Modaes (Spain) Exclusive Interview about the Latest Global Apparel Trade and Sourcing Trends (October 2022)

The full interview, conducted by Modaes’ Editor-in-Chief, Iria P. Gestal, is available HERE (in Spanish). Below is an abridged translation.

Question: Fashion brands have reduced their exposure to China markedly in recent years. What has been the turning point?

Sheng: We could interpret fashion companies’ decisions in the context of their overall sourcing diversification strategy. Many companies want to diversify their sourcing base because of the ever-uncertain business environment, ranging from the continuation of the supply chain disruptions, and the Russia-Ukraine war, to the rising geopolitical tensions. As China is one of the largest sourcing bases for many fashion companies, reducing “China exposure” is unavoidable.

 Question: Isn’t there a specific concern about sourcing from China?

Sheng: Definitely! The Uyghur Forced Labor Prevention Act (UFLPA), officially implemented in the summer of 2022, is a big deal. For example, back in 2017, around 30% of US cotton apparel came from China. However, because of the new law and concerns about the risk of forced labor, China’s market shares fell to only 10% as of August 2022. One well-known US brand selling jean products cut their sourcing from China to just 1% of the total.

Question: Is it possible that the apparel sector as a whole reaches that point?

Sheng: Whether we like it or not, it is still unlikely to get rid of China from the supply chain entirely in the short to medium terms. Notably, China continues to play a significant role as a supplier of raw textile materials, particularly for leading apparel-exporting countries in Asia like Vietnam, Bangladesh, and Cambodia. Diversifying textile raw materials sourcing will be a longer and more complicated process.

Question: Is the “China Plus One” strategy no longer enough?

Sheng: The “China Plus One” strategy does not necessarily mean companies only source from “two” countries. Instead, the phrase refers to companies’ sourcing diversification strategy, trying to avoid “putting all eggs in one basket.” However, neither is the case that fashion companies blindly source from more countries today. Notably, many companies attempt to leverage a stronger relationship with key vendors to mitigate sourcing risks and achieve more sourcing flexibility and agility. For example, fashion companies increasingly tend to work with the so-called “super vendors,” i.e., those with multiple country presence and vertical manufacturing capabilities.

Question: Some politicians have said that the war in Russia has been the “geopolitical awakening” of Europe. Has the same thing happened in fashion?

Sheng: Indeed! We say fashion is a “global sector” because companies “produce anywhere in the world and SELL anywhere in the world.” However, many fashion brands and retailers have had to leave Russia due to the war and geopolitics. The same could apply to China—for example, China’s zero-COVID policy has posed a dilemma for western fashion companies operating there—whether to stay or leave the country, which used to be regarded as one of the fastest-growing emerging consumer markets. Likewise, more and more fashion companies have chosen to develop “dual supply chains” in response to the geopolitical tensions between China and the West—“made in China for China” and “made elsewhere for the rest of the world/Western market.” However, we must admit that this is not an ideal way to optimize the global supply chain.

Question: Has the apparel sector been “naïve” until now, ignoring these risks?

Sheng: I do not think so. In fact, most fashion companies and their leaders closely watch world affairs. As I recall, some visionary companies started evaluating geopolitics’ supply chain implications last year. Indeed, a peaceful world with few trade barriers is an ideal business environment for fashion companies. Unfortunately, there are too many “black swans” to worry about these days. As another example, “friend-shoring,” meaning only trading with allies or “like-minded” countries, becomes increasingly popular today. This phenomenon is also the result of geopolitics. With the looming of a new cold war (or the winter is already here), fashion companies may need to use imagination and prepare for the “worst scenarios” to come.

Question: Is a textile and apparel supply without China a more expensive one?

Sheng: It depends on how to look at it. The most challenging part of “reducing China exposure” is the textile raw materials. But we could think outside the box. For example, my recent studies show that China is NOT the top supplier of clothing made from recycled textile materials. Instead, fashion companies are more likely to source such products locally from the US or EU, or Africa—like Jordan, Tunisia, and Morocco, because of the unique supply chain composition. In other words, sourcing more clothing made from recycled textile materials may help fashion companies achieve several long-awaited goals, such as diversifying sourcing base, expanding nearshoring, and reducing sourcing costs.

