As sourcing executives plot production plans for upcoming seasons — including networking and planning fabric and yarn purchases at trade shows such as Première Vision Preview, Spin Expo, Texworld USA, the International Apparel Sourcing Show and Kingpins in New York the next three weeks — pending changes in U.S. trade policies, rising manufacturing costs and labor unrest in some regions of the world are impacting their strategies.
The U.S. fashion industry, which imported $102.3 billion worth of apparel and textiles from countries around the globe in the year ending April 30, has significant exposure to shifting trade winds from Asia and Africa to Europe and the Western Hemisphere. China remains the top sourcing destination for apparel, controlling a 41.5 percent share of imports to the U.S., but countries such as Vietnam, Bangladesh, Indonesia and Cambodia are benefiting from higher wage rates in China and gaining more business.
“There is greater focus on Indonesia and Bangladesh as a result of rising prices in China, but new countries are now few and far between,” said Rick Darling, president of LF USA and chairman of the American Apparel & Footwear Association. “Production continues to shift to the more central and northern regions of China, as the south shifts to higher-value production and that will continue. This is a long-term trend, as China will remain the largest sourcing base for footwear and apparel even with price increases.”
China, Vietnam and Cambodia were the only top 10 apparel suppliers that posted an increase in apparel imports to the U.S. in the first four months of the year, according to Commerce Department data.
Tanjila Islam, chief executive officer of TigerTrade, a business-to-business Web site that connects manufacturers in Southeast Asia with international partners, said at a seminar organized by the U.S. Association of Importers of Textiles & Apparel that, while China is still the top supplier, the countries of the Association of Southeast Asian Nations, or ASEAN, have been growing. Islam noted that ASEAN members Vietnam, Indonesia and Cambodia have become integral in the advent of the so-called China Plus One sourcing strategy.
“While China remains the number-one exporter, companies have been facing rising labor costs, labor shortages in the coastal cities, pressure on the [yuan] to appreciate and strong growth of the domestic market,” she said. “This…gives an opportunity for the ASEAN region.…But it’s also a challenge because the ASEAN region is large and diverse. You have countries such as Thailand, Indonesia, Vietnam, the Philippines, Myanmar now opening up, so you really have diverse product range with each country having its on strengths and weaknesses. Overall, there is a highly skilled workforce and abundant labor throughout the region, high production efficiency, competitive labor rates and integrated production opportunities…with proximity to China.”
Islam said the Vietnamese government is investing significantly in the sector. With growth in garment and textile exports coming mainly from factories that are foreign owned, locally owned factories offer an opportunity for Western brands. She said Indonesia has a sophisticated and diverse production capability, from fiber manufacturing, spinning and weaving, to dyeing and full-package manufacturing, specializing in high-tech swimwear and innerwear. The government has helped build a highly trained workforce and has been implementing a plan to incentivise factories to upgrade machinery and technology. Islam noted this has resulted in an increase in the number of employees in industry manufacturing by 61,000, has increased production capacity by 19 percent, and has driven funding to upgrade the country’s infrastructure.
In Cambodia, which she said was a “hot market,” with exports now of $3.5 billion, 280 factories and 280,000 workers, there has also been a rise in labor disputes, doubling what was reported last year in the first five months of 2012. The Philippines and Thailand have been shrinking markets due to high cost of labor, but maintain a core of factories for high-end brands and textiles. Then there’s Myanmar, which she said still has a “Wild West feeling,” and an import ban from the U.S., even though recent reforms are seeing the door opening slowly.
Frances Zwenig, counselor at U.S.-ASEAN Business Council, said of Myanmar, “For business purposes, it’s way too early. There’s going to be no movement on imports right now.”
Michael Blakely, director of the Source ASEAN Full Service Alliance, or SAFSA, agreed there’s a long way to go for Myanmar, but “investors in the region are making their moves, buying land,” notably from Thailand.
“China is still the best option for many people and many goods — you still have to have a China strategy,” Blakely said. “But in ASEAN there’s been robust growth. SAFSA goes out and recruits factories and pre-qualifies them. We audit them for social compliance and conduct a quality service audit. We want best-in-class factories.”
