American fashion giants on the ropes by Trump and Ji Xinping
Levi Strauss, Gap, Nike, VF Corporation, PVH, Michael Kors or Ralph Lauren, with a strong dependence on China in its supply chain, could see their margins reduced by the new tariff policy of their country.
Levi Strauss works with almost 150 factories in China; Nike has 118 factories, and Gap concentrates 22% of its purchases in the country. Along with other US-based fashion distribution giants, all of them now fear for their margins. The commercial war between Donald Trump and Xi Jinping has already taken a centre stage in the fashion industry, putting at risk the supply chains of the American groups in China. If China’s imports become even more expensive, groups are faced with a new dilemma: raising prices (with their consequent impact on sales) or losing margin (putting investors on alert).
After escaping the first tariff rate packages in the trade battle between Washington and Beijing, fashion has finally succumbed to the latest bomb thrown by the US president on Chinese imports: additional tariffs on 200 billion euros in imports. Among the categories affected by this new package are textile products and accessories. On September 24, the first rates will be applied to 10% with the aim of raising them to 25% on January 1.
The two largest American labor unions for the fashion industry, Usfia and Aafa, have attacked with harshness the commercial policy of the US Government. Usfia spokespersons said that tariffs not only constitute a tax on consumers, but will cause an interruption of the supply chain. Also the retailers’ association NRF has criticized this decision because it considers that it will have a direct impact on the prices of consumer goods.
How exposed are US fashion groups to China
Although supply chains have spread in recent years to avoid the rise in production costs in the Asian country, China continues to have a predominant weight. Levi Strauss, for example, has extended its sourcing network to 34 countries, but it’s in China where it concentrates the bulk of its production. Only in this country, the denim giant adds about 150 factories.
Gap, on the other hand, has concentrated its sourcing base on some 800 suppliers with operations in fifty countries. In this reshuffle of its sourcing strategy, the American fashion company has also reduced its dependence on China. At present, the group buys 22% of its merchandise in the country. However, the company already concentrates 25% of its supply in Vietnam, which has already become its main productive pole.
PVH, owner of Calvin Klein and Tommy Hilfiger, already warned in its latest annual report of the risk on the approval of tariff rates by the US Government and noted the impact that this would have on its margins, since in 2017 the company’s imports from China were worth 400 million dollars, being the main sourcing pole worldwide. However, PVH has been one of the pioneers in deriving part of the production to Ethiopia and, in 2017, reached an agreement with the country’s government to settle down in one of the newly inaugurated productive platforms.
Ralph Lauren, despite not detailing the countries of origin of their articles, also warned of this risk in its latest annual report and its impact on consumption and margins. In this sense, the company also pointed to the free trade agreements that the United States maintains with other countries, such as Peru, Jordan and South Korea.
VF Corporation, owner of Vans, Timberland or The North Face, among others, also concentrates in China the bulk of its manufacture, although it already represents 17% of the total garments, compared to 15% in Vietnam and 15% in Bangladesh. The company has been “balancing” its sourcing map, as indicated by the company itself. In this sense, the group explains that they don’t want to depend on a single region or country to be more competitive in managing costs and in approaching consumer markets. In fact, sourcing in the Americas already represents almost a third of the total.
Nike, on the other hand, has suppliers in some forty countries, but it’s in China where it continues to concentrate its activity. Only in this Asian country, the group has 118 factories, compared to the 97 that it has in Vietnam, its other main productive pole. In the United States, the group has 44 production centres, being one of the key five sourcing poles for its merchandise. Under Armor, on the other hand, concentrates garments and accessories sourcing in 17 countries, although the bulk is made in China, Vietnam, Malaysia and Jordan.
In the luxury field, Michael Kors produces almost all of his articles in Asia and in Europe. In China, the company concentrates at least 20% of its purchases, according to its annual report. Tapestry (formerly Coach), has sourcing offices in Vietnam, China, Hong Hong, the Philippines, Singapore and Spain. From her portfolio of brands, Kate Spade is the one that has a supply more exposed to China.
A reinventing of global sourcing activity
After the first months of chaos, the experts foresee a new world map of sourcing that will raise new textile poles in countries with commercial advantages with the United States. “If the United States stops Chinese imports of textile goods, a process that has been going on for a decade now will be accelerated, which consists of transferring a large part of the activity of the Chinese sector to other countries in Southeast Asia and Africa, specifically, Ethiopia”, says Gabriel Farías, expert in sourcing. According to Farías, the big fashion distribution groups have long since stopped having 60% of their production in China.
“Chinese industrialists will find a way to avoid US obstacles and seek ways to install new textile hubs in countries with favorable trade agreements with Washington,” says Salvador Maluquer, former representative of the Spanish Intertextile Council at Euratex and an expert on international relations. According to Maluquer, the Chinese industry will withstand the first attack adjusting the margins, but will react immediately settling in other territories.
“It is not the first time it happens, they did it when they settled in Southeast Asia,” says the expert, who recalls that Bangladesh was the territory chosen for the Chinese textile and clothing manufacturers for the tariff benefits that the country maintains. With the European Union and the United States. “When the productive costs began to become more expensive in China, the country’s own manufacturers turned their production to other countries, and now they will do the same again,” agrees Farías.
The United States barriers to Chinese imports of textile goods will accelerate the dissemination of supply
“Items will become more expensive,” says Farías. According to the expert, fashion brands that do not have the capacity to negotiate with their suppliers or do not have enough scale to distribute costs, will end up having an impact on consumption. However, Farias also points out that many firms will choose to pass on their margins to avoid damaging their sales.
“International trade is made up of communicating vessels and if China finds it difficult to access a market, it redirects it,” says Maluquer. However, beyond restoring production, sourcing strategies have faced a “deeper” redefinition for some years, according to Farías, which has to do, first of all, with transparency and sustainability and, second, , with automation and robotization.
According to Farías, relocation is a reality, also in the United States. “But when Donald Trump talks about bringing the factories to the country, they are not the factories that the grandparents saw, but they are fully robotized factories, without operators,” he says. The expert affirms that “this is the really structural rearrangement of sourcing nowadays” and the only one that can keep prices low before the consumer and maintain high margins to satisfy Wall Street investors.
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