Sourcing Horizons: A New Manufacturing Map Emerging

While China remains the industry’s top manufacturing destination, its dominant position is being slowly eroded.

A view of the Qingdao Port in Shandong, China.

For fashion brands, sourcing is no longer about putting all their eggs in only a few baskets.

This story first appeared in the October 2, 2012 issue of WWD.  Subscribe Today.

While China remains the industry’s top manufacturing destination, its dominant position is being slowly eroded as labor costs rise and labor shortages increase, and the movement to manufacture more for domestic consumption and less for exports gains ground. The result is an opportunity for gains in market share and development of specialized production across the globe, from Asian nations to European countries and the Western Hemisphere.

Capital Business Credit’s latest “Global Retail Manufacturers and Importers Survey” found 26 percent of those surveyed have moved some of their manufacturing out of China and 40 percent are considering moving some of their production out of the country.

“While we at CBC continue to believe that China will remain a strong manufacturing partner for retail goods importers in the U.S., there is a shift taking place to either low cost manufacturing destinations like Vietnam and Pakistan, or on the opposite end of the spectrum, to cities in the U.S. where importers can keep an eye on quality control and produce goods faster due to the elimination of overseas shipping times,” said Andrew Tananbaum, executive chairman of CBC.

When clients were asked to which countries they are moving their manufacturing, the U.S. was the most popular at 31.3 percent, followed by Vietnam at 18.8 percent, Pakistan at 10.9 percent, Bangladesh at 9.4 percent and the Philippines at 3.1 percent.

RELATED STORY: Pakistan’s Textile Industry Playing a Balancing Act >>

Tanjila Islam, chief executive officer of TigerTrade, said, “Diversification outside of China is the key issue in sourcing right now. I do think we’ll continue to see China being dominant in the medium term as the leading apparel and textile sourcing country. They just have the expertise and infrastructure for making apparel and textile products across the supply chain. But we are definitely seeing opportunities, with Southeast Asia being the big one, led by Vietnam, which has a lower cost base than China and India, and also Indonesia and Cambodia are very competitive, along with Bangladesh. The DR-CAFTA and NAFTA countries are also seeing more interest.”

Julia Hughes, president of the U.S. Association of Importers of Textiles & Apparel, said the upward pressure on prices throughout Asia is a significant development.

“It is interesting that the Customs value was up double digits for Vietnam and Bangladesh [in July from a year earlier],” Hughes said. “One has to assume that is higher labor, input and transportation costs.”

She said the dollar value of apparel imports rose 21 percent from Vietnam and 11 percent from Bangladesh, and was also higher for Indonesia, Honduras and Cambodia.

Rick Helfenbein, president of Luen Thai USA, said there are a multitude of factors shaping the sourcing landscape.

“The slowdown of European apparel consumption, combined with the continued drop in raw material prices, has tampered the perceived need for U.S. apparel firms to exit China and has returned some stability to the more traditional USA apparel sourcing bases,” Helfenbein said.

He noted that there are significant percentage gains from Vietnam, Cambodia and Indonesia, as well as Mexico and Nicaragua.

Munir Mashooqullah, principal of Synergies Worldwide, said, “Global sourcing is facing a challenge of vendor attrition, increase in wages and energy costs, migration of workers to better paying industries and falling compliance issues. Stability in material prices has helped tremendously, otherwise it would be more difficult.”

Mashooqullah believes China’s market share will decline at the expense of countries and regions such as Bangladesh, Indonesia, Vietnam, Pakistan and some Caribbean Basin countries such as Honduras, Guatemala and Haiti. For European Union countries, he said Turkey, Tunisia, Morocco and Portugal have started to be quick replenishment suppliers again.

“Idle capacity is common in China today, however the factory owners are very clear that orders which are profitable are the ones they want — no more taking orders just for turnover or to build relationships,” he said.

Heath Golden, president and ceo of Hampshire Group Ltd., said, “To me, China Plus One is an oversimplification. For example, [Hampshire’s licensed line of] Panama Jack boardshorts lend themselves to Bangladesh for the price point and the reality is other things lend themselves to other countries.” The company also sources sweaters and woven shirts in China, Bangladesh, India and Vietnam.

Jeff Streader, operating partner of Marlin Equity, said, “China is not the cheapest and will never be the cheapest again. If you talk about low labor, simple T-shirts, it’s Honduras, but if you talk about denim jeans it could very easily be Mexico or perhaps Pakistan and Bangladesh. It varies by product and simplicity or complexity of that particular product.”

Streader said Southeast Asia presents the best alternative to China, but noted that there are concerns over Vietnam’s capability for growth.

