By Sourcing Journal
This article was published in Sourcing Journal February 2, 2022.
After countless years of rumblings and promises, the long-heralded rise in nearshoring appears to finally be here.
In a McKinsey & Co. survey of 38 chief procurement officers at clothing companies, 71 percent said they plan to increase their nearshoring share, including 13 percent who expect to do so by more than 10 percentage points. Twenty-four percent plan to increase reshoring in their sourcing strategy.
For U.S. companies, Central America ranks highest on the list for future nearshoring activities. Roughly eight of 10 North American apparel players—nearly one-quarter of the respondents in McKinsey’s survey are based in the region—plan on increasing their company’s sourcing value share in Central America.
McKinsey’s results, published in a November report, align with the latest data on denim imports from the Commerce Department’s Office of Textiles & Apparel (OTEXA). According to OTEXA, overall U.S. blue denim apparel imports increased 28 percent year over year in October, while those from Western Hemisphere countries grew 40 percent. Mexico registered a 43 percent gain compared to 2020. Imports from the countries of the Central American Free Trade Agreement (CAFTA) rose 29 percent.
Kim Glas, the president and CEO of the National Council of Textile Organizations (NCTO), attributed the increased interest in Western Hemisphere sourcing to three factors: labor shortages due to Covid outbreaks, higher freight costs and the uncertainty related to the reports of forced labor in China’s Xinjiang region. “I don’t see it not being all tied together,” Glas said.
The latter of those three factors became particularly pertinent in December when President Joe Biden signed the bipartisan Uyghur Forced Labor Prevention Act, legislation that bans imports from Xinjiang, into law. The act creates a “rebuttable presumption” that all products from Xinjiang have been made under coercion by persecuted Muslim minorities—thereby barring them from entering the United States under the 1930 Tariff Act—unless “clear and convincing” evidence proves otherwise. Previous rules which had targeted cotton products, tomatoes and some polysilicon products had only blocked goods if forced labor was suspected.
“I think it’s led to brands and retailers starting to ask more questions about their supply chain, like ‘Where did this cotton come from? How about this yarn?’” Glas said. “I would say, too, that [sourcing from China is] a high-risk strategy because [the] U.S. government is becoming even more vigilant related to this issue. And it does not appear that the Chinese are recalibrating their approach. In fact, there’s discussion of further retaliatory measures that China will take as a result of this legislation being signed into law.”
“I would say, too, that [sourcing from China is] a high-risk strategy because [the] U.S. government is becoming even more vigilant related to this issue.” — Kim Glas, NCTO
The U.S. government’s actions on Xinjiang, if fully enforced, provide an opportunity for companies “to shift sourcing closer to home, where they can understand the transparency in their supply chain,” Glas added.
Among those advocating for increased manufacturing in Central America is Vice President Kamala Harris, who in December announced new commitments to invest in the region from seven companies, including Parkdale Mills. A North Carolina-based manufacturer of spun yarn and cotton consumer products, Parkdale plans to invest $150 million in building a new yarn spinning facility in Honduras and supporting an existing facility in Virginia, the White House said. The investment is intended to support roughly 500 employees at each location. According to NCTO, the move will shift 1 million pounds of yarn per week away from supply chains in Asia.
“Parkdale sees an enormous opportunity for brands and retailers to re-shore and nearshore production supply chains and double the size of U.S.-[Dominican Republic-Central America Free Trade Agreement] trade, because of the rules of origin in our trade agreement and a shift in sourcing by brands and retailers mitigating their supply chain sourcing risks,” Anderson Warlick, chairman and CEO of Parkdale Mills, said in a statement released by the NCTO. “We are excited about what this opportunity means for jobs in the U.S. and the region for this critical production chain and couldn’t be more thrilled to be part of this effort. We look forward to working with the Vice President and her team on strengthening the textile and apparel production chains in the U.S. and region.”
In 2021, exports from Central American countries to the United States soared compared to the prior year. Going into the final weeks of the year, the latest data showed textile exports up 33 percent from the Dominican Republic on the low end and up 56 percent from Honduras on the higher end, NCTO’s Glas said. El Salvador, Nicaragua and Guatemala all landed somewhere in the middle. China and Vietnam, by comparison, were up 25 percent and 15 percent, respectively, she added.