The U.S. is involved is negotiating what would be the largest regional trade agreement ever, the Trans-Pacific Partnership. TPP could significantly reshape apparel sourcing because it could give number-two-ranked apparel supplier Vietnam more market access to the U.S. through duty-free treatment.
Trade experts don’t expect the agreement to be finalized this year due to the complexity of reaching consensus on sensitive issues among 11 countries — the U.S., Vietnam, Singapore, Australia, Malaysia, New Zealand, Peru, Brunei, Chile, Mexico and Canada. Japan has also asked to join the talks. Key areas such as rules governing textile and apparel trade are being hammered out. The U.S. has proposed a yarn-forward rule of origin, supported by the domestic textile industry but opposed by importers, that requires apparel be made of fabric and yarns supplied by the U.S. or other TPP signatory countries to qualify for duty-free benefits. A tariff phaseout schedule on apparel and textile imports must also be determined.
“TPP is a critical issue to the apparel and footwear industries,” said Darling. “If executed properly, the inclusion of Mexico, Canada and eventually Vietnam will form the basis for a market that covers most major footwear and apparel production centers and provide both a more effective sourcing base and a stronger export base for the U.S. industries.”
However, textile producers argue it must have a strong yarn-forward rule of origin that would not allow U.S. firms to use yarns and fabrics from China.
Sourcing in Central America, which had been experiencing a bit of an uptick in business, appears to have pulled back in the first four months of the year as textile and apparel imports to the U.S. from the region fell 9.8 percent compared with a year earlier.
Bill Jasper, president and chief executive officer of Unifi Inc. and chairman of the National Council of Textile Organizations, said at NCTO’s annual meeting in May that he expects some sourcing to shift back to the Western Hemisphere.
“The retailers and brands continue to recognize the importance of at least doing some sourcing here in the region,” Jasper said.
U.S. textile exports grew 13.8 percent to $17.3 billion in 2011, with 64 percent of yarn and fabric exports to free-trade partners Mexico, Canada and Central America.
David Sasso, vice president of international sales at Buhler Quality Yarns, which counts Central America and Peru as big export markets, said, “There is more interest in doing business in this Hemisphere. The issues are capacity — the minimum quantities they would like to do — and risk. We have to ask ourselves ‘Can we invest in more capacity and still have a sense of some confidence levels that we will have a return on our investments or are retailers going to go back out and source elsewhere because of some political advantage that the U.S. government gives to Asian countries such as a free trade agreement for Vietnam?’”
Brian Meck, president of Fessler USA, said there is continued interest in Made in USA, but its been somewhat stymied by the overall level of production in U.S. and globally being depressed by economic woes.
“But there is a very strong interest, more and more from the larger brands and retailers,” he said. “The time that these brands and retailers are spending in evaluating working here — sending out teams of people to the factory, doing all the social compliance audits and capacity reviews — they’re doing it the right way. They’re no rushing into it. They’re testing out smaller orders and establishing a relationship. I think it’s here to stay. People have made the decision to establish some vendors and factories in the U.S. and find a way it work for them as a percentage of their sourcing strategy for flexibility and replenishment, and to reduce risk and create diversification.”
Another game changer could be a potential U.S.-European Union free-trade agreement, which the U.S. and EU have said they are considering, although it could take years to negotiate.
Policies related to apparel sourcing in sub-Saharan Africa and Central America are expected to be at the center of Congressional trade action this year. Legislation was introduced in June to extend a provision in the African Growth & Opportunity Act allowing companies making apparel in 25 sub-Saharan African countries to use fabrics from outside the region and still receive duty-free benefits. Known as the “third-country fabric” provision, it is set to expire on Sept. 30 and the uncertainty around whether Congress will extend it for three more years has already lead to a loss in business in the region.
“Barring some outside catastrophe, we are definitely on track for Congressional approval,” said Julia Hughes, president of USA-ITA. “With an immediate effective date for the AGOA extension, that will give companies the ability to maintain supply chains and hopefully move some orders back to Africa.”