The sourcing world as we knew it in the wake of the dismantling of the quota regime 15 years ago, is not what it was for the next decade and half. Today there is not one particular model to be followed, and nor is it about having one single solution to all one’s sourcing problems. Getting it right now may be trickier, but one thing is for certain: sourcing could well be driven by sustainability.
For a long time, with the end of the quota regime in January 2005, the global fashion industry seemed to follow a singular model of sourcing. Broadly speaking, of course. At some point, the cost factor started giving way to the speed element. The jobs lost to the offshoring strategy of fashion companies were sought to be brought back home (i.e the West) through a reshoring drive. Even as things were beginning to coalesce and new realignments in the sourcing world were taking form, the discourse became one about near-shoring. It turned into a question of alternative models. And then suddenly, all hell broke loose.
In today's sourcing ecosystem, one cannot follow one model single path to glory, for there is none. There are way too many factors to be weighed in, and things are no more about getting the source right-it is about getting the mix right. If one chooses to look at the same ecosystem through a different prism, the issue could well be about striking the right balance among a host of fluid factors.
Goodbye Quotas, Hello Costs
In 1974, the Multi Fibre Agreement (MFA) was introduced as a short-term measure. It was meant to allow developed countries to adjust to imports from the developing world. So, developing countries and those without a welfare state ended up with a comparative advantage in textile production because it is labour-intensive and their poor social insurance systems allow them low labour costs.
At the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), textiles and clothing were brought under the ambit of the World Trade Organization (WTO). The MFA's successor, the Agreement on Textiles and Clothing (ATC) provided for the gradual dismantling of quotas. The ATC expired on December 31, 2004.
At that juncture, China was a relatively new entrant to the WTO, having joined only in 2001. But, by the time the quota regime had come to an end, it had already built a rock-solid infrastructure. The rest, as they say, is history. China went on to become the manufacturing powerhouse of the world, and overwhelmingly dominate the textiles and apparel trade. The financial crisis of 2008-09 hit the rich economies much more than it did others, and China was able to make the best of the scenario. Within five years of the end of quotas, much of apparel (as also textile) sourcing had moved to China. The balance of trade was tilted towards China.
The MFA / ATC had controlled exports to major markets, particularly the EU and the US, for over thirty years. Through volume limits (i.e. export 'quotas') on the exports of developing countries that were specified product by product and country by country, the regime had protected the textiles and apparel industry in the US and EU by limiting imports from highly competitive producers like China. In the bargain, it also allowed new producing countries to enter the business.
The trick of the trade then was to find countries with unused MFA / ATC export quotas. Garment manufacturers in South Korea, Taiwan and Hong Kong were able to circumvent MFA restrictions on exports by 'quota-hopping' their production to new countries such as China or Indonesia in the 1980s, Vietnam in the 1990s, or Cambodia in the 2000s. But they did not manufacture in just their own countries; they spread out elsewhere. They worked hand in glove with global buyers in what was called 'triangular manufacturing'-a system wherein US or EU buyers sourced from subsidiaries in third countries with lower labour costs and underutilised export quotas.
Once the quotas went away, China was in a better position to fill in the void than India. China's share of world textile exports jumped from 10.3 per cent in 2000 to 23.5 per cent in 2007, and from 18.2 per cent to 33.4 per cent for apparel. India's share of world garment exports fell between 2000 and 2007, and its share of the world textile market rose only marginally compared to China's large rise.
According to the World Trade Statistical Review 2019, China, European Union (EU28) (meaning all 28 EU member states) and India remained the top three exporters of textiles in 2018. Taken together, the three accounted for 66.9 per cent of world textile exports in 2018. China continued to dominate with a share of 37.6 per cent. In apparel, China, EU28, Bangladesh and Vietnam were the top four exporters with 72.3 per cent of world market shares. China's domination, however, had dropped-from 36.6 per cent in 2010 to 31.3 per cent. The one to have gained over the same period the most was Vietnam, followed by Bangladesh. The geographical shift of sourcing priorities has been attributed primarily to rising wages in China. But the shift over a period of eight years was relatively minuscule.
