Wednesday, May 24, 2017

US Apparel Sourcing- Are We At The End of the Story?

A recent public report by Goldman Sachs considered the US-China trade relationship in apparel and explored the question of whether, with the storm clouds of change brought about by this administration, it was feasible to bring a significant amount of manufacturing back to the US.

After consideration, their analysis was that it would take an investment of about $50 billion, 5-10 years to build, hire and train, and would require a price increase of around 15% due to multiple times the labor cost (that figure is low in my opinion).

What chance is there of that happening? Without a seminal event that required the building of US factories just to maintain supply (considering also that China apparel exports are estimated $300 billion/year), who in their right mind would invest that kind of money just to end up with product that is more costly- in a market that is driven by price? And, if there is some political breakdown that results in higher tariffs or drives the US-China relationship down the drain, what will happen to the industry in the 5-10 years it takes to build this questionable solution with their biggest source of supply cut off or severely restricted?

The answer can be found in the history of apparel sourcing before and since US quotas removed from China (2005).  IN the first few months of that year, an incredible amount of goods were shipped into US from China, which resulted in calls from probably the same people who are talking about it now, to restrict imports from China. The New York Times reported in March of 2005:
Imports of major apparel products from China jumped 546 percent. Last January, for example, China shipped 941,000 cotton knit shirts, which were limited by quotas; this January, it shipped 18.2 million, a 1,836 percent increase. Imports of cotton knit trousers were up 1,332 percent from a year ago.

As a result of the surge, voluntary restraints (the Elvis Era) were agreed by the two countries through 2008. As a person who lived through that era, I can say without hesitation the restrictions did nothing except raise prices and blood pressure.

Then- labor costs should have increased with the Chinese Labor Law of 2008. The aging population started shortly thereafter to affect the apparel labour force; this turned out to be the main driver of increased labour costs. At the same time, China very rapidly built infrastructure, such as high speed rail, to the inland provinces and gave great incentives to folks there to build factories. This took a while, but now many workers have enough jobs in their home provinces to not have to migrate to the East for work. So labour costs continue to rise in the main Eastern apparel-producing provinces.

Finally, the renminbi increased in value slowly but relentlessly. From 8.15 RMB/1 USD in 2006, the rate increased to about 6.05 in the beginning of 2015. It has since recovered to 6.9. (which tells you that the government will do what it has to do to maintain exports)

So, increased labour cost, declining USD exchange rate, legistlative hurdles, and China still represents about $300 billion of the $1.5 triliion US apparel market. Why?

First, China put some of that trade revenue to good use with infrastructure improvements, such as high speed rail, that make the US counterpart look sad and aged by comparison (that is something Goldman Sachs did not mention- how much would need to be spent on infrastructure improvements in US to facilitate a $50 billion investment and an increased labour force of 500,000?)

Second, China found a way to decrease or at least hold costs by increasing the efficiency of manufacturing- most especially, and this is a key to success and a major deficiency in many other countries- creating an almost perfect vertically integrated industry on a very convenient map. In apparel, not only manufacturing but all raw materials and components can be found within the same provinces as most of the factories-Zhejiang and Jiangsu.

Third, above and beyond infrastructure, the government is devoted to policies that will stimulate growth and also offset global and internal factors such as those mentioned above.

Finally, sourcing managers found out that a main reason that China endured as the main apparel manufacturing location is that it continued to be the best choice.
Labour shortage or not, 1.4 billion people in a relatively educated country with a historic affinity for business and business acumen trumps-well- every alternative combined.  No country has the population that China does (except India, whose pitiful lack of infrastructure and backward population, and non-helpful government takes it out of contention), and no country has the vertical integration. Bangladesh, Vietnam, even Thailand etc. still depend on China for raw materials such as fabric.

So here we are in 2017 and China is still the main exporter. What do we see in the future that will change this balance significantly? My view is that whatever was going to happen as far as sourcing diversification has happened already. No emerging countries/regions are threatening to steal significantly more orders from China than they already have. In the past, there has been lots of talk-such as the talk of Africa being the future of global sourcing. Didn’t happen there or anywhere else, and won’t- at least not with the scale that would make a dent in China’s exports.

Unless there is a country or region I missed, I think the diversification of sourcing that was going to happen has pretty much played out- mainly because of the internal factors that limit sourcing as discussed above- population, raw materials, etc. In a time when apparel business is undergoing major changes, nobody on either side of the export-import equation in apparel is going to make major factory investments anywhere-especially in the US where it may be set up to fail.

Message to Washington: The practicality of punitive trade reforms against China for policymakers is: OK, do it- then what?

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