By  on March 23, 2010

WASHINGTON — After two decades of textile and apparel sourcing concentrated in the coastal regions of China, experts predict that rising production and labor costs will drive companies to the country’s cheaper neighbors and regions with developing apparel and textile manufacturing.

The next 10 years will see Vietnam, Bangladesh, India, Pakistan and Indonesia as the rising stars of apparel production.

Increased manufacturing and raw material prices and rising labor costs have already impacted sourcing within China, driving some companies to move production to the northern and western provinces. Until recently, most apparel was manufactured in the southeastern part of China, where there was easy access to ports.

Cost has always been a driving factor of sourcing decisions for apparel executives, and the pressure to keep production expenses low has only increased as consumers have grown used to less expensive clothing and global macroeconomic forces have pressured company margins.

In 2000, China shipped 2.2 billion square meter equivalents to the U.S., according to the Commerce Department’s Office of Textiles & Apparel Last year, the U.S. imported 20.7 billion SME of textiles and apparel from China, nearly half of all goods imported. The total amount of apparel imported into the U.S. in 2009 was 46.6 billion SME.

The value of the dollar against other currencies, inflation trends and speed-to-market pressures in the retail environment in the U.S. will drive sourcing to new regions over the next decade, experts said. Sourcing executives and industry observers pointed out that not only have China’s labor costs risen, but raw material and energy costs have increased as well. Inflation in supplier countries has also had an impact.

The difficulty with shifting into the interior of China for most companies is that the logistical challenges outweigh the labor cost benefit, said Gary Hufbauer, senior fellow at the Peter G. Peterson Institute for International Economics in Washington.

“Ten years from now I think China will be too expensive,” Hufbauer said. “They’re very competitive now, but it would be amazing if their wages weren’t double what they are now in 10 years, or even more.”

The increases will be particularly felt on commodity products, Hufbauer said. China is more likely to maintain its price competitiveness on more sophisticated items. Wages in other countries, like India, could also increase but are not expected to rise at the same rapid rate, which will help those nations pick up some of the market share shifting out of China, Hufbauer said. Countries like Bangladesh will have no wage pressures.

China has made no secret of its wish to graduate from new kid on the block to global powerhouse. For apparel manufacturing, that could mean any production that is still there will shift to the high end, Hufbauer said.

“They may not do jeans in China [in 10 years], but they might do the high fashion stuff,” he said.

Countries like Italy and France that are commonly associated with high-end manufacturing could face a lot of competition from China in the coming decade, he said.

Not everyone agrees about China’s path. David Spooner, an attorney with Squires, Sanders & Dempsey and a former assistant secretary of commerce for the import administration and former special textile negotiator under President George W. Bush, said China’s rising labor costs are driven in part by the exponential growth in its gross domestic product. China’s double-digit expansion is unsustainable, and if GDP growth flagged it “would stop the flight of production,” he said.

Rising costs and other factors might push some production to other countries like Indonesia, Bangladesh and their southeast Asian neighbors, said Rick Darling, president of Li & Fung USA, but China will likely still be the dominant player.

“At the end of the day, anywhere in the world, there’s no replacement for China,” Darling said.

China, Vietnam and Indonesia offer competitive labor and energy costs, despite not having the benefits of a trade preference program with the U.S., said Mark Jaeger, senior vice president, general counsel and secretary of Jockey International Inc.

Economic factors always influenced decisions about sourcing and production, Jaeger said, but because most apparel is produced outside the U.S., trade policy, quotas, safeguards, duties and trade agreements also impact the supply chain for clothing.

The result of the complicated web of policies that can impact apparel and affect the cost and speed of producing in specific countries has “resulted in widespread and inefficient supply chains where inputs are moved around the globe to satisfy origin requirements in trade deals,” Jaeger said.

“Over the next 10 years, I think sourcing will consolidate into fewer countries and supply chains will be focused,” Jaeger said. “Countries that depend on duty preferences for their competitive advantage will gradually lose share.”

Some feel 10 years from now China could resemble the Japan of several decades ago, a country moving up the manufacturing food chain away from gateway industries like apparel and textiles into more complicated, higher-value channels like electronics and cars.

China’s move into higher-margin categories would create a vacuum that could be filled by a number of countries. India and Vietnam, already powerhouses with well-developed infrastructure and vertical platforms, could both step in to fill the void. Vietnam has already expanded the products it manufactures and developed its industry across the board, said Julia Hughes, president of the U.S. Association of Importers of Textiles & Apparel.

Vietnam, Bangladesh, India, Indonesia and Pakistan are top 10 suppliers to the U.S. and Pakistan and India are both vertically integrated in specific product categories.


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