Why Sourcing from China? A Case Study on VF Corporation’s Textile and Apparel Sourcing and Supply Chain Strategy

The prospect of China as a textile and apparel sourcing base for US fashion companies is becoming ever more intriguing. While China remains the top textile and apparel supplier to the US market, US fashion companies have been actively seeking China’s alternatives due to concerns ranging from rising wages, trade wars to perceived supply chain risks.

Recently, VF Corporation, one of the most historical and largest US apparel corporations, released the entire supply chain of its 20 popular apparel items, such as Authentic Chino Stretch, Men’s Merino Long Sleeve Crewe, and Women’s Down Sierra Parka. VF Corporation used 326 factories worldwide to make these apparel items and related textile raw materials. We conducted a statistical analysis of these factories, focusing on exploring their geographic locations, production features, and related factors. The results help us gain new insights into VF Corporation’s supply chain strategy and offer a unique firm-level perspective to understand China’s outlook as a textile and apparel sourcing base for US fashion companies. Specifically:

First, China remains the single largest sourcing base across VF Corporation’s entire textile and apparel supply chain. Specifically, as many as 113 (or 35%) of the total 326 factories used by VF Corporation are China-based, far exceeding any other country or region. Besides China, VF Corporation sourced products from the US (42), Taiwan (31), South Korea (16), Mexico (13), Honduras (12), Vietnam (11), Indonesia (8), as well as a few EU countries, such as Germany, Czech Republic, and France.

Notably, thanks to its unparalleled production capacity, China also offered the most variety of textiles and apparel among all suppliers. Chinese factories supplied products ranging from chemicals, yarns, fibers, trims, threads, labels, packing materials to finished garments. In comparison, most other countries or regions serve a narrower role in VF Corporation’s supply chain. For example, 65% of US-based factories supplied yarns, threads, trims, and fabrics; 80% of Taiwan-based factories supplied trims, fabrics, and zippers; and VF Corporation used most factories from Vietnam, Mexico, Honduras, and Indonesia to cut and sew garments only.

Second, VF Corporation is more likely to source from China when a higher percentage of the production processes across the apparel supply chain happens in Asia. For example, VF did not use any Chinese textile and apparel factory for its Williamson Dickies’s Original 874® Work Pant. Instead, Williamson Dickies’s supply chain was primarily based in the Western Hemisphere, involving the US (yarns, trims, and fabric suppliers), Mexico (fabric suppliers and garment manufacturers), Honduras (garment manufacturers), and Nicaragua (garment manufacturers).

In comparison, VF used China-made textiles for Napapijri’s Parka Coat Celsius. Nearly 83% of this product’s production processes also happened in the Asia region, such as Taiwan (fabrics, zippers, plastic suppliers), Hong Kong (trim suppliers), and Vietnam (garment manufacturers). This pattern reflects China’s deep involvement and central role in the Asia-based regional textile and apparel production network. We may also expect such an Asia-based regional supply chain to become more economically integrated and efficient after implementing the Regional Comprehensive and Economic Partnership (RCEP) and other regional trade facilitation initiatives in the next few years.

Third, reflecting the evolving nature of China’s textile and apparel industry, the result shows that VF Corporation is more likely to use China as a supplier of textile intermediaries than the finished garment. Due to various reasons, from the US Section 301 tariffs to the wage increases, China already plays a less significant role as a garment supplier for VF Corporation, accounting for just around 10% of the company’s tier 1 suppliers. This result is highly consistent with the official trade statistics—measured by value, only 23.7% of US apparel imports came from China in 2020, a new record low over the past decade.

Fourth, interesting enough, the results indicate that when an apparel item involves more production stages or needs a greater variety of inputs, it will reduce VF Corporation’s likelihood of sourcing from China. For example, the supply chain of Icebreaker’s Men’s Merino 200 Oasis Long Sleeve Crewe included five different processes (e.g., wool fiber, wool yarn, and finished garments). VF Corporation used around 21 various factories and facilities across the supply chain, of which 57.1% were China-based. In comparison, North Face’s Women’s Denali 2 Jacket included around 21 different processes (e.g., polyester yarn, nylon yarn, tape, zipper, trim, polyester interlining, thread, eyelet, label, and finished products). The supply chain included around 24 various factories and facilities, of which only 16.7% were China-based. One possible contributing factor behind this phenomenon is the cost of moving intermediaries across China’s borders. Sourcing from China seems to be disadvantaged by the relatively high trade barriers and a lack of free trade agreements with key trading partners, especially when some components in the supply chain need to come from outside the Asia region, such as the Western Hemisphere and the EU.