Vietnam and Bangladesh had gained substantially since 2000, rising manifold, but still their share remains in single digits-from 0.9 per cent to 6.2 per cent for Vietnam and 2.6 per cent to 6.4 per cent for Bangladesh. Both countries (as also a few others in the Southeast Asia region) were cheap sourcing hubs. The growth of apparel exports of these countries was in parallel to that of the fast fashion industry in the West. It made better business sense to source from low-income, low-wage countries than from China which had started paying more to workers.
Till the start of the previous decade, the primary sourcing criterion was cost. The seeds of the movement against fast fashion had not even been sown and sentiments against sweat shops in Asian countries were limited to occasional exposes in the news media. Then two things happened.
First, during Barack Obama's second term as US President, the public sentiment in that country was heavily in favour of getting the jobs back. Offshoring continued, but reshoring started gaining currency, reaching a feverish pitch towards the end of Obama's term which saw Donald Trump coasting to power on a populist wave that clamoured for a 'Made in the US' label. Obama had already engineered two moves to curtail China's economic clout with the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). But stopping China in its tracks did not mean that the jobs would come back. Once Trump was in the White House, the US pulled out of the TPP / TTIP and in another year or so launched a trade offensive against China. That, in itself, is however a different thread. The reshoring drive has continued, though not that noticeably.
The second was the Rana Plaza disaster of April 2013 in which 1,134 people died and 2,500 others were injured. The global outrage against brands that sourced from cheap labour destinations without caring a fig about workers or working conditions put companies on the back foot. As wages, ethics and factories came under the scanner, things are now certainly better for workers than earlier in Bangladesh. Most companies that sourced from Bangladesh still do so. Some are trapped because pulling out would result in too much negative publicity. Some, on the other hand, would like to keep sourcing from Bangladesh because it still makes better business sense than falling back on a more expensive China or translocating elsewhere.
Looking Beyond Costs
Two developments overlapped-the demand for bringing jobs back, and a new way of looking at sourcing i.e. speed-to-market vis-?-vis costs. In some cases, the two meant the same thing.
The US was one of the biggest fashion retail markets but employment in apparel manufacturing in that country had dropped by more than 80 per cent between 1990 and 2011, and it was importing almost 90 per cent of the apparel and footwear from overseas. The demand for reshoring had started during the 2008-09 financial crisis, but even 10 years later it not really worked.
In July 2019, AT Kearney's 6th annual Reshoring Index showed that "growth in manufactured goods imports into the United States from the 14 largest low-cost country (LCC) trading partners in Asia rose by $66 billion or 9 per cent for the year, the largest annual increase since the beginning of the economic recovery. US gross manufacturing output, by comparison, grew only 6 per cent year-over-year (YoY) in 2018." The cost factor is still significant. Data from the American Chamber of Commerce in China supports AT Kearney's findings. About 41 per cent of US companies were considering moving factories from China because of the trade war, but less than 6 per cent were heading to the US, an American Chamber of Commerce in China survey found.
These are possibly early days yet. But there have been significant developments on a number of fronts. Adidas's highly automated "speedfactory" at Atlanta in the US is often cited as an example of the possibilities of reshoring. The plant's production is three times faster and more flexible than at the company's Asian plants. It can make short-run products designed for local markets. The "speedfactories" employ 160 workers compared with 1,000 or more in a typical factory in Asia. Initiatives like these have not yet shifted manufacturing to the US, or even to Europe.
The failure of reshoring has instead yielded to two other schools of thought-right-shoring and near-shoring. The terms are self-evident and overlap as well.
A survey by the University of Warwick's Manufacturing Group, conducted for industry body Reshoring UK in 2018 found that only 13 per cent of companies had directly reshored. On the other hand, 52 per cent had indirectly reshored i.e. they had decided to increase capacity at home instead of abroad. The cost factor still counts, but not as it used to earlier. Costs include both transport and inventory rather than just wages.
Things have been different in the UK, which has been gearing for a Brexit. The Alliance Project (TAP) report Realising the growth potential of UK Fashion and Textile Manufacturing in May 2017 remarked, "The strength of the rationale for sourcing apparel from low-cost countries has weakened, with reshoring and demand for British textiles product (in particular in apparel) continuing to grow. The case still remains strongest at luxury and upper price point clothing, mid-end fast fashion, and where there are high levels of automation in production-up to two-thirds of additional wage costs due to repatriation to the UK can be cancelled-out through automation.
