Rising production costs in China haven’t fully loosened the country’s grip on textile and apparel sourcing quite yet, but they continue to prompt U.S. retailers and brands to look to other low-cost regions to meet their sourcing needs, Kurt Salmon found in its latest Global Sourcing Reference report.
The report, which analyzes current developments and major market trends in textile and apparel sourcing, notes as well that although Bangladesh continues to be among the top five exporters to the United States, it won’t be for long unless it amends its production to become more socially and environmentally responsible. Vietnam and Indonesia, which occupy the No. 2 and 3 spots on the U.S. exporters list, face a similar challenge.
Indeed, while who will take the apparel sourcing reins from China remains unclear, what the 11th edition of Kurt Salmon’s Global Sourcing Reference report does make clear is that there are a host of other low-cost countries eager to do business with U.S. apparel retailers and brands.
An Ever-More Complex Sourcing Market
Many U.S. apparel retailers and brands spent the past 10 years focused on getting their products to market faster—and, for the most part, they succeeded.
But today’s retailers and brands face a host of challenges: a sped-up innovation timeline, demand volatility, pressure to offer an omnichannel experience, increasing internationalization on one hand and regional differentiation on the other, and an expectation on the part of consumers that production is both environmentally friendly and socially responsible. Rising production costs, fluctuating raw material and freight costs, as well as the emergence of new sourcing markets, each with its own set of risks, only intensify the struggle.
Going forward, in order to respond quickly to increasingly unpredictable consumer demands and ever-more complex markets with targeted product development and sourcing decisions, apparel retailers and brands will need to ensure that their merchandising, design, logistics and even suppliers are more integrated process-wise than ever before.
They will also need to make more and better use of analytics and other technology-based solutions. PLM systems will play an important role by enabling retailers and brands to better plan and to increase the degree to which they collaborate with their suppliers on the SKU level.
And they will need a carefully selected portfolio of sourcing countries as well as supplier partnerships designed to afford them a high degree of control—all the way down to the production facilities.
Production Costs Keep Climbing, but China Stays on Top
With the exception of just a handful of markets, the rise in production costs—which Kurt Salmon measures with an internally calculated metric known as the Production Cost Index (PCI)—continues. Bangladesh and Vietnam now have the lowest PCIs of all sourcing countries, of 14 and 18, respectively, in absolute terms (Index 100, the baseline, correlates to the cost level of the United States), as illustrated in Exhibit 1. From 2007 to 2012, they registered respective compound annual growth rates of exports to the United States of 8% and 10%.
Costs in China’s traditional sourcing region in the south have increased more than 160% since 2005, bringing its PCI to 49. Production costs in Southern China are even greater than some of the Central American sourcing markets (such as Guatemala and Nicaragua, which have PCIs of 30 and 31, respectively).
China continued to export more apparel to the United States than any other country in the world, though its market share slipped slightly, to 39% in 2012 from 40% in 2010, as illustrated in Exhibit 2. It’s followed by Vietnam and Indonesia, with market share of 9% and 6%, respectively, while the fourth- and fifth-place slots are held by Bangladesh and Mexico. Taken together, the top five sourcing countries accounted for a total market share of 64% in 2012, edging down from 66% in 2011.
But even as the market share of other low-cost sourcing markets continues to grow, China will remain a significant player over the coming years due to its production clusters, which offer the full range of textile sourcing capabilities, from weaving and dyeing to sewing. In the meantime, however, the move within China toward inland sourcing regions will continue for various products, among them denim, pullovers, and shirts and blouses.
