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China Exodus, Shuttered Factories and Price Spikes: Sourcing in 2019

Sourcing stands to be further upended as the industry faces an increasingly uncertain trade environment, the need to digitize or die trying and a move out of China that could see sourcing costs climb globally.

With brands and retailers fleeing China for fear of sudden new and, in some cases, debilitating tariffs sending their sourcing costs skyrocketing, 2019 could bring much fallout for supply chains.

In light of apparel’s exodus, factories are expected to shutter following Chinese New Year in February and it will cause ripples across the supply chain—including price spikes.

Having summed up sourcing in 2018, we’ve again turned to Li & Fung executive director and group president Marc Compagnon, Synergies Worldwide president and CEO Guido Schlossman and Luen Thai CEO Raymond Tan, to tell us what’s set to transpire in the year ahead.

What will be the key challenge facing sourcing in 2019? And is the industry prepared to face it?

Compagnon: Most of our customers are impacted by the ongoing U.S.-China trade war to some degree, and while there is a temporary truce in place now, we know the situation remains fluid and can escalate at any point. Monitoring the trade war is a priority because that is definitely a key challenge for our customers and all players in the industry heading into 2019. Li & Fung exports out of 50 countries, we have a global sourcing network that is the largest of its kind in the world, so we are best positioned to help our customers navigate this trade war and migrate production out of China to other production countries. Trade aside, the other key challenges facing the industry continues to align with our Three-Year Plan goals of bringing more speed to supply chains and continuing to digitalize the supply chain at every step.

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Schlossman: For one, we’ll see differentiated supply chains. E-commerce, low-price and fast-fashion players continue to dominate retail. However, one universal supply-chain configuration won’t be able to successfully meet the specific needs of those players anymore. The supply chain for e-retailers needs to be different to the one servicing low-price players. Elements and factors that need to be differentiated are: culture, technology, skillsets, overhead structure, manufacturing base, and logistics. Therefore, new supply chain companies that are focused are emerging and taking away market shares of established trading and sourcing firms. Very often these days, we come across companies that define themselves as virtual manufacturers, for instance, and offer specific sourcing solutions for a specific retail segment (i.e. Oculas Virtual Manufacturing Ltd).

We’ll also be facing the capacity battle. The trade dispute between China and the U.S., rising wages in production countries and differences in exchange rate have led to tremendous sourcing shifts in 2018 and this will continue in the year 2019. We are witnessing many factories running full or even overbooked capacities, in countries that benefited from those shifts. (i.e. Cambodia, Vietnam, Bangladesh and Pakistan). The challenge will be, one, to place new orders to those countries, two, to manage on-time deliveries and, three, eventually to assure quality. The role of own buying offices or intermediaries (i.e. virtual manufacturers, sourcing companies), who have a local presence in those countries may become more important than ever.

Lean organization will also be required to stay cost competitive. Full capacities paired with wage increases will put tremendous pressure on prices in 2019. Although own sourcing organizations may be helpful to better manage manufacturers/production in these times, they may on the other hand become challenging. Own sourcing organizations, may be confronted with high overheads, especially if operated in expensive cities such as Hong Kong or Shanghai. But even if located in low-wage countries such as Bangladesh, operating cost could be a challenge, due to high salaries paid to attract talented (local) executives. It will be of key importance to have a lean organization and to apply technology where it makes sense.

Middlemen (virtual manufacturers, etc.) could (re)-emerge and gain market share if they are able to operate a low-cost business model with smart usage of technology.

Tan: Most brands with a U.S. presence will continue to move production out of China. It will also be time for brands to rethink their supply chain model as reducing their China production could mean a huge change in the way how they work with “non-China” production. This is going to be a huge challenge but also a great opportunity for change. Brands with international markets will start to look at how to manage U.S. vs. non-U.S. sourcing, taking advantage of the Chinese manufacturers’ excess capacity with the most mature supply chain in the world.

We had seen a few rounds of consolidations in the past two decades from both sides of the supply chain. I expect to see another round of consolidation especially from the manufacturing side. U.S. brands need to partner with those who are strategically positioned to address their China sourcing concerns. Smaller manufacturing players will be forced to merge with the bigger players to survive or be eliminated.

The biggest challenge from the manufacturing section is that some had been working on downsizing their Chinese operation while expanding outside China. However, they haven’t reached a point whereas their non-China production is matured enough to replace their Chinese capacity. Downsizing Chinese factories costs a lot of money and it also means reduction of profit while one has to invest outside of China with beginning losses. To make things worse, many of these players do not have the experience operating outside of China so there is a long learning curve for them. Brands are now demanding multi-country manufacturing capabilities so they expect their vendor partners to have more than one “non-China” option; this poses a great challenge for many OEM players as they do not have the management team to deal with China downsizing and expanding to more than one “non-China” countries.

I am sure our industry is ready to face it as many brands had been executing their supply chain strategy for years, but they now need to execute it faster, acknowledging that they cannot push for more competitive prices during this period as OEM players need the margin for re-investments. To be frank, those who did not do much to change in the past few years had either been eliminated or will be gone soon.

Bigger players will just take up more market share but isn’t this something we had been seeing for the past two decades?