By  on October 12, 2010

WASHINGTON — A slew of countries is poised to take advantage of China’s rising labor costs.

As the world’s manufacturing powerhouse sees the demand for higher wages and the cost of operations increase, apparel companies are starting to turn to places such as Vietnam, India and Bangladesh, as well as Central America and Mexico for production. Many already have experience in these regions even while they kept the bulk of their sourcing in China, as political and practical decisions forced their hand during the last decade.

While companies can turn to smart, lean manufacturing practices, not all of the rising costs can be mitigated that way and some companies will look for a geographic solution.

Nate Herman, vice president of international trade for the American Apparel & Footwear Association, noted that imports from Mexico, one of the first destinations when the off-shoring of apparel manufacturing started in the early Seventies, have shown recent improvements after years of steady declines. Countries in the Central American Free Trade Agreement have also benefitted from having established apparel centers, Herman said, citing Honduras, El Salvador and the Dominican Republic. Even countries in Asia that were former hot spots, such as Cambodia and Indonesia, have seen positive growth in recent months.

Shipments of textiles and apparel to the U.S. from Mexico for the year ended July 31 were up 19.4 percent to 1.5 billion square meter equivalents, according to the Commerce Department’s Office of Textiles and Apparel. Combined shipments from Indonesia rose 18.6 percent to 1 billion SME. Vietnam’s combined imports to the U.S. climbed 30.8 percent to 1.6 billion SME. China, still by far the largest source of both textiles and apparel, saw its combined shipments increase 29.2 percent to 14.1 billion SME. Year-to-date apparel shipments from Honduras advanced 25.1 percent to 710 million SME and apparel imports from El Salvador rose 23.5 percent to 457 million SME. Cambodia saw apparel imports advance 24.1 percent to 496 million SME.

“[Apparel companies] are not looking to try a brand new place,” Herman said. “They are looking to go back to places where they’ve had experience so they’re not starting from scratch.”

Opinions vary about which regions will be the winners in the years ahead. Bruce Rockowitz, president of Li & Fung Ltd., said Asia has been competing well with Latin America, despite rising price pressures. The interior of China, Vietnam, Bangladesh, Indonesia and to a lesser extent India are likely winners moving forward, he said.

China has been working to shift some production activity to its interior provinces for some time in an effort to combat labor shortages and rising costs in traditional manufacturing centers, said Gary Hufbauer, a senior fellow at the Peter G. Peterson Institute for International Economics in Washington. China has invested significantly in its infrastructure to facilitate its strategic shift of manufacturing, however for many product categories, “nothing beats being in Shanghai,” Hufbauer said. For fast fashion or quick turnaround categories, producing goods in the interior of China would be difficult, even with China’s infrastructure development, which could force firms to look to places like Vietnam, Bangladesh and Cambodia.

The industry adage that “companies chase the lowest-cost needle” is changing, sourcing experts said. In its place, companies are developing more nuanced strategies that include both enhanced factory productivity and diversified sourcing bases to mitigate rising costs.

“Labor costs in China, as well as other countries, have hit rock bottom and are on the way up,” Rockowitz said. “Now we’re back to rising labor costs.”

Wage rates and labor overhead in China are increasing consistently, and consequently driving up costs in countries that compete with China, as well, Rockowitz said. In recent months, strikes in garment centers in nearby Bangladesh and Cambodia have driven home that rising wages are a reality apparel manufacturers will have to face now and down the road.

The outlook for manufacturing in China has been further complicated by rising rhetoric over alleged currency manipulation. Critics charge that China undervalues the yuan by as much as 40 percent, making goods manufactured there cheaper and giving them a distinct price advantage. Just this weekend at a meeting of the International Monetary Fund in Washington, the U.S. and other countries pressured China to allow the yuan to appreciate more rapidly. If the yuan did appreciate significantly it could potentially drive the cost of imports from China up.

Industry experts said sourcing decisions now need to be made on a product-by-product and country-by-country basis. In general, better goods and high fashion garments — those with higher price tags — are likely to still be made in China where the expertise level and quality are consistent, and cost savings in those categories will be eked out through other channels such as increasing the efficiency of manufacturing and inventory management through the use of new technology.

Decisions about where to produce commodity goods that require faster turnaround times and are hampered by thin margins will be more influenced by straight price factors. Companies manufacturing these categories are more apt to continue globetrotting in the hunt for the lowest-cost supplier, and more companies are looking back to countries they abandoned during the production flight to China instead of developing new sources, experts said.

People aren’t running out of China, said Rick Helfenbein, president of Luen Thai USA, but there has been some movement toward nearby countries. However, Vietnam and other Asian nations rely on China for so many of its inputs that they are also vulnerable to many of the same cost pressures.

“People will have diversified portfolios when the dust settles,” Helfenbein said. “They’ll make their better product in China and their commodity product somewhere else.”

Raw material prices and transportation rates have also soared, and the floundering world economy has further challenged apparel firms by making price increases nearly impossible to pass on. More than moving from country to country, smart manufacturing and sourcing will be the most effective way to combat the rising price of manufacturing, executives said.

“We’ve looked at it in terms of entering the world lean: lean manufacturing, lean supply chain, lean enterprise,” said Helfenbein.

While there have been substantial wage increases throughout Asia, if productivity increases with wages it can minimize the impact, said Simona Mocuta, senior manager for the Asia Pacific economics team at IHS Global Insight. For example, between 2005 and 2008 wages in China increased dramatically but apparel prices did not rise because worker productivity and machinery advances kept pace, she said.

“Companies may be squeezed in places, but there’s still a substantial supply of labor available and there are also productivity gains to be had,” Mocuta said.

To cope with rising costs, apparel companies need to take a longer view of their sourcing strategies, experts noted.

“Concentrate not only on your first cost, the factory, but on what is your real cost out the door,” said Rockowitz.

Companies need to look at streamlining costs by doing things like re-engineering how garments are manufactured to be more efficient.

Smarter manufacturing principles and better management can only squeeze so much cost out of the supply chain, however, sources said, and companies will eventually have to face up to the pressure of increased labor costs.

Rising wages are a fact of life for companies doing business in China, just as they have been historically in the apparel industry, said Phillip Swagel, a visiting professor at the McDonough School of Business at Georgetown University.

“Eventually China will price itself out of the market, which in many ways will demonstrate the successful development of China,” Swagel said.

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