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Luen Thai USA President Talks TPP and Emerging Sourcing Destinations

As costs continue to increase and apparel sales continue to falter, companies are looking to new outlets to attract consumers, and to new locales for sourcing–all in an effort to remain relevant and profitable.

But tapping into new markets comes with its own set of challenges as many are increasingly looking to low-cost locales like Cambodia and Bangladesh whose working conditions are often sub-standard. As tragedies like the Rana Plaza building collapse that killed more than 1,000 people shed a new light on labor conditions in the apparel industry, maintaining transparency has become key to keeping a favorable image among consumers. And with that comes further cost challenges.

Sourcing Journal spoke to Rick Helfenbein, president of Luen Thai USA to discuss issues facing the apparel industry today, how companies are meeting the necessary compliance requirements, and how trade policy changes could affect sourcing, including how the Trans-Pacific Partnership (TPP) will impact trade.

SJ: What is the biggest challenge you and your clients have been facing in 2014?
RH: Not everything at retail sells at the same pace. The after effects of 2008-2009 are being felt now in apparel, as the initial uplift posted in 2009 was for small ticket items like clothes. For instance, in 2014 automobile sales are on fire, while sales of apparel remain sluggish. Now, the family car is getting old and needs to be replaced. Auto makers are on track to sell 16.2 million vehicles in 2014 which is the biggest sales volume since 2006. Bottom line, consumers are spending but it’s getting harder and harder to attract their disposable income.

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SJ: How are retailers adjusting to sluggish apparel sales?
RH: In order to stimulate sales and attract customers, retailers are pushing hard to lower the purchase price for “repeat” items, wanting higher initial mark-up so that they can maintain a higher ending mark-up after aggressive promotions.

SJ: What type of cost increases are you seeing in 2014? What regions are experiencing the biggest increases?
RH: China costs, in general, continue to rise, as do labor costs at almost every manufacturing location. We would not expect prices to go down, or level off any time soon.

SJ: How are you offsetting these price increases?
RH: The only way to offset the cost increases is to work hard to improve efficiency in the factory, to watch all your costs very carefully, and to have better utilization of raw materials. If an operator can make 30 units per day instead of 20 just by improving efficiency, this can offset cost increase. Remember, consumers buy individual units, but manufacturers look at units per operator per day.

SJ: What are your thoughts on regions such as Africa and Burma emerging as major sourcing destinations?
RH: Africa is possible, but still seems very far from home and remains a question mark–even for the adventurous. The incentives are good in terms of the African Growth and Opportunity Act (AGOA), but with distrust of Congress for failure to renew the Generalized System of Preferences (GSP) program last year, it’s hard to bank on an AGOA renewal, which is set for 2015. Until AGOA renewal becomes a certainty, manufacturers and investors will remain shy on Africa.

Burma is the next frontier in everyone’s mind, but the country infrastructure remains weak, cost of proper real estate can be speculative, and retention of skilled labor is difficult. It’s going to take some time to see Myanmar develop.

SJ: Do you expect the Trans-Pacific Partnership (TPP) to pass, and if so, how will that impact trade?
RH: TPP will pass–eventually. Congress first needs to enact the Trade Promotion Authority (TPA), or it will be difficult to see TPP pass during the Obama Administration. It’s doubtful that TPA/TPP can survive the 113th Congress, and we won’t know what the 114th Congress will look like until after the November elections.

It’s true that TPP has the potential to be both a blessing and a curse from a manufacturing perspective. There will be a large influx of OEM’s [Original Equipment Manufacturers] that will relocate to Vietnam for apparel and footwear, along with raw material providers to cover the yarn forward requirements. Other countries, however, don’t have a large domestic raw material industry, like the Philippines or certain CAFTA countries, and will fall behind in terms of their apparel exports for the U.S. market. They will find it difficult to compete in an environment that will now allow for both duty free and speed to market.

SJ: How are you improving transparency in your supply chain?
RH: Our customers often visit our factories while their products are in production and data is available every step of the way. We also offer LDP as an option and, in that way, customers have total visibility from purchase through delivery.

SJ: How has the emphasis on compliance and CSR changed your sourcing strategy?
RH: We maintain the highest standards of compliance and CSR. It is an integral part of daily business in today’s environment. We go out of our way to avoid risk, as it’s very important to us that our customers be able to sleep at night.

SJ: How is omnichannel retailing changing how brands source and fulfill their product?
RH: Retailers are more focused on “speed to market,” replenishment opportunities, and pick/pack. Companies with the knowledge and ability to handle that type of delivery system are more in demand. However, all retailers are looking toward speed, so forward thinking OEM’s are already working toward this goal.