Additionally, NO clear evidence suggests that pricing and environmental and social compliance significantly affect VF Corporation’s decision to source from China. For example, the apparel items using either China-made textile raw material or cut and sew in China had a wide price range in the retail market, from as little as $26 to as much as $740. The retail price of those apparel cut and sew in China ranged from $56 to $86, which was neither exceptionally high nor low (i.e., no particular pattern).

Meanwhile, according to VF Corporation, around 61.9% of its China-based factories across the apparel supply chain had received at least one type of “environmental & chemical management certification.” This record was on par with non-Chinese factories (64.8%). Likewise, around 29.0% of China-based tier 1 & tier 2 factories had received one type of “Health, Safety and Social Responsibility Certification(s),” similar to 22.5% of non-Chinese factories. Overall, how US fashion companies like VF Corporation factored in pricing, environmental, and social compliance in their sourcing decisions need to be explored further.

By Sheng Lu

The study will be presented at the 2021 ITAA-KSCT Joint Symposium in November 2021

What Is A Worker-centered U.S. Trade Policy?

Related readings:

2021 USFIA Fashion Industry Benchmarking Study Released

The full report is available HERE

Key findings of this year’s report:

#1 COVID-19 continues to substantially affect U.S. fashion companies’ sourcing and business operations in 2021

  • Recovery is happening: Most respondents expect their business to grow in 2021. Around 76 percent foresee their sourcing value or volume to increase from 2020. Around 60 percent of respondents expect a full recovery of their sourcing value or volume to the pre-COVID level by 2022.
  • Uncertainties remain: Still, 27 percent find it hard to tell when a full recovery will happen. About 20 percent of respondents still expect 2021 to be a very challenging year financially.
  • U.S. fashion companies’ worries about COVID still concentrate on the supply side, including driving up production and sourcing costs and causing shipping delays and supply chain disruptions. U.S. fashion companies’ COVID response strategies include strengthening relationships with key vendors, emphasizing sourcing agility and flexibility, and leveraging digital technologies. In comparison, few respondents canceled sourcing orders this year.

#2 The surging sourcing costs are a significant concern to U.S. fashion companies in 2021.

  • As many as 97 percent of respondents anticipate the sourcing cost to increase further this year, including 37 percent expect a “substantial increase” from 2020.
  • Respondents say almost EVERYTHING becomes more expensive in 2021. Notably, more than 70 percent of respondents expect the “shipping and logistics cost,” “cost of textile raw material (e.g., yarns and fabrics),” “cost of sourcing as a result of currency value and exchange rate changes,” and “labor cost” to go up.

#3 U.S. fashion companies’ sourcing strategies continue to envovle in response to the shifting business environment.

  • Asia’s position as the dominant apparel sourcing base for U.S. fashion companies remains unshakeable.
  • China plus Vietnam plus Many” remains the most popular sourcing model among respondents. However, the two countries combined now typically account for 20-40 percent of a U.S. fashion company’s total sourcing value or volume, down from 40-60 percent in the past few years.
  • Asia is U.S. fashion companies’ dominant sourcing base for textile intermediaries. “China plus at least 1-2 additional Asian countries” is the most popular textile raw material sourcing practice among respondents.
  • As U.S. fashion companies prioritize strengthening their relationship with key vendors during the pandemic, respondents report an overall less diversified sourcing base than in the past few years.

#4 U.S. fashion companies continue to reduce their China exposure. However, the debate on China’s future as a textile and apparel sourcing base heats up.

