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Price Hunt Pushes Sourcing Beyond China

Vietnam, Bangladesh and Pakistan gain ground for sourcing, but China is still the easiest place for companies because it is so well established.

WASHINGTON — Price concerns are driving sourcing executives out of China and into neighboring countries, despite mitigating factors that require longer lead times and a well-balanced sourcing strategy.

This story first appeared in the September 22, 2009 issue of WWD.  Subscribe Today.

China is still the easiest place for companies to source because it is so well established, but it is no longer the most cost effective, an increasingly important element of sourcing decisions in the current economy, production specialists said.

As a result of the search for lower-cost alternatives, companies are beginning to source more from countries such as Vietnam, Bangladesh and Pakistan, said Munir Mashooqullah, principal and founder of Synergies Worldwide, a sourcing firm with more than 50 clients.

“You have to work to find the right factory because the obvious ones are not going to fit into the pricing model which is required in 2009 and 2010,” Mashooqullah said.

Imports from Vietnam and Bangladesh are outperforming most other countries year-to-date, according to the Commerce Department’s Office of Textiles & Apparel. While overall imports of textiles and apparel to the U.S. for the first seven months of the year dropped 10.6 percent to 25.9 billion square meter equivalents compared with the same period a year ago, shipments from Vietnam advanced 22.4 percent to 1.2 billion SME in the period and imports from Bangladesh increased 3.5 percent to 1 billion SME.

Shipments of textiles and apparel from Pakistan declined, but at a slower rate than the rest of the world, and the country remains the number-two supplier overall. Year-to-date apparel and textile shipments to the U.S. from Pakistan fell 5.6 percent to 1.6 billion SME.

Many companies have added one or more of the three countries to their sourcing stable. This shows up in the decline in U.S. imports from China of 5.2 percent to 10.9 billion SME in the same period.

The worldwide average unit value for apparel for the year ended July was $3.08, according to the U.S. Association of Importers of Textiles & Apparel. The unit value for apparel from Pakistan was $2.08, for Bangladesh it was $2.44, for China it was $2.89 and for Vietnam it was $3.29. Since the unit values reflect the average cost of apparel, higher-margin goods skew the figures higher. Bangladesh and Pakistan manufacture mostly basic, commodity items, while Vietnam produces a product mix similar to China’s, but with a lower labor rate.

“Vietnam is a very popular alternative to China,” said Jeff Streader, senior vice president of global sourcing for Guess Inc. “The value is truly tremendous there. It is the absolute powerhouse alternative to China and the rising prices there.”

China has seen rising labor and operational costs in recent years, amid infrastructure challenges.

“Vietnam and Bangladesh are the two countries that are still growing when it comes to apparel production,” said Julia Hughes, senior vice president international trade for USA-ITA. “They’re definitely doing something right. In what’s really a sea of red when you look at import statistics, Vietnam and Bangladesh are still growing.”

Janet Fox, vice president and director of sourcing for J.C. Penney Co. Inc. and chairwoman of USA-ITA, said, “Bangladesh benefited in regards to sourcing because China priced itself out of the market.”

Pakistan, where the company has had facilities for almost 10 years, offers great quality, speed to market, vertical integration and a good value proposition, Fox said.

Bangladesh also has a strong price-value equation, said Streader. With labor costs lower than most other countries and a well-established skill set, as well as a young workforce, the country is well suited to “pump out volume,” he said.

“Bangladesh right now, I call it the retailer’s mecca,” said Mashooqullah. “It’s predominantly European and U.S. mass merchants…they are there in all their basic categories.”

During a visit to Washington last week, Bangladesh foreign minister Dipu Moni met with Secretary of State Hillary Rodham Clinton and said she had pressed for duty free and quota free access for Bangladesh products into the U.S. market. Bangladesh has pushed for duty free access for years, a change importers hail as positive, but which has met with resistance in some industry quarters. Apparel executives said Bangladesh products already have duty free access to Europe and Japan, which, in some cases, has lead to preferential treatment for suppliers in those regions. Lawmakers in Congress have introduced bills that would give duty free access to all the least developed countries, including Bangladesh, but the bills have stalled.

The majority of production in Vietnam, Bangladesh and Pakistan is concentrated on basic products that can afford the lead times and delays associated with some of the challenges in the region. Infrastructure problems such as transportation and Customs inefficiencies have plagued all three countries, experts have noted.

For some, the riskiest factor in manufacturing in Pakistan stems from security concerns. While industry executives shy away from talking about security issues, it is the subtext of production in the area, Hughes said. Instability and recurring violence in the country make some people reluctant to travel or live there. That complicates work standards compliance monitoring for companies and makes it harder to establish offices there. Production in Pakistan is further complicated by infrastructure challenges such as instability in the power grid that leads to regular outages, sourcing executives said.

In Bangladesh, concerns stem primarily from periodic labor unrest and the seasonal monsoons. But experts said the country is predictable in its uncertainty, which allows companies to establish contingency plans for dealing with both impediments arising from weather or worker strikes. Plus, local unrest has declined.

The problems in Vietnam stem mostly from its rapid growth. The country was a bit “overplayed,” Streader said, and the high number of companies looking to manufacture there created some headaches. In addition, production demand grew so quickly that the ports were clogged with goods and the roads weren’t up to par, Fox said. Both of those problems have been addressed and the infrastructure challenges are fading, she added.

In the meantime, challenges can be accommodated by building in the lead times necessary to cope with unforeseen factors.

“That’s sourcing 101,” Fox said. “It’s part of an overall sourcing strategy.…look at your risk-reward and then your mitigation strategies.”

Crystal Button, vice president of merchandising support/global sourcing for Redcats USA said her firm has backup facilities outside of Pakistan and Bangladesh where it can shift production in case of political instability or a natural disaster.