Though the continued expansion of manufacturing in Central America will necessitate further investment in local infrastructure—something Glas said NCTO has been urging governments, including the United States’, to do—the labor market seems to be there. Unlike in the United States, where businesses have struggled to find workers, Glas said there’s a “strong interest” in these jobs, whether that’s raw material, textile or apparel production.
Though much of the increase Central America has seen is related to lower-than-usual numbers in 2020, Glas said NCTO expects 2021 will surpass even 2019. Looking ahead, she believes it is “totally achievable and feasible” to double exports from Central America and Western Hemisphere trade partners in three to five years “if we put the right plans into place to make that happen.”
“It’s exciting,” Glas said. “This is all very achievable and it will take all of us to make that happen. And I think hopefully Covid has taught us some critical lessons about supply chains, whether it was PPE or textile and apparel or home furnishing products, that we can’t have all of our eggs in the China-Asia basket, we need to de-risk our strategy and to ensure that we have close proximity to market for products that we either use every day or we need in a health care crisis.”
Savelli (SVL), a Brazilian footwear company that manufactures footwear for its own brands as well as third parties, has seen increasing demand for Brazilian products, particularly from the United States. Bruna Pini Martins Machado de Moraes, SVL’s export manager, said one of the reasons is companies’ desire to not rely on one single producer after the pandemic. Those that used to produce entirely in Asia before are now looking to spread out across multiple locations so that they are not impacted should something similar happen.
At Pegada, another Brazilian footwear manufacturer, production dropped 20 percent in 2020 as Covid protocols limited the company’s output. This year, however, orders have increased substantially, returning its factories close to full capacity and its outputs back to 2019 levels, CEO Gabriel Ranft said.
According to data from the Brazilian Association of Footwear Industries’ (Abicalçados), the South American country exported 110.77 million pairs of shoes from January to November, generating $805.7 million. These totals represented increases of 31 percent and 34.6 percent in volume and revenue, respectively, against the same period in 2020. Compared to 2019, volume grew 5.6 percent and revenue decreased 9.6 percent.
Exports to the United States saw even greater improvements, with imports up 59.2 percent in volume year over year to 13.55 million pairs. Revenue from the first 11 months of the year grew 61.3 percent versus 2020 to $204.36 million. In November alone, volume and revenue jumped 138.8 percent and 210.6 percent year over year, respectively. The United States’ share of Brazil’s footwear exports has also increased, Letícia Sperb Masselli, manager of Abicalçados’ Brazilian Footwear Program, said. Historically around 20 percent, that share has climbed to 25 percent.
“It’s a lot of brands that used to produce in Asia looking for Brazilian factories to produce,” Masselli said. “This is growing big, and our factories are having to adjust bigger than before the pandemic in order to fulfill that demand.”
Though the supply chain issues of 2021 “definitely” helped raise interest in Brazilian manufacturing, Masselli said Abicalçados actually began hearing talk of increased orders in late 2020.
“There is a big movement of people who are talking about outsourcing nearshore,” Masselli said. “Of course, there are some logistics situations that impact all over the world, but the huge [logistics] problems… are manageable when we are closer together.”
With environmental concerns weighing more in companies’ strategies, firms in the Western Hemisphere are turning to green practices to differentiate themselves from the competition.
Guatemala, for example, has a 70 percent renewable energy portfolio, Glas said. “That’s fantastic as people are looking to continue addressing carbon emissions,” she added.
In Brazil, SVL is aiming to make its production “100 percent sustainable” in a couple of years. In the short term, they plan to launch an eco-friendly line in 2022. Pegada, meanwhile, has obtained “many” certifications in Brazil and has joined Abicalçados’ Sustainable Origin Program.
“When we started to be approached by international buyers, especially Americans and some European buyers, they would ask us about sustainability,” Masselli said. “It’s been almost a decade now that we [have been] working on a certification of sustainable origin. It does not certify products, it looks at processes. So, we look at sustainability in ways, so it’s not only environmental, but we looked at social, we look at economical, we look at all of that…. We do not certify only the footwear factories, but the entire supply chain.”
Though the program is something that Abicalçados has mostly communicated domestically in Brazil, the organization launched it internationally in November at Expo 2020. “It’s going to be something that we will be working on for the next years in communicating this internationally,” Masselli said.