Cheaper to Make Textiles in the United States than in China: Reality or Myth?

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A New York Times article back in August 2015 suggests that “yarn production costs in China are now 30 percent higher than in the United States” because of savings in raw and auxiliary material. The article believes the cost difference is why some Chinese textile companies are coming to build factories in the United States, such as Keer Group’s cotton mill in South Carolina.

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However, in a recent interview with China Textile News, Chairman of the Cixi Jiangnan Chemical Fiber Co (Cixi) provides a different cost sheet (above). In September 2013, Cixi invested a $45million polyester staple fiber mill in South Carolina. Because nearly 80% of Cixi’s outputs are sold outside of China, and the United States is its single largest export market, the investment intends to help the company maintain its presence in the U.S. market and substantially save transportation cost.

According to Cixi, it is a misunderstanding that making textiles in the United States is cheaper than in China. Although moving factories to the United States may help Chinese companies save money in land, electricity, natural gas, and logistics, it will significantly increase the costs in purchasing manufacturing equipment, building factories and managing daily operation of the company.  Additionally, culture and language barriers, as well as labor policy in the United States, could also become critical challenges facing Chinese investors. Cixi admits that to keep its U.S. factory running smoothly, members of its management team all come from China.

VF Sourcing Strategy Case Study Updates (May 2017)

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(Slide above: VF Corporation European Headquarter; Photo Credits: Hannah Wilson)

VF Business Operation General

V.F. Corporation (VF) designs, manufactures, distribute and market branded lifestyle apparel, footwear and accessories. The company offers Jeanswear, outdoor and action sports, image wear, sportswear and contemporary brands. The company markets its products under brands namely, the North Face, Wrangler, Timberland, Vans, Lee and Nautica, among others. It sells its products to specialty stores, department stores, national chains and mass merchants, as well as through direct-to-consumer channel consisting of VF operated stores and internet sites.

VF reported revenue of $12 billion in 2016, up 1% over fiscal year 2015. Gross margin% of the company improved 20 basis points to 48.4% as benefits from pricing, lower product costs, and a mix-shift toward higher margin businesses. However, gross margin% was partially offset by changes in foreign currency and the impact of restructuring charges. VF’s adjusted operating income was down 6 percent to $1.7 billion. Adjusted operating margin decreased 90 basis points to 14.0%.

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VF Sourcing Strategy

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VF’s centralized global supply chain organization is responsible for producing, procuring and delivering products to its customers. On an annual basis, VF sources or produces approximately 523 million units spread across more than 30 brands. VF’s products are obtained from its 27 self-operated manufacturing facilities and approximately 1,600 contractor manufacturing facilities in over 50 countries. No single supplier represents more than 10% of VF’s total cost of goods sold. In 2016, 22% of VF’s units were manufactured in VF-owned facilities and 78% were obtained from independent contractors.

VF operates manufacturing facilities in the U.S., Mexico, Central and South America, the Caribbean and Europe. A significant percentage of denim bottoms and occupational apparel is manufactured in these plants, as well as a smaller percentage of footwear and other products.

For VF’s self-owned production facilities, VF purchases raw materials from numerous U.S. and international suppliers to meet their production needs. Raw materials include products made from cotton, leather, rubber, wool, synthetics and blends of cotton and synthetic yarn, as well as thread and trim (product identification, buttons, zippers, snaps, eyelets and laces). Products manufactured in VF facilities generally have a lower cost and shorter lead times than products procured from independent contractors.

Independent contractors generally own the raw materials and ship finished, ready-for-sale products to VF. These contractors are engaged through VF sourcing hubs in Hong Kong (with satellite offices across Asia) and Panama. These hubs are responsible for managing the manufacturing and procurement of product, supplier oversight, product quality assurance, sustainability within the supply chain, responsible sourcing and transportation and shipping functions. In addition, VF’s hubs leverage proprietary knowledge and technology to enable certain contractors to more effectively control costs and improve labor efficiency. Substantially all products in the Outdoor & Action Sports and Sportswear coalitions, as well as a portion of products for VF Jeanswear and Imagewear coalitions, are obtained through these sourcing hubs.

Products obtained from contractors in the Western Hemisphere generally have a higher cost than products obtained from contractors in Asia. However, contracting in the Western Hemisphere gives VF greater flexibility, shorter lead times and allows for lower inventory levels.