–END–

What Do Fashion Companies Say about China As an Apparel Sourcing Base? (Updated June 2022)

This study aims to understand western fashion brands and retailers’ latest China apparel sourcing strategies against the evolving business environment. We conducted a content analysis of about 25 leading fashion companies’ public corporate filings (i.e., annual or quarterly financial reports and earnings call transcripts) submitted from January 1, 2022 to June 15, 2022.

The results suggest several themes:

First, China remains one of the most frequently used apparel sourcing destinations. For example:

  • Express says, “The top five countries from which we sourced our merchandise in 2021 were Vietnam, China, Indonesia, Bangladesh and the Philippines, based on total cost of merchandise purchased.”
  • According to TJX, “a significant amount of merchandise we offer for sale is made in China.”
  • Children’s Place says, “We source from a diversified network of vendors, purchasing primarily from Vietnam, Cambodia, Indonesia, Ethiopia, Bangladesh, and China.
  • Ralph Lauren adds, “In Fiscal 2022, approximately 97% of our products (by dollar value) were produced outside of the US, primarily in Asia, Europe, and Latin America, with approximately 19% of our products sourced from China and another 19% from Vietnam.

However, many fashion companies have significantly cut their apparel sourcing volume from China. More often, China is no longer the No.1 apparel sourcing destination, overtaken by China’s competitors in Asia, such as Vietnam.

  • According to Lululemon, “During 2021, approximately 40% of our products were manufactured in Vietnam, 17% in Cambodia, 11% in Sri Lanka, 7% in China (PRC), including 2% in Taiwan, and the remainder in other regions… From a sourcing perspective, when looking at finished goods for the upcoming 2022 fall season, Mainland China represents only 4% to 6% of our total unit volume.”
  • Levi’s says, “The good thing about our supply chain is we’ve got truly a global footprint. We don’t manufacture a whole lot in China anymore. We’ve been slowly divesting manufacturing out of China, if you will, and kind of playing our chips elsewhere on the global map… Less than 1% of what we’re bringing into this country, into the US, less than 1% of it is coming from China.”
  • Adidas says, “In 2021, we sourced 91% of the total apparel volume from Asia (2020: 93%). Cambodia is the largest sourcing country, representing 21% of the produced volume (2020: 22%), followed by China with 20% (2020: 20%) and Vietnam with 15% (2020: 21%).”
  • Victoria’s Secret says, “On China, China is a single-digit percentage of our total inflow of merchandise. We’re not particularly dependent on China at all.”
  • Nike did not mention China as their leading apparel sourcing destination at all, “For fiscal 2021, 30% of NIKE Brand apparel was manufactured in Vietnam, and 24% of NIKE Brand footwear and less than 12% of NIKE Brand apparel was manufactured in Indonesia.”

Meanwhile, fashion companies still heavily use China as a sourcing base for textile raw materials (such as fabrics). For example:

  • Columbia Sportswear says, “in China where a large portion of the raw materials used in our products is sourced by our contract manufacturers.”
  • Lululemon says, During 2021, approximately 48% of our fabrics originated from Taiwan, 19% from China Mainland, 11% from Sri Lanka, and the remainder from other regions.”
  • Likewise, Puma says, “90% of our recycled polyester comes from Vietnam, China, Taiwan (China) and Korea.

Second, fashion brands and retailers express serious concerns about China’s COVID policy and government lockdown measures. Companies say such measures have affected their businesses negatively, from supply chain disruptions and shipping delays to lost sales in the China market. For example:

