The Covid-19 pandemic and an ongoing trade war have prompted the global fashion business to reevaluate its sourcing capabilities, but with that in mind, new realities face the industry. To get to where they need to be, retailers and brands in today’s world are striving to go beyond moving portions of their supply chains out of China to facilitate a rebound—they are looking to consolidate suppliers and gain a more complete insight of exactly how and where their products are made.
In a panel at Sourcing Journal’s 2020 Sourcing Summit, Achim Berg, senior partner at McKinsey & Co., pointed to a survey the consulting firm conducted in May that found that 50 percent of fashion businesses say they expect to take sourcing out of China down the road in some capacity. As many as 20 percent say they would take more than 10 percent of their sourcing capabilities out of the market, while another 30 percent say they would shift 3 percent to 10 percent elsewhere.
India (37 percent decrease) and Bangladesh (32 percent decrease) also appear to be the nations most affected by the shift in sourcing attitudes, while Vietnam and other Southeast Asian countries will be the biggest beneficiaries in share. Vietnam will see a 24 percent increase in overall production, while the miscellaneous Southeast Asian markets increasing production 19 percent.
Angie Lau, CEO of the Hong Kong-based intimate apparel manufacturer Clover Group International Limited, indicated that those in the undergarments arena have begun that migration process early. Clover, she added, has been manufacturing in Cambodia for 20 years and India for 10 years, with operations in Thailand as well.
“I think the majority of the manufacturers are still pretty secure in terms of their knowledge and experience and the way they accommodate to the current climate,” said Laum. “I don’t think the changes will affect us to the degree that you think it would.”
China’s apparel growth will give a boost to Asian neighbors
Even with the exodus, David Sävman, head of supply chain at H&M, noted that China remains a very attractive market. The more the China grows, there will be more competition throughout neighboring Asian countries, he added.
China is expected to drive 45 percent of total market growth in global apparel and footwear through 2024, surpassing both North America and Western Europe in expected total retail value. The global market is expected to grow only 1 percent per year (with China growing 3 percent) due to the 20 percent to 30 percent dip in 2020 followed by anticipated recovery to pre-Covid levels through 2023.
“More local consumption will definitely also apply, and it will also convince a number of players to produce for the local markets,” Berg said. “It will definitely have an impact on the way we source, and also the regional supply chain. Sixty-four percent of the survey participants told us that they plan to have more regional supply structures and that they will try to reduce the dependency on international fabric. That is more impactful on Tier 2 markets, but it will definitely have an impact on the overall interplay of what’s going on.”
Traceability can’t be ignored amid Xinjiang labor concerns
Of course, one of the major elephants in the room related to China has been the reported mass internment and forced labor of Uyghurs and other Muslim minorities in Xinjiang and how fashion brands should respond to sourcing cotton in the region. This makes it even more important to understand the suppliers and what companies or factories they work with to ensure that materials are ethically sourced.
Laum noted that her company has had full traceability into its supply chain for six years now to weed out any “conflict minerals,” so this has already been something on Clover’s roadmap.
“This Xinjiang issue is making us twice as precise in what we’re getting, and we want to foster honest and transparent conversation within our supply chain,” Laum said.
H&M’s Sävman says the retailer has “very good” traceability into its supply chain, noting that when it comes to raw materials like cotton, it is already 100 percent certified via BCI. (Cotton sourced from Xinjiang is BCI-certified.)
“At the moment, we feel confident that more work can be done on an even more granular level,” Sävman said.
Expect more supplier consolidation
During the session, Berg also pointed out that 73 percent of sourcing executives plan to consolidate their supplier base by at least 5 percent, with 60 percent expecting the consolidation to accelerate due to Covid-19 as companies move to larger, more advanced suppliers. The amount of consolidation on the supply side is curious given the emphasis on sourcing diversification, but with sustainability top of mind in fashion, the seemingly opposing directions appear to be the industry’s way of keeping a closer eye on all materials coming down the pipeline.
Sävman agreed that consolidation is accelerating, noting that H&M is shrinking its supplier base in the name of sustainable purchasing practices such as its goals to be circular and carbon-positive.
“We want to be able to act and continue to have supplier relationships that enable our business partners to take those leaps in the timeframe that we have to take those,” Sävman said. “We purely don’t have the ability to work very scattered and transactional, but we really need to kind of sharpen our focus and on fewer and more progressive business partners that are willing to go this journey with us.”
Nearshoring will expand, but demands higher product prices
Berg predicts nearshoring will increase, particularly in Turkey, North Africa and some markets in Europe and South America, but admitted the complexity of quantifying the lead-time savings to justify it.
“There are certain products, if you go into personalization, co-creation or customization, where you would be able to ask for a higher price if you provide that addition, that can also justify the higher-cost price and keep the same margin or get a higher margin,” he said. “At the moment we believe that ‘chase and replenish’ makes sense, it’s a different story, because you need to look at KPIs like sell-through to realize margin.”