THE MIDEAST CRISIS: SCANNING THE GLOBE FOR SOURCING OPTIONS
Byline: Scott Malone
NEW YORK — Fear of more terrorism at home, the war in Afghanistan and unrest in many surrounding Muslim nations are causing apparel executives to rethink production strategies — and the big winners could be Mexico and the CBI countries.
Sourcing officials for the past six weeks have been analyzing their production networks, determining how dependent they are on factories in Pakistan, Indonesia and other countries that might be shaken by the current crisis, and seeking out backup suppliers to ensure they’ll be able to keep stores stocked and profits from plummeting.
Thus far, executives said, goods are continuing to flow from foreign factories into the U.S., with some minor delays as a result of increased Customs Service monitoring. They’re not reporting massive cancellations of orders from any part of the world.
“Penney’s as a general rule is taking a wait-and-see attitude,” said Peter McGrath, president of purchasing at J.C. Penney Co., based in Plano, Tex. “We still have product being made in Pakistan, Turkey, Indonesia and other places that I’d describe as Muslim-sensitive areas. We have not made any quick decisions to move anything around.”
Should air strikes in Afghanistan disrupt shipments out of neighboring Pakistan or if Osama Bin Laden’s efforts to stoke anti-American rage in Muslims around the world proves disruptive to factories elsewhere, McGrath said he is confident Penney’s would be able to react.
“Penney’s is large enough that we bring in goods from 60 countries, currently,” he said. “We have people on the ground in 23 countries. To be able to change should not be problematic.”
Many U.S. firms, though, are taking care to spread their orders around, to increase their odds of receiving goods on time in the event of a disruption.
“Instead of giving a program to one supplier, we’re giving it to two and figuring that if something goes wrong, one of them will come through even if the other gets backed up,” said Jim Gutman, president of Pressman Gutman, a New York-based converter that primarily deals in Asian fabrics.
Importers’ concerns are not limited to Pakistan, which shares a lengthy border with Afghanistan. Gutman noted that he buys some fabric from Uzbekistan, which also adjoins Afghanistan. Other executives expressed concerns about production in Bangladesh, which makes textiles and garments of Pakistani yarns, as well as in the largely Muslim countries of the Mideast, where civilian populations have voiced opposition to American policies. Recent demonstrations in Indonesia have also caused some to worry.
“Among our apparel importer clients, there is an overriding concern about the potential for supply disruptions,” said consultant Mary O’Rourke, a partner in the Jassin-O’Rourke Group.
That, she said, has caused some U.S. companies to look more closely at producing in Mexico and the nations of the Caribbean Basin.
“Everyone is not pulling everything out of overseas production markets, but there is a definite beginning of a shift of a portion of sourcing,” she said. “I think of it as sourcing insurance. They’re shifting into Mexico and the CBI. There are some importers doing things that they haven’t done in 10 or 15 years, like committing 60 percent of an order to a core supplier in China or India and planning to do the other 40 percent regionally.”
Further, she said, with many retailers becoming increasingly uneasy about the recent slowdown in consumer spending, apparel companies are finding another advantage in local production. Not having to allow for the three weeks it takes to ship goods across the Pacific means that firms can wait three weeks longer to place their orders and adjust those orders accordingly to correspond with shopping patterns.
Tom Haugen, executive director of Li & Fung (Trading) Ltd., a $4.5 billion apparel supplier with headquarters in Kowloon, Hong Kong, said he believes that immediate worries about the economy have caused many in the industry to delay production commitments.
“We’ve heard talk, but there still hasn’t been a great deal of action about moving sourcing to other places,” said Haugen, whose company acts as a full-package garment contractor and deals with factories in Asia, the Mideast, Europe and the Americas.
“People are still trying to digest what all this means. They’re trying to figure out what it is going to do for their sales. Decisions are being deferred. People are pushing back decisions and, consequently, their buying trips.”
While indecision might be one motivation for buyers to delay trips, fear is another. The terrorist attacks and State Department travel advisories have left many American executives nervous about traveling overseas.
While his company feels confident about continuing to produce in Indonesia, Haugen said, “As an American, I wouldn’t be going there right now. Not because I think there’s a big problem, but if your car makes a wrong turn and you drive into a little problem, it can become a big problem for you.”
Haugen isn’t the only industry executive nervous about being in Indonesia. Beaverton, Ore.-based Nike Inc. has pulled all its American ex-patriate citizens out of that country for the time being, though it, too, continues to manufacture there.
Given the reluctance of American buyers to travel overseas, Li & Fung is sending more of its staff to visit clients here.
“We are looking to have more of our people visit the U.S. customers more frequently, and we’re looking into videoconferencing. Internally, that is probably the biggest change,” said Haugen, noting that his firm is also sending top executives to a security class later this month.