"However, there is clear growth across all product areas, in particular where there is more added value in the manufacturing process-from design, to digital and panel printing, jersey and jacquard, embroidery and knitwear-the more the market can be made in the UK. Evidence from manufactures and retailers since the Alliance Report shows that there has been increased spending at high and low price points."
Many of the answers came in the October 2018 McKinsey report Is Apparel Manufacturing Coming Home? It predicted that nearshoring-or sourcing in the US or countries close to the US-will accelerate in the years ahead. Trends like speedy fashion shifts requiring quick turnarounds, advances in automation and sustainability concerns would make nearshoring more attractive as others (e.g., rising wages in Asia, China tariffs) are making sourcing from Asia less so.
Among factors reducing the advantage of offshoring were rising wages for factory workers across Asia. Labour costs in China in 2005 were one-tenth of those in the US; in 2018, they were about one-third. "In some nearshore markets, the gap to offshore labour costs has even disappeared," the report pointed out. Even Mexico offered lower average manufacturing labour costs than China. Also, the hourly manufacturing labour costs in Turkey were more than five times higher than those in China in 2005, the factor diminished to only a factor of 1.6 times by 2017.
The second deterrent factor was Asia's own rising demand for apparel. Apparel sales in Asia are expected to grow by 6 per cent annually accounting for about 40 per cent of global sales by 2025. The McKinsey report observed, "This burgeoning local demand is creating competition for Asia's apparel manufacturing capacity and changing the export balance. Though there are not yet substantial capacity issues, many Chinese manufacturers are switching their focus and producing for the local market since the demand is so high."
Therefore, nearshoring and automation together will be a driving force for apparel companies that want to remain competitive in adding value to their supply chain. Plus, speed-to-market and in-season reactivity, leveraged by proximity of sourcing and manufacturing, would supercede the historical marginal cost advantage previously favoured.
It's all about business. The fashion cycle which once turned once in six months is now capped to six weeks. So, companies now need to compress lead times. Transitioning from offshoring to China to near and onshoring offers the opportunity to eliminate significant blocks of time. Moreover, the efficiencies once associated with South Asian and Southeast Asian countries is on the decline. Plus, the cost of freight and duties add to the home turf advantage.
It has been more than a year since the McKinsey and if one were expecting to see dramatic changes, one would be disappointed-nothing earthshaking has happened. As yet certainly.
There is a reason for that: everyone is cautious and everyone is keeping cards close to the chest. While one only needed to do smart mathematical calculations ten years ago, today one needs to factor in political fallouts. Worse, there are too many of them. From the US-China trade war to Brexit and India's decision to walk out of the Regional Comprehensive Economic Partnership (RCEP), one can never be sure which way things would turn a year from now. To compound problems, the global trade scenario itself has remained bogged down by an ever-ongoing global slowdown.
The New Benchmarks
All debates about reshoring, near-shoring, right-shoring, and whatever new-fangled term have you-all have the same element at their hearts: costs. But January 2020 is not January 2005-we live in a different world where "climate emergency" is declared the Word of the Year by Oxford Dictionaries and where consumers are far more ethical, conscious and connected. And yes, demanding too.
The 2013 Rana Plaza tragedy and its fallout has been discussed before. The deaths and injuries did not result in brands changing their source points to other countries, but they were forced to put pressure on factory owners to make working conditions better and pay better wages. There were many lessons to be learnt there, and one was this: you cannot keep sourcing as you please. Five years later, corporations are increasingly under scrutiny and social media is ruthlessly unforgiving.
Sourcing needs to become ethical. Moreover, there are organisations that maintain the tempo. The World Report 2018 of Human Rights Watch remarked, "Factory building collapses and fires are not the only problems in the apparel manufacturing world. In the $2.4 trillion garment industry, which employs millions of workers worldwide, labour rights abuses are rife. In countries around the world, factory owners and managers often fire pregnant workers or deny maternity leave; retaliate against workers who join or form unions; force workers to do overtime work or risk losing their job; and turn a blind eye when male managers or workers sexually harass female workers. Why should global apparel brands care? And what is their role?
