The session intends to facilitate constructive dialogue regarding the latest progress, challenges, and opportunities for achieving more sustainable and socially responsible apparel sourcing in the Post-COVID world. The session will offer a unique opportunity to hear directly from leading fashion brands and retailers regarding 1) fashion companies’ latest sourcing practices against the evolving business environment and their impacts on due diligence; 2) fashion companies’ new efforts and innovative projects to achieve more sustainable and socially responsible apparel sourcing; 3) opportunities and challenges to further improve sustainability and social responsibility in apparel sourcing in the post-COVID world. In addition, the session will be highly relevant and informative to all stakeholders in the fashion apparel business community, civil society, international organizations, academia, and policymakers.
In December 2022, Just-Style consulted a panel of industry experts and scholars in its Outlook 2023–what’s next for apparel sourcing briefing. Below is my contribution to the report. All comments and suggestions are more than welcome!
2023 is likely another year full of challenges and opportunities for the global apparel industry.
First, the apparel industry may face a slowed world economy and weakened consumer demand in 2023. Apparel is a buyer-driven industry, meaning the sector’s volume of trade and production is highly sensitive to the macroeconomic environment. Amid hiking inflation, high energy costs, and retrenchment of global supply chains, leading international economic agencies, from the World Bank to the International Monetary Fund (IMF), unanimously predict a slowing economy worldwide in the new year. Likewise, the World Trade Organization (WTO) forecasts that the world merchandise trade will grow at around 1% in 2023, much lower than 3.5% in 2022. As estimated, the world apparel trade may marginally increase between 0.8% and 1.5% in the new year, the lowest since 2021. On the other hand, the falling demand may somewhat help reduce the rising sourcing cost pressure facing fashion companies in the new year.
Second, fashion brands and retailers will likely continue leveraging sourcing diversification and strengthening relationships with key vendors in response to the turbulent market environment. According to the 2022 fashion industry benchmarking study I conducted in collaboration with the US Fashion Industry Association (USFIA), nearly 40 percent of surveyed US fashion companies plan to “source from more countries and work with more suppliers” through 2024. Notably, “improving flexibility and reducing resourcing risks,” “reducing sourcing from China,” and “exploring near-sourcing opportunities” were among the top driving forces of fashion companies’ sourcing diversification strategies. Meanwhile, it is not common to see fashion companies optimize their supplier base and work with “fewer vendors.” For example, fashion companies increasingly prefer working with the so-called “super-vendors,” i.e., those suppliers with multiple-country manufacturing capability or can make textiles and apparel vertically, to achieve sourcing flexibility and agility. Hopefully, we could also see a more balanced supplier-importer relationship in the new year as more fashion companies recognize the value of “putting suppliers at the core.”
Third, improving sourcing sustainability and sourcing apparel products using sustainable textile materials will gain momentum in the new year. On the one hand, with growing expectations from stakeholders and pushed by new regulations, fashion companies will make additional efforts to develop a more sustainable, socially responsible, and transparent apparel supply chain. For example, more and more fashion brands and retailers have voluntarily begun releasing their supplier information to the public, such as factory names, locations, production functions, and compliance records. Also, new traceability technologies and closer collaboration with vendors enable fashion companies to understand their raw material suppliers much better than in the past. Notably, the rich supplier data will be new opportunities for fashion companies to optimize their existing supply chains and improve operational efficiency.
On the other hand, with consumers’ increasing interest in fashion sustainability and reducing the environmental impact of textile waste, fashion companies increasingly carry clothing made from recycled textile materials. My latest studies show that sourcing clothing made from recycled textile materials may help fashion companies achieve business benefits beyond the positive environmental impacts. For example, given the unique supply chain composition and production requirements, China appeared to play a less dominant role as a supplier of clothing made from recycled textile materials. Instead, in the US retail market, a substantial portion of such products was “Made in the USA” or came from emerging sourcing destinations in America (e.g., El Salvador, Nicaragua) and Africa (e.g., Tunisia and Morocco). In other words, sourcing clothing made from recycled textile materials could help fashion companies with several goals they have been trying to achieve, such as reducing dependence on sourcing from China, expanding near sourcing, and diversifying their sourcing base. Related, we are likely to see more public dialogue regarding how trade policy tools, such as preferential tariffs, may support fashion companies’ efforts to source more clothing using recycled or other eco-friendly textile materials.
Additionally, the debates on fashion companies’ China sourcing strategy and how to meaningfully expand near-sourcing could intensify in 2023. Regarding China, fashion companies’ top concerns and related public policy debates next year may include:
What to do with Section 301 tariff actions against imports from China, including the tariff exclusion process?
How to reduce “China exposure” further in sourcing, especially regarding textile raw materials?
How should fashion companies respond and mitigate the business impacts of China’s shifting COVID policy and a new wave of COVID surge?
What contingency plan will be should the geopolitical tensions in the Asia-Pacific region directly affect shipping from the region?
Meanwhile, driven by various economic and non-economic factors, fashion companies will likely further explore ways to “bring the supply chain closer to home” in 2023. However, the near-shoring discussion will become ever more technical and detailed. For example, to expand near-shoring from the Western Hemisphere, more attention will be given to the impact of existing free trade agreements and their specific mechanisms (e.g., short supply in CAFTA-DR) on fashion companies’ sourcing practices. Even though we may not see many conventional free trade agreements newly launched, 2023 will be another busy year for textile and apparel trade policy deliberation, especially behind the scene and on exciting new topics.
By Sheng Lu
Discussion question: As we approach the middle of the year, why do you agree or disagree with any predictions in the outlook? Please share your thoughts.
U.S. fashion companies report significant challenges coming from the macro-economy in 2022, particularly inflation and rising cost pressures. However, most respondents still feel optimistic about the next five years.
Respondents rated “increasing production or sourcing costs” and “inflation and outlook of the U.S. economy” as their 1st and 3rd top business challenges in 2022.
As a new record, 100 percent of respondents expect their sourcing costs to increase in 2022, including nearly 40 percent expecting a substantial cost increase from a year ago. Further, almost everything has become more expensive this year, from textile raw materials, shipping, and labor to the costs associated with compliance with trade regulations.
Over 90 percent of respondents expect their sourcing value or volume to grow in 2022, but more modest than last year.
Despite the short-term challenges, most respondents (77 percent) feel optimistic or somewhat optimistic about the next five years. Reflecting companies’ confidence in their businesses, nearly ALL respondents (97 percent) plan to increase hiring over the next five years.
U.S. fashion companies adopt a more diverse sourcing base in response to supply chain disruptions and the need to mitigate growing sourcing risks.
Asia remains the dominant sourcing base for U.S. fashion companies—eight of the top ten most utilized sourcing destinations are Asia-based, led by China, Vietnam, Bangladesh, and India.
More than half of respondents (53 percent) report sourcing apparel from over ten countries in 2022, compared with only 37 percent in 2021.
Reducing “China exposure” is one crucial driver of U.S. fashion companies’ sourcing diversification strategy. One-third of respondents report sourcing less than 10% of their apparel products from China this year. In addition, a new record of 50 percent of respondents sources MORE from Vietnam than China in 2022.
Nearly 40 percent of respondents plan to “source from more countries and work with more suppliers” over the next two years, up from only 17 percent last year.
Managing the risk of forced labor in the supply chain is a top priority for U.S. fashion companies in 2022, especially with the new implementation of the Uyghur Forced Labor Prevention Act (UFLPA).
Over 95 percent of respondents expect UFLPA’s implementation to affect their company’s sourcing. Notably, more than 85 percent of respondents plan to cut their cotton-apparel imports from China, and another 45 percent to further reduce non-cotton apparel imports from the country.
Most respondents (over 92 percent) do NOT plan to reduce apparel sourcing from Asian countries other than China. However, nearly 60 percent of respondents also would “explore new sourcing destinations outside Asia” in response to UFLPA.
