Rising labor costs in China are so far failing to erode the country's wide global leadership in apparel production but far-reaching economic and demographic trends could lead to more significant shifts in the coming years, according to several speakers at the packed World Sports Forum (WSF) in Munich last month.
The forum organized by the World Federation of the Sporting Goods Industry (WFSGI) drew a record number of about 150 participants with discussions on global trends and emerging markets for sourcing, focusing on apparel. It came after the WFSGI developed its in-house expertise on apparel sourcing with the appointment of Dhyana van der Pols as head of textile innovation and manufacturing last year. It was announced at the WSF that tailored workshops will be organized jointly with the International Apparel Federation from this year, with detailed country reports for sourcing.
Speaking at the WSF, Van der Pols played down suggestions that production was shifting significantly to new emerging sourcing markets. She pointed out that there were still only 150 apparel suppliers in Ethiopia, compared with about 5,000 in Bangladesh. The supply in the surrounding countries is not always optimal, either. However, Van der Pols pointed to the regionalisation of sourcing, with apparel made in Peru to be sold in Colombia, or other such combinations to avoid duties and to reduce waste.
Leonie Barrie, managing editor of Just-style.com, was also unconvinced that apparel production was moving away from China on a large scale or that emerging sourcing markets were taking significant market share. As Barrie pointed out, about 97.5 percent of global apparel production still takes places in just 20 countries. She saw some companies increasing their mix of Far Eastern sourcing and near-shore production for replenishment, but at the same time she spotted the opposite as well.
So far the most important reason for companies to shift their production is to obtain lower costs, but these costs are increasing in many important sourcing countries – not only China. The rise of 10 percent for average Chinese wages in 2014 was easily surpassed by a rise of 77 percent in Bangladesh, 25 percent in Cambodia and 15 percent in Vietnam, based on figures by Credit Suisse.
Clothing trade figures compiled by Barrie from Clothesource Tradetrak for last year showed that China accounted for 38.8 percent of apparel imports into the European Union, far ahead of Bangladesh with 19.1 percent. The share of much talked-about sourcing countries such as Myanmar and Ethiopia was still negligible, with Myanmar reaching just 0.3 percent and Ethiopia even less. Furthermore, the evidence showed that imports from China were growing faster than most other large sourcing countries – with the exception of Indonesia.
China's production is also buoyed by increasing domestic demand. To give an impression of the country's production capacity against emerging markets: If just 3 percent of Chinese apparel production were to move to Myanmar, that country's garment industry would double in size. For sports apparel in particular, Barrie said that China continued to tick all the boxes.
Van der Pols pointed to other trends in the supply chain. An intriguing example is that of Everlane, which has chosen to entirely cut out retailers. It sells basics only online and in pop-up stores but still pockets an ample margin that is shown on its website for each product, in a strategy that it calls radical transparency.
For example, a chart for a polo shirt shows precise costs for materials, labor, hardware, duties and transport adding up to about $14. Everlane then charges $35, against a “traditional retail” price tag estimated at $70. Gustin, which started with jeans in San Francisco, has adopted an equally radical model of slow fashion: The garments only go in production once the company has garnered sufficient online orders for a particular model.
Sven Kromer, partner at Kurt Salmon, which produces the Global Sourcing Reference report, concurred that sourcing models would have to become more differentiated, integrated and transparent, while taking greater advantage of technology. He also emphasized the importance of logistics as a competitive advantage for suppliers, adding that the development of ports and roads in the last years remained an advantage for China – perhaps more relevant than labor costs, which make up only about 5 percent of production costs for some garments, he said.
Haico Ebbers, professor of international economics at Nyenrode Business University in the Netherlands and chairman of the Europe China Institute, put the discussion in the context of the “emerging market century.” Ebbers depicted a huge shift in economic influence due to the expansion of emerging markets. However, he added that the shift entails a mixture of globalization, regionalization and localization.
Ebbers mentioned an annual survey of chief executives by Pricewaterhouse Coopers, in which they referred to the influence of governments and consumer behavior as some of the factors that would most affect their business in the next ten years. This called for a localization of their business approach, to understand consumer behavior and to deal with new government policies. At the same time, the growth of Southeast Asian economies could lead to the rise of an Asian World Bank or an Asian Monetary Fund, for instance.
The Dutch professor added that a turning point could come rapidly for China, since it has been predicted that the labor force would start to decline in 2020. The demographic window in which economic growth occurs due to the increase in the labor force would thus close, calling for rapid improvements in productivity. Only in a few countries such as Brazil is the window still wide open.
Ebbers predicts that there will be a shift of the global middle class to the emerging economies by 2030. Yet he advises that any analysis of the consumption potential should focus on their income elasticity – meaning the reaction of consumers when their income increases. As an example, once Chinese consumers achieve purchasing power of about $10,000, one extra percent of growth in their income will lead to 2 percent of growth in spending on cars. In this respect, he said many Asian economies were just reaching the take-off phase.
Asian sourcing and consumption are among the topics that will be in focus for the Hong Kong office of the WFSGI, which should be opened and fully operational by April. Like Taiwan in 2013, an as-yet-unidentified Asian country will host the WFSGI Manufacturers' Forum this year, as well as several workshops to dig deeper into specific aspects of manufacturing, such as water and waste management, chemical and supply chain management.
