The trade war between the USA and China is having a serious effect on all suppliers, buyers, and industry professionals. It is causing lots of hardship and added costs to everyone.
Tariffs are raising the cost of the products which will cause a serious disruption in the global economy.
Buyers are negotiating with their current Chinese vendors on price concessions to help absorb the tariffs. Other companies look to diversify their sourcing and supply chain networks by moving production out of China.
Imports of basic apparel items such as tops, bottoms, and underwear can be shifted to lower-cost production hubs such as Vietnam, Cambodia, and Bangladesh.
But at what cost? Is there available production space in these countries on their factory floor or will they outsource their production? Companies need to be aware of the following:
- There are a diminishing supplier base and manufacturing capacity in developing countries
- Can you replace vendors who can offer you the same fabrics, trims, product quality, and deliveries at comparable prices?
- How long does it take for you to onboard new suppliers
- Inside your company are staff available to provide training to new vendors in regards to your culture, compliance, policies, procedures, systems, and manuals?
- In what ways will you maintain the consistent quality and craftsmanship that you have developed with your established vendors?
- Do you have staff in those countries on the ground to manage your production (QA/QC)
- Shipping and logistics ports are over capacity in developing countries; it can take weeks to get your products onto ships
China has established infrastructure, transportation, highways, high-speed rail, large airports to manage shipping and logistics, but developing countries are just starting to build all that stuff.
China specializes in the manufacturing of higher-value goods such as accessories, suits, coats, and sweaters that US brands may be forced to absorb the tariff hike.
Vietnam prices have been on the rise for the past five years as the cost of land and labor have been steadily increasing. The chart below looks at the increase in the minimum wage in Vietnam.
Let us examine what one company is doing to transition through this difficult time.
G-III Apparel Group (G-III)
G-III has seen year-on-year net sales rise, future pre-booked orders have increased; in general, their future business is looking good.
The company has a lot of exposure in China and the USA. In 2017, G-III generated 88% of its revenues from the USA and purchased 65% of their finished goods from China.
Morris Goldfarb, CEO said, “We are not choosing factories or countries solely on the merit of the tariff. We have a great product. We work hard at developing these relationships. We are not very fast to give them up. In a perfect world, these tariffs wouldn’t be in play – but if they are and they become a reality, I assure you that we will find a solution. We’re not going to abandon 40 years of hard work and quality product for entering into virgin territory and risking our company. That’s not who we are, so there might be some short term pain in the margin but I believe this is the best solution for us.”
On the assumption that this trade war and tariffs are a short-term disruption, many vendors and buyers are working through the challenges. What is the long term effects on your business if you switch suppliers?
Are you choosing suppliers solely on price? Is the lowest price always the best option? Really make sure you have thoroughly thought through the consequences before you enter into new relationships.
Will changing your suppliers affect your brand value and corporate integrity with the end consumer?