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State of Trade 2016: Costs, Logistics and Faster Fashion Among Top Concerns for Sourcing

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If 2015 was the year rising costs were top of mind, 2016 seems set to be the year of general uncertainty.

And not knowing what to expect from a market going through a state of disruption has meant a drop in optimism. Only 45 percent of those surveyed in Panjiva’s “State of Trade 2016” report done in conjunction with Sourcing Journal, reported an optimistic outlook for the year, down from 55 percent in 2015 and 64 percent in 2013.

“I think there are two factors that are contributing to the decline in optimism among sourcing professionals,” Panjiva CEO Josh Green offered. “First, sourcing executives are consumers too and are feeling the anxiety that many consumers are feeling about the overall trajectory of the economy. Second, sourcing executives know better than most about weakness in the Chinese economy, which has the potential to be a drag on the global economy.”

That drop in general positivity comes alongside a slowdown in the rate of U.S. import shipment growth, too. U.S. maritime imports grew just 0.1% in 2015, though 70 percent of respondents said they expect to ship more goods in 2016.

Here’s a look at what’s expected for the year ahead.

TPP unlikely to force immediate supply chain adjustments

The Trans-Pacific Partnership (TPP) trade agreement that the U.S. signed with 11 other nations, is facing a divided Congress and a tight timeline to get passed before President Obama passes the torch.

But despite the controversy surrounding the deal, sourcing respondents were positive about it, with 46 percent expressing certainty that TPP would be good for business.

What those respondents aren’t, however, is eager to make immediate moves to plan for the trade deal. Only 5 percent of respondents said they would make sourcing changes in 2016 because of TPP, while 43 percent indicated more long-term thinking, saying they’d make changes within the next five years. Fifty-two percent said TPP wouldn’t have any effect at all on their sourcing strategies.

Talk of China joining TPP has been buzzing on and off but Americans think the move is far less likely than Chinese respondents believe. Only 10 percent of Americans said China will eventually join the TPP compared to 44 percent of their Chinese counterparts who are confident the move will happen.

Retailers seek to shake up sourcing strategies

Amid a changing retail market and a modern consumer that few have yet figured out how to serve, retailers are increasingly looking to adjust their supply chain strategies. Seventy-two percent of respondents in the apparel industry said they are looking to source in a new market this year, 48 percent want to diversify their supplier base, and 36 percent want to improve manufacturing efficiency to cut costs.

Those looking to source somewhere new have their eyes focused on Asia, with China still topping countries of interest despite rising costs and a slowing economy. Vietnam, India and Bangladesh have also been a lure.

Last year, only seven of 350 respondents showed any interest in sourcing in Myanmar, but U.S. imports from the redeveloping country doubled in 2015.

More apparel retailers embrace fast fashion

H&M and Zara have solidified their positions as the hands that dealt retail a fatal blow thanks to their savvy fast-fashion models, and now 42 percent of companies said they are trying to adopt a similar supply chain model.

Of that 42 percent, however, 29 percent aren’t confident their companies can get there.

“Fast fashion demands thorough integration of data collection at point of sale and supply chain management,” Green explained. “For most companies, this constitutes a total overhaul of their business processes, rather than incremental improvements in supply chain efficiency. Given how hard it is make even small changes in supply chains, I think it’s reasonable that many experienced professionals are skeptical that their organizations have the ability to make radical changes.”

Chinese firms troubled by rising costs 

China may still be king of the jungle, but its economic slowdown and rising costs have some sourcing executives seeking a new leader.

“Rising wages in China have been forcing supply chains to extend beyond China for quite some time,” Green said. “This trend will continue—further increasing the complexity of global supply chains—but sourcing executives will feel this as incremental, not monumental, change.”

Only 27 percent of respondents from China expressed an optimistic outlook for 2016, compared to the 45 percent overall who were positive about the months ahead. Rising wages topped the list of concerns, with 63 percent expressing worry over it.

To cope with those rising manufacturing costs, even Chinese buyers (74 percent of them) are looking to leave China and source somewhere else in 2016, with 79 percent searching for other options within Asia.

“These numbers suggest Chinese firms, under pressure to keep costs low, are moving some of their business out of China and into cheaper neighboring countries—good news for nearby developing nations, not so good news for an already troubled Chinese economy,” according to the report.

Logistics consolidation inevitable

Low shipping rates have forced logistics companies to rethink their strategies, and some are considering merging or forming alliances. Two major Chinese carriers, China Ocean Shipping Group (Cosco) and China Shipping Group (CSCL) are currently trying to get their recently completed merger approved by EU and U.S. regulators, and Maersk and MSC formed an alliance called 2M to reduce overcapacity and costs.

When asked about the future for the industry, logistics companies said they see more alliances ahead in 2016.

Importers and exporters appear to have mixed feelings about the mergers. Thirty-five percent said they are concerned about consolidation while 59 percent said it would make shipping goods easier. Thirty-one percent fear it will drive up costs.

“Higher costs are likely inevitable given the current state of the logistics industry, but their effect on importers and exporters is more questionable,” according to the report. “Logistics customers benefited from some of the lowest shipping rates in history in 2015, meaning there is likely room for growth in costs without overly adverse effects on demand.”

Outlook for 2016

Companies, it seems, have finally reached a point where they are starting to grasp the necessity of disruption.

“The possibility that consumers will fundamentally change their behaviors is no longer a possibility—it’s a reality. Social media enables trends to spread more quickly than ever before, with trends spreading across cities and across borders in days, not months,” Green said. “And with endless purchasing options available on their phones, consumers are demanding that retailers be more responsive to their demands than ever before. Retailers know that they have to disrupt themselves or face disruption. That said, the company that actually has the courage to disrupt itself is the exception, rather than the rule.”

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