By  on May 22, 2008

WASHINGTON — China squeaked by Mexico to take over the title of top denim supplier to the U.S. in 2007 with 18.4 percent of the denim market, while, overall, Asia continued to dominate jeans sourcing.

Cost has long been one of the key factors dictating denim manufacturing, which is why the supply chain has been heading to Asia, where low production costs are hard to beat. In the current economic climate, cost is likely to continue to be the key factor influencing sourcing decisions.

However, as costs in China rise due to internal pressures, and as speed-to-market becomes increasingly important in the fast-fashion era, sourcing executives said some production could shift to Central America in the coming months.

China and Mexico show almost the same market share, 18.4 and 18.3 percent, respectively, for the 12 months ended Feb. 29. China's denim shipments to the U.S. spiked 30.6 percent to 3.11 million dozen pairs, propelling it into the top spot. Conversely, Mexico's shipments fell 20.5 percent to 3.1 million dozen.

Hong Kong increased its shipments by 9.6 percent to 2 million dozen, which represented 11.8 percent of all denim jeans sent to the U.S.

The largest growth in shipments was from Egypt, which increased its volume by 101.5 percent to 902,931 dozen, 5.3 percent of total category imports. Macau increased shipments by 66.3 percent to 881,817 dozen, or a 5.2 percent share. Sri Lanka also posted a big bump in shipments, up 53.7 percent to 551,344, or a 3.3 percent share.

The biggest losses, aside from Mexico's fall from the top spot, were in shipments from Pakistan and Indonesia. Pakistan's denim imports fell 19.1 percent to 575,825 dozen and a 3.4 percent market share, enough of a drop to move it from the fifth largest supplier to the ninth. Indonesia, the fourth largest supplier in 2006, fell out of the top 10.

The last few years have seen a rapid increase in jeans sourced from Asia.

"The search for low sourcing costs will continue to drive changes in the global sourcing pattern for denim and in particular for denim jeans," said Mark Messura, executive vice president of global supply chain for Cotton Inc. "As for normally price-conscious consumers in uncertain economic times, they will put even more pressure on retailers to offer lower prices to make the sale."The focus on unit costs was the driver of the shift in sourcing from Mexico to Asian suppliers, Messura said. The average cost of importing a pair of jeans from China, compared with shipping from Mexico, is 5 percent less, he said. Price differences have only gotten wider in recent years, he said.

A turning away from the Americas toward Asia has been a long-term trend, said Tom McKenna, president of Cone Denim, but he said he expects that to slow for some categories in 2009 and 2010 as executives seek to balance cost concerns with other factors.

"We do expect to see some equilibrium emerge between the Americas and other areas moving forward," McKenna said.

Companies will reach a balance that includes the Americas because of speed-to-market and proximity to supply chain and Asia because of cost pressures, he said.

"The erosion of share the Americas have seen over the last 10 years will settle into some type of equilibrium," McKenna said.

Cone Denim just completed the construction of a denim production facility in Nicaragua that has "tremendous jeans potential," McKenna said.

There are several other companies looking at building there, he said.

"We believe [Nicaragua] is one of the key platforms for sourcing for jeans moving forward," McKenna said. "We've been encouraged by the amount of investment we've seen and expect to see in the next year or two."

Cone built its new facility over the last year and it went online this spring.

Sources said there is some potential for production in countries that are part of the Central American Free Trade Agreement: the Dominican Republic, Guatemala, Honduras and El Salvador, in addition to Nicaragua. Costa Rica is part of the CAFTA territory but it is not yet a full participant.

There are still challenges to manufacturing jeans in Central America. Under the terms of CAFTA, factories must source their fabric from within the region or from the U.S., with the exception of some limited allowances for foreign fabric that are consumed quickly.

Denim capacity in the U.S. has fallen dramatically in the last five years. According to the U.S. Census Bureau, from 2002 to 2007 blue denim production in the U.S. fell by more than 65 percent."It's definitely a major concern for all of us in this region," said Jeff Rosenstock, vice president of General Sportwear Co., which manufactures private label jeans for J.C. Penney Co. Inc., Kohl's Corp., Belk, The Bon-Ton Stores Inc., VF Jeanswear and Old Navy.

General Sportwear has sewing factories in Nicaragua and Honduras.

"Even though fabric prices around the world are rising due to soaring energy prices, the costs are going up more on the U.S. side," Rosenstock said. "It's getting to the point now where it's more economical to bring in foreign fabric and just pay the duty, it's still cheaper. That's a bad sign for U.S. fabric mills."

Cost is unlikely to disappear as a major factor in denim sourcing decisions. As the economy continues to struggle, denim, like most apparel, will face tough times and cost consciousness among consumers will put pressure on players all the way down the supply chain.

"The retailer likely to connect successfully with consumers in the months ahead will be those selling at lower costs and those retailers who have figured out how to take the best fashion elements of denim and make them appealing at mass market prices," Messura said.

McKenna said, "We recognize on our customers' behalf that it is a very challenging sourcing environment based on inflationary pressures around the world, uncertainty in trade policies and other governmental policies. It's an extremely complex environment to source jeans, complicated for all apparel but especially for jeans because it's much more difficult to do it in a high quality and responsible way."

Imports of Women’s Blue Jeans
(12 months ended Feb. 29)
Country Dozen% ChANgE% of MarketValue, in millions
China 3,112,278 30.6 18.4 $317
Mexico 3,103,315 -20.5 18.3 $338
Hong Kong 2,007,779 9.6 11.8 $227
Egypt 902,931 101.5 5.3 $71
Macau 881,817 66.3 5.2 $96
Cambodia 761,156 11.6 4.5 $77
Bangladesh 660,332 7.2 3.9 $48
Jordan 630,130 -3.2 3.7 $55
Pakistan 575,825 -19.1 3.4 $50
Sri Lanka 551,344 53.7 3.3 $44
Source: International Development Systems Inc.

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