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USFIA: Sourcing Execs Flounder in Uncharted, Protectionist Territory

In the course of one year, sourcing executives’ concern about U.S. protectionist trade policies have increased tenfold.

As the United States Fashion Industry Association’s (USFIA) latest Fashion Industry Benchmarking Study showed, Trump’s trade policy agenda has become their biggest concern, jumping to No. 1 from a No. 10 concern last year.

“This is not surprising to those of us in the nation’s capital; we, too, are worried, and we’ve been actively working to keep our message in front of the Administration and Congress,” USFIA president Julia K. Hughes said in the opening remarks of the report. “There is certainly more uncertainty about trade policy—and we’re in uncharted territory…”

What’s keeping sourcing execs up at night

As a result of wading in these foreign waters, optimism about the five-year outlook for apparel has hit a low not yet seen in the study’s three-year history. The percentage of those who were optimistic or somewhat optimistic about the outlook slid to 71 percent this year after a much higher 92.3% last year.

Of the 12.9% of sourcing executives who said they’re actually somewhat pessimistic about what’s to come, most of them were large-scale retailers.

After America’s protectionist policies, sourcing executives ranked these concerns as the next most pressing: market competition, investing in and updating technology, managing supply chain risks and meeting consumer demand.

What they’re less concerned about, is increasing production or sourcing costs, which slipped from the No. 2 concern last year down to No. 7 this year.

“There are two possible explanations: respondents may view protectionist trade policy and market competition as having a broader and more strategic impact on their business than sourcing or production cost, and companies may be saving money on costs associated with sourcing and production thanks to a strong U.S. dollar against other major currencies, as well as the record lows in oil prices this year.”

When it came to the border adjustment tax, which the Administration has been largely mum on in recent days, 100 percent of respondents said they’re opposed to it.

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What’s happening with sourcing costs?

In what’s been a sliver of positive news amid a plethora of challenges, cost pressures are lessened this year compared to others. Sixty percent of sourcing execs said they expect a modest or slight increase in sourcing costs this year, compared to 74.1% who believed that to be the case last year. A total 31.3% of sourcing execs don’t think sourcing costs will change at all this year.

Labor costs, however, are the top factors driving sourcing costs up, and 73 percent of sourcing execs think wages rates will rise in short order.

“Wage levels continue to rise quickly in many Asian countries where U.S. fashion companies primarily source, including China, Vietnam, Cambodia, Sri Lanka and Bangladesh,” the report noted. Raw materials and shipping fees are the next biggest factors contributing to sourcing costs and more than half of respondents think those will tick up this year, too.

Changes ahead for sourcing

Despite the laundry list of challenges facing sourcing, companies are still planning to hire more employees. Eighty percent of sourcing execs said they’ll take on more workers in the next five years (compared to 83 percent last year)—but they’ll be hiring for now much-needed positions: supply chain specialists, data scientists, sourcing specialists and marketing analysts.

“The contrasting demand for talent in non-manufacturing versus manufacturing positions reflects business priorities in the years ahead, along with the continuing structural readjustment of the U.S. fashion industry,” the study noted.

As has been the case, sourcing executives will be looking to diversify their sourcing bases, and even more so than they had last year. A total 57.6% of respondents said they currently source from 10 or more different countries, up from 51.8% who said so last year.

Sourcing execs surveyed are sourcing from 51 countries or regions around the world this year, which is down slightly from last year’s 56.

Ninety-one percent of respondents are sourcing in China, 88 percent in Vietnam, 76 percent in India, 73 percent in Indonesia, 70 percent in the United States, 64 percent in Cambodia and 61 percent are sourcing in Bangladesh. While the majority of companies are still sourcing in China, the country’s competitive edge is in decline.

“For the first time since we began conducting the survey, the utilization of China as a sourcing base dropped, from 100 percent to 91 percent this year,” according to the study. “Although less than five companies say they do not source from China, this change nonetheless signals a decline of China’s overall attractiveness as a textile and apparel sourcing base, and suggests a shift in U.S. fashion companies’ sourcing strategies.”

Asia remains largely the dominant source for apparel but there have been some key increases that speak to shifts in sourcing: sourcing from the U.S. reached 70 percent, up from 52 percent last year; Guatemala picked up, moving from 37 percent last year to 42 percent this year; El Salvador jumped to 36 percent from 26 percent; and sourcing in Haiti inched up to 21 percent from 19 percent.

[Read more about sourcing in Central America: Sourcing in Central America Ramps up in Line With Need for Shortened Supply Chains]

“Given the uncertainty in the Trump Administration’s trade policy agenda, companies may use diversification to mitigate potential market risks and supply chain disruptions due to protectionism,” the report noted, though adding that just 9 percent of respondents have plans to substantially diversify their sourcing base.

Sourcing growth in Vietnam will temper as companies are more conservative about what they’re doing there without the TPP in place, and though companies will still source from Bangladesh (which slipped from the No. 5 sourcing locale to No. 7 this year), they are growing increasingly cautious as only 32 percent said they’d increase sourcing there “somewhat,” and no one indicated plans to substantially increase their sourcing in Bangladesh.

“‘Made in Bangladesh’ enjoys a prominent price advantage over many other Asian suppliers,” the report noted. “However, respondents say sourcing in Bangladesh is high risk; since compliance is so important to companies, this risk level could be holding them back from increasing sourcing there.”