"The governments of producing countries worldwide are primarily responsible for working conditions and labour law compliance in factories. But according to international standards, though non-binding, global apparel and footwear companies or "brands" that order products manufactured in factories also have a responsibility to ensure that the rights of workers are respected throughout their supply chain. They must take measures to prevent and address human rights abuses."
Sourcing needs to become transparent. The same report continued, "Since 2005, Nike and Adidas have been publishing their supplier factory information, and more brands followed. Some brands that closely guarded factory names as "competitive information" have now released this data. In 2013, the leading fashion group H&M-which according to a company representative used to keep its supplier factories list locked in a safe in Stockholm at one point-became the first fashion brand to publish the names and addresses of its supplier factories. Other companies followed suit in 2016, with big companies like C&A, Esprit, Marks and Spencer, and Gap Inc also going transparent."
Popular movements like Fashion Revolution have been keeping on the pressure too. It is not enough to source economically, the sourcing has to keep people in mind too. People, as in workers. There is, therefore, more home work to be done for brands-right from fact-checking their local partners to even studying the countries they wish to source from. Or, it might become a bad investment.
Take the example of Cambodia, a small-time sourcing point and an old-time favourite with apparel companies of the West. The EU had announced last year it would begin a monitoring process to decide whether to end duty-free and quota-free imports from Cambodia. It cited "serious human rights violations" and "democracy setback" as the reasons. The EU has threatened to withdraw the 'Everything But Arms' (EBA) benefit to the country's textiles and garment sector. The final report has not been revealed, but it is believed to be critical. A decision on this will be made by February. Cambodia is also under pressure from the US for undermining democracy, ignoring labour standards, disregarding human rights and failing to protect intellectual property. Such instances will increasingly put many countries under the lens, and make companies rethink sourcing strategies.
There are other trends that can make a huge impact on the very process of apparel production-the chief among them being the campaign against fast fashion. This segment of the fashion industry has been losing supporters, but it's still booming. What is ironic is that while people from within the fashion industry are increasingly speaking out in favour of slow fashion, the segment is still being stridently promoted by other sectors that have benefitted a lot: real estate and logistics. But when the tide turns overwhelmingly against fast fashion- sustainability and circularity trends already indicate as much-both brands and manufacturers will take a hit. The small apparel producing countries would be hardhit and could do well to have contingency plans in place.
Also, the adage that knowledge is power will hold truer than before. Much of this knowledge would go beyond the realms of conventional business wisdom-into the turbulent domain of the climate crisis. According to the latest Global Risks Report of the World Economic Forum (WEF), all top five long-term risks relate to the climate. So, how does it affect sourcing? Simple example: if one were told (correctly so) that a particular coastal city will be hit by rising seas in another 20 years, one would simply not invest there. Or, if one were told that a specific cotton-growing region would be severely hit by water scarcity in 10 years, one would not set up a factory there just because access to cotton today is easy. It will pay to be climate-aware. Climate knowledge will be power.
Moreover, everything about sourcing will have to turn sustainable. The title of McKinsey's October 2019 survey should sum up this write-up: Fashion's new musthave: Sustainable sourcing at scale. The chief purchasing officer (CPO) survey found that "social and environmental sustainability has become a key priority for apparel companies, just as it is becoming an increasingly important issue for consumers and governments." The respondents were not just about anybody-the survey reflected the perspectives of 64 sourcing executives, who together are responsible for a total sourcing value of more than $100 billion. Most of them reported that "responsible and sustainable sourcing is already a top priority on their company's CEO agenda-and the area in greatest need of improvement in their companies."
The report outlined, "Indeed, the industry lacks a common language on sustainable sourcing, let alone a shared set of standards. But the findings leave no doubt that sustainable sourcing at scale will be a must for apparel companies over the next five years-and that consumer demand for sustainable fashion is growing rapidly. At the same time, margin pressure is making it even more important that companies improve the efficiency of end-to-end product development and sourcing processes. As our survey shows, executives see no conflict between this imperative and the drive for sustainability."
What this means is that apparel producing countries will need to work on the sustainability factor to score over others. Some have already breezed ahead. For example, Bangladesh already has an RMG Sustainability Council in place, while many others are still twiddling their thumbs.
The old sourcing model is dead. Long live the new sourcing model: it is called sustainability.