Mapping and understanding the supply chain is a critical strategy adopted by U.S. fashion companies to address the forced labor risks in the supply chain. Almost all respondents currently track Tier 1 and 2 suppliers. With the help of new traceability technologies, 53 percent of respondents have started tracking Tier 3 suppliers this year (i.e., those manufacturing yarn, threads, and trimmings), a substantial increase from 25-36 percent in the past.
There is considerable new excitement about increasing apparel sourcing from members of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Respondents also call for more textile raw sourcing flexibility to encourage apparel sourcing from the CAFTA-DR region.
CAFTA-DR plays a more significant role as a sourcing base. About 20 percent of respondents place more than 10% of their sourcing orders from the region, doubling from 2021.
Over the next two years, more than 60 percent of respondents plan to increase apparel sourcing from CAFTA-DR members as part of their sourcing diversification strategy.
CAFTA-DR is critical in promoting U.S. apparel sourcing from the region. Around 80 percent of respondents took advantage of the agreement’s duty-free benefits when sourcing apparel from the region this year, up from 50—60 percent in the past.
Respondents say the exceptions to the “yarn-forward” rules of origin, such as the “short supply” and “cumulation” mechanisms, provide essential flexibility that encourages more apparel sourcing from CAFTA-DR members.
Respondents say improving textile raw material supply is critical to encouraging more U.S. apparel sourcing from CAFTA-DR members. Particularly, “allowing more flexibility in souring fabrics from outside CAFTA-DR” and “improving yarn production capacity and variety within CAFTA-DR” are the top two priorities.
U.S. fashion companies strongly support another ten-year renewal of the African Growth and Opportunity Act (AGOA). Meanwhile, Ethiopia’s loss of AGOA eligibility discourages U.S. apparel sourcing from the ENTIRE AGOA region.
As much as 75 percent of respondents say another ten-year AGOA renewal will encourage more apparel sourcing from the region and making investment commitments.
However, despite the tariff benefits and the liberal rules of origin, respondents express explicit concerns about the region’s lack of competitiveness in speed to market, political instability, and having an integrated regional supply chain.
Ethiopia’s loss of AGOA benefits had a notable negative impact on sourcing from the country AND the entire AGOA region. Notably, no respondent plans to move sourcing orders from Ethiopia to other AGOA beneficiaries.
Event summary by Mariel Abano (FASH455 student, Spring 2022)
COVID-19 and other external shocks such as the Ukraine-Russia war shifted the fashion supply chain from its conventional low-cost model. In response to the changes, brands and companies focus on flexibility, strengthening their relationships with suppliers, and sustainability.
Regarding the pandemic’s impacts on the apparel supply chain, fashion brands need to be more future-oriented to better prepare for unexpected market shocks that may come up in the fluctuating world. Flexibility within their merchandising teams allowed Neiman Marcus to pivot during the pandemic and market differently within the context of the pandemic. The company explored new ways to connect with its consumers via digital platforms as many physical stores closed. However, fashion companies need to be flexible enough to respond to the increasing demand from its growing e-commerce platform. This is not always easy to happen.
Likewise, Reformation tries its best to predict demand, build supply chain capacity, and manage lead time during COVID-19. Their manufacturing chains within the U.S. and vertical integration helped them respond quickly to supply chain disruptions. As a result, the company pivoted quickly to athleisure even though its brand is typically known for its event-wear dresses.
Meanwhile, when evaluating their supply chain, Amanda Martin explains that Neiman Marcusprioritizes labor, speed, and cost. With this, there is a balance between investment of capital and resources and mitigating costs like surging fuel prices.
The relationship with vendors also matters during the pandemic. For example, Neiman Marcus’s relationships with its vendors built over the years allowed the company to move more quickly from ocean to air shipping during the pandemic. In the discussion, Amanda Martin explained why the relationship between retailers/brands and manufacturers needs to help both sides grow and benefit. Likewise, Reformation also focuses on people and their relationships with their suppliers during the pandemic. Kathleen Talbot emphasizes that brand-supplier relationships are evolving. Fostering two-way conversations is key to moving away from the previous model that prioritized the needs and wants of the brand over the manufacturer.
Sustainability is NOT ignored during the pandemic. For example, fashion companies increasingly use technology and process management to take accountability for supply chains and improve traceability. In terms of environmental impact, there are more applications within sourcing emphasizing recycled and renewable materials. For example, Reformation recently launched a new circularity initiative that focuses on extending a product’s lifetime and then recycling that back into the system. When creating new styles, the company started from sustainable fibers. Further, they hope to shift transportation from air to other means to minimize their carbon footprint.
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.
The Regional Comprehensive Economic Partnership (RCEP)is a free trade agreement between ten member states of the Association of Southeast Asian Nations (ASEAN)* and five other large economies in the Asia-Pacific region (China, Japan, South Korea, New Zealand, and Australia). RCEP was reached on November 15, 2020, after nearly eight years of tough negotiation. (Note: ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. India was an original RCEP member but decided to quit in late 2019 due to concerns about competing with Chinese products, including textiles and apparel.)
So far, RCEP is the world’s largest trading bloc. As of 2019, RCEP members accounted for nearly 26.2% of world GDP, 29.5% of world merchandise exports, and 25.9% of world merchandise imports.
As of November 1, 2021, Lao, Burnei, Cambodia, Singapore and Thailand (ASEAN members), as well as China, Japan, New Zealand and Australia have ratified the agreement. This has met the minimum criteria for RCEP to enter into force (i.e., six members, including at least three ASEAN members and three non-ASEAN members).
Why RCEP matters to the textile and apparel industry?
RCEP matters significantly for the textile and apparel (T&A) sector. According to statistics from the United Nations, in 2019, the fifteen RCEP members altogether exported US$374 billion worth of T&A (or 50% of the world share) and imported US$139 billion (or 20% of the world share).
In particular, RCEP members serve as critical apparel-sourcing bases for many US and EU fashion brands. For example, in 2019, close to 60% of US apparel imports came from RCEP members, up from 45% in 2005. Likewise, in 2019, 32% of EU apparel imports also came from RCEP members, up from 28.1% in 2005.
Notably, RCEP members have been developing and forming a regional textile and apparel supply chain. More economically advanced RCEP members (such as Japan, South Korea, and China) supply textile raw materials to the less economically developed countries in the region within this regional supply chain. Based on relatively lower wages, the less developed countries typically undertake the most labor-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets worldwide.
As a reflection of an ever more integrated regional supply chain, in 2019, as much as 72.8% of RCEP members’ textile imports came from other RCEP members, a substantial increase from only 57.6% in 2005. Nearly 40% of RCEP members’ textile exports also went to other RCEP members in 2019, up from 31.9% in 2005.
What are the key provisions in RCEP related to textiles and apparel?
First, RCEP members have committed to reducing the tariff rates to zero for most textile and apparel traded between RCEP members on day one after the agreement enters into force. That being said, the detailed tariff phaseout schedule for textile and apparel products under RCEP is very complicated. Each RCEP member sets their own tariff phaseout schedule, which can last more than 20 years (for example, 34 years for South Korea and 21 years for Japan.) Also, different from U.S. or EU-based free trade agreements, the RCEP phaseout schedule is country-specific. For example, South Korea sets different tariff phaseout schedules for textile and apparel products from ASEAN, China, Australia, Japan, and New Zealand. Japan’s tariff cut for apparel products is more generous toward ASEAN members and less so for China and South Korea (see the graph above). Companies interested in taking advantage of the duty-free benefits under RCEP need to study the “rules of the game” in detail.
Second, in general, RCEP adopts very liberal rules of origin for apparel products. It only requires that all non-originating materials used in the production of the good have undergone a tariff shift at the 2-digit HS code level (say a change from any chapters from chapters 50-60 to chapter 61). In other words, RCEP members are allowed to source yarns and fabrics from anywhere in the world, and the finished garments will still qualify for duty-free benefits. Most garment factories in RCEP member countries can immediately enjoy the RCEP benefits without adjusting their current supply chains.
What are the potential economic impacts of RCEP on the textile and apparel sector?