  • Most U.S. fashion companies still plan to source from China in short to medium terms. While 63 percent of respondents plan to decrease sourcing from China further over the next two years, it is a notable decrease from 70 percent in 2020 and 83 percent in 2019.
  • Most respondents still see China as a competitive and balanced sourcing base from a business perspective. Few other sourcing countries can match China’s flexibility and agility, production capacity, speed to market, and sourcing cost. As China’s role in the textile and apparel supply chain goes far beyond garment production and continues to expand, it becomes ever more challenging to find China’s alternatives.
  • Non-economic factors, particularly the allegations of forced labor in China’s Xinjiang Uygur Autonomous Region (XUAR), significantly hurt China’s long-term prospect as a preferred sourcing base by U.S. fashion companies. China also suffered the most significant drop in its labor and compliance rating this year.

#5 With an improved industry look and the continued interest in reducing “China exposure,” U.S. fashion companies actively explore new sourcing opportunities.

  • Vietnam remains a hot sourcing destination. However, respondents turn more conservative this year about Vietnam’s growth potential due to rising cost concerns and trade uncertainties caused by the Section 301 investigation.
  • U.S. fashion companies are interested in sourcing more from Bangladesh over the next two years. Respondents say apparel “Made in Bangladesh” enjoys a prominent price advantage over many other Asian suppliers. However, the competition among Bangladeshi suppliers could intensify as U.S. fashion companies plan to “work with fewer vendors in the country.”
  • Respondents are also interested in sourcing more from Sub-Saharan Africa by leveraging the African Growth and Opportunity Act (AGOA). Respondents also demonstrate a growing interest in investing more in AGOA members directly. “Replace AGOA with a permanent free trade agreement that requires reciprocal tariff cuts and continues to allow the “third-country fabric provision” is respondents’ most preferred policy option after AGOA expires in 2025.

#6 Sourcing from the Western Hemisphere is gaining new momentum

  • Overall, U.S. fashion companies’ growing interest in the Western Hemisphere is more about diversifying sourcing away from China and Asia than moving the production back to the region (i.e., reshoring or near-shoring).
  • Respondents say CAFTA-DR’s “short supply” and “cumulation” mechanisms provide critical flexibility that allow U.S. fashion companies to continue to source from its members. However, despite the “yarn-forward” rules of origin, only 15 percent of respondents sourcing apparel from CAFTA-DR members say they “purposefully use U.S.-made fabrics” to enjoy the agreement’s duty-free benefits.
  • Respondents suggest that encouraging more apparel sourcing from the Western Hemisphere requires three significant improvements: 1) make the products more price competitive; 2) strengthen the region’s fabric and textile raw material production capacity; 3) make rules of origin less restrictive in relevant U.S. trade agreements.

This year’s benchmarking study was based on a survey of executives at 31 leading U.S. fashion companies from April to June 2021. The study incorporates a balanced mix of respondents representing various types of businesses in the U.S. fashion industry. Approximately 54 percent of respondents are self-identified retailers, 46 percent self-identified brands, 69 percent self-identified importers/wholesalers. Around 65 percent of respondents report having more than 1,000 employees. Another 27 percent of respondents represent medium-sized companies with 101-999 employees.

Primark’s Global Sourcing for Apparel

About Primark

Primark is one of the largest fashion retailers in Europe, offering something for everyone with a wide selection of products available across womenswear, menswear, kidswear, home, health & beauty, and gifting. It has 384 stores and employs over 70,000 people in the Republic of Ireland, the UK, Spain, Portugal, Germany, the Netherlands, Belgium, Austria, France, Italy, Slovenia, Poland, and the US.

As of May 2021, Primark sources from 28 countries working with around 928 contracted factories. Of these factories, 86 percent are Asia-based. Another 10 percent and 4 percent are located in Eastern EU and Western EU countries, respectively. Primark does not own any of these factories, however.

Measured by the number of workers, Primark’s Asian factories are larger than their counterparts in other parts of the world. For example, while Primark’s factories in Pakistan and Bangladesh typically have more than 2,500+ workers, its factories in Western EU countries like the UK, Germany, Italy, and France, on average, only have 64-200 workers. This pattern suggests that Primark mainly uses Asian factories to fulfill volume sourcing orders and its EU factories mostly produce replenishment or more time-sensitive fashionable items. 

Further, reflecting the unique role of the garment industry in creating economic opportunities for women, females account for more than half of the workforce in most garment factories that make products for Primark. The percentage is exceptionally high in developing countries like Myanmar (89%), Sri Lanka (78%), Vietnam (77%), and Cambodia (75%).

