With supply chains in question following the Brexit vote and a cooling Chinese economy, Drapers considers where British fashion companies will be sourcing from next
Holi Studios, Cambodia
A shift is happening in garment-manufacturing. For British brands and retailers, China is still by far the biggest player when it comes to sourcing apparel in large volumes – but it is becoming more expensive, and its position at the top is not as secure as it once was.
A survey by Barclays and research agency Conlumino shows that 28% of British retailers are considering changing their sourcing countries following the UK’s vote to leave the European Union. There are myriad other factors driving changes to the sourcing map, such as the demand for faster fulfilment, ethical and legal considerations after incidents including the Rana Plaza disaster in Bangladesh, and political turmoil in locations such as Turkey.
Some smaller sourcing markets stand to profit from these changes. Vietnam has been a top-five sourcing market for the US for some time, but is now becoming increasingly important for the UK. Cambodia, Morocco, Pakistan and Myanmar are also developing quickly. Opportunities in Africa are on many a retailer’s radar and, although the Barclays research suggests EU countries may fall out of favour with British retailers, Portugal is enjoying a resurgence.
China is still the most established sourcing market for the UK. Data compiled by the UK Fashion and Textiles Association (UKFT) shows that the total value of garments imported from China to the UK was just shy of £4bn in 2015, up 13.2% since 2010. In second place was Bangladesh, at £1.8bn.
“Currently, no other market can compete with China for comprehensiveness of its product offering, technical capabilities and integration of the textile value chain,” says Peter Rinnebach, senior manager at consultancy Kurt Salmon. But he adds: “China is not a low-cost sourcing country any more.”
UKFT chief executive Adam Mansell takes up this point: “When it comes to sourcing apparel, the key cost is labour. One of the reasons China is slowing down is that labour costs have gone up considerably.”
This is where countries such as Cambodia could step in, says Mansell. The average wage for a garment factory worker in Cambodia was $140 (£105) per month in January 2016, compared with China’s range of 1,000 yuan ($150/£112.50) in poorer provinces to 2,190 yuan ($327/£245.25) in Shanghai. Moreover, Cambodia’s unemployment rates are higher.
“In Cambodia, there are an awful lot of people looking for jobs, and it is more straightforward to set up factories there,” Mansell says. The value of goods imported from Cambodia rose 302% between 2010 and 2015, from £161m to £646m. Vietnam, which, like Cambodia, has labour and fixed-cost advantages over China, has also enjoyed growth – from £226m in 2010 to £435m in 2015.
Holi Studios, Cambodia
Africa – in particular Ethiopia – is also gaining in popularity. Menswear supplier Bagir recently moved its production from China, Romania and Burma to wholly or part-owned sites in Egypt, Vietnam and Ethiopia. Chief executive Eran Itzhak explains that Ethiopia has a duty free route to the European Union and US, as well as competitive labour and other fixed costs (see box below). The International Apparel Federation is working closely with the Ethiopians to develop a sustainable manufacturing base and its website states: “The government is truly investing in the industry and a number of large companies such as H&M, [US brand house] PVH and [Indian textile manufacturer] Arvind are making a long term commitment to Ethiopia”.
Closer to home, UK brands and retailers increasingly favour factories in Portugal and Morocco, where there is good infrastructure and faster delivery.
“More [brands] appear to be sourcing near-shore than before, primarily because of the speed of delivery, working closer to the seasons and prices going up in the Far East,” observes Buzz Carter, event director for near-shore sourcing show Fashion SVP.
“In the 1960s, Morocco was the ‘Sewing Room‘ for European brands,” says Mohamed Tazi, managing director of the Moroccan Textile Association. “Then they went to China and Turkey, but now many are coming back. One reason is the nearness of Morocco to Europe, and the high quality and flexibility our manufacturers offer.” The Maroc In Mode trade show – taking place on 19-20 October – aims to emphasise this closeness and encourage European brands to source their garments in Morocco.
Maroc In Mode
Portugal has always had a significant manufacturing industry. “It is very competitively priced, the quality is high and factories there have speed of turnaround and ability to work with some of the last-minute changes retailers and brands are looking for,” says Mansell. “They understand the British business mentality.” Brands and retailers are also turning to some of these countries because they carry a lower risk. For example, fashion businesses can be reasonably confident that factories in Portugal complete due diligence in setting up any ethical strategies.
However, Kosten Metreweli, chief marketing officer at Segura, which offers compliant software for sourcing, warns that situations can change quickly: “Look at Turkey, with a reputation for high capacity and quality, yet now beset with political issues. When selecting new geographies, brands need to be prepared to be very agile with their sourcing approach, and understand where potential supply chain vulnerabilities exist.”
