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Turning Away From the Low-Cost Model

The race to find the cheapest price in global manufacturing is ebbing in favor of a more sophisticated approach.

WASHINGTON — The race to find the cheapest price in global manufacturing is ebbing in favor of a more sophisticated approach.

Price is still important, but the ability to deliver quality merchandise in a more timely fashion is taking the lead as the way to achieve better profit margins.

Rather than moving their manufacturing production from country to country, factory to factory, each season, looking for cheaper production, brands are now narrowing their supplier base and strengthening ties with factories in hopes of driving profits. This has also been driven in part by continued quotas on Chinese imports, opening up opportunities and the need to build relationships with factories in other countries.

In many cases, factories are taking on more aspects of product development or moving more creative capacity closer to production for quicker turn times.

“We’re really changing the business model,” said Fritz Winans, managing director of Asia development for Liz Claiborne Inc., which owns a slate of brands including Sigrid Olsen, Juicy Couture and Mexx, in addition to its namesake label.

Winans’ posting in Hong Kong is just one example of how seriously Claiborne takes this shift — until taking on his current role in September, he worked more in the front end of the business, leading the firm’s moderate and better sportswear department store businesses as group president. Claiborne is also building a 6,500-square-foot design center in Hong Kong that will help cut development from concept to market in half, to around 22 weeks.

The Sigrid Olsen design and merchandising team is moving to China, where it will be able to handle some aspects of design, such as immediately signing off on a color dye. If not based near production, Winans said design teams will be on a routine of “high-velocity travel” that will have them overseas five times a year for two weeks at a time.

“When you come over here and you build it, and you do it face to face with the factories, you’re able to get your message through much clearer,” he said. “For people to kind of get into the sandbox and play nicely together, it’s not as easy as you think.”

The move to a smaller pool of factories in fewer countries, spurred on by ever-tougher competition at retail and loosening restrictions on international trade, has apparel and textile producers around the world adjusting how they do business.

In the face of a strengthening China, which is increasingly the center of gravity in apparel manufacturing, producers in other countries such as Pakistan and Turkey are working more closely with brands and focusing on niche businesses. Closer to China, firms in Hong Kong are reinvesting their profits in their operations, taking on more aspects of design.

Still, having the factory do more development doesn’t work in all situations.

“It very much depends on the price point, because if you have a one-stop shop that kind of gives you everything that you need, then you’ve got to pay for it,” said Tata Datta, director of global sourcing at Russell Corp.

Datta is working to narrow Russell’s manufacturing base.

“If you have the partnership with the suppliers, they feel that their business is taken care of,” she said. “They can keep their lines running with basic product and do peaks and valleys for higher-end product so it certainly makes a lot of sense.”

Building closer, more symbiotic relationships with suppliers is evolution, not revolution, said George Derhofer, senior vice president of global operations, imagewear and outlet at VF Corp.

The company is still holding the design reins, though.

“It’s a collaborative kind of thing, but you should not think that we’re handing off the responsibility of great innovative design to our suppliers,” said Derhofer.

Here’s a look at production developments in key countries.

HONG KONG

This special administrative district of China has mastered the art of redefining itself in the midst of its gigantic, growing parent.

While the Made in Hong Kong label has benefited from a regime of temporary quotas China agreed to in its dealings with the U.S. and European Union, it isn’t enough to give local garment factories a guarantee for long-term survival.

The key to Hong Kong’s continued success is not only offering manufacturing of goods, which can’t come close to being competitive with China’s cheaper prices, but more important, being a value-added manufacturer, said experts. This includes offering design and sourcing material for customers, in addition to high-quality niche production and reliable delivery.

Now is the time for manufacturers to add more services and do it right, said Peter Liu, chairman of the textile and apparel committee at Hong Kong’s American Chamber of Commerce, at the recent Prime Source conference.

Sun Hing Knitting is one of many firms that have boosted investment in existing Hong Kong facilities. In the past 18 months, the company invested $6 million to $8 million to expand its local facilities and has at least doubled its net capacity, said Andrew Leung, chairman of Sun Hing Knitting Factory and honorary chairman of the Textile Council of Hong Kong.

While the company has four factories in China and does its sourcing in China and Macau, Leung still sees the investment as a long-term plan for Hong Kong because of the territory’s ability to attract the higher end of the market.

“We still believe that a certain amount of Hong Kong production is a wise decision,” Leung said.

Sun Hing Knitting’s exports total about 30 percent to the U.S., 60 percent to Europe and the remaining 10 percent to Asia and the rest of the world.

The Esquel Group is also working on geographic diversification with the expansion of outward processing arrangements in the special administrative regions of Hong Kong and Macau, which give a quota-free alternative.