Regarding Primark’s China sourcing strategy, on the one hand, Primark sources from as many as 475 suppliers located in China, far more than any other Asian country. However, most of Primark’s China factories are small and medium-sized, and fewer than 1% report having 1,000+ workers. In comparison, more than 75% of Primark’s factories in Bangladesh, Pakistan, and Myanmar have 1,000+ workers. This pattern suggests that China plays a more sophisticated role in Primark’s textile and apparel supply chain and is often used to balancing flexibility and agility.

Primark’s Ethical Trade and Environmental Sustainability team comprises over 120 specialists based in key sourcing countries. The team visits and reviews every supplier factory at least once a year to ensure the factories’ standards align with Primark’s products Code of Conduct.

Every factory that manufactures products for Primark has to meet internationally recognized standards before the first order is placed and throughout the time they work with Primark.

Further reading:

USITC Reports the Economic Impacts of U.S. Free Trade Agreements

In June 2021, the U.S. International Trade Commission (USITC) released the 2021 Economic Impact of Trade Agreements Implemented under Trade Authorities Procedures report. By using both qualitative and quantitative methods, USITC assessed the impact of trade agreements on U.S. industries, including workers, since 2016. Below are the key findings related to the textile and apparel sector:

First, free trade agreements enacted in the U.S. have had a small but positive effect on the U.S. economy and trade. As of January 1, 2021, the United States has 14 free trade agreements (FTAs) with 20 countries in force. In the year 2017 (the base year), they led to an estimated increase in U.S. real Gross Domestic Product (GDP) of $88.8 billion (0.5 percent), and in aggregate U.S. employment of 485,000 full-time equivalent (FTE) jobs (0.3 percent). Real wages increased by 0.3 percent. Further, U.S. exports increased by $37.4 billion (1.6 percent), and imports increased by $95.2 billion (3.4 percent) because of these FTAs.

Second, USITC estimates that U.S.-free trade agreements have expanded the U.S. textile industry but hurt U.S. domestic apparel production. Thanks to the North American Free Trade Agreement (NAFTA, now the U.S.-Mexico-Canada Trade Agreement, USMCA) and the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), the Western Hemisphere has become the single largest export market for U.S. textile producers. However, U.S. apparel manufacturers have to face intensified import competition.

Third, the textile and apparel-specific rules in U.S. free trade agreements are complicated and often hinder the usage of the trade agreements. As noted by USITC, the U.S. duty on imported textile and, especially, apparel goods are among the highest of all product categories. Despite the duty-saving incentives, only 12.1% of U.S. textile and apparel imports came in under FTAs in 2020, even lower than 16.7% in 2007 when fewer FTAs were in force.

The complexity of the textile and apparel-specific rules of origins (ROOs) is a significant cause of the low FTA utilization rate. As USITC noted, “No two FTAs using the tariff shift model contain the same ROOs for apparel goodsfor some importers, the strict preference rules of origins (ROOs), along with the record-keeping and documentation requirements the rules entail, make the cost of compliance too great to take full advantage of the duty-free opportunities.” According to the annual USFIA fashion industry benchmarking study, the surveyed U.S. fashion companies consistently expressed the same concerns about the too restrictive ROOs in U.S. FTAs.

Related, the USITC report noted, “some U.S. domestic textile industry representatives state that the existing FTA rules follow a simple template designed to benefit upstream manufacturers in the textile and apparel supply chain.” Having to use more expensive domestic-made fibers and yarns reduces the price competitiveness of U.S. fabrics and home textiles in the export market.

Further, the USITC report explains the history of the “Short supply” and “Tariff-preference level, TPL” mechanisms in U.S. free trade agreements. However, the report does not provide an assessment of their trade impacts.

Trade statistics show that these exceptions to the restrictive “yarn-forward” rules of origin are critical for U.S. apparel sourcing from certain FTA partners. For example, more than 60% of U.S. apparel imports from Canada claimed duty-free benefits by using the TPL mechanism rather than complying with the USMCA/NAFTA “yarn-forward” rules in 2020.  Around 8% of U.S. apparel imports from Mexico did the same. Likewise, in 2020, approximately 4% of U.S. apparel imports from CAFTA-DR members used the “short supply” mechanism, and the other 4% used the “cumulation” mechanism.