The COVID-19 outbreak has upended the fashion supply chain in many ways, largely through interruptions across factories, distribution centers and stores, but one of the biggest disruptions it has brought highlights a rift between retailers and manufacturers amid rampant order cancellations.
This “seesaw effect”—which began with low supply from the sourcing locales first hit by the pandemic before an immediate shift to sagging demand from the most recently affected countries—illustrates the difficulty in maintaining a healthy balance of supply and demand during unpredictable global circumstances.
The early February mass closing of Chinese factories in the outbreak’s wake created a major supply crunch for U.S. retailers, particularly as 40 percent of apparel, 65 percent of footwear and 80 percent of accessories are sourced there. During a webinar Wednesday, Rick Helfenbein, former chairman and CEO of the American Apparel and Footwear Association (AAFA), noted that the supply issues were exacerbated by simultaneously strong U.S. demand.
Within a few weeks, that dynamic did a 180 as factories in China began to reopen in late March, coinciding with cascading store closures sweeping the U.S. Brick-and-mortar shutdowns ended up eviscerating not only sales from goods manufactured in China, but also those in other countries as well that had also relied on the purchases.
“Supply side started to come back while the demand side fell of a cliff, that’s the seesaw effect,” Helfenbein said. “There was also a ‘name and shame’ game going on, where manufacturers might point out that big brands that talk all the time about their social responsibility and how much they love their factories end up cancelling their orders. There’s a couple websites out there that started naming names of who cancelled orders, and a lot of retailers reversed their positions because it’s a real black eye. You’re still stuck here with a big business problem, but by cancelling orders, you’re putting people out of business, and in the case of a country like Bangladesh: no money, no food.”
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In some cases, retailers invoked force majeure to free them from the obligation to buy the planned goods under unforeseen circumstances, pushing many factories towards bankruptcy.
“Now we have a problem where the seesaw is starting to reverse itself again because people are going back to work in the U.S.,” Helfenbein said. “Hopefully not right away, but as the demand side pushes its way up, a lot of these factories have now shut down. They can’t ship, and this is another problem. We’re going back and forth, and back and forth.”
Reshoring apparel manufacturing could be slow going
While the coronavirus pandemic has brought a rise in “Made in the U.S.A.” rhetoric among shoppers and the federal government, the prospect of offshore manufacturing returning to the U.S. or its near-shore neighbors on any meaningful scale is still a pipe dream in the near term. American-manufactured apparel has grown from 2.6 percent to 3 percent of the market, but don’t expect sourcing habits to change far beyond that.
“We can make fabric in America, we can grow good cotton in America and we can spin yarn like nobody else,” Helfenbein said. “There’s a lot of things we can do in America, but sewing garments? Maybe we can make some PPE or single garments, but the idea that 3 percent is going to become 97 percent is just not going to happen. Reshoring is a great idea where it works and we encourage everybody to do it, but the reality check is it’s not going to be more than 3, 4 or maybe 5 percent of the market. We still have to look at where goods come from.”
Although recent trade tensions have made companies wary about sourcing in China, moving operations out of the country hasn’t been a swift process. In 2018, the U.S. sourced 41.91 percent of apparel from China, but that number dipped to 39.93 percent in 2019, Helfenbein said, quoting AAFA data. During the same period, apparel sourcing from Vietnam increased from 13.39 percent to 14.26 percent, he added.
Even after the COVID-19 pandemic subsides, Helfenbein doesn’t anticipate significant shifts away from China, especially as factories throughout the country have reopened.
“You would anticipate with all these tariffs and all this conversation surrounding China that the bottom would fall out, but in terms of apparel it has not,” Helfenbein said. “If we open up successfully, your number one and number two markets will continue to be China and Vietnam because you can get fabric and the factories are under control.”
Overall, global sourcing capacity is diminishing from a manpower standpoint―particularly among the top five countries that represent nearly 70 percent of the U.S. apparel sourcing market, including China, Vietnam, Bangladesh, Indonesia and India. While China has reopened its factories, mills throughout the country are still operating at reduced capacity, while Vietnam’s factories are at roughly 70 percent of their usual output, he noted.
The other top three countries have it much worse, with Bangladesh seeing April exports down 85 percent. Several factories have reopened but capacity is reduced significantly―out of the 4.1 million people involved in garment textiles, 1 million are presently out of work, with the country on lockdown until May 16. In Indonesia, factories are operating at approximately 50 percent capacity, while India has been hit even harder, with the factory workforce capped at 33 percent until the country exits lockdown on May 17.
The webinar, titled “From Doom and Gloom to Hope: The Softlines Supply Chain Turned Upside Down,” was hosted by the Retail Marketing Society in partnership with Secured Finance Network.