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US-China Trade War Accelerates Apparel Factories' Shift from China to Southeast Asia and Bangladesh

China1Calvin Klein, Tommy Hilfiger, Levi's, Crocs and Uniqlo have moved their production out of China as costs rise and the nation moves up value chain As others follow, Vietnam is first choice for footwear, Bangladesh has a skilled workforce, Indonesia is modernizing factories, and Cambodia is also a player

Fashion brands must focus on current affairs as well as current trends. Lately, industry executives have been expending a lot more time and effort than expected on working out what US President Donald Trump will do next.

China2On October 1, Trump fired another shot at the heart of Chinese manufacturing when he increased existing tariffs on US$250 billion worth of Chinese goods from 25 to 30 percent.

An additional US$300 billion worth of Chinese imports were also taxed at a 15 percent rate – and much of the focus was on apparel. This has caused major problems for the many fashion brands that make their goods in China and market their wares in the United States.

Since the start of Trump's presidency, household names such as Uniqlo, Levi's, Crocs, Calvin Klein and Tommy Hilfiger have moved their entire manufacturing base out of China.

Politics is not the only factor – rising labor costs and an increasing reluctance in China to produce low-cost goods were prompting the sourcing caravan to move on even before the trade war began. There is no doubt Trump sped up their departure, however.

"There is a real sense of panic," says Sean Coxall, the president of solutions at Hong Kong-based supply chain manager Li & Fung. "We have been working with key customers on a backup plan since Trump came into office, and any company that did not do this in advance is pretty stupid in my opinion. Trump has done most of what he said he would, so why wouldn't he follow through here?"

The more entrenched the trade conflict with China becomes, the more appealing it is for companies to divert supply chains, despite the risk involved, and move – although very few of them are eyeing up the US as a final destination, which is Trump's apparent motive.

"All the companies I work with are anxious and nervous, but one thing nobody is doing is suggesting we open factories in the US," says Matt Priest, the president of the Footwear Distributors and Retailers of America. "There is a lot of concern, though, as the supply chain cannot shift as quickly as political decisions come down, and while our members have been moving out of China for a long time, about 70 percent of their products are still made there."

What about Chinese-designed brands that also have buyers in the US market? Even if America is not their focus, do they also need to move their manufacturing offshore to retain their US clients?

We're noticing a lot of brands migrating to Bangladesh. They are training the workforce and importing new expensive machinery. It's the one place you could do everything: denim, jumpers, shoes, you name it "China could surpass the US as the world's biggest fashion market in 2020, according to most data we have seen, so certain Chinese brands will not care what is going on in the US, as it is no longer the center of the entire industry," says Weyan Lui, of intelligence firm L2. "But there is no doubt that any Chinese brands with interests in the US will be hit by this and concerned about what a heavy hike in price will do to their US sales."

For any fashion brands concerned about tariffs the only option is to move their manufacturing abroad, and a number of other Asian countries have dangled carrots before their noses. 

Vietnam has long been the logical first choice – particularly when it comes to footwear. This comes down to a number of factors: Vietnam has free trade with end-market countries including the 28 nations of the EU, Australia, Canada, Japan, Mexico, New Zealand, and Singapore.

Workers are skilled, and while wages are relatively high for the region (at US$216 a month), they are less than half that of China. Infrastructure is good and, unlike in some countries in the region, electricity remains reasonably cheap thanks to government subsidies.

"Vietnam is excellent in terms of high-value goods and is definitely a market that would benefit from a trade war between the US and China," says Coxall.

"I would say at the moment that Bangladesh has the advantage in terms of apparel and Vietnam has the advantage in footwear; it produces a much higher amount of footwear than anywhere else in Southeast Asia. It also makes very high-quality footwear, which is why Uniqlo makes all its footwear in Vietnam even though they rely largely on Bangladesh for everything else."

Bangladesh is still working on smoothing out the difficulties that previously beset its manufacturing industry. The Rana Plaza tragedy in particular – when a garment factory collapsed in the country's capital, Dhaka, in 2013, killing 1,134 people – has been difficult for brands and customers to forget, even though safety standards have improved significantly since then.

"We're noticing a lot of brands migrating to Bangladesh," says Coxall. "They are training the workforce and importing new, expensive machinery. It's the one place you could do everything: denim, jumpers, shoes, you name it. They have even developed the laser technology you need to create high-quality jeans."

And then there is Cambodia, where apparel manufacturing accounts for 80 percent of national export earnings and employs more people than any other industry – so it is no surprise that the government is putting policies in place to tempt even more international brands to their shores.

These include allowing 100 percent foreign equity ownership and an exemption from import duty on machinery and equipment. Cambodia also shares ports with Vietnam, which helps with transport and the import of raw materials from China.

Cambodia also benefits from the EU's "Everything but Arms" scheme, which allows developing countries duty-free access to the EU market for export goods. However, last year, Brussels said Phnom Penh had one year to work on its human rights record – particularly with regards to its appalling record on underage sex workers and child rape – or its membership would be suspended.

There is also Indonesia. Jakarta is rolling out an ambitious plan to digitalize its clothing and textile industry – a key policy devised to meet the government's goal of turning Indonesia into one of the world's top five textile and apparel producers by 2030. It plans to achieve this by investing in top-quality machinery, training the workforce and working with local and international investors to build new, artificial-intelligence-ready factories.

The Indonesian government has also talked extensively about how it wants to be ahead of the game when it comes to 3D scanning – customers send in a 3D scan of their measurements and receive clothes fitted to their bodies – and AI-related 5G technology.

All these countries offer a lot – but it is important to note that there will be no easy successor to China's manufacturing reign and that brands will need to accept that the future holds plenty of cross-border sourcing.

"To my knowledge, there is no single country which can replace the role China currently plays in manufacturing for the global apparel industry," says Foote. "My sense is that fashion brands trying to leave China are faced with logistical challenges in finding new suppliers, across an array of countries, where they can meet their production needs."

As the Chinese fashion industry matures and migrates from "Made in China" to "Designed in China", this is a shift that would have occurred in time anyway. Trump has merely sped up the process.

Source: South China Daily



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