Outlook 2022– Key Issues to Shape Apparel Sourcing and Trade

In December 2021, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2022–what’s next for apparel sourcing briefing. Below is my contribution to the report. All comments and suggestions are more than welcome!

What next for apparel sourcing?

As “COVID sets the agenda” and the trajectory of several critical market and non-market forces hard to predict (for example, global inflation, and geopolitics), fashion companies may still have to deal with a highly volatile and uncertain market environment in 2022. That being said, it is still hopeful that fashion companies’ toughest sourcing challenges in 2021 will start to gradually ease at some point in the new year, including the hiking shipping costs, COVID-related lockdowns, and supply chain disruptions.

In response to the “new normal,” fashion companies may find several sourcing strategies essential:

One is to maintain a relatively diverse apparel sourcing base. The latest trade data suggests that US, EU, and Japan-based fashion companies have been steadily sourcing from a more diverse group of countries since 2018, and such a trend continues during the pandemic. Echoing the pattern, in the latest annual benchmarking study I conducted in collaboration with the United States Fashion Industry Association (USFIA), we find that “China plus Vietnam plus many” remains the most popular sourcing model among respondents. This strategy means China and Vietnam combined now typically account for 20-40 percent of a fashion company’s total sourcing value or volume, a notable down from 40-60 percent in the past few years. Fashion companies diversify their sourcing away from “China plus Vietnam” to avoid placing “all eggs in one basket” and mitigate various sourcing risks. In addition, more than 85 percent of surveyed fashion companies say they will actively explore new sourcing opportunities through 2023, particularly those that could serve as alternatives to sourcing from China.

The second strategy is to strengthen the relationship with key vendors further. As apparel is a buyer-driven industry, fashion brands and retailers fully understand the importance of catering to consumers’ needs. However, the supply chain disruptions caused by COVID-19 remind fashion companies that building a close and partner-based relationship with capable suppliers also matters. For example, working with vendors that have a presence in multiple countries (or known as “super-vendors”) offers fashion companies a critical competitive edge to achieve more flexibility and agility in sourcing. Sourcing from vendors with a vertical manufacturing capability also allows fashion companies to be more resilient toward supply chain disruptions like the shortage of textile raw materials, a significant problem during the pandemic.

Further, we could see fashion companies pay even closer attention to textile raw material sourcing in the year ahead. On the one hand, given the growing concerns about various social and environmental compliance issues like forced labor, fashion brands and retailers are making more significant efforts to better understand their entire supply chain. For example, in addition to tracking who made the clothing or the fabrics (i.e., tier 1 & 2 suppliers), more companies have begun to release information about the sources of their fibers, yarns, threads, and trimmings (i.e., tier 3 & tier 4 suppliers). On the other hand, many fashion brands and retailers intend to diversify their textile material sourcing from Asia, particularly China, against the current business environment. Compared with cutting and sewing garments, much fewer countries can make textiles locally, and it takes time to build textile production capacity. Thus, fashion companies interested in taking more control of their textile raw material sourcing need to take concrete actions such as shifting their sourcing model and making long-term investments intentionally.

Apparel industry challenges and opportunities

One key issue we need to watch closely is the US-China relations. China currently remains the single largest source of apparel globally, with no near alternative. China also plays an increasingly significant role as a textile supplier for many leading apparel exporting countries in Asia. However, as the US-China relations become more concerning and confrontational, we could anticipate new trade restrictions targeting Chinese products and products from any sources that contain components made in China. Notably, with strong bipartisan support, President Biden signed into law the Uyghur Forced Labor Prevention Act on December 23, 2021. The new law is a game-changer! Depending on the detailed implementation guideline to be developed by the Customs and Border Protection (CBP), US fashion companies may find it not operationally viable to source many textiles and apparel products from China. In response, China may retaliate against well-known western fashion brands, disrupting their sales expansion in the growing Chinese consumer market. Further, as China faces many daunting domestic economic and political challenges, a legitimate question for fashion companies to think about is what an unstable China means for their sourcing from the Asia-Pacific region and what the contingency plan will be.

Another critical issue to watch is the regional textile and apparel supply chains and related free trade agreements. While apparel is a global sector, apparel trade remains largely regional-based, i.e., countries import and export products with partners in the same region. Data shows that from 2019 to 2020, around 80% of Asian countries’ textile and apparel imports came from within Asia and about 50% for EU countries. Over the same period, over 87% of Western Hemisphere (WH) countries’ textile and apparel exports went to other WH countries and about 75% for EU countries.

