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.