China’s Changing Role in the World Textile and Apparel Supply Chain

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Following the steps of many countries in history, China is gradually shifting its role in the world textile and apparel supply chain. While China unshakably remains the world’s largest apparel exporter, its market shares measured by value fell from 38.6 percent in 2015 to 35.8 percent in 2016.  China’s market shares in the world’s top three largest apparel import markets, namely the United States, EU and Japan, also indicate a clear downward trend in the past five years. This result is consistent with several recent survey studies, which find that fashion brands and retailers are actively seeking alternative apparel sourcing bases to China. Indeed, no country, including China, can forever keep its comparative advantage in making labor-intensive garments when its economy becomes more industrialized and advanced.

However, it is also important to recognize that China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured in value, 47 percent of Bangladesh’s textile imports came from China in 2015, up from only 39 percent in 2005. We can observe similar trends in Cambodia (up from 30 percent to 63 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 68 percent), Malaysia (up from 25 percent to 49 percent), Indonesia (up from 26 percent to 40 percent), Philippines (up from 19 percent to 40 percent) and Sri Lanka (up from 15 percent to 38 percent) over the same time frame. 

So maybe the right question to ask in the future is: how much value of “Made in China” actually contains in Asian countries’ apparel exports to the world?

China’s Textile and Apparel Factories Today

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Apparel Sourcing in U.S. Trade Preference Program Countries

Speakers:

  • Tarek Kabil – Egyptian Ministry of Trade & Industry
  • Ashraf Rabiey – QIZ Minister of Egypt
  • Gabi Bar – QIZ Minister of Israel
  • Mark D’Sa – Special Project Director for Haiti
  • Moderator: Gail Strickler – former Assistant US Trade Representative for Textiles

Discussion questions:

  1. How are trade preference programs different from free trade agreements? 
  2. What are the financial incentives for US brands and retailers to source apparel in preference program countries? Why do U.S. apparel imports from members of AGOA, QIZs and HELP overall remain at a fairly low level despite the trade preference programs? How to improve the situation?
  3. Overall, why or why not should the US keep the trade preference programs or any critical reforms are needed?
  4. Any other interesting points you learned from the video or questions you may have?

Rana Plaza Case Study: Discussion Questions from FASH455

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#1 How shall we describe the relationship between the Alliance and the Accord? Are they collaborators or competitors? Do you think the Alliance and the Accord can join forces?

#2 How many inspectors are “enough” for Bangladesh? The case study mentions that the Alliance and the Accord are observing around 2,000 factories, but how about the other 3,000 in Bangladesh? And how about those unknown and “undocumented” factories, where the working conditions could be even worse?

#3 Do Western fashion brands genuinely care about what is happening in the Bangladeshi garment factories? Or do they actually care about their own interests—profit, public image and reputation among consumers?

#4 What has made Western fashion brands stay in Bangladesh after the Rana Plaza tragedy instead of moving their sourcing orders to other Asian countries in the area such as Cambodia and Vietnam?

#5 How transparent should be companies’ supply chain? Should fashion brands be required to disclose more supply chain information—such as where their products were made and who made them? What could be the difficulty of enforcing a more transparent apparel supply chain?

#6 In addition to more frequent inspections, what other measures can be taken to improve social responsibility practices in the garment industry?  

#7 Four years after the Rana Plaza, are you satisfied with the changes that have happened in Bangladesh? What major social responsibility problems in the Bangladeshi garment industry remain unsolved?

[Please feel free to join our online discussion. For the purpose of convenience, please mention the question # in your reply/comment.]

North Korea’s Apparel Exports: Four Things to Know

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First, apparel (defined by HS Chapters 61 & 62) is one of the top categories of North Korea’s merchandise exports. Statistics from the International Trade Center (ITC) show that of North Korea’s total US$2,339.9 million merchandise exports in 2016, US$564.7 million (or 19.4%) were apparel.