Notably, the reaching and implementation of new free trade agreements will continue to alter and shape new regional textile and apparel supply chains in 2022 and beyond. For example, the world’s largest free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), officially entered into force on January 1, 2022. The tariff reduction and the very liberal rules of origin in the agreement could strengthen Japan, South Korea, and China as the primary textile suppliers for the Asia-based regional supply chain and enlarge the role of ASEAN as the leading apparel producer. RCEP could also accelerate other trade agreements in the Asia-Pacific region, such as the China-South Korea-Japan Free Trade Agreement currently under negotiation.

As one of RCEP’s ripple effects, we can highly anticipate the Biden administration to announce its new Indo-pacific economic framework soon to counterbalance China’s influences in the region. The Biden administration also intends to leverage trade programs such as the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) to boost textile and apparel production, trade, and investment in the Western Hemisphere and address the root causes of migration. These trade initiatives will be highly relevant to fashion companies that could use the opportunity to expand near sourcing, take advantage of import duty-saving benefits and explore new supply chains. 

Additionally, fashion companies need to be more vigilant toward political instability in their major sourcing destinations. We have already seen quite a turmoil recently, from Myanmar’s military coup, Ethiopia’s loss of the African Growth and Opportunity Act (AGOA) benefits, concerns about Haiti and Nicaragua’s human rights, and the alleged forced labor in China’s Xinjiang region. Whereas fashion brands and retailers have limited or no impact on changing a country’s broader human rights situation, the reputational risks could be very high. Having a dedicated trade compliance team monitoring the geopolitical situation routinely and ensuring full compliance with various government regulations will become mainstream among fashion companies.

And indeed, sustainability, due diligence, recycling, digitalization, and data analytics will remain buzzwords for the apparel industry in the year ahead.

by Sheng Lu

COVID-19 Hits the Bangladeshi Garment Industry

Discussion questions [Anyone is more than welcome to join our online discussions; For FASH455, please address at least two questions in your comment; please also mention the question number (i.e., #1, or #3; no need to repeat the question) in your comment.]

#1: How to understand apparel is a global sector from the video?

#2: How to understand the economic, social, and political implications of apparel sourcing and trade from the video?

#3: What are the top challenges facing Bangladeshi garment factories during COVID-19? Why or why not do think these challenges will go away soon?

#4: How is the big landscape of apparel sourcing changing because of COVID-19? Any apparel trade or sourcing patterns that COVID-19 didn’t change based on the video?

#5: Anything else you find interesting/intriguing/controversial/thought-provoking from the video? Why?

[discussion for this post is closed]

Statistics: Global Apparel Market 2021-2026

Market size

Estimate by Euromonitor (2021)
Estimate by Marketline (2021)

Top apparel retail markets

Apparel retail sales by region

Note:

#1 According to industry estimates, the world’s apparel retail market is expected to enjoy a 7.6-8.6 percent growth 2021-2022. However, the annual growth rate will slow down to 4.0-5.7 percent during 2022-2024 and down further to 3.8-4.6 percent during 2025-2026.

#2 The Asia-Pacific region, North America, and Western Europe will stay the world’s largest apparel consumption markets, accounting for over 80 percent of the retail sales. However, the Middle East and Africa, and Latin America will be important emerging markets to watch.

#3 Given GDP per capita and the size of the population, China and the United States will remain the world’s top two largest apparel retail markets with no near competitors. However, affected by the macro-economic environment, we may only see modest retail sales growth in these two markets through 2026.

Video Discussion: How Amazon Beat Supply Chain Chaos With Ships, Containers and Planes

Note: The video provides a great overview of Amazon’s supply chain strategies in response to the current shipping crisis and their broad industry implications. You will also learn how international shipping and logistics work today, including processes, technologies, innovations, and remaining challenges.

The latest industry estimates show that Amazon’s apparel and footwear sales in the U.S. grew by roughly 15% in 2020 to more than $41 billion, more than Walmart did. This represents a highly impressive 11%-12% share of all apparel sold in the U.S. and 34%-35% share of all apparel sold online. Amazon achieved early success by offering a wide range of basics, but it has since expanded its fashion business. It now features a growing slate of name brands. The company also launched online luxury fashion shops in the fall of 2019.