On the one hand, the implementation of RCEP is likely to further strengthen the regional textile and apparel supply chain among RCEP members. Particularly, RCEP will likely strengthen Japan, South Korea, and China as the primary textile suppliers for the regional T&A supply chain. Meanwhile, RCEP will also enlarge the role of ASEAN as the leading apparel producer in the region.
On the other hand, as a trading bloc, RCEP could make it even harder for non-RCEP members to get involved in the regional textile and apparel supply chain formed by RCEP members. Because an entire regional textile and apparel supply chain already exists among RCEP members, plus the factor of speed to market, few incentives are out there for RCEP members to partner with suppliers from outside the region in textile and apparel production. The tariff elimination under the RCEP will put textile and apparel producers that are not members of the agreement at a more significant disadvantage in the competition. Not surprisingly, according to a recent study, measured by value, only around 21.5% of RCEP members’ textile imports will come from outside the area after the implementation of the agreement, down from the base-year level of 29.9% in 2015.
Further, the reaching of RCEP could accelerate the negotiation of other trade agreements in the Asia-Pacific region, such as the China-South Korea-Japan Free Trade Agreement. We might also see growing pressures on the Biden administration to join the Comprehensive and Progressive Agreement of the Trans-Pacific Partnership (CPTPP) to strengthen the US economic ties with countries in the Asia-Pacific region. The economic competition between the United States and China in the area could also intensify as the combined effects of RCEP and CPTPP begin to shape new supply chains and test the impacts of the two countries on the regional trade patterns.
The virus is here to stay. What steps the companies must take to mitigate its impact?
Sheng: Earlier this year, I, together with the US Fashion Industry Association, surveyed about 30 leading US fashion brands and retailers to understand COVID-19’s impact on their sourcing practices. Respondents emphasized two major strategies they adopted in response to the current market environment. One is to strengthen the relationship with key vendors, and the other is to improve flexibility and agility in sourcing. These two strategies are also highly connected. As one respondent told us “We’re adjusting our sourcing model mix (direct vs. indirect) & establishing stronger strategic supplier relationships across entire matrix continue to build flexibility and dual sourcing options.” Many respondents, especially those large-scale fashion brands and retailers, also say they plan to reduce the number of vendors in the next few years to improve operational efficiency and obtain greater leverage in sourcing.
Which are the countries benefitting out of the US-China tariff war and why?
Sheng:The trade war benefits nobody, period. Today, textiles and apparel are produced through a highly integrated supply chain, meaning the US-China tariff war could increase everyone’s production and sourcing costs. Back in 2018, when the tariff war initially started, the unit price of US apparel imports from Vietnam, Bangladesh, and India all experienced a notable increase. Whereas companies tried to switch their sourcing orders, the production capacity was limited outside China. Meanwhile, China plays an increasingly significant role as a leading textile supplier for many apparel exporting countries in Asia. Despite the trade war, removing China from the textile and apparel supply chain is impossible and unrealistic.
How do you compare the African and Asian markets when it comes to sourcing and manufacturing? Which are the advantages both offer?
Sheng: Asia as a whole remains the world’s dominant textile and apparel sourcing base. According to statistics from the United Nations (i.e., UNComtrade), Asian countries as a whole contributed about 65% of the world’s total textile and apparel exports in 2020. In the same year, Asian countries altogether imported around 31% of the world’s textiles and 19% of apparel. Asian countries have also established a highly efficient and integrated regional supply chain by leveraging regional free trade agreements or arrangements. For example, as much as 85% of Asian countries’ textile imports came from other Asian countries in 2019, a substantial increase from only 70% in the 2000s. With the recent reaching of several mega free trade agreements among countries in the Asia-Pacific region, such as the Regional Comprehensive Economic Partnership (RCEP), the pattern of “Made in Asia for Asia” is likely to strengthen further.
In comparison, only about 1% of the world’s apparel imports come from Africa today. And this percentage has barely changed over the past decades. Many western fashion brands and retailers have expressed interest in expanding more apparel sourcing from Africa. However, the tricky part is that these fashion companies are hesitant to invest directly in Africa, without which it is highly challenging to expand African countries’ production and export capacity. Political instability is another primary concern that discourages more investment and sourcing from Africa. For example, because of the recent political turmoil, Ethiopia, one of Africa’s leading apparel sourcing bases, could be suspended for its eligibility for the African Growth and Opportunity Act (AGOA). Without AGOA’s critical support, Ethiopia’s apparel exports to the US market could see a detrimental decline. On the other hand, while these trade preference programs are crucial in supporting Africa’s apparel exports, they haven’t effectively solved the structural issues hindering the long-term development of the textile and apparel industry in the region. More work needs to be done to help African apparel producers improve their genuine export competitiveness.
Another issue is Brexit. Is that having any significant impact on the sourcing scenario of the world or is it just limited to the European nations?
Sheng: Despite Brexit, the trade and business ties between the UK and the rest of the EU for textile and apparel products continue to strengthen. Thanks to the regional supply chain, EU countries remain a critical source of apparel imports for UK fashion brands and apparel retailers. Nearly 35% of the UK’s apparel imports came from the EU region in 2019, a record high since 2010. Meanwhile, the EU region also is the single largest export market for UK fashion companies—about 79% of the UK’s apparel exports went to the EU region in 2019 before the pandemic.
However, trade statistics in the short run may not fully illustrate the impacts of Brexit. For example, some recent studies suggest that Brexit has increased fashion companies’ logistics costs, delayed customs clearance, and made talent-hiring more inconvenient. Meanwhile, Brexit provides more freedom and flexibility for the UK to reach trade deals based on its national interests. For example, the UK recently submitted its application to join the Comprehensive Progressive Agreement of the Trans-Pacific Partnership (CPTPP). The UK is also negotiating a bilateral trade agreement with the United States. The reaching of these new trade agreements, particularly with non-EU countries, could significantly promote the UK’s luxury apparel exports and help the UK diversity its source of imports.
How do you think the power shortages happening across Europe, China, and other nations, are going to impact the apparel supply chains?
Sheng: One of my primary concerns is that the new power shortage could exacerbate inflation further and result in a more severe price hike throughout the entire textile and apparel supply chain. When Chinese factories are forced to cease production because of power shortage, the impact could be far worse than recent COVID-related lockdowns in Vietnam and Bangladesh. As mentioned earlier, more than half of many leading Asian apparel exporting countries’ textile supplies come from China today. Also, no country can still compete with China in terms of the variety of apparel products to offer. In other words, for many western fashion brands and retailers, their stores and shelves could look more empty (i.e., having less variety of products to sell) because of China’s power shortage problem.
Primarkis 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.
The article is available HERE (need Just-Style subscription)
Key findings
First, more US apparel companies prioritize consolidating their existing sourcing base than diversification during the pandemic. Nearly half of the top 30 US apparel companies we examined explicitly say they either sourced from fewer countries or worked with fewer vendors in 2020 than 2017-2019 before the pandemic. In comparison, only about one-third of respondents say they were sourcing from more countries in 2020 than two years.
Second, the desire to form a closer relationship with key vendors and ensure social and environmental compliance are the two primary factors behind US apparel companies’ consolidation strategy. In a time of uncertainty like the pandemic, apparel companies are leaning more heavily on suppliers that have proven reliable, capable, and flexible. Working closely with the suppliers and building an efficient and trust-based supply chain also play a central role in US fashion companies’ COVID-mitigation strategies. Meanwhile, with social and environmental compliance becoming increasingly crucial in apparel sourcing today, companies are cutting ties with vendors that are not adhering to government mandates and proprietary codes of conduct. Notably, US apparel companies’ higher expectations for sustainability as well as social and environmental compliance may have resulted in a smaller pool of qualified suppliers.
Third, the desire to steer away from China and reduce sourcing risks are the two main drivers behind US fashion companies’ recent sourcing diversification strategy. US apparel companies mostly moved their sourcing orders from China to China’s competitors in Asia instead of expanding “near-sourcing. On the other hand, it is not uncommon to see US apparel companies keep a relatively diverse sourcing base to control various sourcing risks in the current business setting.
