China costs are great wall for fashion firms
July 11, 2010
Crain's New York Business
Rising labor prices force clothing makers to seek cheaper alternatives
By Adrianne Pasquarelli
The “Made in China” label on a garment’s tag no longer translates to “made for cheap.”
Manufacturers of all stripes are facing cost increases as China’s laborers demand higher wages. For New York’s local clothing vendors, the garment center-based manufacturers who supply bigger retail chains, the pain is especially acute. Production costs could potentially go up as much as 20% annually, as both labor and cotton prices rise. Many vendors are searching out cheaper alternatives and making internal adjustments to remain afloat, following specialty retailers like Ann Taylor and Guess, which are eyeing a shift to countries like Vietnam and India.
“It’s like a roller-coaster ride every time costs go up,” says Peter Dunbar, president of Robar Inc., a 20-year-old manufacturer of baby clothing on West 33rd Street. “We’ll move elsewhere if we need to, in order to survive in the business.”
The cost increases could disrupt the delicate balance between mass-market retailers, like Macy’s or Walmart, which stake their reputations on low prices, and the vendors that supply their clothing. It will be hard to pass any increases onto the consumer at a time when shoppers are hypersensitive to costs, so retailers will put pressure on vendors. June same-store sales, a comparison of sales at stores open more than a year, were up a modest 3.2%, according to research firm Kantar Retail.
“It’s a very difficult situation for all manufacturers, when the market is still weak,” says Tom Nastos, chief executive of Endurance, another garment center vendor that creates men’s and women’s denim-based sportswear.
While consumers may balk at a $3 price increase for a $5 T-shirt at Kohl’s, manufacturers are finding it increasingly difficult to find low-wage laborers. The younger generation of Chinese workers, who are more educated than their parents, are refusing sweatshop conditions and demanding more money because of their awareness of their rights.
“The younger Chinese do not want to work the same way their parents did,” says Robert Grbic, senior executive vice president at Capital Business Credit, which lends to garment companies. “They’re more attuned to being consumers and want greater pay.”
Of course, finding cheap labor to exploit in other countries isn’t the perfect answer. China offers its own raw materials like fabric and buttons, a well-oiled infrastructure and speedy shipping. Thailand creates its own fabric, but the recent political unrest there makes apparel companies wary. Vietnam lacks developed infrastructure, and production in India and Bangladesh would require longer shipping times. Many countries lack the industry know-how, as well.
“You have to move raw materials, and so you’re creating a logistical cost,” says Mr. Nastos. “We have to diversify the supply chain.”
Inland China’s cheaper appeal
One attractive alternative may be moving farther inland in China. While most apparel production is currently done in urban, coastal areas like Shanghai, labor experts say other areas of the nation could be just as profitable and the labor less expensive.
“Regionally in China, there’s a gap between the richer coastal provinces and the poorer inland provinces,” says Mary Gallagher, director of the Center for Chinese Studies at the University of Michigan. “[Apparel companies] have been successful in China up till this point, so there’s no reason to think they won’t be successful even if they move inland.”
Even if vendors can find decent alternatives, industry analysts suspect mass-market retailers will begin to bring more production in-house to bypass the middleman.
“The elimination of suppliers is one of the factors looming out there,” says Andrew Jassin, who runs Jassin Consulting Group, about the supply chain consolidation. Experts say vendors should look for new opportunities, like licensing a popular brand that already has a loyal customer following.
“We are always open to a licensing deal for a trademark brand, but we are not actively looking for one,” says Mr. Dunbar, who supplies clothing to Sears and J.C. Penney. Looking at the bright side, he adds, “Not all retailers are large enough to do their own sourcing and production.”