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Lack of Large-Scale, Long-Term China Alternatives Has Industry Spooked

The apparel supply chain is a very vulnerable organism, and the recent clash between the U.S. and China over alleged trade imbalances and intellectual property infractions underscored its weaknesses. With just the threat of skyrocketing tariffs on clothing produced in China, fashion firms were sent scrambling to understand the implications, revamp operations and quiet shareholder concerns.

With the current lull in the trade war, which many hope signals the beginning of the end, the industry is starting to assess what happened and ask how similar disruption can be avoided in the future. The answer, according to Robert Sinclair, president of supply chain for Global Brands Group, and Ted Dagnese, chief supply chain officer for Lululemon Athletica, may be: stay ready so you don’t have to get ready.

At the AAFA Executive Summit on Thursday, the executives shared their companies’ sourcing approaches, which center around forging lasting partnerships, sticking it out when things get tough and constantly charting—and re-charting—possible paths toward the future.

“We stay tight with our vendor base and we find that helpful when it comes to how to manage countries that suddenly become possibly less desirable than they were yesterday,” Dagnese said.

And thanks to “a little dumb luck” as well as shrewd planning, the company, which has been credited with sparking the yoga pant boom, has been insulated from the standoff with China. Dagnese said its exposure is in the single digits for finished goods.

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But, he said, if the worst had happened, it’s not Lululemon’s ethos to bail on commitments and leave factories out in the cold.

To help ensure that the athleisure brand always has options that would create as little disruption for itself and its partners as possible, Lululemon only works with factories that have established operations in multiple parts of the globe. “We very closely monitor our allocation of business and because fabric is such a key part of what we do, [we know] it is much easier to switch a cut-and-sew factory than it is to switch a mill, especially when we’re working with nylons, polys and spandex yarns, so we have to be extremely thoughtful how we set up to start,” Dagnese said.

At Global Brands Group, partnership is taking on even more meaning. The company, which spun off from mega sourcing agent Li & Fung, is about six months into creating a new mindset organization wide. “Sourcing was transactional and we’re shifting gears to be much more strategic and intimate to focus on key partners,” Sinclair said, adding that the new relationship is putting partners on more equal footing.

“We’re moving to a more decentralized structure and empowering and engaging stakeholders in the supply chain,” he said. “You don’t need to do it all. You may as well empower people in the supply chain to make decisions on your behalf but you can only do that once you’ve established that trust and partnership.”

And once those bonds are created, they’re not to be severed without cause and consideration.

Even though Global Brands has about a 37 percent exposure to China today, the company is being thoughtful in its reaction to the tariff situation. “Your sourcing strategy has to address the needs of not just the U.S. market but the other markets your addressing,” he said, adding it doesn’t stop there. “Trade is one of many influencers. There’s currency volatility [and] wage inflation so all of these moving parts you have to look at holistically and weigh them before you make a decision based on one variable.”

That said, Global Brands is taking the ongoing tensions between the two countries seriously. The company plans to reduce its exposure by 10 percent this year.

But both men acknowledge that viable options aren’t plentiful, especially not when it comes to capacity and infrastructure.

“Where I get a little nervous is, what’s the next China?” Dagnese said. “The learnings from the trade escalations with China will leave their mark for all, with us being able to assess a broader set of what ifs. It will add a strategic tool as we think about risk.”

Taiwan is on Lululemon’s radar for technical fabric and the company sees a strong future in Vietnam for mills, as it sees more established players setting up operations there. It also partnered with MAS to open a new factory in Haiti as a way to “de-risk” its supply chain and capitalize on the country’s free trade status. As for Africa, Lululemon hasn’t braved the region, which Dagnese said still doesn’t have the requisite infrastructure.

Even with emerging markets, Sinclair says there’s no silver bullet solution once you remove China from the mix.

He said the industry will have to figure out a viable option because even beyond trade tensions, time may be running out in China. He worries that the Made in China 2025 initiative, a sort of America First counterpart, will create yet anther roadblock for apparel companies working there. “The focus is high tech so how will that marginalize us in our industry and could we therefore be shoved out of the market?” he said, adding if so, it spells big trouble. “I don’t see another China out there that’s even close to replacing it.”

He sees the promise of Vietnam as only an immediate Band-Aid given the size of the labor pool there, which he said is already getting tapped out. “To what extent will you invest in Vietnam if its runway is 5 to 7 years down the road?” he said.

Dagnese has a slightly less pessimistic view of the Made in China 2025 ramifications. “I would not say it will push us out as an industry, but it would put a stop to any significant move back in,” he said.