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Second, apparel is also one of the fastest-growing categories of North Korea’s exports over the past decade. From 2003 to 2016, the value of North Korea’s apparel exports surged by 416%, compared to only 171% increase of other products over the same period.

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Third, over 99.4% of North Korea’s apparel exports went to China in 2016. Notably, back in 2003, China only accounted for 49.7% of North Korea’s apparel exports. However, apparel exports from North Korea to China received two substantial boosts just in the past ten years: one in 2009 (the year when UN resolution 1874 was adopted) and another in 2013 (the year when UN resolution 2087 was adopted).

Fourth, interesting enough, North Korea’s apparel exports predominantly concentrate on men and women’s overcoats (HS 6201 and 6202) as well as suits, jackets, and blazers (HS 6203 and 6204). This is a notable difference from most other developing countries, such as Bangladesh, Vietnam, and Cambodia whose apparel exports usually focus on more basic items like shirts and trousers.  

by Sheng Lu

Extended readings:

Disclaimer: All blog posts on this site are for FASH455 educational purposes only and they are nonpolitical and nonpartisan in nature. No blog post has the intention to favor or oppose any particular public policy, nor shall be interpreted in that way.

Outlook of Sourcing from Vietnam (Updated: August 2017)

State of Vietnam’s Textile and Clothing Industry

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Vietnam has a substantial textile and clothing industry comprising around 4,000 enterprises, of which the majority were located in the country’s two principal population centers—Ho Chi Minh City and Hanoi. Around 70% of these enterprises were involved in the manufacture of clothing. A further 17% were involved in the fabric sector, 6% in the yarn sector, 4% in the dyeing sector and 3% in the accessories sector.

It is estimated that around 70% of Vietnam’s textile and clothing production is dependent on the cut and trims operations, using imported textiles and other inputs predominantly from China. This problem is not limited to a single category as the country needs to import man-made fibers, yarns, fabrics, and accessories as well as raw cotton.

The dyeing and finishing segments of the supply chain remain fairly underdeveloped. In the past, the Vietnamese government has issued tightly controlled permits for these operations. Also, there has been a deficiency of investment in these segments because of unclear regulations, and this has resulted in a bottleneck in the supply chain.

Similarly, high added-value design and “downstream” activities rely on the input of foreign companies are also underdeveloped. Consequently, in carrying out these activities, the industry relies heavily on the help or participation of foreign companies.

State of Vietnam’s Textile and Apparel Export

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Vietnamese textile and clothing exports began to gain momentum in 2001 when trading relationships were established with Western countries (e.g., the US-Vietnam Textile Agreement). The industry’s exports received a further boost after Vietnam joined the World Trade Organization (WTO) at the start of 2007, and the quotas which had been restricting imports of Vietnamese goods in the US market were eliminated.

In 2016, Vietnam’s textile and clothing exports totaled $28 billion (84% were clothing), which represented 16.0% of Vietnam’s total merchandise exports. Globally, Vietnam was the world’s third largest apparel exporter in 2015, after China and Bangladesh (WTO, 2016).

The Vietnam Textile & Apparel Association (VITAS) expects Vietnam’s textile and clothing exports to enjoy an average 15% annual growth in the next four years and exceed $50 billion USD by 2020.

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Vietnam’s textile and clothing exports went to around 180 countries. The United States is Vietnam’s top export market (around 40%), followed by the EU (around 12.5%), Japan (10.3%) and South Korea (8.1%).

Outlook of Sourcing from Vietnam by US Fashion Companies

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According to the 2017 US Fashion Industry Benchmarking Study, Vietnam is the 2nd most used sourcing destination by respondents. Particularly, the most commonly adopted sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many”:

  • China typically accounts for 30-50 percent of respondents’ total sourcing value or volume. 
  • Vietnam typically accounts for 11-30 percent of companies’ total sourcing value or volume. 
  • For the “many” part, each additional country (such as US, NAFTA members and CAFTA members, EU countries and members of AGOA) typically accounts for less than 10 percent of respondents’ total sourcing value or volume.

