Consumers are used to cheap Chinese-made clothes, But as China’s manufacturing base continues to contract, they may have to change their expectations, reports Erin O’Loughlin.
Robert McKee can remember the first outsourcing trip he ever took. The Chicago native and now fashion industry strategist for software provider Lawson, wryly recalls a journey that stretched “all the way from Chicago to Philadelphia” as part of his work for a tailored suiting company. More than 35 years on, it is par for the course that textile supply chains for just about any established label span multiple world time zones.
Yet McKee says more supply chain change is a-coming, and indeed it has already begun. This time, he says, it's going to crash into the one market the global apparel industry has come to so fiercely depend on: China.
“During the initial throes of the economic downturn, 20,000 factories in China went out of business because of a lack of orders,” McKee says. “They got hit very quickly by the issue of insolvency since most of those organisations borrow money against future orders.
“With the crush of the cancellation of the incoming orders plus the tightening of global credit markets, any marginal suppliers were easily driven out of business.”
In short, the manufacturing supply base available to Australian fashion businesses
is shrivelling.
“The struggle for good suppliers is going to become more difficult and it's going to rear it's head in global shortages of product availability,” he warns.
Beyond mere theorising
For anyone who doubts the legitimacy of such predictions, they need only speak to Australian labels currently manufacturing off-shore to know the problem is real. Billabong International CEO Derek O'Neill, for one, admitted during the company's 2009/10 financial presentation that it is feeling the supply-chain pinch.
Billabong International currently owns 13 brands and manufacturers across 400 factories in 28 countries, with China accounting for 50 per cent of the company's production.
“The fact is, particularly in the south of China, the ability to get workers to come and work in the factory has increasingly been more and more difficult,” O'Neill says. “I spoke with just one of our suppliers last week while I was in California and he indicated he's only got 60 per cent of the workforce he had last December, and he's struggling to attract extra people to come and work in the factory.
“Minimum wage went up by 20 per cent in May for labour in China. The currency has also moved again... You've got cotton prices that are at somewhere around 13 or 14-year highs right now. You've had container prices to the US particularly virtually triple from around 12 to 15 months ago. You've had freight prices increases.” It's not just the multinationals like Billabong that are noticing a change.
Director of Sydney-based textile design, manufacturing and import company Trackmaster, Finlay Crawford, expresses similar sentiments. In addition to the factors referenced by O'Neill, Crawford says he has noticed occupational health and safety concerns and environmental worries are also plaguing the Chinese textile manufacturing market.
Figures from business information supplier IBISWorld suggest these supply chain tightenings will be felt more widely across Australia's textile industry than ever before.
Analyst Cathy Hewish reports imports will account for approximately 77.7 per cent of the women's clothing market in Australia in 2010-11, up from 53 per cent 10 years ago.
What's more, 75 to 85 per cent of clothing in Australia is currently sourced from China, with markets such as India and Indonesia generally supplying less than five per cent of clothing imports.
As Billabong's O'Neill observes, “I think every garment company is facing exactly the same thing.”
The next China
Could it be the solution is as simple as the textile manufacturing industry migrating to another region, as it has done so many times in the past century?
“China will not obviously go away,” McKee says. “There will be continued movement from the coastal regions and the southern regions into the interior, westward and northward. I'm sure that more and more manufacturing of textiles and apparel will be moved into western China, inner Mongolia, places like that.”
McKee can also see the Chinese increasing their investment in textile manufacturing – just not on their own shores.
“I guess the next big place or places that we end up going will probably be factories built or owned by the Chinese. They know what they're doing, they've developed significant competence, and I believe they will probably be the next big investors. If you take a look at growth of textile apparel fashion manufacturing in Vietnam and Cambodia which is going on right now, a lot of it is outsourced production from China, and a lot of it is factories with Chinese ownership.”
Statistics from logistics provider Logwin lend support to McKee's theory. “Intra-Asia business now equates to more than 30 per cent of global volumes, meaning there are frequent carrier connections, even on a daily basis, to most ports and airports,” the company reports.
While Logwin's original and main market in fashion logistics is Europe, the company has noticed increased demand for its services in Vietnam, Indonesia, Bangladesh, India, Turkey and eastern Europe.
And yet each other region presents its own problems. Bangladesh has this year been hit by rioting and wage rate rises which have forced the closure of select factories.
While the country has previously been slated as one of the fastest-growing zones of clothing production, Trackmaster's Crawford does not mince words when asked how Bangladesh's apparel manufacturing compares to that out of China: “extremely badly”.
Billabong’s O'Neill echoes a similar sentiment. “I think there's some opportunity in places like Sri Lanka,” he says. “India's certainly interesting, and I think Vietnam and potentially Cambodia are going to be high on most people's lists in terms of alternatives.
“There are other options but China's difficult to just replace because the delivery and the equality are also very good, as well as – in general – the price.”
The end of deflation
If textile businesses cannot find a low-cost, high-quality alternative to China's manufacturing base, do fashion businesses then just have to absorb China's price increases? O'Neill hopes not.
“I'd like to think that ultimately, while some companies may effectively reduce their margin for a period of time, there's not a lot of magical solutions and ultimately prices will need to be adjusted up. The consumer, at some point, may just have to accept that. There's been real apparel deflation for probably 15 to 20 years in most territories in the world, and I think that's just about coming to an end.”
McKee agrees. “Quarter over quarter over quarter for about the last 20 years, the fashion industry has been deflationary,” he says. “The prices are always dropping. But last quarter was the first time in something like 20-plus years that fashion wholesale prices actually rose. Which may be a sign of something, maybe not. I don't want to read too much into it. One quarter doesn't necessarily make a trend. But we may have hit the point where we're not going to drive the prices too much lower than we already have.”
Price hikes aren't likely to go unnoticed by the apparel purchasing public, especially if they should come in the wake of a year lamented by retailers for widespread retail discounting. The solution, McKee says, is to realise market differentiation needn't be based on price.
“Certainly one of the things that we're talking about with a lot of customers and prospects is your ability to interact with consumers now becomes a real key differentiator. I think a lot of organisations are going to have to stay [alert] to multichannel opportunities.”
His bets are hedged not only on online retailing but on interactive TV shopping. As with those prepared to hedge bets on when China's textile manufacturing sector will truly begin to wind down, only time will tell if he's right.