Fourth, the content analysis further reveals that US fashion brands and retailers commit to sourcing and supply chain innovation in response to COVID-19 and the new business environment. Some specific sourcing strategies are noteworthy:
Work with “super vendors,” i.e., vertically integrated suppliers that can execute multiple steps in the supply chain or those with production facilities in numerous countries.
Optimize supply chain process to improve speed to market.
Adjust fabric and textile raw material sourcing base, although the specific strategies vary from company to company.
With the public’s increasing demand, fashion companies are making more significant efforts to improve their apparel supply chains’ transparency, i.e., mapping where the product is made and knowing suppliers’ compliance with social and environmental regulations.
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 more than 300 factories worldwide to make these apparel items and related textile raw materials.
We conducted a statistical analysis (Multivariate analysis of variance, MANOVA) of these factories, aiming to evaluate the state of VF Corporation’s apparel supply chain transparency, including its strengths and areas that can be improved further. The findings of this study will fulfill a critical research gap and significantly enhance our understanding of the nature of today’s apparel supply chain and the opportunities and challenges to improve its transparency.
The results show that VF Corporation’s suppliers in different segments of the apparel supply chain had different transparency performances overall:
While more than 92% of tier 1 & 2 suppliers shared their environmental or social compliance information with VF Corporation, less than 60% of VF Corporation’s tier 3 & 4 suppliers did so (note: statistically significant).
A higher percentage of VF Corporation’s tier 2 & 3 suppliers (i.e., mills making fabrics, yarns, or accessories) received environmental compliance-related certification than tier 1 suppliers (i.e., garment factories) (note: statistically significant).
Meanwhile, VF Corporation’s tier 1 suppliers were more active in pursuing social compliance-related certification than suppliers in other levels (note: statistically significant)
However, no evidence suggests that whether from a developed or developing country will statistically affect a vendor’s transparency performance.
The study’s findings have several important implications:
First, more work can be done to strengthen fashion companies’ transparency of tier 3 & 4 suppliers (i.e., textile mills making yarns and fibers). Despite the significant efforts to know their garment factories (i.e., tier 1 suppliers), fashion companies like VF Corporation still have limited knowledge about vendors upper in the supply chain. Notably, even VF Corporation doesn’t have much leverage to request environmental and social compliance-related information from these vendors. According to VF Corporation, often “Supplier was unresponsive to VF’s request for information.”
Second, the results suggest that vendors at different supply chain levels have their respective transparency priorities. However, it is debatable whether tier 1 & 2 suppliers also need to care about environmental and sustainability-related compliance, and if tier 3 & 4 suppliers should be more transparent about their social compliance record. The growing concerns about forced labor involved in cotton production (i.e., tier 4 suppliers) make the debate even more relevant.
Additionally, different from the public perception and previous studies, the findings call for equal treatment of suppliers from developed and developing countries when vetting their environmental and social compliance-related transparency.
Because this case study looked at VF Corporation only, future research can continue to investigate other fashion companies’ supply chain transparency based on data availability. It will also be meaningful to hear directly from tier 3 & 4 suppliers to understand their perception about improving the apparel supply chain’s transparency and related opportunities and challenges.
While textile and apparel is well-known as a global sector, the latest statistics show that world textile and apparel trade patterns remain largely regional-based. Three particular regional textile and apparel trade flows are critical to watch:
First, Asian countries are increasingly sourcing textile raw material from within the region. As much as 85% of Asian countries’ textile imports came from other Asian countries in 2019, a substantial increase from only 70% in the 2000s. This result reflects the formation of an ever more integrated regional textile and apparel supply chain in Asia. However, as Asian countries become more economically integrated, textile and apparel producers in other parts of the world could find it more challenging to get involved in the region. With the recent reaching of several mega free trade agreements among countries in the Asia-Pacific region, such as the Regional Comprehensive Economic Partnership (RCEP), the pattern of “Made in Asia for Asia” is likely to strengthen further.
Second, the EU intra-region trade pattern for textile and apparel stays relatively strong and stable. Intra-region trade refers to trade flows between EU members. Statistics show that 54.6% of EU(27) members’ textile imports and 37.4% of their apparel imports came from within the EU(27) region in 2019. This pattern only slightly changed over the past decade. In other words, despite the reported increasing competition from Asian suppliers, many of which even enjoy duty-free market access to the EU market (such as through the EU Everything But Arms program), a substantial share of apparel sold in the EU markets are still locally made.
EU consumers’ preferences for “slow fashion” (i.e., purchasing less but for more durable products with higher quality) may contribute to the stable EU intra-region trade pattern. Many EU consumers also see textile and apparel as cultural products and do NOT shop simply for the price. This explains why Western EU countries such as Italy, Germany, and France rank the top apparel producers and exporters in the EU region despite their high wage and production costs.
Third, the Western Hemisphere (WH) supply chain faces significant challenges despite the seemingly growing popularity of “near-sourcing.” On the one hand, textile and apparel exporters in the Western-Hemisphere still rely heavily on the regional market. In 2019, respectively, as much as 79% of textiles and 86% of apparel exports from countries in the Western Hemisphere went to the same region.
However, on the other hand, the Western-Hemisphere supply chain is facing increasing competition from Asian suppliers. For example, in 2019, only 22% of North, South, and Central American countries’ textile imports and 15% of their apparel imports came from within the Western Hemisphere, a new record low in ten years. Similarly, in the first eleven months of 2020, only 15.7% of US apparel imports came from the Western Hemisphere, down from 17.1% in 2019 before the pandemic. The limited local textile production capacity and the high production cost are the two notable factors that discourage US fashion brands and retailers from committing to more “near-sourcing” from the Western Hemisphere.
In comparison, Asian countries supplied a new record high of 62.2% of textiles and 75% apparel to countries in the Western Hemisphere in 2019, up from 49.1% and 71.1% ten years ago. This trend suggests that as the competitiveness of “Factory Asia” continues to improve, even regional trade agreements (such as USMCA and CAFTA-DR) and their restrictive “yarn-forward” rules of origin have limits to protect the Western Hemisphere supply chain.
In comparison, Asian countries supplied a new record high of 62.2% of textiles and 75% apparel to countries in the Western Hemisphere in 2019, up from 49.1% and 71.1% ten years ago. This trend suggests that as the competitiveness of “Factory Asia” continues to improve, even regional trade agreements (such as USMCA and CAFTA-DR) and their restrictive “yarn-forward” rules of origin have limits to protect the Western Hemisphere supply chain.
Additionally, many say that the reaching of RCEP creates new pressure for the new Biden administration to consider joining the CPTPP and strengthening economic ties with countries in the Asia-Pacific region. Notably, several USMCA and CAFTA-DR members, such as Mexico, also have RCEP or CPTPP membership. Apparel producers in these Western Hemisphere countries may find it more rewarding to access the cheaper textile raw material from Asia through CPTPP or RCEP rather than claiming the duty-saving benefits for finished garments under USMCA or CAFTA-DR. Like it or not, the Biden administration’s inaction will also have consequences.
U.S. apparel imports continue to rebound, but uncertainty remains
Asia will remain the dominant apparel sourcing base
U.S. fashion companies are NOT giving up China as one of their essential apparel-sourcing bases, although companies continue to reduce their “China exposure” overall. Meanwhile, do NOT underestimate the impact of non-economic factors on sourcing.
No clear evidence suggests near sourcing from the Western Hemisphere is happening in a large scale
Watch Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These two mega-free trade agreements could shape new textile and apparel supply chains in the Asia-Pacific region.
