2016 August Sourcing at Magic Debriefing

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New landscape of sourcing

  • Sourcing is turning from regional to global. In the past, U.S. apparel companies/fashion brands set up regional offices to handle sourcing. Nowadays, companies are building a global infrastructure to develop, source and market their products around world. Global rather than regional sourcing also allows companies to improve sourcing efficiency and reduce total product and distribution cost while maintaining quality of their product and services.
  • U.S. apparel companies/fashion brands are going with fewer but more capable vendors (“super vendors”). For example, executive from a leading U.S. apparel brand said their company has shrunk their sourcing base by 40% in the past few years. At the same time, they now expect their vendors to be able to supply on a global scale, including having multiple manufacturing facilities around the world and being able to provide value added services such as design and product development.
  • Related, sourcing is shifting from cut-make-and trim (CMT) to full package. This is consistent with our findings in the latest USFIA benchmarking study which suggests that vendors are highly expected to have the capacity of supplying raw material.
  • U.S. apparel companies/fashion brands are also investing to build a more partnership-based relationship with vendors— help vendors reduce cost, become more innovative and have the same vision looking at the whole picture of the supply chain. At the same time, U.S. apparel companies/fashion brands see vendors as their “ambassadors” and want to know more about them—what they believe, what they can bring to the table and how they treat their workers.
  • Companies are redefining the role of sourcing in their businesses. Sourcing is no longer treated as a technical function, but an integral part of a company’s overall business strategy.  

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Made in USA

  • There is a noticeable interest in sourcing textiles and apparel “Made in USA” at Magic. A dozen U.S.-based apparel companies attended the Magic show and their booths attracted a heavy traffic. According to representatives from these companies, U.S. consumers’ increased demand for apparel “Made in USA” has been a strong support for their business growth in recent years.
  • Nevertheless, apparel “Made in USA” often contain imported inputs today. I specifically asked a few vendors where their fabrics come from. All but one company said fabrics were imported because it was so hard to find domestic suppliers, especially for woven fabrics. Interesting enough, some companies feel OK to label their apparel “Made in USA” even though they use imported fabrics. According to them, apparel can be labeled “Made in USA” as long as “domestic content exceeds 60% of the value of the finished product.”
  • At a seminar, some entrepreneurs which make and sell “Made in USA” apparel and accessories said price and production cost remain one of their top business challenges. I asked the panel whether going high-end is the only option for the future of apparel “Made in USA” given the high labor cost in the country. They disagreed—saying technology advancement and design innovation could help reduce production cost. However, all panelists admit they carry some luxury product lines. Additionally, some companies choose to emphasize concepts other than “Made in USA”, such as “hand-made” and “Pride in Seattle”, in order to make their products look more personal to consumers and allow more flexibility in sourcing raw material.

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Updates of sourcing destinations

