The media reports don’t lie – sourcing in China is getting more expensive. As the wage differential between China and countries in the Americas narrows, firms are looking for ways to shift their production back to the birthplace of outsourcing, and dramatically cut their lead times along the way.
In this Sourcing Journal Special Report, we interview Mike Todaro, Executive Director of the American Apparel Products Network, Fred Isenberg of NGC, and Shelly Habinsky of INT Trading USA.
Why are firms leaving China?
Mike Todaro: They’re leaving because they’re more sensitive to total cost.
We live in a society where everyone is chasing cheap, and the pursuit of cheap obviously builds in delay. People have gone so far away chasing cheap. And because of the relationships and the fact that Asians stick to their plan, they’ve made it so easy over there that now that people are coming back and they don’t know what to do. They don’t know operations anymore. The people who could take apart and reassemble a factory are mostly gone. When people tell us they’re coming back to the Americas, my first question is, “Tell me why you’re leaving.”
Fred Isenberg: Costs in China are rising. There’s always uncertainty in sourcing, and people are beginning now to look at the total cost. What does it really cost me to make it? Not just the cost of the goods, but what is the cost of the time? In Asia you can’t source anything in less than 90 days. It’s impossible. Here, you can turn goods in 3-5 weeks if you have your supply chain set up. In Asia, you’re going to deal with anything from 18 to 23 or 24 days on the water, plus cost of country transportation if you’re bringing goods East.
Shelly Habinsky: Business is soft, and they really want to be able to get things in fast. They want to be able to wait as long as possible and have a quick turn time. It’s really tough to do that from Asia.
What do the Americas have to offer?
MT: What doesn’t get better and faster if it’s closer? There was a very sophisticated retailer who came to me in an emergency because their China guy couldn’t come through and I put them in the Americas to get it done. They came to me after and they said,
“Working with this guy in South America is easier, faster, better, cheaper, and safer. It’s easier because we know how to work the factories. We know that it’s hard and we’re good at that. We have time difference and cultural similarities. It was faster because they factories in South America have a better preproduction structure and discipline. They’re better at joint planning.”
FI: Denim, khakis, t-shirts, and intimate apparel (which has always been there). Those are being made there. Workwear, like work pants and work shirts. Companies like Cintas and Dickey’s and VF’s workwear divisions have a large sourcing mix there. You can get the fabrics in the US and the factories down there know how to make it.
SH: You could do denim in El Salvador; you could do denim in Colombia. In Colombia, the problem is with the capacity of their dying and finishing equipment. If they get a super big order, they have a shade problem, because they don’t have big batch equipment. They’re used to dealing with their own domestic retailers, which are smaller quantities. They’d never get a customer like footlocker.
What countries are people looking at?
MT: At least in the apparel industry, the world is divided up into China and Not China. In the land of Not China, there’s Southeast Asia, South Asia, and then Turkey and Eastern Europe, then there’s just something called the Americas. Because of consolidation, there’s a lot of big global people, and it doesn’t matter to them if it’s in Guatemala or Nicaragua. It matters if it’s in the Americas or not.
FI: El Salvador, Nicaragua, Panama, Honduras, Colombia, and Mexico.
SH: Anything duty free. DR-CAFTA countries especially.
How do lead times and costs differ?
MT: If it weren’t for the legislation in the textile industry, then everything in Latin America will be gone. Having said that, there was a tremendous advantage in synthetics. There were some countries that invested over $250 million in a little valley in El Salvador. They invested in extrusion, shipping, a world class knitting operation, elastics. This Brazilian company that built the mill not only saved 10,000 jobs, but also created 10,000 more. I think the big thing the Americas have learned how to do is say no and mean it.
FI: Haiti is one of the cheapest in the world on labor cost. Everywhere else, the labor costs are a little higher, but if you look at total costs and with rising costs in Asia – you know, the gap is closing. That’s a main reason that companies are coming back. The price disparity is not so vast, and there are certainly advantages to near sourcing.
The infrastructure is good. You can even get goods out of Haiti, believe it or not. You have a port in Guatemala in Central America and so getting goods in and out is not a problem. All the major carriers serve them.
SH: From price points, we’re looking at duty free, which makes a big difference. There are key fabric resources opening up in Central America. You look at who they’re making for. For example, Under Armor just commented yesterday they’re starting to look again at South America.
What tradeoffs are firms making?
MT: If a retailer or brand isn’t building trusting relationships, they won’t have good working relationships. Our theory is that the reason companies are setting up companies in Latin America is so that their supply chain will precede their retail. It’s the U.S. right now, but the growth rate in Latin American markets is amazing.
FI: The real limitation down there is the fabrics. New environmental laws make it so there are types of fabrics that you just can’t get in this part of the world. There’s a supply chain limitation that says not every category is going to come back there. The companies that made it closed their operations and it’s never going to come back. That’d be pretty much any of your synthetics, like used in lady’s fashion.
SH: A lot of businesses don’t know the hemisphere that well, but it’s a really good opportunity. I don’t think economic conditions are going to change. I think there’s going to be a new way of doing business, and speed to market is going to be a big part of that thing. Working in Central and South America is going to be a big part of it.
How can firms take advantage of Americas manufacturing?
MT: I think we’re in a position to define what the business model is going to be. Another thing we decided next week is that we’re not going to sit there and wait for retailers and brands to tell us what to do. The power in the supply chain has shifted from the retailer and brand to the factory. The factory is the one that has the power – they have connections to textile mills, trim suppliers, and shipping companies. They can get everybody in a room.
FI: There are some products that are very cost effectively made. VF makes a tremendous amount of denim products in South and Central America. They pride themselves on having a well-balanced sourcing profile. A lot of firms are looking at VF and saying, maybe we ought to think about it. The pressure is always on price, availability, and capability.
SH: In South America, the real key countries right now are Peru (which is expensive, high end – two types of yarns, which are more expensive). If you go to Central America, LF has a big office where they’re doing Kohl’s, Express, and Ascena Group, Lane Bryant. Lane Bryant started in October and just up until October they’re going to do $9 or $10 million. Maurice’s, Justice, all want to do business down there.
What’s next for the Americas?
MT: They have a new technology where you can print a pattern on paper and roll it onto a roll of fabric. You can email the factory a pattern, they can print it that day using sublimation – a market that is supposed to grow forty-fold – and get it on a plane that night. There are things that are happening that could eliminate the whole supply chain.
FI: You’re seeing fabric manufacturers opening up major operations, which is usually a good sign that something is going to happen. A fabric manufacturing facility, whether it’s woven or knit, the investment is millions and millions of dollars in equipment, so they’re not going to open mills if there’s no place to sell their fabric.
SH: It’s small in relationship to China, but it’s coming back. It’s an emergent trend.