Jason Prescott founded JP Communications INC in 2005 and rapidly established TopTenWholesale.com and Manufacturer.com as the largest US-based B2B global trade network for manufacturers, retailers, department stores, discounters, importers, wholesalers, buyers and brands. A decade later, in 2016, he established the Apparel Textile Sourcing trade show platform with the China Chamber of Commerce for Import & Export of Textile & Apparel to connect the global B2B network of over 2 million with manufacturers around the globe via in-person events. By 2020, the ATS brand has created the fastest-growing trade shows in the industry producing annual events in Miami, Toronto, Montreal, Berlin and virtually.
Jason is active in search marketing models and technology and provides consulting and seminars in around the world for organizations looking to invest in the USA market. He is the author of two best-selling books, Wholesale 101 and Retail 101, published by McGraw Hill as well as articles on business and technology appearing in B2B Online, Omma, IMediaConnection, CEO Magazine, Entrepreneur Online, and been cited in Inc Magazine, Business Week and Forbes Online.
Kendall: What has motivated you to get involved in the apparel business, especially running the Apparel Textile Sourcing Trade (ATS) Shows, which has grown into one of the most popular and influential sourcing events today?
Jason: We started our company in 2005 w/ our flagship product – www.TopTenWholesale.com – which is a search engine for wholesale suppliers and products. In 2010 we acquired www.manufacturer.com – a sourcing platform to find global producers and manufacturers. It would be fair to say that never in our wildest imagination did we think we would be producing some of the world’s top sourcing trade fairs in the apparel and textile industry. I’d like to say it was a natural evolution but to be frank the opportunity came up over a cup of tea with a very good friend of mine, Mr. Chen Zhirong – Director for the China Chamber of Commerce for Import & Export of Textiles (CCCT) – in Dec 2015. What started from a cup of tea wound up growing into a trade show company that now produces events 4 cities, 3 countries and 2 continents (Miami, Toronto, Montreal, Berlin).
More than 200 of the world’s top producers of apparel, textiles, accessories, footwear, and personal protective equipment will exhibit virtually at Apparel Textile Sourcing trade shows this fall. Attendance is always free and the interactive event also specializes in seminars, sessions, workshops and panels from experts in the industries of sourcing, fashion, design and retail.
Kendall: COVID-19 is the single biggest challenge facing the textile and apparel industry today. From your observation, how has COVID-19 affected textile and apparel companies’ sourcing practices? What will be the medium to the long-term impact of COVID on textile and apparel sourcing?
Jason: The fallout from the pandemic – particularly in the textile and apparel industry – and how it impacts sourcing, has had such a far-reaching magnitude that it’s still very challenging to figure out how sourcing practices will be impacted. Over the long term, there is no question that this pandemic will speed up near-sourcing, on-shoring, digitization, and real-time production. The interim has resulted in massive layoffs, geo-political uncertainty and a turbulent political atmosphere that has rattled the cages of just about every sourcing director. The industry has seen purchase orders defaulted on, behavior in the supply chain that should not be tolerated, and a general lack of accountability. I also have no question that as we continue to emerge out of the pandemic there will be an advanced focus much more on the global revolution of sustainability, fair labor practices, plus a far-keener eye on the eco-systems in which the textile industry lives and breathes.
Kendall: There have been more heated debates on the future of China as an apparel sourcing base for US fashion companies, especially given the escalating U.S.-China trade war and the COVID-19. What is your view?
Jason: It should be noted that more than a billion dollars of trade in the textile sector in China was lost in export shipments to the USA during the first half of 2019 – primarily due to the trade war. The pandemic has since crippled exports of textile and apparel – in not just China – but also in every sourcing region on the planet. While many media outlets and others talk about the demise of China as a producer for textile and apparel that is just not the case. The Chinese have built an infrastructure, invested billions of dollars in the best technology, and have mastered the art of production over the last 3+ decades. We must not also forget that much of this infrastructure was built with trillions of dollars by the world’s leading brands, retailers, and governments. To bail on that would not be prudent. The Chinese are extremely adaptive and there is no question they have taken the time during the pandemic – and I should also note that they have emerged quicker than anyone else from the pandemic – to invest much more in technology, made-to-order, customization, and enhances on sustainable practices by utilizing more renewables.
Kendall: Many studies suggest that fashion companies continue to actively look for China’s alternatives. Do we have a “Next China” yet– Vietnam, Bangladesh, India, Ethiopia, or somewhere else?
Jason: No we do not have a next China yet. The production in many regions that have competent supply chains – like Vietnam – are full and at over-capacity. It should further be noted that a large portion in places like Vietnam are owned in partnerships thru the Chinese. Simply stated, many of the other regions such as Bangladesh, India, and the AGOA regions lack infrastructure and the decades of experience that the Chinese have.
Kendall: Some predict that near sourcing rather than global sourcing will become ever more popular as fashion companies are prioritizing speed to market and building a shorter supply chain. Why or why not do you think the shift to near sourcing or reshoring is happening?
Jason: This is correct. On-demand production, near-sourcing, and the evolution of digitization will of course lead to increased manufacturing domestically. Neither of these options are yet a solution for the high-volume production which is at the heart of the industry. I will agree that the continued emergence of micro-brands, and continually evolving shifts in consumer behavior which generally has resulted in ‘disloyalty’ to brands is another factor that makes on-shoring or near-shoring more attractive.
Kendall: Building a more sustainable and socially responsible textile and apparel supply chain is also growing in importance. From interacting with fashion brands and retailers, can you provide us with some updates in this area, such as companies’ best practices, issues they are working on, or the key challenges that remain?
Jason: The circularity of the industry encompassing the producer, the brand, logistics, and the consumer will continue to evolve in their social responsibilities and awareness of sustainable practices engaged in by the brand. There are great organizations out there like WRAP, TESTEX and Better Buying who are growing and have a much larger voice than what they have had in the past. Post-pandemic, I believe we will see social responsibility as one of the top priorities with so many millions of people displaces from COVID-19.
Kendall: For our students interested in pursuing a career in the textile and apparel industry, especially related to sourcing, do you have any suggestions?
Jason: The top suggestion I can offer is to pursue experience as you are actively engaged in your studies. One of the key elements I can advise of is to take the time and learn culture over language. Having a cultural understanding of the key regions where sourcing occurs will catapult your career and bring significant relationships to the table that you never thought you would have had before. Also, attend trade shows! Walking thru international apparel trade shows – like The Apparel Textile Sourcing – will help you immerse yourself with numerous different nationalities and personalities that you would otherwise never have the chance to meet. Jump on any opportunity you can to go abroad. Especially to regions in Asia and Latin America. Most importantly never forget that your credibility in life is everything and maintain the highest pedigree of integrity as possible.
The study was conducted based on a survey of 116 sourcing executives from fashion retailers and brands predominantly in North America and Western Europe between April 14 and April 22, 2020.
Key findings:
First, the fashion industry’s sourcing operations have been hit hard by COVID-19
Sales revenues are expected to contract by 27 to 30 percent in 2020 year over year.
Jointed affected by store closures and supply disruptions, two-thirds of fashion sourcing executives expect a cut in sourcing volumes by at least 20 percent in 2020, while only 18 percent expect a smaller decline of between 5 and 20 percent.
Second, regarding fashion companies’ immediate response to COVID-19:
Most sourcing executives are adopting a mixed approach to managing existing orders through a combination of reducing the number of orders, reducing the quantities per order, and canceling finished-goods orders. Almost half of the respondents (49 percent) have canceled less than a quarter of their existing orders of finished goods, while 22 percent have not canceled any orders at all. In general, European fashion players are using cancellations less often than those from North America.
Most fashion retailers and brands (90 percent of respondents) are accepting shipping delays for at least some of their orders. Around two-fifths of respondents are accepting delays for more than half of their orders.
Third, fashion brands and retailers are taking measures to support critical supplier base:
Measures commonly taken by fashion companies include collaboration with factories in cost reduction, providing payment of raw material and fabrics, forward looking collaboration in research and development, or product design.
However, still, only 19 percent of respondents say they are providing pre-payment for sourcing orders.
Meanwhile, 45 percent of sourcing executives expecting more than half of their suppliers to be in the next six months.