  • Ethiopia: as I observe, Ethiopia is THE star at this year’s Sourcing at Magic. The country was repeatedly mentioned by panelists at various seminars as a promising and emerging sourcing destination. Several events at the show were also exclusively dedicated to promoting apparel and footwear “Made in Ethiopia”. A couple of reasons why Ethiopia is so “hot”: 1) the ten year extension of AGOA creates a stable market environment encouraging sourcing from Africa and investing in the region (and for sure the duty free access both to the US and EU market).  2) Located in the middle of Africa, Ethiopia is regarded as a hub that has the potential to take a leadership role in integrating the apparel supply chain in the region. 3) It is said that Ethiopian government is very supportive to the development of the local textile industry.  4) Many U.S. fashion companies feel sourcing from Ethiopia involves less risks of trade compliance than sourcing from some Asian countries such as Bangladesh.  
  • China: China unarguably remains the No.1 textile and apparel supplier to the U.S. market—in terms of numbers, around 60% vendors at the Magic show came from China. But I notice that booths of Chinese vendors didn’t have much traffic this time, an interesting signal for sourcing trend in the upcoming season. Nevertheless, while U.S. apparel companies/fashion brands are placing more emphasis on supply chain efficiency, quality of products, speed to market and added value in sourcing, “Made in China” will continue to enjoy many unique advantages over other suppliers. Plus, Chinse factories are actively investing overseas, from Southeast Asian countries to Africa. This makes Chinese factories likely to grow into “super vendors” that western fashion brands/retailers are looking for. To certain extent, macro trade statistics alone may not be able to fully reveal what is going on in apparel sourcing and trade.   
  • Vietnam: Regarding the future of Vietnam as a sourcing destination for U.S. apparel companies/fashion brands, somehow I hear more concerns than excitements at Magic. The uncertainty surrounding the ratification of TPP by the U.S. Congress definitely has made some companies hold back their investment and sourcing plan in Vietnam. Another big concern is Vietnam’s labor shortage and limited manufacturing capacity: apparel factories in Vietnam are already competing with electronic industry for young skilled workers. US companies also have to compete with their EU counterparts for orders in Vietnam. The newly reached EU-Vietnam Free Trade Agreement (EVFTA), which is very likely to be implemented earlier than TPP, provides Vietnam duty free access also to the EU market. And EVFTA adopts a much more flexible rule of origin than TPP, making it easier for Vietnam factories to actually use the agreement.

Sustainability

The awareness of social responsibility and sustainability has much improved: everyone in the industry is talking about them and have a view on them. On a voluntary basis, some companies are making efforts to improve traceability of their products, i.e. to help consumers know exactly where their clothing comes from and what is happening at the upstream of the supply chain. Yet, how to encourage factories to share their information and control tier 2 and tier 3 suppliers remain a challenge. 

by Sheng Lu

Note: Sourcing at Magic is one of the largest and most influential annual textile and apparel sourcing events hosted in the United States. Special thanks to the Center for Global and Areas Studies at the University of Delaware for funding the trip.

Apparel “Made in America” of Imported Fabrics

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Presidential candidate Hillary Clinton recently launched a new website “Made In America: A Buyer’s Guide for Donald Trump”, which highlighted hundreds of U.S. manufacturers for products ranging from men’s ties, suits to furniture. 

Joseph Abboud is one of the companies highlighted by the website for making “Made in America” suites and shirts. But does “Made in America” mean a Joseph Abboud branded suit or shirt is 100% made in the United States from yarns, fabrics to the cut-and-sew process? Not necessarily!

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According to information submitted by Joseph Abboud to the “Made in USA” database managed by the Office of Textiles and Apparel under the U.S. Department of Commerce, some of its products actually are “partially made in U.S.A. with imported fabrics”.

This is evidenced both by Joseph Abboud’s product label and information provided by some retailers which sell Joseph Abboud’s branded products (See pictures below).

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Hamilton Shirts of Houston is another company highlighted by Clinton’s “Made in USA” website. But similar as the case of Joseph Abboud, a Hamilton branded shirt priced at $215-$245 is typically “Hand cut and sewn in the USA. 100% cotton Italian fabric.”

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Actually, Joseph Abboud is a brand owned by JA Holding, Inc., which was acquired by Tailored Brands for $94.9 million on August 6, 2013. As of June 2016, Tailored Brands also owns the Men’s Wearhouse and Jos. A. Bank.

Like most other US apparel companies/fashion brands today, Tailored Brands commits to global sourcing. In fiscal year 2015, the company “sourced approximately 60% of direct sourced merchandise from Asia (36% from China) while 13% was sourced in the U.S., 12% in Mexico, and 15% was sourced in other regions.” (Source: Tailored Brands Annual Report, 2015)

Tailored Brands uses the factory in New Bedford, MA (the one highlighted by Clinton’s website) to make tailored clothing under the Joseph Abboud label, including designer suits, tuxedos, sport coats and slacks which they sell in Men’s Wearhouse stores as well as Joseph Abboud’s flagship store. Tailor Brands also sells Joseph Abboud branded products in Moores stores, which are made in Canada by a third party.