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Respondents also see Vietnam overall a balanced sourcing destination, regarding “speed to market”, “sourcing cost” and “compliance risk”.

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Additionally, U.S. fashion companies intend to source more from Vietnam through 2019, but imports may grow at a relatively slow pace, possibly due to the United States’ withdrawal from the Trans-Pacific Partnership (TPP) and the increasing labor costs in the country.

References:Textile Outlook International (2017); WTO (2017); UN Comtrade (2017)

2017 U.S. Fashion Industry Benchmarking Study Released

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The report can be downloaded from HERE

Key findings of the study:

While the majority of respondents remain confident about the five-year outlook for the U.S. fashion industry, the percentage of those who are “optimistic” or “somewhat optimistic” dropped to a record low since we began conducting this study in 2014. This change could be due to concerns about the “protectionist trade policy agenda in the United States” and “market competition in the United States from e-commerce,” the top two concerns this year.

  • The percentage of those who are “optimistic” or “somewhat optimistic” fell from 92.3 percent in 2016 to 71.0 percent in 2017, a record low since we began conducting this study in 2014. As many as 12.9 percent of respondents are “somewhat pessimistic” about the next five years, mostly large-scale retailers with more than 3,000 employees.
  • Despite the challenges, demand for human talent in the industry overall remains robust. This year, around 80 percent of respondents plan to hire more employees in the next five years, especially supply chain specialists, data scientists, sourcing specialists, and marketing analysts.
  • Cost is no longer one of the top concerns; respondents are less stressed about “increasing production or sourcing cost,” which slipped from #2 challenge in 2016 to #7 challenge in 2017. Only 34 percent rate the issue among their top five challenges this year, significantly lower than 50 percent in 2016 and 76 percent in 2015. Labor cost remains the top factor driving up sourcing cost in 2017.

Although U.S. fashion companies continue to seek alternatives to “Made in China,” China’s position as the top sourcing destination remains unshakable. Meanwhile, sourcing from Vietnam and Bangladesh may continue to grow over the next two years, but at a relatively slow pace.

  • 91 percent of respondents source from China; while 100 percent sourced from China in our past three studies, China is still the top-ranked sourcing destination this year, and the percentage of those expecting to decrease sourcing from the country fell from 60 percent in 2016 to 46 percent this year—and many more expect to maintain their current sourcing value or volume from the country in the next two years.
  • Likely reflecting the United States’ withdrawal from the Trans-Pacific Partnership (TPP) and the expectation of increasing labor costs, only 36 percent of respondents expect to increase sourcing from Vietnam in the next two years, much lower than 53 percent who said the same in 2016.
  • Respondents are cautious about expanding sourcing from Bangladesh in the next two years, with only 32 percent expecting to somewhat increase sourcing While “Made in Bangladesh” enjoys a prominent price advantage over many other Asian suppliers, respondents view Bangladesh as the having the highest risk for compliance.

U.S. fashion companies continue to maintain truly global supply chains.

  • Respondents source from 51 countries or regions in 2017, close to the 56 in last year’s study.
  • 6 percent source from 10+ different countries or regions in 2017, up from 51.8 percent in last year’s survey. In general, larger companies have a more diversified sourcing base than smaller companies. Additionally, retailers maintain a more diversified sourcing base than brands, importers/wholesalers, and manufacturers.
  • Around 54 percent expect their sourcing base will become more diversified in the next two years, up from 44 percent in 2016; among these respondents, over 60 percent currently source from more than 10 different countries or regions.
  • The most common sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many.” The typical sourcing portfolio today is 30-50 percent from China, 11-30 percent from Vietnam, and the rest from other countries.
  • While Asia as a whole remains the dominant sourcing region for U.S. fashion companies, the Western Hemisphere is growing in popularity. This year, we see a noticeable increase in sourcing from the United States (70 percent, up from 52 percent in 2016) and countries in North, South, and Central Americas, which offer a shorter lead time and relatively lower risk of compliance.