Fourth, fashion companies are thinking about the “next normal” for apparel sourcing:
76 percent of respondents believe that COVID-19 will accelerate flexibility and speed for apparel sourcing. This includes a high acceleration of more flexible product development with shorter lead times and smaller batch sizes in sourcing orders.
Achieving social and environmental sustainability in sourcing is becoming mainstream in the next normal. The pandemic has shone a spotlight on companies’ commitments to the safety of their customers, staff, and those working in the global value chain.
74 percent of respondents anticipate that digitization of product development and sourcing processes will accelerate and 60 percent agree that on-demand production through (semi)-automation will be a key driver in enabling new business models.
Fifth, regarding fashion companies’ adjustment of sourcing destinations:
The report suggests “the trend to move volume out of China has been slowed slightly by COVID-19”, particularly because “the strong value chain integration in China that makes raw material access less disruption prone than the globally interconnected value chains that fashion production countries depend upon.”
South-East Asian sourcing markets have been less disrupted and are expected to gain share compared to the pre-COVID-19 five-year trend.
COVID-19 has led to a reversal of the medium-term trends in Bangladesh with about a third of sourcing executives expecting volume decreases.
46 percent of sourcing executives indicated they expect the trend of “near-sourcing” to increase next year
Key findings:
The fashion industry is just at the beginning of its struggle with COVID-19: 1) duration and ultimate severity of the pandemic remains unknown; 2) Stores and factory closures have significantly disrupted the supply chain; 3) consumers’ demand plummets.
The developing world, where most clothing is currently sourced from, will face the most hardship caused by COVID-19, namely Bangladesh, India, Cambodia, Honduras, and Ethiopia. While developed nations could recover from COVID-19 relatively fast, these developing counties, especially the least developed ones (LDCs), may suffer from a more extended period of high unemployment, which means widespread hunger and disease.
COVID-19 will result in significant shifts in consumers’ preferences: 1) The pandemic will bring values around sustainability into sharp focus, intensifying discussions around materialism, over-consumption, and irresponsible business practices. 2) A significant drop in consumer spending on apparel will result in massive inventory build-ups. 3) Social distancing has highlighted the importance of digital channels more than ever and the lockdown has elevated digital as an urgent priority across the entire value chain.
The fashion industry will look very different in the post-Covid19 world. 1) The ensuing financial distress will spur industry consolidation to an extent significantly greater than that caused by the 2008 global financial crisis. 2) COVID-19 will turn fashion into an even more “winner-takes-all” industry. 3) Innovation will scaled-up along the entire fashion value chain. Regarding sourcing, it means “near sourcing” and “vendor integration.”
Summarized by Meera Kripalu (Honors student, Marketing and Fashion Merchandising double majors).
The studywas based on a survey of 64 sourcing executives from vertical apparel retailers, hybrid wholesalers, and sportswear companies, with a total sourcing volume of $100 billion. Below are the key findings of the report:
More sourcing executives now focus on process improvements in their companies, such as sustainability and transparency (56% of respondents), digitalization of sourcing process and related areas (45% of respondents), consolidation of supplier base (42% of respondents), end-to-end process efficiency (41% of respondents) than shifting sourcing countries (20% of respondents). Related, as cost gaps between sourcing destinations are narrowing, apparel companies are shifting from minimizing the price of supply to a focus on customer-centric, agile product development to meet customer demand. Digitalization, such as intelligent sourcing, is one of the most promising areas.
Affected by the on-going U.S.-China tariff war, two-thirds of surveyed companies expect their overall sourcing cost to increase in the years ahead, including 37.5% expecting a 2-4% increase and 25% expecting 1-2% increase. However, only 3.1% of respondents expect a significant cost increase (>4%).
Echoing the findings of other recent studies, respondents plan to source relatively less from China through 2025. Bangladesh, Vietnam, Myanmar, and Ethiopia are among the top alternative sourcing destinations. Meanwhile, more companies are considering near-sourcing. The biggest challenge, however, is limited fabric production capacity, NOT higher wages.
Sustainable apparel sourcing is regarded as a must—70% of EU companies and 35% of North American companies surveyed say “responsible and sustainable sourcing was on the CEO agenda.” Top challenges to achieve sustainable apparel sourcing include “no common, objective industry standard on sustainable sourcing”, “consumers lack a clear picture of what sustainable fashion is all about”, “mixed influence of the sourcing function in company-wide sustainability strategy.” Further, more companies prioritize environmental-sustainability initiatives (issues such as sustainable material, recycled material, traceability, and packing) than social sustainability initiatives (issues such as) fair on living wage and decent work). Additionally, respondents hold competing views on whether sustainability will increase sourcing costs overall. Around 58% of respondents see additional costs for sustainable sourcing between 1% and 5%.
Sustainability will play an increasingly important role in how apparel companies select their suppliers. Some surveyed apparel brands and retailers say they have upgraded their supplier ratings over the last couple of years, moving away from viewing sustainability simply as a compliance-based hygiene factor and instead embracing criteria that are more sophisticated.
There is also a need to shift from the transactional-based, season-by-season and the low-commitment relationship between apparel companies and their vendors to strategic partnerships between the two. Around 73% of respondents plan to consolidate their supplier base by at least 5% over the next few years. Related, apparel companies increasingly empower suppliers for self-auditing with tools like the Higg Index.
Last week in FASH455, we discussed the unique critical role played by textile and apparel trade in generating economic growth in many developing countries. The developed countries also use trade policy tools, such as trade preference programs, to encourage the least developed countries (LDCs) making and exporting more apparel. However, a debate on these trade programs is that they have done little to improve the genuine competitiveness of LDCs’ apparel exports in the world marketplace, but instead have made LDCs rely heavily on these trade programs to continue their apparel exports. Here is one more example:
With growing concerns about “the deterioration of democracy, respect for human rights and the rule of law in Cambodia”, in a statement made on February 12, 2019, the European Union says it has started the process that could lead to a temporary suspension of Cambodia’s eligibility for EU’s Everything But Arms (EBA) program. Specifically, the EU process will include the following three stages:
Stage 1: six
months of intensive monitoring and engagement with the Cambodian government;
Stage 2: another three months for the EU to produce a
report based on the findings in stage 1
Stage 3: after
a total of twelve months in stages 1
& 2, the EU Commission will conclude the procedure with a final decision on
whether or not to withdraw tariff preferences; it is also at this stage that
the Commission will decide the scope and duration of the withdrawal. Any
withdrawal would come into effect after a further six-month period.
However, the EU
Commission also stressed that launching the temporary withdrawal procedure does
not entail an immediate removal of Cambodia’s preferential access to the EU
market, which “would be the option of last resort.”
Developed in 2001, the EBA program establishes duty-free and quota-free
treatment for all Least Developed Countries (LDCs) in the EU market. EBA includes
almost all industries other than arms and armaments. As of February 2019, there
are 49
EBA beneficiary countries.
The EBA program has benefited the apparel sector in particular given clothing accounts for the lion’s share in many LDCs’ total merchandise exports. Because of the preferential duty benefits provided by EBA, many LDCs can compete with other competitive apparel powerhouses such as China. Notably, the EBA program also adopts the “cut and sew” rules of origin for apparel, which is more general than the “double transformation” rules of origin typically required by EU free trade agreement and trade preference programs. Under the “cut and sew” rule, Cambodia’s apparel exports to the EU can enjoy the import duty-free treatment while using yarns and fabrics sourced from anywhere in the world.
Cambodia is a major apparel supplier for the EU market, accounting for approximately 4% of EU’s
total apparel imports in 2017. Exporting
apparel to EU through the EBA program is also of particular importance to
Cambodia economically. In 2016, the apparel sector created over 500,000
jobs in Cambodia, of whom 86% were female, working in 556 registered factories.
According to Eurostat, of EU’s €4.9bn imports from Cambodia in 2017, around 74.9% were apparel (HS chapters 61 and
62). Meanwhile, of EU’s €3.7bn apparel imports from Cambodia in 2017, as high
as 96.6% claimed the EBA benefits. Understandably,
losing the EBA eligibility could hurt Cambodia’s apparel exports to the EU significantly.