Travel security is also on the mind of Isaac Dabah, chairman and chief executive officer of New York-based Gloria Vanderbilt Apparel Corp., which produces garments in Sri Lanka, Asia and parts of the Mideast, as well as Mexico. While he said he’s not worried about shipments from those locations being interrupted, he acknowledged a reluctance to send his own employees to the factories to check on operations and quality.
“It’s difficult,” he said. “I don’t have a problem going myself, but I can’t tell people to go.”
One way Gloria Vanderbilt gets around that is by having its own people stationed overseas full-time. The company opened its own factory in Jordan a year ago. Concerns about instability overseas have prompted some firms to look more closely at stepping up production in the Caribbean Basin, a region to which the U.S. extended trade benefits over a year ago.
“We’ve been having customers call us,” about CBI programs, said Michael Delaney, senior vice president of marketing and strategic planning at fiber and yarn maker Unifi Inc., Greensboro, N.C. “There was already a lot of interest in CBI, not just for the economics of it, but also for the speed advantages associated with it. What this has done is create a lot of focus there.”
Jon Penrice, North American business director for DuPont Apparel & Textile Sciences, based in Wilmington, Del., said, “This may really get CBI firing on all cylinders.”
“One reason people have been reluctant to explore CBI is just fear of change,” he said. “This whole Afghanistan thing has given people a reason to change. Now they will develop some relationships that they may not have had the energy to pursue before.”
Over the past year, many sourcing executives have cited CBI manufacturers’ inability to provide full-package garment production as a roadblock to the growth of that region’s industry. Qaizar Hassonjee, DuPont’s director for global sourcing, said his company is working with the region’s factories to help them develop this capability.
One of the key things the company is doing is working with 10 to 15 top CBI factories to help them find ways to finance full-package production, which requires factories to buy fabric and other raw materials upfront and then sell the finished garments to apparel vendors and retailers.
“We’ve been working very specifically with some of the Lycra Assured partners to see how we can help them with some level of loan guarantees and things like that,” he said.
Driven by logistical concerns and patriotic motivations, some in the industry have wondered whether it would be logical for apparel companies to turn back to U.S. production, which many have all but abandoned in recent decades.
Consultant Emanuel Weintraub, sharing a position held by many in the industry, said that would be an unrealistic goal.
“‘Made in America’ is not going to be viable, because we’ve totally abandoned such a huge part of our apparel industry that it would be an effort to even get it back,” he said. “Then when you did that, the cost of the product vis-a-vis the rest of the world would make the product noncompetitive. The consumer today is not looking for increased prices of apparel. They’re looking for deflationary prices, which is what is going on.”
Bruce Raynor, president of the apparel and textile union UNITE, said companies should think seriously about returning to U.S. production.
“There are plenty of domestic contractors with the skills and the capacity to meet the needs of retailers and apparel companies,” Raynor said. “There is a mentality that needs to change in the industry, and that has been about price. They say, ‘Let’s go out and find the countries with the poorest conditions and the lowest living standards and manufacture there.’ And then they pretend they care about human rights, but they don’t.”
While the current crisis might remind some companies of the advantage to not being too dependent on production in any one factory or country, most executives interviewed said they don’t expect it to have a long-term effect on sourcing practices.
“Nobody is going to stop everything from overseas. From a cost point of view, they need to be there,” said O’Rourke. While concerns about shipments might drive demand for locally made textiles and garments higher in the months ahead, she said, “I don’t think anyone should delude themselves into thinking we’re seeing a long-term shift.”
Li & Fung’s Haugen added that, while Americans are currently keeping a closer eye than usual on unrest in foreign countries, the unrest in itself is not atypical.
“We’re watching Pakistan, but everyone is ignoring Bangladesh altogether, which is more important for us than Pakistan,” as a source of supply, he said. “They’re marching in the streets in Bangladesh, but in Bangladesh they’re always marching in the streets about something. I don’t think it’s any different than it has been in the past.”
The Pakistani and U.S. governments have also in recent weeks assured importers that they will work to keep commercial transportation out of Indonesia running smoothly.
Executives said it’s impossible to predict what sort of industrial or transportation disruptions the industry could face in the future. Until another threat manifests itself, though, they’re spreading their production bases a little wider.
Gutman of Pressman-Gutman said some of the fabrics he buys are made of Pakistani yarns, and for the time being, he is not giving up on Pakistani production.
“We’re trying to avoid a problem by making alternate plans and backing ourselves up with secondary resources,” he said. “And we’re advising our customers that disruption is a possibility and, if that occurs, we can’t necessarily be responsible for what happens. That’s all we can do.”