Today, ethical sourcing and sustainability are given more weight in U.S. fashion companies’ sourcing decisions. Respondents also see unmet compliance (factory, social and/or environmental) standards as the top supply chain risk.

  • 5 percent of respondents say ethical sourcing and sustainability have become more important in their company’s sourcing decisions in 2017 compared to five years ago.
  • 100 percent of respondents currently audit their suppliers, including how suppliers treat their workers, suppliers’ fire safety, and suppliers’ building safety. The majority (93 percent) use third-party certification programs to audit, with a mix of announced and unannounced audits.
  • As many as 90 percent of respondents map their supply chains, i.e., keep records of name, location, and function of suppliers. More than half track not only Tier 1 suppliers, suppliers they contract with directly, but also Tier 2 suppliers, i.e. supplier’s suppliers. It is less common for U.S. fashion companies to map Tier 3 and Tier 4 suppliers though, which could be because of the difficulty of getting access to related information with such a globalized and highly fragmented supply chain.

Free trade agreements (FTAs) and trade preference programs remain underutilized, and several FTAs, including CAFTA-DR, are utilized even less this year than in previous years.

  •  Of the 19 FTAs/preference programs we examined this year, only NAFTA is used by more than 50 percent of respondents for import purposes.
  • Even more concerning, some U.S. fashion companies source from countries/regions with FTAs/preference programs but, for whatever reason, do not claim the benefits. For example, as many as 38 percent and 6 percent of respondents, respectively, do not use CAFTA-DR and NAFTA when they source from these two regions.

Respondents unanimously oppose the U.S. border adjustment tax (BAT) proposal and call for the further removal of trade barriers, including restrictive rules of origin and high tariffs.

  • 100 percent of respondents oppose a border adjustment tax; 84 percent “strongly oppose” it.
  • Respondents support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to the restrictive yarn-forward rules of origin in NAFTA and future free trade agreements.
  • Respondents say the “complex standards on labeling and testing”, “complex rules for the valuation of goods at customs” and “administrative and bureaucratic delays at the border” are the top non-tariff barriers they face when sourcing today.

The benchmarking studies from 2014 to 2016 can be downloaded from https://www.usfashionindustry.com/resources/industry-benchmarking-study 

Tariff Phaseout Schedule for Apparel in the EU-Vietnam Free Trade Agreement

The EU-Vietnam Free Trade Agreement was concluded in December 2015. The agreement is EU’s second free trade agreement with a Southeast Asian country (after Singapore) and is the most ambitious and comprehensive FTA that the EU has ever concluded with a middle-income developing country.

Statistics from the Eurostat show that Vietnam was EU’s sixth largest extra-region apparel supplier in 2015 (after China, Bangladesh, Turkey, India and Cambodia), accounting for 3.5% of imports in value (or €28.0 billion) and 2.8% in volume.

The EU-Vietnam free trade agreement is expected to substantially expand Vietnam’s textile and apparel exports to the EU market. On the one hand, EU’s import duties on textile and apparel from Vietnam will be eliminated through a seven-year phaseout period once the agreement comes into force (see below). On the other hand, a garment made in Vietnam which contains fabrics made in South Korea or other ASEAN countries with which the EU has a free trade agreement in force will still be qualified for duty-free treatment under the agreement.

EVFTA tariff phaseout

EVFTA table

category explaination

Complied based on the EU-Vietnam Free Trade Agreement: Agreed text as of January 2016.

The legal review of the negotiated text is currently on-going and will be followed by translation into the EU’s official languages and Vietnamese. The EU Commission will then present a proposal to the Council of Ministers for approval of the agreement and ratification by the European Parliament. The agreement is expected to come into force in 2018.