China's changing role as the go-to for clothes sourcing
China's role as the clothes sourcing go-to for most of the apparel industry is set to change, driven by a perfect storm of factors including labour costs, exchange rates and the cost of raw materials, and a rampant domestic market, according to John McClure, M&S head of sourcing for the Far East.
From a sourcing point of view, the last two decades have been about building capabilities in regions, with sourcing offices and going direct to manufacturers, giving consumers the benefit of cheaper clothing. As a result, "the consumer has never had it so good," McClure told a recent technical seminar on garment costing, organised by the Association of Suppliers to the British Clothing Industry (ASBCI). But now there are "some really difficult dynamics" on the horizon.
Raw materials: Brands, retailers and manufacturers should not expect the price of raw materials to decline in the next decade, says McClure. "We can't rely on raw materials being a source of improving any margins, we are kind of margined out at the moment. Raw material prices fluctuate depending on whether it is wool, cashmere, cotton or synthetic, supply and demand. With what is around the corner in terms of being more sustainable, there's nothing to tell me the price of raw materials is declining.
Labour costs: With low-cost countries keen to develop their economies, labour costs are going up – whether in Bangladesh, Cambodia, Myanmar or anywhere else. The textile industry is the second biggest employer in the world. "We have to develop these countries [but] at the end of the day as they develop, their cost base is going to go up and they are trying hard to get efficiencies and automation. If you think about it, before China, Taiwan was the sweatshop of the world, but now it is one of the top ten economies of the world making electronics." Exchange rates: The exchange rate trend is making it more difficult for everyone to manage their costs and maintain healthy margins.
Picking the right sourcing hotspot
With labour costs going up and an increased focus on brands and retailers to ensure they are sourcing from suppliers and countries that consider the welfare of their workers, people and the environment, the market has never been more challenging.
For a long time, China was the obvious choice when it came to sourcing, simply due to economies of scale, and lower labour costs. But that is quickly changing. McClure notes of the South East Asian nations, China is at the higher end of the scale when it comes to garment costings. And because other countries like Bangladesh have duty-free access to the European Union under the Everything But Arms (EBA) programme, China can work out 40-50% more expensive overall when it comes to sourcing.
But China is not as worried about being more pricey, particularly since its domestic market is so rampant. "There are 200m people in China that are now middle class. The big cities are so consumer-driven it is unbelievable. The disposable income is driving massive consumption."
Then there is the technology aspect.
"China is going at it. It's into 5G. There are some cities that no longer use paper money. It's also becoming world-leading in terms of eco-credentials and what it is doing.
"So China is going to be a very different place in the next ten years. It is certainly not going to be a source of cheap clothing or labour."
Choosing the right country, however, is very important he says. "We can't make everything in one country. There are lots of my colleagues that want to make absolutely everything Bangladesh because it's a no-brainer. But we all know that's not sensible. And cost is only one aspect of sourcing that always seems to dominate."
Of some things to consider when looking at which market to source from, McClure says a brand or retailer needs to consider raw material verticality and proximity, whether the item is fast fashion or a staple line, and whether the country is duty-free or not. Inflation versus investment is another factor to consider.
"If we look at Cambodia, there's not much investment there, things are getting more expensive. It is only a small country with 16m people. And actually, people have been investing there for a long time. Now we are just sweating the asset, there's not a lot of fresh investment going in. Cambodia has served us well, it is a good friend. But where will we be in the next 5-10 years because there's no fresh investment going in."
Vietnam, on the other hand, has the biggest amount of investment of any Southeast Asia country at the moment. That, he believes, is thanks to the current trade spat between the US and China.
According to AT Kearney's sixth Reshoring Index manufacturers are diversifying away from China and toward lower-cost countries, such as Vietnam, which has captured an additional $36bn of import value, half of the $72bn lost by China. Examples of these are sportswear brands Nike and Adidas who, according to the report, have increased the share of their production in Vietnam – from about 30% to about 45% over the past 10 years – at the expense of China.
Over the five-year period between 2013 and 2018, Vietnam's imports to the US more than doubled from $21.7bn to $47.7bn. This growth (a 17% compound annual growth rate, or CAGR, for 2013-2018) far surpassed the growth levels of all other Asian LCCs, which grew at an average CAGR of just 5%.
Between the first quarter of 2018 and the first quarter of 2019, Vietnam's imports to the US grew 36% while China's imports fell 13% over the same period. Attributing to its growth story are lower labour costs than China's, proximity to Southeast Asian supply chains, and a government whose policies are highly favourable to foreign direct investment (FDI). The maturation of Vietnam's strategic infrastructure investments has also contributed to the recent spike in its imports as well.
Vietnam has a population of about 100m people: "The demographics are great and it is soon going to be free trade with the US. It's in the North, close to China, so there's longevity of costs," McClure notes.
"We know it's in the middle where costs are concerned. It's not the cheapest nor the most expensive. But it is sophisticated and is going to have longevity. So, in my opinion, it really is an important country to watch."
He believes that by 2024 Vietnam will have $50bn worth of exports going into America, making it bigger than Bangladesh. But he says the transition out of China and into Vietnam will still be gradual rather than a sudden switch.
Being less transactional
There are no easy options when it comes to weighing up where to source from and which suppliers to partner with, particuarly with brands maxed out on margins. And given that it makes no business sense to make everything in one location, brands and retailers must be "less transactional" and work closer to those partners that can go the distance.
"I believe this is now more critical than what we have been used to getting away with over the last two decades. We've been very transactional. I think it is going to be a major factor for controlling costs: making the right choices over the next ten years as opposed to being just transactional," says McClure.
Addressing the US-China trade spat, he believes it has only served to accelerate China's agenda to be less reliant on the US.
"I think the US is playing into their hands in some way. China is building stronger allegiances with the rest of the world and has accelerated its investments in Southeast Asia. With the pressure of everybody coming out of China gathering momentum, we are being told if you don't put down your capacity requirements, your orders will not be met. It is definitely not the time to be a transactional player."
Making the right choices early on in the process is key to managing costs.
"Choosing suppliers and what you need from them is very important. But whether it is about the country, the supplier or your internal choices, it is all about making the right choices to affect costs. And I don't think we, as retailers and brands, spend enough time on this."