Related article: Clothing Label Reveals the Global Nature of the Textile and Apparel Industry 

Disclaimer: All blog posts on this site are for FASH455 educational purposes only and they are nonpolitical and nonpartisan in nature. No blog post has the intention to favor or oppose any particular presidential candidate, nor shall be interpreted in that way.

How is China’s Garment Industry Dealing with Rising Labor Costs?

Please feel free to share your views on the following discussion questions based on the video:

China is no longer one of the cheapest places to produce garments. The minimum monthly wages in China have far exceeded those in Bangladesh, India and Cambodia:

  • How are Chinese garment factories coping with the challenges of rising labor cost?
  • Is adopting Taylor’s “scientific management”, i.e. asking skilled workers to do less skilled jobs in a more specialized production line, a smart idea?
  • What is your view on the growing difficulty of hiring and retaining young skilled workers for the garment industry in China?
  • Any other thoughts on the video?

Appendix: State of China’s Apparel Exports in 2015

According to the UNComtrade, China remains the world’s largest apparel exporter in 2015 (37.4% world share for knitted apparel, HS61 and 34.9% for woven apparel, HS62).

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62From 2011 to 2015, “Made in China” continues to acquire more market shares in some key apparel import markets in the world, including the United States and UK (i.e. China’s apparel exports to these markets grew at a faster rate than these countries’ apparel import growth from the world—bubbles in blue in the figures below). Nevertheless, in some other markets (bubbles in yellow in the figures below), notably Japan and Germany, China is losing market shares to other garment exporters such as Vietnam and Bangladesh.

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2016 U.S. Fashion Industry Benchmarking Study Released

The 2018 U.S. Fashion Industry Benchmarking Study is now available
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The report can be downloaded from HERE

Key Findings of the study:

I. Business environment and outlook in the U.S. Fashion Industry

  • Overall, respondents remain optimistic about the five-year outlook for the U.S. fashion industry. “Market competition in the United States” is ranked the top business challenge this year, which, for the first time since 2014, exceeds the concerns about “increasing production or sourcing cost.”

II. Sourcing practices in the U.S. fashion industry

  • U.S. fashion companies are more actively seeking alternatives to “Made in China” in 2016, but China’s position as the No.1 sourcing destination seems unlikely to change anytime soon. Meanwhile, sourcing from Vietnam and Bangladesh may continue to grow over the next two years, but at a slower pace.
  • U.S. fashion companies continue to expand their global reach and maintain truly global supply chains. Respondents’ sourcing bases continue to expand, and more countries are considered potential sourcing destinations. However, some companies plan to consolidate their sourcing bases in the next two years to strengthen key supplier relationships and improve efficiency.
  • Today, ethical sourcing and sustainability are given more weight in U.S. fashion companies’ sourcing decisions. Respondents also see unmet compliance (factory, social and/or environmental) standards as the top supply chain risk.

III. Trade policy and the U.S. fashion industry

  • Overall, U.S. fashion companies are very excited about the conclusion of the Trans-Pacific Partnership (TPP) negotiations and they look forward to exploring the benefits after TPP’s implementation.
  • Thanks to the 10-year extension of the African Growth and Opportunity Act (AGOA), U.S. fashion companies have shown more interest in sourcing from the region. In particular, most respondents see the “third-country fabric” provision a critical necessity for their company to source in the AGOA region.
  • Free trade agreements (FTAs) and trade preference programs remain underutilized in 2016 and several FTAs, including NAFTA and CAFTA-DR, are utilized even less than in previous years. U.S. fashion companies also call for further removal of trade barriers, including restrictive rules of origin and remaining high tariffs.

The benchmarking study was conducted between March 2016 and April 2016 based on a survey of 30 executives from leading U.S. fashion and apparel brands, retailers, importers, and wholesalers. In terms of business size, 92 percent of respondents report having more than 500 employees in their companies, while 84 percent of respondents report having more than 1,000 employees, suggesting that the findings well reflect the views of the most influential players in the U.S. fashion industry.

