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Sourcing Trends 2014: Wages, Compliance and Top Sourcing Countries

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Every year the apparel industry is buffeted by a combination of domestic and global trends. The global nature of the apparel sourcing supply chain means that wage protests thousands of miles away can be as critical as a stalled trade bill in Congress. The last year was a turbulent one, and a quick review of the looming issues likely to haunt 2014 will help companies prepare for the year ahead.

Apparel industry wages and compliance issues, both stemming from a wave of protests in Bangladesh and the ensuing media furor, were hot topics in 2013 and are likely to continue to be top of the agenda in 2014. The ethical sourcing debate is not going away, especially not in the wake of a late-in-the-year introduction of a supply chain transparency bill that all but insures the ethical sourcing debate will continue to have legs. The Washington trade outlook was dim in 2013 due to congressional inaction and,  if the current trends continue, 2014 may not herald much in the way of positive moves for the trade agenda. Expired bills and trade talks are largely seen to have slowed (or stalled entirely), and any new legislative efforts won’t simplify the 2014 agenda.

Wages

Waves of protests in Bangladesh brought international attention to bear on wages in the apparel industry, sparking concerns that rising wages there in the wake of local agreements would spread to other countries. There was talk of a negative impact on the country’s apparel sector, but that has not been borne out in import figures to date. Most industry experts acknowledge that while wages are part of the complicated cost analysis used to pick source countries, it may be hard to predict the impact rising workers’ wages in one country will have on the others. There are industry experts who predict no effect, and similarly industry experts who predict an industry domino effect.

Regardless of how rising wages in countries like Bangladesh impact other countries, experts point out that with public pressure and political forces continuing the drum beat over low industry wages, companies cannot afford to ignore this issue.

“Wage issues used to be country specific, but globalization and free flow of information over the Internet has allowed for everyone to be aware of all the wage issues in each and every country,” said Rick Helfenbein, president of Luen Thai (USA).  “We now talk about a living wage versus a minimum wage, and workers in developing countries will continue to fight for their rights. Expect more strikes and more violence to occur where wage issues still remain unsettled.”

Compliance

The wage issues this year were tied closely to public scrutiny of industry compliance trends. Internal and external compliance programs are no longer a fringe trend;  they stand center-stage with the other major factors companies consider when making sourcing decisions. The decisions of retail behemoth Walmart and other large companies to implement  compliance programs are taking their toll on the supply side in major sourcing countries like China and Bangladesh, said Munir Mashooqullah, president of Synergies Worldwide. Compliance efforts may also push costs higher as more companies work to find manufacturing partners able to comply with rising compliance standards.

The issue isn’t likely to fade anytime soon. In December, a Democratic Congressional proposal to legislate ethical sourcing and supply chain transparency was introduced. The Business Transparency on Trafficking & Slavery Act (H.R. 2759), was modeled on the existing California Transparency in Supply Chains Act of 2010, that requires certain companies doing business in the state to provide visibility into where and how their products are sourced.

According to the website of Rep. Carolyn Maloney (D-N.Y.), the co-sponsor who introduced the bill, it “would require companies to disclose any measures taken to identify and address instances of human trafficking, slavery, and child labor in their supply chains.“ The national bill includes some additions such as a broader definition of child labor and a requirement that companies include supply chain disclosures in annual reports submitted to the Securities and Exchange Commission.

The bill was introduced just before the holidays, and is likely to be widely opposed by not only the apparel industry but many consumer goods companies. Its introduction ensures that compliance issues are likely to remain front and center for the near term. There were also some efforts earlier in 2013 to push for legislation specifically to address issues in Bangladesh.

“Ethical sourcing is a headline issue for 2014,” said Julia Hughes, president of the U.S. Fashion Industry Association (formerly the U.S. Association of Importers of Textiles and Apparel).

Trade Agenda

Anyone who has paid even the slightest attention to activity in Washington over the last year is unlikely to have an optimistic outlook for the future of any substantial trade agenda. Not only is the Obama administration still working to bring negotiations for the Trans-Pacific Partnership to a close, but it launched new talks with the European Union. The Trans-Atlantic Trade and Investment Partnership talks kicked off in July.

“TPP and T-TIP could have the greatest impact on our respective business, but the reality is that implementation could be five or six year away, assuming the legislation were to pass any time soon — which is also unlikely. The trade outlook from a legislative perspective is dim. There is a supposed ‘trade package’ due to rise in the first quarter of 2014. Let’s hope that has some positive results,” Helfenbein said.

Most industry observers don’t have much hope for a lot of action in 2014, given how many trade issues are outstanding and the heavy lift on achieving any new agreements. Hughes said extending existing trade promotion programs or reauthorizing those that have expired — a long list that includes Trade Promotion Authority, the miscellaneous tariff bills, the Generalized System of Preferences and Trade Adjustment Assistance — might prove to be an easier lift than completing new trade packages, but nothing is certain in the current congressional climate.

“TPP may stall out because of the sheer weight of trying to get a deal,” Hughes said, but “trade will be a 2014 issue.”

There’s hope that some of these could move in tandem, Hughes said, since the success of TPP and T-TIP could hinge on the renewal of TPA. However, moving anything through Congress during an election year is challenging, she said.

“The Congressional agenda in 2013 with regard to trade related issues has yielded less than nothing. Perhaps it would be better to characterize the 113th Congress as a step backwards for trade,” Helfenbein noted. “Someone must have decided that failure was actually an option, as Congress failed to rollover GSP, failed to resolve the MTB issue, failed to renew TPA, and failed to work on the Customs Reauthorization Act. This is the least productive Congress in our nation’s history.”

Top Sourcing Countries

Industry experts predict that the top apparel sourcing countries  ̶  China, Vietnam, Bangladesh and Indonesia — are likely to keep their seats at the head table, despite global forces such as rising wages and changing economic realities in some of the countries. Vietnam and Pakistan might take some additional share of the market in 2014, Mashooqullah said, and the Western Hemisphere could pick up some additional business.

Despite “expert” predictions for years that China would lose market share, it has not, Helfenbein said, instead holding steady over the last several years.

“You can’t ignore China,” Hughes said.  “You have to expect that China is going to retain its dominant position.” The other top four are also relatively stable, she added.

Bangladesh gained market share in 2013, despite all the attention it received related to wage issues and worker protests. Vietnam is solidly entrenched at number two and Bangladesh will soon eclipse Indonesia as the world’s third largest apparel exporter if it continues to grow, Helfenbein said.

Retail Outlook

It has been slow, but the economy continues to recover in the wake of the Great Recession, which should give apparel companies some hope for the 2014 retail forecast.

“Barring a shock event, we expect the U.S. economic recovery will pick up pace in 2014, and that would include the retail sector,” said Mark Weinstein, senior managing director with FTI Consulting and a member of the firm’s retail team. “Despite persistent headlines about all those ‘left behind’ in this recovery (and there are indeed many who have yet to benefit), most Americans are feeling better about the economy… All consumer confidence polls [in 2013] were trending favorably compared to 2012 until the autumn.”

Generally, the future for retail sales growth will continue to be in online sales, Weinstein said, regardless of the product category and “fewer trips to the mall will become the norm for most shoppers.” Low prices and convenience are the primary drivers, he noted.

Apparel was not always a top priority for consumers as the recovery started, Weinstein said. High unemployment among teens and young adults did not bode well for retailers that target those groups, and it is likely that sector will continue to struggle until employment for young professionals shows an uptick, he said.

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