“Bangladesh has a very important role in producing value products for the U.S. and I think they will continue to be important from that perspective, which also holds true for Vietnam and Cambodia,” he added.

Bangladesh has been suffering from labor unrest, and a series of labor actions over wages and working conditions has made some leery of the country, experts said. The same is true of Cambodia, where a new report from the Clean Clothes Campaign and the Community Legal Education Center on the Better Factories Cambodia Project, created in 2001 as a result of the U.S.-Cambodia Textile & Apparel Trade Agreement to create incentives to improve labor rights, concludes it has “significantly aided” in ushering in better working conditions, but also notes that there are areas that need improvement. In 2011, there were 284 factories registered with the BFC project, but it’s estimated the number of subcontracting factories runs into the hundreds.

“This is problematic because manufacturers tend to use subcontractors to escape the [BFC] monitoring,” the report noted.

RELATED STORY: Better Factories Cambodia Seeks More Oversight >>

Helfenbein believes a “China Plus Two” strategy is the best plan right now.

“It’s very hard to divide energies and investment of time and people beyond just a few borders,” he said. “Concentration of effort is paramount. The longer-term issue is still related to establishing working partnerships between large players in assembly, logistics and textiles. Ultimately, that type of arrangement provides the most efficient use of a viable and efficient supply chain.”

Hughes of the USA-ITA said, “I am not sure I would any longer talk about China Plus One or Two. It is really China Plus Five or Six. There has definitely been a trend for slightly less consolidation of orders in a few countries.” She said companies are also taking a closer look at free-trade agreements that offer duty savings, notably CAFTA and NAFTA.

Hampshire Group’s Golden noted that his firm acquired Rio Garment in Honduras a year ago to capitalize on the shift back to the Western Hemisphere.

“The minimum wage rate in the Pearl River Delta in China has come very close to the minimum wage rate in Honduras and the rate in China is certainly rising faster than in Honduras,” Golden said. “There are retailers approaching us every day about how we can put together programs and move them from Asia to the Western Hemisphere. We are thinking about how we can do all of our woven business in the Western Hemisphere and what programs can be picked off [from Asia] and moved.”

A new United Nations report documents a shift from the extensive offshoring of the last two decades back to making goods closer to home. The returning of production, or “reshoring,” should have positive employment consequences for industrialized countries, the report said.

The study, which points out that the steep increase in world oil prices “has sharply driven up logistics and transportation costs,” states that “a reassessment of supply chain risks and management costs may lead companies to reconsider manufacturing goods in the United States.”

“With the big cost advantage no longer there due to increasing energy costs and declining wage gaps, it’s less profitable to offshore than five or 10 years ago,” said Jorg Mayer, senior UNCTAD economist.

Growing consumer awareness over environmental issues, labor problems in developing countries and concerns over brand damage from disasters such as last month’s fires in Pakistan that killed more than 300 workers are playing a role in the reshoring trend, Mayer said.

Many brands and retailers have given the U.S. a fresh look as inventory control and quick replenishment become more important.

Streader said he believes in the “reemergence of the apparel industry in the U.S.” He said, “It won’t be a top 10 producer in terms of major apparel producing countries, but I think any companies that we invest in will take a hard look in the migration of production to the U.S. in some products where it makes sense.”

“Going Global: Export Guide for Textiles and Apparel,” a new report from the Commerce Department, shows U.S. textile and apparel exports increased 14 percent in 2011 to $22.4 billion. Canada held the top spot for U.S. textile and apparel exports, followed by Mexico, Honduras, China and the Dominican Republic. The report also profiles the five fastest growing markets for U.S. exports of textiles and apparel. For textiles, they were Chile, Turkey, Peru, Sweden and Poland. Chile, the United Arab Emirates, Holland, Israel and Malaysia led in apparel.

“It’s really a good time for U.S. manufacturing,” said TigerTrade’s Islam. “There’s demand from new designers and smaller companies for low-minimum orders, for which U.S. manufacturers are able to be competitive, and also in the areas of quick turnaround, fast fashion and just-in-time products, as well as the ability to work with specialized materials — organic, high-performance, products with high innovation.”

Canadian manufacturing is also seeing a resurgence. Philippa Madigan, executive vice president of Toronto-based manufacturer Parkhurst, said, “As labor prices are going up and labor shortages grow in China, we’re finding our prices are so competitive, especially when you add on cost of shipping and other things. We’re also importers, so we see this first hand.”

Madigan said as in the U.S., fast turn and the issue of creating jobs on the home front are important today. She said, “We tell retailers that we employ people in our mills who shop in your stores.”