John Cheh, vice chairman of the Hong Kong company, pointed out recently that his company’s strategy is to maximize value-added services, emphasize quality instead of quantity and have a vertically integrated model from cotton farming to manufacturing. Esquel’s clients include Hugo Boss and Brooks Bros.

The value of domestic exports of clothing from Hong Kong increased 92 percent in March 2006 versus a year earlier to $243.6 million, according to Hong Kong’s Information Services Department. The increase was a slightly milder 77 percent for the first quarter.

While China’s learning curve is incredibly rapid, there are some things that companies agree it will take a while to grasp, namely fashionable design and successful local brands, as well as understanding a client’s needs. In addition to other value-added services, this is where Hong Kong is banking on for its future.

PAKISTAN

Pakistani textile mills have moved to niche markets, focusing on more complex designs as U.S. importers adjust their sourcing strategies.

In the last five years, the country’s mills have improved their productivity, efficiency and economies of scale at the bottom of the manufacturing pyramid, and invested in service and creative staff at the top.

They have cut the time of interpreting design demands, reducing the back and forth in sample submission and decreasing lead time from product concept to delivery.

“Pakistani mills are focusing on a few products in which they are competitive,” said Azfar Hasan of Matrix, a leading textile buying house located in Lahore, with a client roster that includes Nike and Phillips-Van Heusen brands Izod, Van Heusen, Arrow, Geoffrey Beene and Bass. “Pakistan’s strength lies in products made of heavier fabrics, like French terry and fleece, cotton-based products that use indigenous shorter staple cotton and performance element fabrics, like wrinkle-free and moisture management.”

Hasan said Pakistan could not compete with China on volume except in fleece and that the country’s knit apparel exports are down 4 percent since quotas were lifted in 2005.

To meet this challenge, mills have moved to a more individualized approach.

“Smaller, boutique-type companies expect more service and more research and development of product from us,” said Hasan. “Their products are meant for a less-conformist consumer who wants a more individualized look. Thus, the product runs are smaller, the product is more embellished and the margins are healthier for everyone involved.”

Comfort Knitwear director Asher Khurram said his mill has managed to maintain its $35 million per year export despite the industry downslide because it found a niche market catering to streetwear brands with high value-added products requiring embellishments, like hand appliqués, in which there is not much competition locally or globally.

To attract the hip-hop streetwear business, Khurram said Comfort is providing more innovative fabrics, textures and washes. Some innovations are in denim wash, destructive and beaten looks, acid wash, toxic wash, mercerized fabric and peached fabric. U.S. importers send their designers to Pakistan before every season and develop the samples. This way, the sampling is faster and there is a shorter lead time.

“Though Pakistani mills are not coping well with the rise of China in finished apparel, we are doing well in heavier-weight cotton fabrics for bottoms, such as denims, twills and canvases,” said Yousuf Abdullah, director of Sapphire Textile Mill in Lahore.

Sapphire supplies 80 percent of its finished fabric to mills in India, Sri Lanka and Bangladesh for American brands such as Gap, Abercrombie & Fitch and Liz Claiborne. Sapphire’s bottoms fabric export doubled to $4 million in April 2006 from $2 million in April 2005.

TURKEY

Earlier this year, a group of Turkish textile workers marched to the headquarters of Koc Holding and laid a black wreath at the entrance. It was a protest against a Koc finance executive who disparaged their ailing industry, which has been hit by the Chinese and soaring domestic costs.

“The textile sector is going to die; you cannot keep it alive with artificial measures,” Koc Holding’s Rustu Saracoglu had said.

These comments hurt even more since it is the automotive sector, in which Koc is a leader, that has knocked textiles and apparel off the pedestal of leading Turkish exporters. The latest figures show a 1 percent fall in apparel exports in the year to April and a modest 4 percent increase in textiles from sectors that for so long enjoyed double-digit export growth.

“Textile execs bought the most expensive jeeps, they lived in the most modern houses. Yachts, flats, the lot … money was good and easy,” said Haluk Korkmaz, owner of Atak Tekstil, reminiscing about the boom years in the Eighties and Nineties.

Now, he predicts that the sector will shrink by about 50 percent.

“This year, I really felt the danger of China,” Korkmaz said. “Now, they can make everything.”

Ismail Gulle, president of the Istanbul Textile & Raw Materials Exporters’ Association, said factories were closing at an alarming rate and the yarn sector alone had lost 20 percent capacity last year.

Apparel has been hurt more than textiles, so far, and this is likely to continue, since creative fabric producers have successfully managed to build relationships with high-end European and American brands such as Armani and Donna Karan, that then have the garments made elsewhere. But the manufacture of basic clothing, which made up a large proportion of the apparel industry, definitively is migrating to China. The high-quality branding and design initiatives expected of garment makers will take longer to achieve and then it will only be achieved by a few.