1: What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2019, and why?
In my view, uncertainty will remain the single biggest challenge facing the apparel industry in 2019, ranging from a more volatile global economy, the unpredictable outlook of the U.S.-China trade talks to the various possible scenarios of Brexit. While uncertainty creates exciting new research opportunities for scholars like me, it could be a big headache for companies seeking a foreseeable market environment to guide their future business plan and investments.
Meanwhile, the increasing digitalization of the apparel supply chain based on big-data tools and artificial intelligence (AI) technologies means a huge opportunity for fashion companies. Indeed, the apparel industry is quickly changing in nature—becoming ever more globalized, supply-chain based, technology-intensive and data-driven. Take talent recruitment as an example. In the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), as much as 68 percent of surveyed leading U.S. fashion brands and apparel retailers say they plan to increase hiring of data scientists in the next five years. Googling “apparel industry” together with terms such as “big data” and “data science” also returns much more results than in the past. It is hopeful that the advancement of digital technologies and the smarter use of data will enable apparel companies to overcome market uncertainties better and improve many aspects of their businesses such as speed to market, operational efficiency and even sustainability.
2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2019, and what can apparel firms and their suppliers do to stay ahead?
Based on my research, I have three observations regarding apparel companies’ sourcing trends and the overall sourcing landscape in 2019:
First, apparel companies overall will continue to maintain a diverse sourcing base. For example, in a recent study, we examined the detailed sourcing portfolios of the 50 largest U.S.-based apparel companies ranked by the Apparel Magazine. Notably, on average these companies sourced from over 20 different countries or regions using more than 200 vendors in 2017. Similarly, in the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), we also found companies with more than 1,000 employees typically source from more than ten different countries and regions. Since no sourcing destination is perfect, maintaining a relatively diverse sourcing base allows apparel companies to strike a balance among various sourcing factors ranging from cost, speed, flexibility, to risk management.
Second, while apparel companies are actively seeking new sourcing bases, many of them are reducing either the number of countries they source from or the number of vendors they work with. According to our study, some apparel companies have been strategically reducing the number of sourcing facilities with the purpose of ensuring closer collaborations with their suppliers on social and environmental compliance issues. Some other companies are consolidating their sourcing base within certain regions to improve efficiency and maximize productivity in the supply chain. Related to this trend, it is interesting to note that approximately half of the 50 largest U.S. apparel companies report allocating more sourcing orders to their largest vendor in 2017 than three years ago.
Third, nearshoring or onshoring will become more visible. Take “Made in the USA” apparel for example. According to the 2018 U.S. Fashion Industry Benchmarking Study, around 46 percent of surveyed U.S. fashion brands and apparel retailers report currently sourcing “Made in the USA” products, even though local sourcing typically only account for less than 10 percent of these companies’ total sourcing value or volume. In a recent study, we find that 94 out of the total 348 retailers (or 27 percent) sold “Made in the USA” apparel in the U.S. market between December 2017 and November 2018. These “Made in the USA” apparel items, in general, focus on fashion-oriented women’s wear, particularly in the categories of bottoms (such as skirts, jeans, and trousers), dresses, all-in-ones (such as playsuits and dungarees), swimwear and suits-sets. The advantage of proximity to the market, which makes speedy replenishment for in-season items possible, also allows retailers to price “Made in the USA” apparel substantially higher than imported ones and avoid offering deep discounts. Looking ahead, thanks to automation technology and consumers’ increasing demand for speed to market, I think nearshoring or onshoring, including ”Made in the USA” apparel, will continue to have its unique role to play in fashion brands and retailers’ merchandising and sourcing strategies.
3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?
2019 will be a year to test apparel companies’ resources, particularly in the sourcing area. For example, winners will be those companies that have built a sophisticated but nimble global sourcing network that can handle market uncertainties effectively. Likewise, companies that understand and leverage the evolving “rules of the game”, such as the apparel-specific rules of origin and tariff phase-out schedules of existing or newly-reached free trade agreements, will be able to control sourcing cost better and achieve higher profit margins. Given the heavy involvement of trade policy in apparel sourcing this year, companies with solid government relations should also enjoy unique competitive advantages.
On the other hand, as apparel business is changing in nature, to stay competitive, apparel companies need to start investing the future. This includes but not limited to exploring new sourcing destinations, studying the changing consumer demographics, recruiting new talents with expertise in emerging areas, and adopting new technologies fitting for the digital age.
4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2019 to be better than 2018, and why?
Two things are at the top of my watchlist:
First, what is the future of China as an apparel sourcing base? While external factors such as the U.S.-China tariff war have attracted most of the public attention, the genuine evolution of China’s textile and apparel industry is something even more critical to watch in the long run. From my observation, China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured by value, 47 percent of Bangladesh’s textile imports came from China in 2017, up from 39 percent in 2005. Similar trends are seen in Cambodia (up from 30 percent to 65 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 71 percent), Malaysia (up from 25 percent to 54 percent), Indonesia (up from 28 percent to 46 percent), Philippines (up from 19 percent to 41 percent) and Sri Lanka (up from 15 percent to 39 percent) over the same time frame. A key question in my mind is how quickly China’s textile and apparel industry will continue to evolve and upgrade by following the paths of most other advanced economies in history.
Second, how will the implementation of several newly-reached free trade agreements (FTAs) affect the big landscape of apparel sourcing and the existing regional apparel supply chains? For example:
The newly-reached U.S.-Mexico-Canada Free Trade Agreement (USMCA or commonly called NAFTA2.0) includes several interesting changes to the textile and apparel specific rules of origin provisions, such as the adjustment of the tariff-preference level (TPL) mechanism. Whether these changes will boost textile and apparel production in the Western-Hemisphere and attract more sourcing from the region will be something interesting to watch.
The implementation of the Comprehensive and Progressive Agreement of the Trans-Pacific Partnership (CPTPP)and the EU-Vietnam Free Trade Agreement (EVFTA)will allow Vietnam to get access to nearly 40% of the world apparel import market (i.e., EU + Japan) duty-free. However, restrained by the country’s relatively small population, the apparel industry is increasingly facing the challenge of competing for labor with other export-oriented sectors in Vietnam. Realistically, what is the growth potential of apparel “Made in Vietnam” after the implementation of CPTPP and EVFTA?
In 2017, close to 80% of Asian countries’ textile imports came from other Asian countries, up from around 70% in the 2000s. Similarly, in 2017, 85.6% of Asian countries’ apparel imports also came from within the region. The negotiation of the Regional Comprehensive and Economic Partnership (RCEP) is likely to conclude in 2019, whose membership includes member states of the Association of Southeast Asian Nations (ASEAN) and other six economies in the Asia-Pacific region (Australia, China, India, Japan, South Korea and New Zealand). Will RCEP result in an ever more integrated Asia-based textile and apparel supply chain and make the Asia region even more competitive as an apparel sourcing destination?
#1 How do rules of origin (RoO) and free trade agreement (FTA) regulations affect speed to market in apparel sourcing? Do countries who are part of an FTA find it to be easier to get to market in a shorter amount of time if they are working with other FTA members? Or could RoO slow down the production process because producers have to be more careful about compliance with the complicated RoO?
#2 Why or why not the “yarn forward” rules of origin remains an effective way to promote textile and apparel production in the Western-Hemisphere? What other options are available to improve the competitiveness of the Western-Hemisphere textile and apparel supply chain?
#3 What would happen to the Western-Hemisphere textile and apparel supply chain should NAFTA no longer exist?
#4 Should NAFTA be responsible for the loss of US apparel manufacturing jobs? Any hard evidence?
#5 If you were U.S. trade negotiators, what would you do with TPL in NAFTA given the competing views from the U.S. textile industry and U.S. fashion brands and retailers?
