Whether it’s a matter of companies struggling to find their footing amid tariffs that steadily threw them off balance last year—and the unforeseen duties that could continue to do the same this year—or endeavoring to design supply chains to meet the needs of a more demanding, more sustainable modern sourcing sector, 2020 will be a “continuation of the metamorphosis,” according to William E. Connor II, CEO of Hong Kong-based global sourcing firm The Connor Group.
The challenges may not be new, but the curveballs could multiply.
“If you look at retail sales, generally, [the industry is] actually doing quite well, and it’s more consumer behavior, it’s more changes in the supply chain that are introducing the challenges,” Connor said. “Add to that this incredible uncertainty with regard to tariffs, the fact that the WTO is under pressure, [Trans-Pacific Partnership] didn’t pass, this variety of civil unrest in Hong Kong, and the whole landscape has become much more complicated. But the root is the same as dealing with the sea change in retail that began quite some time ago.”
In reflecting on the year gone and the one ahead, Connor’s outlook is one both mixed with unease and opportunity.
On stepping back from China ahead
Companies across the apparel and footwear supply chain have made moves in the last year to rejigger their sourcing mix to reduce their exposure to China amid the ceaseless trade war with the U.S., but the evolution won’t be quick or painless. What companies will have to consider is what their pace of change will cost them.
Leaving China, according to Connor, means forgoing speed, quality, synergies, access to inputs and vertical integration, and still, despite its position in Asia’s financial center, The Connor Group is pulling back on China, too.
“Of our total business, a little under half … is coming out of China,” Connor said. “Our children’s wear business has recently grown, and a lot of that was not placed in China intentionally.”
Pricing advantages and shifts among certain clients have taken the company further into Bangladesh, Vietnam and Indonesia.
“If you take the new business out of the equation … I’m guessing that about 10 percent of our business has probably been moved out,” Connor said. “In a perfect world, we would say, ‘Yes, to avoid the tariffs, we’re just going to take all this business and we’re going to move it to Vietnam.’ But the reality is that the efficiencies that China gives us are not quite there in Vietnam, and the infrastructure is not quite there in Vietnam.”
All things considered, including the remaining uncertainty of what’s to become of tariffs this year, The Connor Group will continue its scale back on China sourcing.
“We are looking at moving production out of China because we have to, but to what degree we still don’t know yet,” Connor said. “We’re kind of at that spot where [we’re thinking] how aggressively do we want to move when we don’t yet know what the cost of goods will ultimately be, because you give up a lot when you move out of China.”
On sourcing costs
What’s to come of costs this year will depend on what’s to come of tariffs, but that aside, the expectation is that it may be the one area not marked with tumult.
“Like-for-like costs—both wages and the cost of inputs—will remain fairly static for 2020,” according to Connor.
While there’ll be the expected swings in cotton prices, absent any great shift in exchange rates, sourcing costs may not change all that much from what the sector saw in 2019. What will change costs are the new demands on supply chains.
“If we look at sustainability and we look at what materials are going to be used, how do we cut down on waste? This comes with a cost. So if you’re going to move from generic cotton to organic, you’re going to have to pay a premium for that. Same thing with recycled materials,” Connor said. “Any impact on costs is going to be engendered more by a shift to new materials and processes.”
And that shift to new materials and processes will also fuel a further squeeze on margins.
“It’s going to have an impact on margin at every level. How much price elasticity is there?” Connor noted.
Over the years, margins have really “been beaten up” according to Connor, with vendors’ margins “reduced substantially,” and brands and retailers taking their hit, too. Where tied to China sourcing, the depreciation of the yuan has allowed vendors to absorb some of the cost of tariffs, and with so many inputs sourced locally, they’re not facing exchange rates on those imports, which will continue to help offset margin pressure in China.
But as companies move to new markets and take on new supply chain strategies, or fight to address lead times that may not be as quick as in China, they’ll be facing greater costs in terms of increasing efficiencies.
“Margins are under great pressure, but we’re dealing with them in many different ways,” Connor said.
On the outlook ahead
The challenges ahead for 2020 may be many, but growth in the apparel industry hasn’t been as bleak as the economic picture presents. This year, however, may serve to tarnish that period of growth.
“For the last 10 or 11 years, growth has been almost unprecedented,” according to Connor. “The United States has continued to expand, sort of defying all odds. In terms of the health of the economy, China is obviously going to see growth rates drop, and I think globally in 2020 and forward we’re going to see this wonderful decade of healthy growth contract a little bit. … The overall contraction of global growth is going to put more pressure on everything. It’s going to make things more difficult.”
In short, 2020 will still be defined by uncertainty, with pockets of positives.
“Retail is still going to grow … [and] I think economies will remain healthy, albeit with slower growth rates,” Connor said. “All of these things are going to be the same challenges that we’ve had to face. The new ones, like tariffs, like the increased demand for sustainability, will be made more difficult by more of the kind of topline challenges of contracting growth.”
The piece originally appeared in the Sourcing 2020 report. Click to read our in-depth examination of the outlook, opportunities and obstacles for the apparel and footwear market this year.