To survive the fallout, Turkish producers are trying to go upmarket and build strong relationships with clients, aiming to anticipate their needs and offering a fast turnaround in line with the current demands of the fast-fashion sector that now dominates shopping areas the world over.

Bossa, a leading denim producer, now develops a larger number of smaller lines in collaboration with or targeted at individual customers, winning strong relationships and a rich archive in return.

Companies such as Isko-Sanko and Altinyildiz are constantly working on new high-tech products, a general trend illustrated by the increasing number of garments and textiles being put through exacting laboratory testing.

Designers are being hired by ambitious companies determined to find an advantage amid the competition. Quality fabric specialist Soktas built a state-of-the-art design room where it encourages creativity and regularly hosts representatives of top Italian and U.S. brands.

Some big, integrated garment facilities are able to keep going as long as they don’t rely on only commodity goods. Many small and medium-size companies are expected to fall by the wayside because they cannot afford the cost of branding and the design talent, nor can they cope with high employee taxes, energy prices and the strong Turkish lira.

“In textiles, export figures continue to rise despite a narrowing sector,” Gulle said. “One reason is the rising unit value as we go for higher quality, which balances falling numbers. Also, even when garment manufacture moves abroad, we still send cloth to the countries where the clothes are made. So textiles will continue to live, even if apparel is hit badly. This is what happened in Italy.”

Suleyman Orakcioglu, who owns Orka Tekstil and heads the Istanbul Readywear & Apparel Exporters Association, said his sector, too, will fight hard to survive.

“This year is a difficult one, but we still expect to increase exports by 5 percent,” he said. “We are strong enough for this fight.”

For those determined not to shut up shop, there is another route. With an “if you can’t beat ’em, join ’em” attitude, some Turkish firms are exploring working with emerging Chinese companies.

Men’s wear label Kigili is sure that this is the way forward. A confident owner, Abdullah Kigili, recently told a Turkish newspaper that he had been offered a partnership to open a chain of stores in China by the Heilan Group.

“We will reduce the sizes and dress the Chinese,” he said. “If we don’t go to China today, someone else will do it tomorrow.”

ISRAEL

Seamless apparel manufacturer Tefron announced a joint venture with China’s Langsha Knitting Co. Ltd. and Itochu Corp. of Japan this month.

The plan is for Langsha to manufacture seamless underwear for the Asian market using Tefron’s Santoni knitting machines, and distribute it through its brands in China. Itochu, meanwhile, will manage the joint venture, which is 50.1 percent owned by Tefron.

“It’s a good path for us,” said Yos Shiran, chief executive officer of the Tefron, based in Misgav. “They have good channels and it seems like the right move.”

Then again, given China’s manufacturing strength and manpower, it may be the only move. While Tefron, the world’s largest manufacturer of seamless apparel, took more than two years to decide whether this was the right deal, Shiran said he’s known for the last five years that China was in Tefron’s future.

“We bring our know-how and we’ll sell that to their market,” Shiran said. “And in order to sell to China, it’s better to be inside China.”

Tefron is emblematic of Israel’s narrowing textile industry, which has been leaning away from manufacturing and moving toward technology, design and vertical production. While Israel’s $1 billion in textile exports has remained stable over the last few years, the industry has had to compete with China’s efficiency and low minimum wage, just like the rest of the textile world, said Ramzi Gabbai, head of the textile division at Israel’s Manufacturers Association.

“In Israel, it’s technology-driven companies — with a focus on design, finishing and printing — that are succeeding,” said Gabbai. “The local companies will continue along the same lines. We can’t work in mass production; there’s no chance. We have to be unique.”

That has always been the aim of Tefron, which makes intimate apparel, swimwear and activewear for Victoria’s Secret, Gap, Banana Republic, Calvin Klein, Nike, Reebok, Patagonia and Target Stores. The New York Stock Exchange-traded company started out manufacturing underwear for the Israeli army in the Seventies, but looked to technology to revolutionize its textile business. Tefron now has manufacturing facilities in Israel, Honduras, Jordan and the U.S.

“Being high-end helps,” said Shiran. “Israel is a small country and because of high labor costs, we had to find a niche in which we could compete. We excel in know-how, but when we want to get out there, a joint venture is the solution, especially if you’re looking to get into China. You can’t avoid that market. It’s big and it will be bigger.”

With contributions from Vicki Rothrock, Hong Kong; Mahlia Lone, Lahore, Pakistan; Suna Erdem, Istanbul, and Jessica Steinberg, Jerusalem