Discussion questions:

  1. What are the unique features of Amazon’s supply chain strategies in response to the current shipping crisis? Do these strategies work well? What is your evaluation?
  2. To what extent can other retailers emulate what Amazon is doing? Should they?
  3. Should conventional fashion companies (such as Macy’s and Gap Inc) see Amazon as a competitor or a potential collaborator? Why?
  4. Is there anything else you find interesting/intriguing/thought-provoking in the video? Why?

Shipping & logistics terms mentioned in the video:

  • TEU (Twenty-foot Equivalent Unit): TEU is a measure of volume in units of twenty-foot long containers. For example, large container ships are able to transport more than 18,000 TEU (a few can even carry more than 21,000 TEU). One 20-foot container equals one TEU.
  • FEU (Forty-foot Equivalent Unit): Two TEUs equal one FEU.
  • FCL (Full Container Load): This means that a shipment occupies the entire space of a container without having to share it with other shippers. In an FCL cargo, the complete goods in the container are owned by one shipper.
  • LCL (Less than Container Load): LCL describes the transportation of small ocean-freight shipments, which do not require the full capacity of a container.
  • ULD (Unit Load Device): A container used for baggage, cargo and mail on wide-body and narrow-body aircraft.
  • Freight Forwarder: An agency that receives freight from a shipper and arranges for transportation with one or more carriers to the final destination. While the forwarder does not always handle the freight itself, it contracts with other carriers to move goods via road, rail, ocean and air.

Supplementary reading: The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (2016, 2nd ed) by Marc Levinson

State of Fashion 2022 Report by McKinsey & Co & BOF

In December 2021, McKinsey & Co’ and Business of Fashion (BOF) released its annual State of Fashion report. Below are the key points in the report regarding the sourcing trends in the year ahead:

#1 The logistics challenges could intensify in 2022, with 87% of respondents expecting supply chain disruptions to continue to affect their profit margins in the year ahead negatively.  The global surges in demand create additional and unpredictable pressures on freight services, ports, and terminals. As a result, fashion companies may need to “plan for a permanently more expensive logistical future.”

#2 It will be critical for fashion companies to keep sourcing flexible, build resilience into the supply chain, and work closely with vendors. As one respondent commented, “[crises like] pandemics do happen.”

#3 The interest in nearshoring and reshoring will continue in 2022. Over 70% of respondents plan to increase the share of nearshoring close to company headquarters, and about 25% intend to reshore sourcing to their headquarters’ country. Notably, some EU-based companies have been moving textile manufacturing from China to Turkey to minimize delays.

#4 One crucial free trade agreement to watch is the Regional Comprehensive Economic Partnership (RCEP), to take effect on January 1, 2022. It’s the largest free trade agreement in history, involving nearly 30% of the world’s population. RCEP “has the potential to be at the core of the reconstruction of the global supply chain. RCEP is possibly the only trading block with both production capacity and consumer demand,” meaning it could dramatically facilitate regional trade and investment within Asia.

#5 There is a “significant opportunities in creating a hyperdigital supply chain.” Some companies are leveraging technology to find“competitive advantages in a supply-chain context when it comes to speed, agility, cost efficiency, and price.” However, fashion companies admit, it will remain challenging to plan inventory flow with much precision, which won’t change any time soon.

Other interesting comments from the report:

 “One mega trend…in the sector is the importance of breaking down the traditional boundaries of what’s in the company and [what is done externally]; what can be accomplished together as a network — whether it’s creativity, sustainability, and supply chain, or technology.”

“As fashion brands look to pursue closed-loop recycling solutions, it is increasingly important to engage with suppliers who can help them move toward sourcing circular materials.” “Cost is certainly a factor; recycled fibres are typically more expensive than their virgin counterparts.”

“In the longer term, fashion brands will need to balance the desire to enhance speed to market with the need to alleviate supply chain pressure…That may mean streamlining production, logistics planning, and booking capabilities, as well as putting in place contingency plans and alternative suppliers while remaining as agile and flexible as possible.”

Shipping Crisis and Supply Chain Disruptions: Impacts on Apparel Sourcing and Trade (updated December 2021)

Interview with Lululemon CEO
Impact on cotton price and cotton apparel

For FASH455: Please feel free to share any thoughts or propose discussion questions based on the three short videos above.

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