After Decades of China Dominance, Sourcing Seeks a New Way Forward

Updated: Nov 4, 2020

By Sourcing Journal

This article was originally published in Sourcing Journal October 14, 2020. We are sharing because it not only explains the sewn products industry’s interest in moving away from China, it also provides examples of the sourcing opportunities available in India, Vietnam, Bangladesh, and the United States. This topic — shifting, evolving & devolving supply chains will be discussed during the SPESA Virtual Executive Conference October 29-30.

As the world continues to reel from myriad challenges, one wonders if the events of 2020 will read, in future history books, like a dystopian drama.

A global pandemic has managed to dismantle supply chains and deflate consumer confidence. And even though some stir-crazy shoppers are now eager—after so many months at home—to part with a few dollars for a pick-me-up, the contagion’s unabated spread has made it impossible for the retail sector to return to business as usual.

Stores and shopping centers, for the most part, remain deserted. And though e-commerce has accelerated tremendously, the uptick in online orders has still fallen far short of what many legacy businesses need to survive.

This year represents an inflection point for the industry, with the word “unprecedented” being thrown around liberally. But the problems that plagued apparel’s sourcing sector began long before the globe became familiar with the term, “coronavirus.”

Over the past two years, tariffs on goods from China have forced the U.S. apparel businesses to reexamine their dependence on the country. Rising labor costs, currency devaluations and rumblings about human rights abuses have also presented unfavorable conditions for healthy trade, and brands have been slowly, through necessity, engaging partners elsewhere.

What’s more, the ethos of the fashion industry is changing—and not in China’s favor. Its massive capacity and unending supply helped the country burgeon into a hub for fast fashion, but disposable clothes are quickly going out of style. While the region has the ability to produce just about anything, from luxury goods to mass market wares, a Made in China tag still carries unfavorable implications.

The stall and restart cadence of 2020 has shone a light on some harsh truths, according to Munir Mashooqullah, founder and chairman of global sourcing firm Synergies Worldwide. Even after normal trade resumes, sourcing is unlikely to return to the status quo, he told Sourcing Journal. “I don’t want to say never, but the possibility of that happening is very low,” he said.

China has been dealt a handful of blows, he added, citing the continued trade war, currency issues, and of course, the Covid crisis that began to radiate outward from Wuhan in January, eventually infecting the globe. “Naturally, when a country is facing all these headwinds, your interest and investment is going to be diluted,” Mashooqullah added.

Synergies has both factories and offices in China, and Mashooqullah said he’s seen an uptick in interest from brands and fashion firms looking to stake out new relationships or further diversify away from the country. “Movement has accelerated,” he stated. Synergies is in a unique position to observe these trends as it also has factories in nine other countries, including key players like Bangladesh, India, Pakistan, Portugal, Turkey and Cambodia.

Mashooqullah believes that China’s reign as a singular sourcing superpower is over. And contenders for the giant’s business aren’t just waiting in line for a piece of the pie—they’re actively digging in.

Bangladesh and India are emerging as leaders in unstructured casual clothing, denim and children’s wear, while Pakistan has cornered the market in popular fleece styles. Vietnam’s technical skill is nearly unrivaled, with an ability to produce highly sophisticated synthetic performance products, Mashooqullah said. Still, the country imports more than half of its raw materials and inputs from outside markets, including China, making it tough to verticalize operations.

Some suppliers based in China and Hong Kong heard the canary in the coal mine years ago, and have worked to set up factories in these other locales to circumvent tariffs and tap into different skill sets. And brands have since followed, Mashooqullah said. “I think the departure to other countries with Chinese expertise has already happened.”

Hong Kong-based multicategory supplier Lever Style has employed such a tactic, seeking to diversify its own sourcing operations so that its clients don’t have to. According to executive chairman Stanley Szeto, the optimal supply chain is a network of strategic sourcing partners, each equipped with unique capabilities spanning a range of product categories.

Lever Style, which once served retail stalwarts like J. Crew and Banana Republic, has evolved its strategy in recent years. It now focuses on direct-to-consumer brands, which Szeto believes to be the business model of the future. When the firm went public in fall of last year, one of his stated goals was to focus on the acquisition of smaller, more categorically diverse suppliers to better serve these specialty startups.

“We’ve been trying to be as flexible as possible for our clients, and that’s why we have factories all over the place,” Szeto said, adding that Lever Style operates on an asset-light strategy with quick turns and low minimum order quantities—all key qualifiers for DTC clients like Stitch Fix, Bonobos and Everlane.

“Before the trade war, China was by far our largest production base,” he added, but now Vietnam is larger, accounting for about half of Lever Style’s production. In July, the firm acquired Vista Apparels, a China-based knitwear supplier that specializes in sweaters, with the intent to bring those operations to a new factory in Vietnam. And in August, Lever Style bought Hong Kong’s Liwaco Overseas Marketing Limited, a technical outerwear company responsible for the high-performance gear sold by brands like Mammut and Helly Hansen.

Operational diversification makes Lever Style a one-stop shop for its customers, who can work with the company on the creation of all types of garments without worrying about managing multiple downstream relationships. “Whenever they have to find a new supplier and onboard them, it’s actually very cumbersome,” Szeto said. “And that’s why the narrower the sourcing base that our clients have, the better off they are. They can focus more on the front end, and what they’re good at.”

Szeto believes that having factories in multiple markets also reduces the risk for brands. “By working with us, they’re not putting all their eggs in one basket in terms of a single factory and a single country,” he said. Lever Style, he added, can shift manufacturing amongst its factories “as the winds blow.”

“If, let’s say, Donald Trump tomorrow says we’re going to slap tariffs on Vietnam,” Szeto theorized, referencing the United States Trade Representative’s recent announcement that it would be investigating the country on charges of currency manipulation, “we can move operations for our clients.” Lever Style’s growing network of factories and materials suppliers is designed to allow the company to react to shifts in trade relationships quickly, without disrupting production.

Speed and versatility are paramount, especially set against the uncertain backdrop of a Covid-ridden world. As the fashion industry marches forward into the unknown, Szeto believes brands will increasingly rely on “test-and-react strategies” where trends are vetted swiftly and fast reorders are key.

“Some manufacturers will adapt to the new quick-turn, high-mix-low-volume demands from brands,” he said. “Others may let companies like ours take over their businesses so we can do the hard work of transformation.”

Large-scale denim manufacturer Saitex is in the midst of just such a metamorphosis, according to founding CEO Sanjeev Bahl. “People lose business quite frequently because of this nonsensical system we have,” Bahl said, referring to the longstanding reliance on high minimum order quantities, long lead times and strict seasonal calendars. “These are all antiquated.”

“We thought, ‘Let’s try and create a speed-to-market model that is totally integrated,’” he added. The Vietnam-based B Corp has recently verticalized its operations in the country by setting up its own denim mill, lending speed and agility to its processes, and providing traceability from a materials perspective.

“Being a factory in Vietnam didn’t cut it,” Bahl said, as he felt constrained by mill partners’ limitations. “There’s no transparency, there are quality issues, and there are pricing constraints because there’s nothing you can do about the material cost.”

Owning its own mill allows Saitex to streamline production, testing fabrics for shrinkage, double-checking measurements, and creating optimal washes “in-house.”