  • Levi’s says,” The other issue that we’ve been watching real closely is the impact that of COVID shutdowns in China has had on ports there. China, which is only 3% of our total business, was down mid-single-digit as growth in e-commerce was more than offset by declines across other channels due to COVID-related lockdown.”
  • Guess says, “closure of less than 2% of our directly operated stores as of April 30, 2022, mostly in China… Approximately $4.0 million was driven by the lower profit in China due to the impact of the COVID-19 pandemic
  • G-III apparel adds, “The Company’s fiscal year 2023 guidance contemplates the expected impact from the current supply chain conditions, including the current lockdowns in China, expected increased shipping costs and delays in receipt of goods.
  • Columbia sportswear says, “At varying times, government efforts to control the spread of COVID-19 impacted our stores in China.”
  • PVH says, “COVID-related pressures have continued into the first quarter of 2022, although to a much lesser extent than in the prior year period in all regions except China, as strict lockdowns in China have resulted in temporary store closures and have also impacted certain warehouses, which has resulted in the temporary pause of deliveries to the Company’s wholesale customers and from its digital commerce business.”
  • When discussing their outlook for fiscal year 2023, Under Armour says, “approximately three percentage points of (revenue) headwinds related to our strategic decision to work with our vendors and customers to cancel orders affected by capacity issues, supply chain delays, and emergent COVID-19 impacts in China.

Third, fashion companies report the negative impacts of US-China trade tensions on their businesses. Also, as the US-China relationship sours, fashion bands and retailers have been actively watching the potential effect of geopolitics. For example,

  • Express says, “recent geopolitical conditions, including impacts from the ongoing conflict between Russia and Ukraine and increased tensions between China and Taiwan, have all contributed to disruptions and rising costs to global supply chains.”
  • When assessing the market risk factors, Chico’s FAS says, “our reliance on sourcing from foreign suppliers and significant adverse economic, labor, political or other shifts (including adverse changes in tariffs, taxes or other import regulations, particularly with respect to China, or legislation prohibiting certain imports from China)
  • Adidas holds the same view, “In addition, the challenging market environment in China had an adverse impact on the company’s business activities… Additional challenges included the geopolitical situation in China and extended lockdown measures.”
  • Macy’s adds, “At this time, it is unknown how long US tariffs on Chinese goods will remain in effect or whether additional tariffs will be imposed. Depending upon their duration and implementation, as well as our ability to mitigate their impact, these changes in foreign trade policy and any recently enacted, proposed and future tariffs on products imported by us from China could negatively impact our business, results of operations and liquidity if they seriously disrupt the movement of products through our supply chain or increase their cost.
  • Gap Inc. says, “Trade matters may disrupt our supply chain. For example, the current political landscape, including with respect to U.S.-China relations, and recent tariffs and bans imposed by the United States and other countries (such as the Uyghur Forced Labor Prevention Act) has introduced greater uncertainty with respect to future tax and trade regulations.
  • QVC says, “The imposition of any new US tariffs or other restrictions on Chinese imports or the taking of other actions against China in the future, and any responses by China, could impair our ability to meet customer demand and could result in lost sales or an increase in our cost of merchandise, which would have a material adverse impact on our business and results of operations.”

Additionally, some fashion companies still see China as a promising sales market with growth potential. Localizing the supply chain (i.e., made in China for China) could be an increasingly popular practice for these companies. For example,

  • PVH says, “So, I think in general, our production in China is heavily oriented to China for China production. I think for us generally speaking, the biggest impact of the shutdowns that we’ve seen across Shanghai and Beijing has really been focused on the impact to our China market.”
  • Likewise, Levi’s says, “We’re manufacturing somewhere in the neighborhood of 5% of our global production is in China, and most of it staying in China.
  • Hanesbrands says, “we’re committed to opening new stores, and that’s continues to go well, despite, the challenges that are there. Looking specifically at Champion, we continued our expansion in China adding new stores in the quarter through our partners.”
  • H&M says, “we still see China as an important market for us.
  • According to Hugo Boss, “Thanks to overall robust local demand, revenues in China in 2021 grew 24% as compared to 2019.”
  • VF Corporation adds, “Consumer interest in our core categories is growing and we’re committed to continued expansion in China and across Asia-Pacific. Our confidence in the momentum of such key growth engines as our Outdoor & Action Sports businesses and our brands in China is evidenced by our plans to further increase investments in 2022 behind very targeted marketing and brand-building initiatives in these businesses.

by Sheng Lu

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