The Outlook of “Factory-Asia”
#6 From the perspective of the U.S. textile and apparel industry, is it a good idea for the United States to reach free trade agreement (FTA) with Asian countries? If so, what countries should be included in the new FTA? If not, why?
#7 How can U.S. companies get involved in the Asia-based textile and apparel supply chain?
#8 Why or why not is the “Flying geese model” unique to Asia? Can the model be replicated in America too?
(Welcome to join our online discussion. Please mention the question number in your reply)
In January 2018, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2018–Apparel Industry Issues in the Year Ahead management briefing. Below is my contribution to the report. All suggestions and comments are most welcome!
1. What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2018, and why?
One of the biggest opportunities facing the apparel industry in 2018 could be the faster growth of the world economy. According to the International Monetary Fund (IMF), the global growth forecast for 2018 is expected to reach 3.7 percent, about 0.1 percent points higher than 2017 and 0.6 percent points higher than 2016. Notably, the upward economic growth will be broad-based, including the United States, the Euro area, Japan, China, emerging Europe and Russia. Hopefully, the improved growth of the world economy will translate into increased consumer demand for clothing in 2018.
Nevertheless, from the macroeconomic perspective, oversupply will remain a significant challenge facing the apparel industry in 2018. Data from the World Bank and the World Trade Organization (WTO) shows that, while the world population increased by 21.6 percent between 2000 and 2016, the value of clothing exports (inflation-adjusted) surged by 123.5 percent over the same period. Similarly, between 2000 and 2016, the total U.S. population increased by 14.5 percent and the GDP per capita increased by 22.2 percent, but the supply of apparel to the U.S. retail market surged by over 67.8 percent during the same time frame. The problem of oversupply is the root of many challenges faced by apparel companies today, from the intense market competition, pressure of controlling production and sourcing cost, struggling with excessive inventory and deep discounts to balancing sustainability and business growth.
2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2018, and what can apparel firms and their suppliers do to stay ahead?
The 2017 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA) earlier this year, provides some interesting insights into companies’ latest sourcing strategies and trends. Based on a survey of 34 executives at the leading U.S. fashion companies, we find that:
First, most surveyed companies continue to maintain a relatively diversified sourcing base, with 57.6 percent currently sourcing from 10+ different countries or regions, up from 51.8 percent last year. Larger companies, in general, continue to have a more diversified sourcing base than smaller companies. Further, around 54 percent of respondents expect their sourcing base will become more diversified in the next two years, up from 44 percent in 2016; over 60 percent of those expecting to diversify currently source from more than 10 different countries or regions already. Given the uncertainties in the market and the regulatory environment (such as the Trump Administration’s trade policy agenda), companies may use diversification to mitigate potential market risks and supply chain disruptions due to protectionism.
Second, although U.S. fashion companies continue to seek alternatives to “Made in China” actively, China’s position as top sourcing destination remains unshakable. Many respondents attribute China’s competitiveness to its enormous manufacturing capacity and overall supply chain efficiency. Meanwhile, it is interesting to note that the most common sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many” (i.e. China typically accounts for 30-50 percent of total sourcing value or volume, 11-30 percent for Vietnam and less than 10 percent for other sourcing destinations). I think this sourcing model will likely to continue in 2018.
Third, social responsibility and sustainability continue to grow in importance in sourcing decisions. In the study, we find that nearly 90 percent of respondents give more weight to sustainability when choosing where to source now than in the past. Around 90 percent of respondents also say they map their supply chains, i.e., keeping records of name, location, and function of suppliers. Notably, more than half of respondents track not only Tier 1 suppliers, suppliers they contract with directly, but also Tier 2 suppliers, i.e., supplier’s suppliers. However, the result also suggests that a more diversified sourcing base makes it more difficult to monitor supply chains closely. Making the apparel supply chain more socially responsible, sustainable and transparent will continue to be a hot topic in 2018.
3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?
I assume many experts will suggest what apparel firms should change to stay competitive into the future. However, the question in my mind is what should companies keep doing regardless of the external business environment? First, I think companies should always strive to understand and impress consumers and control their supply chains. Despite the growing popularity of e-commerce and the adoption of transformative new technologies, the fundamental nature of apparel as a buyer-driven business will remain the same. Second, companies should always leverage their resources and stay “unique,” no matter it means offering differentiated products or value-added services, maintaining exclusive distribution channels or keeping the leadership position in a particular niche market. Third, apparel firms should always follow the principle of “comparative advantage” and smartly define the scope of their core business functions instead of trying to do everything. Additionally, winners will always be those companies that can take advantage of the mega-development trends of the industry and be willing to make long-term and visionary investments, both physical and intangible (such as human talents).
4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2018 to be better than 2017, and why?
I think the apparel industry should keep a close eye on the following issues in 2018:
The possible reaching of the Regional Comprehensive Economic Partnership (RCEP): Even though RCEP is less well-known than the Trans-Pacific Partnership (TPP), we should not ignore the potential impact of the agreement on the future landscape of textile and apparel supply chain in the Asia-Pacific region. One recent study of mine shows that the RCEP will lead to a more integrated textile and apparel supply chain among its members but make it even harder for non-RCEP members to get involved in the regional T&A supply chain in the Asia-Pacific. This conclusion is backed by the latest data from the World Trade Organization (WTO): In 2016, around 91 percent of Asian countries’ textile imports came from other Asian countries, up from 86 percent in 2006. The more efficient regional supply chain as a result of RCEP will further help improve the price competitiveness of apparel made by “factory Asia” in the world marketplace. Particularly in the past few years, textile and apparel exports from Asia have already posted substantial pressures on the operation of the textile and apparel regional supply chain in the Western Hemisphere.
Automation of apparel manufacturing and its impact on the job market: Recall my observations at the MAGIC this August, several vendors showcased their latest technologies which have the potential to automate the cut and sew process entirely or substantially reduce the labor inputs in garment making. The impact of automation on the future of jobs is not a new topic, but the apparel industry presents a unique situation. Globally, over 120 million people remain directly employed in the textile and apparel industries today, a good proportion of whom are females living in poor rural areas. According to the World Trade Organization (WTO), for quite a few low-income and lower-middle income countries such as Bangladesh, Gambia, Pakistan, Madagascar, Sri Lanka, and Cambodia, as much as over 70 percent of their total merchandise exports were textile and apparel products in 2016. Should these labor-intensive garment sewing jobs in the developing countries were replaced by machines, the social and economic impacts will be consequential. I think it is the time to start thinking about the possible scenarios and the appropriate policy responses.
First, apparel companies are attaching greater importance to speed-to-market in their sourcing decisions. According to the result, the need for a faster, more responsive supply chain is being driven by consumers’ increasing demands for immediacy and constant newness, as well as the speed with which social media can spread new trends.
Second, respondents say the rising sourcing and production cost remains one of their top business challenges in the New Year. Key drivers of cost increase include wage of production workers, raw material price and the social and environmental compliance cost. Notably, almost half expect their sourcing budget to go up, with 15.3% seeing an increase of more than 5%, and 32.8% anticipating a rise of between 1% and 5%. A further 32.1% see their budgets staying the same in the year ahead.
Third, the survey result confirms that China’s dominance of global apparel manufacturing is unlikely to change anytime soon. Asked about their China sourcing plans in 2018, 21.1% of respondents said they would buy more here over the next 12 months, some 30.5% expect their China sourcing to remain roughly the same year-on-year, and 28.9% expect to source less. Respondents say that “no other country can match China regarding the size of its supply base, its range of skills, its quality levels, its product variety and the completeness of its supply chain. The country also continues to lead the way when it comes to efficiency and infrastructure.” Meanwhile, Bangladesh and Vietnam continue to be seen as the two sourcing markets most likely to grow in importance in the next five years.
Fourth, respondents also expressed concerns about uncertainty over trade agreements (64.5%), particularly how the Trump Administration may do with the North American Free Trade Agreement (NAFTA). However, the impact of uncertainty created by Brexit seems to be limited.
FASH455 Global Apparel & Textile Trade and Sourcing 