Rinnebach points out that political instability is also affecting how brands view Bangladesh: “The political situation remains a risk, especially after the terrorist attack on the restaurant in the Gulshan district of Dhakka this summer. Another risk is the worker-safety situation. A lot of initiatives are under way, hopefully showing positive effects, but another Rana Plaza-type incident could force brands to question their strategies of further strengthening Bangladesh sourcing.”
Itzhak says political stability and security are important for two reasons. First, you need to worry about the personal security of your local employees, experts that are coming to support production and customers who visit the factory. Second, instability can damage productivity. “This is why we are not operating in countries like Bangladesh,” he explains.
Itzhak has five criteria for choosing new production sites:
1. Do you have a financial interest in the factory, whether it be an investment, joint venture or, ideally, full ownership or control?
2. Are there duty free routes to the markets you serve?
3. Does the country have competitive labour, energy, transportation and other fixed costs?
4. Can you access raw materials locally to create an efficient vertical operation and shorten the lead time?
5. Do the factories specialise in the type of garment you want to produce?
Despite the potential benefits of sourcing beyond China and Bangladesh, up-and coming source nations such as Portugal, Cambodia and Ethiopia have a long way to go before they can compete on scale and efficiency (see box below).
Ben Keisner, sales director at courier business Freight Brokers, says many of its fashion clients are reviewing their supply chains, but have not committed to any big changes: “A lot has to happen before people make a switch. China is still miles ahead in terms of quality control and ease of transportation.”
Yet, while China’s dominance remains unchallenged, the tide is turning. In five years’ time, the sourcing map could look very different from today.
Case studies: Your views on where to source from now
Three years ago, sourcing from Ethiopia sounded like a dream. But there is huge pressure on prices and you need to compete – and the labour costs in traditional textile countries such as China, Vietnam and Bangladesh are going up. Ethiopia provides a duty free route to our markets, and has competitive labour and other fixed costs. We could also buy 50% of our facility, so we’re controlling the production.
The first challenge is transportation. One of its major disadvantages is that Ethiopia has no seaport. Goods travel by land to Djibouti’s port, which takes two days. A railway line to Djibouti is under construction, which will decrease transportation costs by at least 40%, but in the meantime it is still expensive. We have mitigated the risk by signing an agreement with the biggest mill in the country, so we’re not dependent on raw materials from outside Ethiopia.
There is also the lack of textile tradition and knowledge. We are the first ones to export tailored garments from Ethiopia. It’s like being the first man on the moon. We had to relocate our general manager from China to Ethiopia to oversee the production and we’re recruiting experienced managers from Sri Lanka and Bangladesh to run the line.
If you are considering setting up production in Ethiopia, you need equity and your own managers. It is not because the locals are not talented – they just don’t have the experience and they need training. Five years from now, it will be a different conversation.
Eran Itzhak, chief executive of menswear supplier Bagir
We work with Portugal on some of our products including towelling robes and swimwear. We find it easier to source more premium textiles and fibres from within Europe, and the consistency of product and the workmanship is excellent. We work with smaller quantities and the lead times can be more flexible than sourcing from the East. There is less emphasis on filling containers to gain good freight rates, and there are no duty rates to take into account. We can solve any issues quickly and we have the ability to take on repeats within season, although Portuguese factories do suffer from production capacity constraints in the peak season like any other country.
We find that development can be facilitated quickly and the mills and factories have a better understanding of the European market trends to bring ideas and concepts to us. We believe, as do many of our customers, that consumers consider “Made in Portugal” in the label to be a stamp of quality and understand the more premium nature and limited production that lies behind its creation.
The flip side of all this is undoubtedly price, as the worker rates are significantly higher than in the East, and garment production generally requires a large amount of labour input in cutting, sewing and checking. To give an example, for an embellished swim garment, the price difference can be more than twice what it would be if we sourced from Asia. As margin and price are such an important driver for many of our customers, there are only a selection who feel that Portugal is a viable option for them.
Tristan Haddow, chief executive of brand supplier Haddow Group
Cambodia is actually very structured for a south-east Asian country. It has a lot of laws in place to protect both the employer and employee, and it is making headway with a living wage. It is taking a while, but [working conditions] are improving. It is also pretty fast and efficient; a lot of the main factories are run by people who used to work in China. People still associate Cambodia with fast fashion, but they do everything from fast fashion to luxury, and a lot of footwear, so there are a lot of different opportunities. There is a really good skills base.
One pitfall is that it is more expensive from a delivery perspective. They do have great logistics – quite fast – but it is much more expensive than shipping from India. I think because the infrastructure for shipping out to Europe is new, there are only a few international companies who really do it. And Cambodian factories have been focused on mass quantities, so they are very open to the bigger retailers, but for the medium-sized retailers it can be difficult to find out who is running what, where and how.
Leah Rodrigues, founder of Cambodian training and production centre Holi Studios