This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced, flexible approach to product sourcing. VF intends to continue to manage its supply chain from a global perspective and adjust as needed to changes in the global production environment (VF Annual Report, 2015, 2016).

“Third-Way” Sourcing Update

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VF has the goal of 40/40/20 for factory ownership. They want to own 40% of the factories they use, utilize the third-way approach in 40% of the factories, and use transactional sourcing for the other 20% (Glaser, 2014).

VF has expanded its Third-Way manufacturing program to sub-Sahara Africa, in addition to the third way factories VF works within Bangladesh, Cambodia, the Dominic Republic and Nicaragua. VF is looking into Africa because, while Africa may not be as efficient as Asia currently, there is potential to get it to 80% efficiency in the coming years. It could also be cheaper to source from Africa given the African Growth and Opportunity Act (AGOA) with the United States

Since its creation VF has split its “Third-Way” factories into three different categories: light, medium, and heavy. Light Third-Way is having engineers consult with the factories and visit each week. The medium Third-Way involves having an engineer on site and a long-term commitment to the supplier from VF. Lastly, the heavy Third-Way involves profit-share and open book costing as well as sharing of research and development (R&D) (Barrie, 2015). 

Trust continues to be a central theme in Third-Way sourcing, as does having the right people on board with the initiative. VF also believes that any positive changes made to the factories because of the Third-Way program will ultimately help the whole industry and drive positive change, even if the changes are used for other companies that source from the same vendor (Barrie, 2015).

What Do You Take Away from FASH455?

I encourage everyone to watch the above two short videos, which provide a great wrap-up for FASH455 and remind us the meaning and significance of our course.

Indeed, I hope students can take away essential knowledge about textile and apparel (T&A) trade & sourcing from FASH455. So far in the course we’ve discussed various trade theories, evolution pattern of the global T&A industry, three major T&A supply chains in the world (namely the “Western-Hemisphere” supply chain, “Factory Asia” supply chain based on the flying geese model and the phenomenon of intra-region T&A trade in Europe) as well as T&A trade policy. Understanding how trade and sourcing work will be highly relevant and beneficial to your future career in the fashion industry no matter as a fashion designer, buyer, merchandiser, sourcing specialist or marketing analyst.

However, more importantly, I hope FASH helps students shape a big picture vision of the T&A industry in today’s global economy and provides students a fresh new way (perspective) of looking at the world. Throughout the semester, we’ve examined many critical, timely and pressing global agendas that are highly relevant to the T&A industry, from apparel companies’ social responsibility practices, the debate on the impact of free trade agreements (FTAs) to the controversy of Trumps’ trade policy agendas. It is important to keep in mind that we wear more than just clothes: We also wear the global economy, international business, public policy and trade politics that make affordable, fashionable, and safe clothes possible and available for hardworking families.

Likewise, I hope FASH455 puts students into thinking the meaning of being a FASH major (as well as a college graduate) and how to contribute to the world we are living today positively. A popular misconception is that T&A is just about “sewing,” “fashion magazine,” “shopping” and “Project Runway.” In fact, as one of the largest and most economically influential sectors in the world today, T&A industry plays a critical and unique role in creating jobs, promoting economic development, enhancing human development and reducing poverty. For example, globally over 120 million people remain directly employed in the T&A industry, a good proportion of whom are females living in poor rural areas. For most developing countries, T&A usually accounts for 70%–90% of their total merchandise exports and provide one of the very few opportunities for these countries to participate in globalization. We are as important as any other major on the campus!

Last but not last, I hope from taking FASH455, students can take away meaningful questions that can inspire their future study and even life’s pursuit. For example:

  • How to make the growth of global textile and apparel trade more inclusive?
  • How to distribute the benefits & cost of globalization among different countries and groups of people more equally?
  • How to make sure that tragedies like the Rana Plaza building collapse will never happen again?
  • How to make international trade work better and lead to economic growth and human development more effectively?
  • How to use trade policy as a tool to solve some tough global issues such as labor practices and environmental standard?

These questions have no real answer yet. But they are waiting for you, the young professional and the new generation of leaders, to write the history, based on your knowledge, wisdom, responsibility, courage and creativity!

So what do you take away from FASH455? Please feel free to share your thoughts and comments.