For the benchmarking studies in 2014 and 2015, please visit: https://www.usfashionindustry.com/resources/industry-benchmarking-study

The True Meaning of FASH455 (Global Apparel and Textile Trade and Sourcing)

 

I encourage everyone to watch these two short videos, which provide a great summary of FASH455 and remind us the true meaning of our course.

First and foremost, FASH455 is not designed to be a course which just technically talks about textile and apparel (T&A) trade and how to source T&A products. Yes, from various trade theories, evolution pattern of the global T&A industry, T&A regional production and trade network to the flying geese model, we do cover a lot of factual knowledge and theories in FASH455, because this is a highly professional area. But please keep in mind that the vision and perspective set for FASH455 are much higher and critical, that is:

  1. What role can the textile and apparel industry play in building a better world—how to reduce poverty, achieve economic growth, promote human development, enhance sustainability and contribute to world peace and security?
  2. What does it mean as a FASH major (as well as a college graduate)? What can we positively contribute to the world we are living today?

By the same token, I hope students realize that the most meaningful thing you can take away from the course is a fresh new way (perspective) of looking at the world and recognizing the critical 21st century global agendas that are closely connected with our T&A industry. For example:

  • How to more equally distribute the benefits & cost of globalization among different countries and groups of people?
  • How to make sure that tragedies like the Rana Plaza building collapse will never happen again?
  • How to make international trade work better and more effectively lead to economic growth and human development? 
  • How to achieve sustainability while develop the economy? To which extent shall we renovate the conventional growth model?
  • How to use trade policy as a tool to solve some tough global issues such as labor practices and environmental standard? 

For many of these questions, there is no good answer yet. But they are waiting for you, the young professional and new generation of leaders, to find an answer and write the history, based on your knowledge, wisdom, responsibility, courage and creativity!

What do you take away from FASH455? Please feel free to share your thoughts and comments.

African Growth and Opportunity Act and Textile & Apparel

(In the video: Gail Strickler, former Assistant US Trade Representative for Textiles, highlights the immense opportunities created by the renewal of AGOA for duty-free access to the massive US market for African textile and apparel producers.)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to U.S. imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen U.S. trade and investment ties with the region. (note: non-reciprocal means SSA countries do not need to offer equivalent benefits to imports from the United States.)

Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA.  Like many trade agreements and trade preference programs, AGOA also set unique rules of origin for textile and apparel (T&A):

First, to enjoy the duty-free and quota-free treatment in the US market, eligible T&A products made in qualifying AGOA countries need to be one of the following categories:

  • Apparel made with US yarns and fabrics;
  • Apparel made with Sub-Saharan African (SSA) regional yarns and fabrics, subject to a cap;
  • Apparel made with yarns and fabrics not produced in commercial quantities in the United States;
  • Certain cashmere and merino wool sweaters; and
  • Eligible hand-loomed, handmade or folklore articles and ethnic printed fabrics.

Second, under a special rule called “third-country fabric” provision, AGOA countries with lesser-developed countries (LDBC) status can further enjoy duty-free access in the US market for apparel made from yarns and fabric originating anywhere in the world (such as China, South Korea, and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology-intensive textile products. [Note: Although the US imports of apparel made with third-country fabric are subject to a cap, the cap has never been reached].

According to a 2014 comprehensive study conducted by the USITC, the “third-country fabric” provision has three major benefits to the AGOA members:

1) Increase exports of apparel. This can be evidenced by the fact that most US apparel imports under AGOA came from those countries that are eligible for the “third-country fabric” provision, such as Lesotho, Kenya, Mauritius, and Swaziland. In comparison, because South Africa is not eligible for the “third-country fabric” provision, its apparel exports to the United States had significantly dropped since 2003 and only accounted for 0.6% among AGOA countries in 2013.

