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Sourcing Trends: How China is Shaking Up the Apparel Sector

China, it seems, has been the root of all sourcing shifts: the country’s moves have sent apparel companies into the arms of other low-cost countries, caused brands to seek cost concessions because of currency devaluations and dip in cotton demand from the Asian powerhouse has stirred up the raw materials sector.

Sourcing executives face no shortage of challenges in today’s market, and as panelists discussed the sector’s trends at Sourcing Summit 2015 Thursday, China was the cause of a considerable number of changes in sourcing.

For starters, many brands are moving their sourcing—at least in part—out of China, not only because of rising costs there, but because of the Trans-Pacific Partnership’s promise of duty free trade with other low-wage nations sometime in the perhaps not-so-near future.

Trent Janik, Kate Spade’s VP of sourcing and manufacturing, who spoke on the panel moderated by Sourcing Journal founder and publisher Edward Hertzman, said, “We’re moving our sourcing out of China to other countries that potentially have—that we’re hoping will be TPP or GSP, so we’re moving quite a lot to Vietnam and to the Philippines. Over the last two years our China sourcing has gone down to about 68 percent of our sourcing base, which is about a 38 percent reduction.”

For Target, China is still competitive, president of Target Sourcing Services Kelly Caruso said, adding that Vietnam has existing competitiveness and the company still continues to evaluate emerging markets like Africa and Myanmar though no plans are yet in place to open a new market.

What’s going on with raw material costs?

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Decreases in raw material costs have caused a lot of uncertainty and volatility in the market over the last few years, Cotton Incorporated’s senior economist Jon Devine said during the panel. However, he added, “We will have some stability in cotton prices and some low levels of cotton prices we haven’t seen in maybe a year.”

The reason for that? China has been unwinding some of its past policies of keeping cotton reserves, trying to sell off the stockpile and the move has sent prices lower.

“Given the important role that the Chinese government has played in terms of affecting costs over the past couple years, I think some of the transitions we’re seeing out of China,” Devine said, “Could bring additional certainty to the market and perhaps some additional stability to raw material pricing.”

At Target, Caruso said, “We’re seeing continuous fluctuation in raw material cost, increase in labor cost across the globe and increase cost in the supply chain due to complexity.” But the company is combating those costs by increasing supply chain efficiency.

Because a better part of Kate Spade’s business is handbags, slightly lower leather costs have helped the bottom line a bit, but the company is still taking positions with its leather suppliers and its apparel vendors and seeking costs savings.

“We’re going at any avenue we can go, whether it’s going after the devaluation or just talking to our vendors, many of them have come back with a little bit of money,” which all helps today’s hard-to-come-by margins, Janik said.

Should currency devaluations be helping with sourcing costs?

As AlixPartners managing director David Bassuk explained, labor has gone up, but commodity costs have come down, and currency devaluations across not only China but India, Indonesia and a number of other countries have brought costs down considerably.

China’s recent currency devaluation brought some costs down and now CEOs and CFOs are asking sourcing executives to go back to suppliers for cost savings and concessions.

“What we’re really seeing is retailers coming out and kind of demanding their suppliers to give money back or to offer them some kind of a concessions in a way that they haven’t done and it’s making the industry really different,” Bassuk said.

In the last month, Bassuk said, Walmart, Home Depot, Toy R’ Us and some 20 other retailers have publicly acknowledged they are seeking cost breaks from their suppliers and many of them are right to do so.

According to Bassuk, the average unit costs retailers should be getting is—in AlixPartners’ view—significantly lower that what they are in fact getting.

“There’s a disconnect there,” he said. “About a third of the time, we see that there’s no opportunity and retailers and brands are getting fair share of the devaluation cost improvement. About a third of the time we see that there’s opportunity being left on the table and about a third of the time, or some of the time, we see such a dramatic opportunity that there’s an actual opportunity to go claw back costs.”

Suppliers are now going to retailers and trying to offer different services than they had in the past to accommodate for the costs and finding new ways to work, Bassuk explained, and the devaluations are leading to a trend of much more, at times contentious, sometimes partnering way of working with Asian suppliers.