market. Other than geographic proximity, often, these regional suppliers also enjoy preferential market access to the US, EU, and Japan provided by regional free trade agreements.

Africa, on the other hand, is not close to any of these three major apparel import markets geographically. Why would fashion companies in the United States, Japan, or the EU have to source from Africa when there are so many other options available?

Q .: For price?

Sheng Lu: Several trade preference programs currently offer apparel exporters in African countries preferential or duty-free market access to the United States, the EU, and Japan (such as the African Growth Opportunity Act and the EU and Japan Generalized System of Preferences programs). However, sourcing from Africa will entail other extra costs—for example, the raw material cost will be higher as yarns and fabrics have to be imported from Asia first, and the transportation bill could be costly due to the poor infrastructure. Further, not like their counterpart in Asia, the apparel industry is not regarded as a development priority in many African countries, which continue to rely heavily on the export of raw materials instead. Manufacturing for the local market is also complicated—apparel producers in Africa are struggling with both the cheap clothing imported from Asia and the mounting used clothing sent from the West.

Q .: It is said that fashion might be the most regulated sector in international trade other than agriculture. How to explain this?

Sheng Lu:  I think we need some changes here. For example, in 2018, textiles and apparel accounted for only 5% of the total U.S. merchandise imports but contributed nearly 40% of the tariff revenue collected. This phenomenon, which makes no sense economically, is the result of the industry lobby—trying to protect domestic manufacturers from import competition.

As another example, around 15%-17% of Mexico’s clothing exports to the United States do not claim the duty-free benefits provided by the North American Free Trade Agreement (NAFTA), as the NAFTA rules of origin strictly require the using of regional yarns and fabrics for qualified apparel items. In the end, companies prefer bigger savings on the raw material cost than claiming the NAFTA duty-saving benefits. We should think about how to modernize these trade rules and make them more supply-chain friendly in the 21st century.

Meanwhile, policymakers are developing new regulations to address some emerging areas in international trade, such as E-commerce, labor standards and environmental protection. Increasingly, trade policy is moving from “measures at the border” to “measures behind the borders.”