2) Encourage foreign investment. From 2003 to 2013, a total 21 T&A FDI projects were made in SSA, among which 18 projects (or 85.7%) were greenfield FDI. The third-country fabric provision is the main driver for these FDI projects. For example, many Chinese and Taiwanese investors had opened apparel factories in Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Namibia, Nigeria and Tanzania as a source of exports to the United States and the EU.

3) Enhance trade diversification. Theoretically, relaxing rules of origin (RoO) such as the third-fabric provision can free up companies’ resources and allow them to expand export product lines. As observed by a few empirical studies, AGOA’s third-country fabric provision helped related countries increase the varieties of apparel exports between 39 and 61 percent.

AGOA receives new authorization in 2015, which will last for 10 years until 2025 (including the 3rd country fabric provision). This ten-year renewal of AGOA is regarded as critical and necessary to encourage more long-term investment in the region. As put by Florizelle Liser, Assistant US Trade Representative for Africa “What we know is that African producers of apparel, like producers of apparel all around the world, need to have the flexibility to source their input from wherever of those can be produced most effectively, cost effectively for the products that they are sewing. So we want through the “third country fabric” provision to give the African producers of apparel that flexibility. We do know in terms of establishing textiles business on the ground producing those inputs right there in Africa and that more of that indeed is going to happen. The reason is that as U.S. buyers of apparel and this is an enormous market for apparel… as U.S. buyers of apparel source more of their apparel from Africa, then investors in textile mills, which are very expensive, will be incentivized and are being incentivized to actually establish those fabric mills right there in Africa, and then be able to save time, in terms of getting those inputs that are needed for the clothing that is being produced. So we see that happening already: it’s happening in Kenya, it’s happening in Ethiopia and around the continent. And that is what we need to have more of as we go forward in this ten-year extension of AGOA.”

AGOA 1

AGOA 2

AGOA 3

Why NCTO and Euratex Disagree on the Textile and Apparel Rules of Origin in T-TIP?

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In an April 13 press briefing, the National Council of Textile Organizations (NCTO) which represents the U.S. textile industry, insists the Trans-Atlantic Trade and Investment Partnership (T-TIP) shall adopt the so called “yarn-forward” Rules of origin (RoO). Yarn-forward (or “triple transformation”) in T-TIP means, in order to receive preferential duty treatment provided under the trade agreement, yarns used in textile production in general need to be sourced either from the US or EU.  All 14 existing free trade agreements (FTA) in the United States adopt the yarn-forward RoO.

In comparison, in its position paper released in June 2015, the European Apparel and Textile Confederation (Euratex), which represents the EU textile and apparel industry, favors a so called “fabric forward” RoO in T-TIP instead of “yarn-forward”. Fabric-forward (or “double transformation”) in T-TIP means in order to receive preferential duty treatment provided under the trade agreement, fabrics used in apparel production in general need to be sourced either from the US or EU, but yarns used in textile production can be sourced from anywhere in the world.

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Exploring data at the 4-digit NAICS code level can find that the United States remains a leading yarn producer. Value of U.S. yarn production (NAICS 3131) even exceeded fabric production (NAICS 3132) in 2014. This means: 1) U.S. has sufficient capacity of yarn production; 2) it will be in the financial interests of the U.S. textile industry to encourage more use of U.S.-made yarns in textile production in the T-TIP region (i.e. pushing the “yarn-forward” RoO).

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EU yarn import

However, data at the 4-digit NACE R.2 code level suggests that EU(28) was short of €5,643 million local supply of yarns (NACE C1310) for its manufacturing of fabrics (NACE C1320) in 2013 (latest statistics available). This figure well matched with the value of €4,514 million yarns that EU (28) imported from outside the region that year. Among these yarn imports (SITC 651), over half came from China (22%), Turkey (19%) and India (13%), whereas only 5% came from the United States. Should the “yarn-forward” RoO is adopted in T-TIP, EU textile and apparel manufacturers may face a shortage of yarn supply or see an increase of their sourcing & production cost at least in the short run.

Sheng Lu