In addition to China, Indonesia and Vietnam are the top sourcing countries for eight out of 10 product groups and are increasing their market share when it comes to pullovers; suits, blazers and coats; shirts and blouses; skirts and dresses; and trousers. Cambodia is showing strong double-digit growth in six out of 10 product categories, but its market share remains relatively small. Bangladesh continues to sit at No. 4 on the list of apparel exporters to the United States after bumping Mexico out of that spot in 2010. But much like Vietnam and Indonesia, Bangladesh is under enormous pressure to ensure that its production adheres to socially and environmentally responsible standards, especially in light of the factory fires that have broken out in the region over the past couple of years. Indeed, a recent survey of leading producers and retailers found that corporate social responsibility (CSR) now ranks as the most important factor when it comes to sourcing, before production quality, reliability and flexibility. Ensuring adherence to CSR standards now extends beyond just tier 1 suppliers to include the monitoring of tier 2 suppliers as well.
Although only 35% of the companies interviewed have already established standards for tier 2 suppliers, half of them plan to do so in the near future.
CSR is not the only challenge for low-cost sourcing centers or those countries aspiring to be; many still lack the required infrastructure as well as the supply chain and production capabilities needed to offer volumes similar to those of China. For example, India, in order to hold onto its place as the sixth-biggest exporter of apparel to the United States, has to solve its infrastructure, productivity and business environment issues and better leverage its materials, which are more consistently available than those of many other low-cost sourcing countries.
Rounding out the top five apparel exporters to the United States is Mexico. Notably, the country is second only to China for denim; the value of its denim exports to the United States saw growth of 9% from2011 to 2012. Honduras, meanwhile, has become America’s single largest source of T-shirts, helped by the U.S.-Central America Free Trade Agreement (CAFTA), which went into effect in 2006. When ranked among the top apparel exporters to the United States, it sits at No. 7.
Mexico Could Regain Its Place as U.S. Favorite
The textiles industry in Mexico is recovering from a decade of losing ground to lower-cost Asian rivals. While severe import duties succeeded in protecting its domestic market, they failed to prevent the deterioration of its market share in Mexico’s No. 1 export destination, the United States. More recent developments, however, are playing in the country’s favor, causing both domestic demand to rise and U.S. companies to shift their orders back to Mexico.
As Asian wages climb, sourcing from Mexico is becoming increasingly attractive due to its comparably high-skilled labor force, its improving infrastructure, its membership in the North American Free Trade Association and, most importantly, its proximity to the United States, which allows for short lead times. Indeed, Mexico is becoming known as an affordable place to produce and one whose facilities provide a high level of customer satisfaction.
Africa: a Rising Sourcing Star?
Among the other sourcing markets gaining attention in the face of rising production costs are those in Africa. But with the exception of Mauritius and Madagascar, Africa’s textile and apparel production is still in its infancy. Only individual countries like Ethiopia are showing growth, and to just a small degree.
But foreign investors are increasingly establishing their own textile production capacities on the continent; for example, Chinese and Turkish producers have been building vertically integrated production sites in Ethiopia in order to take advantage of local cotton availability and low labor costs. Additional infrastructure investments being made by local governments, such as the railroad from Addis Ababa to the port of Djibouti, will help lay the foundation for future growth. Sub-Saharan Africa in general is an area to watch, especially with the likes of H&M, Primark, Tesco, Walmart and other companies having already started pilots in the region.
Tomorrow’s sourcing road will be a bumpy one, with raw material prices difficult to predict and constantly shifting consumer expectations. The winners will be those retailers and brands that succeed in establishing a consistent information and coordination process that not only includes their sourcing countries’ value chains, but those of their tier 1 and tier 2 suppliers as well. They must, moreover, build country and supplier portfolios that on one hand meet their needs in terms of quality, flexibility and raw materials, and on the other benefit from the cost savings offered by aspiring and newly developing sourcing regions whenever possible. The Global Sourcing Reference report gives U.S. retailers and brands insight into the future of existing and newly emerging sourcing markets so that they can optimize their sourcing activities.
The 11th edition of Kurt Salmon’s Global Sourcing Reference analyzes current developments and major market trends in textile and apparel sourcing, with snapshots of the 46 most important sourcing countries around the globe. In addition to macroeconomic trends and their impact on sourcing strategies, this edition of the study looks at the developments taking place in China and Bangladesh and assesses the potential of certain countries in Africa.
10 December 2013