Contributed by Greg Knowler, Senior Asia Editor, JOC.com
Factories across Asia are trying to cope with shrinking order sizes and regional demand that is creating a radical shift in a business model that has been operating for decades, according to a new report on the apparel and footwear business.
Research from clothing research company Inside Fashion found that order sizes from Asian mills have decreased by about 20 to 30 percent over the past three years.
In its Industry Outlook 2017 report, compiled in conjunction with CBX Software, Inside Fashion director and head of market intelligence Jane Singer noted that in China and across Asia, factories were originally set up to handle big volumes of fairly basic garments.
“Back then, factories could get orders for 10,000 dozen of a garment in one style and a few colors with six month lead times,” she wrote. “Now what we see happening is an entire business model, which has been set up and running for decades, facing a radical shift in the market. Today buyers are saying to those same factories: ‘We need small orders, we need more complex orders, we need faster delivery’.”
Singer said for many factories, re-engineering their business to meet the new demands was too big a hurdle. For even the most agile factories it was a long-term process, but they still had to survive in the short term and to hold on to some of the volume orders, Chinese factories are drastically cutting their prices.
“Manufacturers from other nations are complaining about this, but companies will do what they have to do in order to stay alive,” Singer said.
At the same time, she said the more sophisticated factories were trying to refocus and become high-end producers, leveraging their advanced skills and going after more complex orders where there is more price flexibility.
“Moving up market is a critical part of the equation. In order to offset the reduction in order size, factories are looking to trade up to higher value orders. That is exactly what an increasing number of the best manufacturers are doing.”
Also impacting the apparel and footwear supply chain were China shifting from supplier to buyer, and the rapid rise of Vietnam production, according to the Inside fashion report. For more than two decades, China has been the world’s factory, the go-to place anything can be made at a competitive price, but that was changing and the mainland was becoming a huge buyer of consumer products.
Looking ahead, Singer said China will need to use more of its domestic manufacturing capacity to serve its home market. “For suppliers outside of China, there will be growing opportunities to sell to China’s domestic brands,” she said. “Already, leading Asian and European suppliers are finding a growing market in exporting to China. European mills now tell us that Chinese buyers are willing to pay a premium for better quality materials.”
China-based suppliers are selling an increasing part of their production into China. “Many report selling up to 30 to 50 percent of their production domestically, up from 0 to 10 percent three years ago. We are also seeing foreign suppliers getting serious about selling to Chinese brands,” said Singer.
China remains the largest source for the approximately 2.4 billion pairs of shoes the US imports each year. China accounts for 63 percent of US footwear imports, rapidly-growing Vietnam accounts for 16 percent, and Indonesia is 15.7 percent, according to the US Department of Commerce.
The approximately 400 million pairs of shoes imported from Vietnam in 2016 continued a streak of 10 to 20 percent annual growth in exports to the United States that the country has experienced in recent years. As an alternative to China, Vietnam has established its niche in the global supply chain and will remain a key exporter to the US market because its prices and productivity — even without duty-free status — remain competitive.
“The thing that we’re watching in Vietnam is wages. A rush of investment from multi-national companies [not only in the textile industry], as well as the investment in increasing factory capacity, will put upward pressure on wages [as we have seen in China],” Singer said.
“Already factories are complaining about increases in the actual wages they need to pay to attract good workers. The more forward thinking factories are investing in automation to boost productivity.”
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