In 2013, total trade growth in the world was only 2.5%—an unremarkable rate brought on by a sluggish economy in the West and new trade restrictions. And as president of Li and Fung Sourcing Marc Compagnon noted, the rate was even slower in the U.S. and European Union, where most customers exist.
“What it ends up being is a market share game. There’s no growth. It’s anemic and so it becomes a question of market share amongst the customers,” Compagnon warned. Global trade growth statistics might paint a pessimistic picture—economists already lowered projected growth rates for 2014 and 2015—however, in his State of the Industry Address at the Sourcing Journal “Insight & Outlook” summit in New York last month, Compagnon reminded the audience that a whole other world on the cusp of purchasing power exists—six billion people, to be exact.
Of the seven billion people in the world, six billion live in emerging markets where most companies produce and do most of their business, Compagnon revealed. “If you’re a U.S. company and you think about your supply chain and think about your vendors and how they supply you, the competition isn’t going to be from other U.S. and EU companies. It’s going to be from companies in Asia that are supplying the huge and growing demands for China and India and the whole South East Asia. That is where the demands are coming from and that’s going to be a huge shift on the way the supply chain has to deal with this huge increase,” he said.
In fact, the U.S. and European Union are expected to only contribute 0-2 percent to total apparel growth in 2015. Growth, Compagnon reported, is instead coming from China, India, Russia and Brazil—where growth is between 4 and 10 percent. He added, “Fifty percent of the world’s apparel growth is going to come just from China. That is a staggering number and really those are the dramatic changes that is going to happen to our industry and to the world.”
Compagnon calls it the “billion-to-billion” shift. Just as the first billion Chinese workers went into the supply chain during the last 30 years, creating price deflation, the world is now seeing that billion go into a society that is starting to consume. Likewise, he said there are another billion future consumers in India fueled by Prime Minister Narendra Modi’s “incredible energy and the changes he wants to make in India.” Compagnon said, “A billion workers have become a billion consumers and that is going to be a huge change to the world. There’s nothing of that scale that has happened to the world…You have a billion people who are starting to consume in apparel and things that they didn’t do before.”
Having to meet the demands for six billion new consumers is a good challenge to have, especially when compared to the more uncertain factors reshaping the global sourcing arena, but the health of the industry, and it’s future, is not as bleak as it may seem.
While Compagnon said it is difficult to know what is going to happen with the “bullish” Chinese RMB, other key performance indicators (KPIs), such as gradually declining oil and cotton prices, are solid. He added, “China has issued their new procedure on cotton and how they are going to deal with the surplus and we believe that will be deflationary cotton pricing.” And in developing countries, Compagnon sees the slight depreciation to their consumer price index (CPI), and slight inflation in the developed world, in the long term, become a good way to combat the inflationary wages in the developing markets.
Minimum wage increases—as much as 100 percent in Vietnam and Bangladesh—might seem like a staggering number, but Compagnon said minimum wage movement is just part of the equation. “If you take it including the valuation or appreciation of currencies, it changes the total picture in these developing countries,” he noted.
As the U.S. dollar grew stronger, most other countries have devalued against it. In LF’s forecast, the dollar will continue to strengthen and thus devaluation will continue. Compagnon said, “If you take the two together you see what the actual real net wage movement is in absolute terms. Not that they are small, but they are more balanced when you take that currency into consideration—it is not as dramatic. What we expect to happen is continued inflation in these developing countries, but the wages and raw materials will help keep some of those increases down.”
Less predictable is political and social instability. In 2013, China, Vietnam, Indonesia, India, Thailand, Cambodia, Sri Lank and the Philippines were all considered to be stable sourcing environments. “Then we woke up in 2014 and found out that Vietnam, Thailand and Cambodia all had issues in the woodwork,” Compagnon quipped.
From Vietnam’s anti-China sentiment, which had to do with China getting into the country’s space in the South China Sea, to political issues in Thailand and strike-ridden Cambodia, Compagnon said manufacturers have to be quick on their toes and the need for a flexible supply chain has never been more crucial. “These are markets that we do a lot of business in, but when you think its stable, there are issues and we have to continue to deal with this complex world,” he said.
Likewise, as governments shift, so do the habits of consumers, who are being inundated with new ways to consume, but as Compagnon noted, whether someone buys on mobile, omni, click here and pick up there, it doesn’t really matter. “At the core of it all, someone has to make the product that the consumer is going to buy…Our job is how to help our customers, satisfy that consumer better than competitors at the end of the day. Changes are going to continue. The pace of change is so rapid and the supply chains in some cases haven’t kept up with the needs of the new world,” he explained.
For most brands and retailers, Compagnon said it’s not necessarily about price, but about the right product at the right time at the right place that sells at full price. However, that might be easier said than done in a world obsessed with fashion as fast as their technology, and in what Compagnon called a U.S. market “so engrained in a promotional cadence trying to drive through huge amounts of inventory at cheaper and cheaper prices.” He continued, “It’s not sustainable. It has to change and I think that the fast fashion guys have showed there’s other ways to do that and it’s creating dramatic changes in our business today.”
While there is no quick fix for either side—suppliers will continue to battle with increased compliance, shorter lead times and fewer basics, as retailers struggle with deflationary price structures and tanking foot traffic, which Compagnon does not see coming back— He stressed that both sides must look to the future generation for solutions. With half of U.S. consumers of Millennial age, a generation well documented for changing the face of retail, Compagnon said companies must force themselves to have an open mind. He said, “Most companies are run by people my age and don’t know what’s going on. You have to stay relevant, to know what is going by spending time with the younger generation. Bring them into your company.”
Compagnon added, “These changes are rapidly changing the way we have to respond in business… It is a complicated world that gets more complicated everyday and more fragmented.”