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Impact of the COVID-19 Pandemic on the Asian Apparel and Footwear Industry

Companies and Markets

By Daniel Cooper  |  July 20, 2022

In this four-part series, we use FactSet data to explore the impact that the global COVID-19 pandemic has had on the apparel and footwear industry around the world. We have complemented the international trade data contained within the FactSet workstation with the underlying United Nations’ Comtrade data to better understand the product flow between suppliers and buyers.

In this first article, we look at the sales performance to date and consolidate the broker and analysts’ views of the industry together with their expectations for sales growth over the next three years. In the second article, we will explore the corporate balance sheet in more detail to better understand how the pandemic period has changed the structure of corporates’ financial position. The third article will look at recovery options and propose some high-level boardroom agenda items that corporates should be prioritizing if they haven’t done so already. The last article in the series will summarize our findings and discuss the outlook for the global apparel and footwear industry.

The Importance of Asia in Global Trade

Consumer thirst for fashion, and fast fashion in particular, has never been stronger. We are now far enough into the year where enough financial information is available to start analyzing and drawing conclusions on how the pandemic period has affected this industry.

First, let’s use the UN customs export data by country to determine the size of this industry. In 2021, $582.1 billion of apparel and footwear-related goods were manufactured and exported around the world. This was an increase of $47.8 billion compared to the levels seen in 2017. Unsurprisingly, 2020 saw a decline in global activity, with trade dropping to $501.6 billion. The data for 2021 tells us that demand has absolutely bounced back.

global-trade-in-apparel-footwear

Asia Pacific is by far the largest exporting region and was responsible for 61% of all export activity in 2021, totaling $375.1 billion. The next largest region is Europe at 37%, with the rest of the world playing a very minor role.

regional-shares-global-export-activity-apparel-footwear

The world’s three largest exporters are all based in Asia. China exports $187.6 billion (29.3%) of the world’s total, Vietnam is in second place with $58.7 billion (9.2%), and Bangladesh is in third place with $44.3 billion (6.9%). These three countries collectively represent nearly half the world’s total exports and three quarters of all Asian exports.

The United States is the largest single beneficiary of these goods. It imports 14% of the world’s apparel and footwear exports, totaling $90.2 billion. Of this, 47.1% comes from China, creating a significant concentration risk. From a China export perspective, less than one-third of Chinese output heads to the U.S., so the concentration risk is only on the U.S. side.

Let’s examine this relationship in a little more detail. The chart below displays China’s total exports of apparel and footwear over the last five years compared with the amount of output that headed to the U.S.

china-global-apparel-footwear-exports

Overall, Chinese output has been in decline since 2017. The start of the pandemic year saw the lowest export levels in recent years. However, the data for 2021 shows a strong rebound in demand even as many countries continued to battle with complex pandemic issues.

While Chinese output was on the decline, the amount heading toward the U.S. increased between 2017 and 2018. But after the U.S. began imposing trade tariffs on Chinese goods imports in 2018, Chinese imports fell. In 2020, Chinese exports of apparel and footwear to the U.S. were down 21% from the prior year.

However, there may be respite coming, given the challenge the U.S. is facing with inflation and a decision pending on whether the tariff program will be suspended. What a suspension looks like is still to be determined but it appears to be a quick win in the very short term with potentially longer-lasting implications.

What are Sales Expectations for the Industry Over the Next Few Years?

To understand what market analysts are forecasting for this industry, we consolidated the available analyst and broker opinions from the apparel brands and large retailers in this sector using FactSet Estimates data.

consensus-sales-forecasts-apparel-brands-large-retailers

This data set only includes significant companies on which brokers and analysts provide opinions. Still, this should give us a broad understanding of how the industry is going to perform because of the market dominance of these companies. The smaller retailers and independents will inevitably look at this as their best possible performance.

In Europe, growth in 2021 was significantly higher than every other region at 35%, but this high level of momentum is expected to be short lived; growth is projected to settle back down to mid- to high-single digits over the next few years. This confirms that the industry is set to increase in size going forward.

While growth remains high initially, all metrics apart from Asia all end up roughly in the same place in 2024. Contrast that to the profile in Asia where growth last year was much more modest, but the future projections are much flatter, resulting in much higher expected growth in 2024 than the rest of the world.

Sales Performance in Asia

The best performing corporates in Asia saw sales growth in the low teens in the years leading up to 2020 and then a slight dip into negative territory before a strong recovery in 2021.

historical-sales-performance-asian-apparel-footwear-companies

This rebound in sales in 2021 was almost twice the largest pre-pandemic growth. The median performers saw low single-digit year-on-year sales growth and a much harsher decline of 16% in 2020. Figures for 2021 look to correct much of this decline.

Corporates based in mainland China saw much larger pre-pandemic growth. In 2017, the top performers saw low 20% growth but the pattern across the board for 2020 and 2021 is very aligned to the wider region.

The corporates that are manufacturing in China but based out of Hong Kong saw much larger declines in 2020. The top performers declined by 13%, while the median performers saw sales fall by 22%. However, the decline for these corporates started in 2019; the top performers saw sales growth drop from 14% to 4% and the median performers saw two years of decline. In 2019, sales fell by 5% for these corporates.

High Levels of Bad and Doubtful Debt

Sales are the lifeblood of an organization, but a sale only adds value when the invoice has been settled in full.

High levels of bad and doubtful debts within a sales portfolio can indicate poor credit control processes. But given the unprecedented journey we have just been through, the levels of bankruptcy in the retail sector in Europe and North America could be a key reason for this increase.

bad-doubtful-debts-asian-apparel-footwear-manufacturers

If we compare 2021 with pre-pandemic levels in 2019, all three benchmarks in this chart have remained at a higher level.

China remains the worst affected by pre- and post-pandemic levels of bad and doubtful debt. Pre-pandemic, China saw default levels at 3.4%, spiking in 2020 at 6.3% before dropping to 4.7% last year. At just under 5%, this is still very high. If 2022 has similar levels, the Chinese manufacturers may need to take a closer look at their operational processes.

The overall Asia and Hong Kong benchmarks have seen levels in 2021 only slightly higher than pre-pandemic levels, which further highlights that there may be more work to do in China.

The danger of having high bad and doubtful debt levels is not only is the sale not collectible, but the goods are often not recoverable—by the time you look to recover the goods, they have generally been moved on and hard to trace. Not only is the sale lost but also the inventory and the overheads associated with the sale and the recovery process. Poor performance here can also indicate that the sales teams do not have correctly aligned key performance indicators (KPIs) that support the overall profitability of the business.

In the next article in this series, we will examine what has happened to corporate balance sheets of Asian corporates in the apparel and footwear industry.

Other articles in this series:

How Has the Pandemic Impacted the Balance Sheets of Asian Apparel and Footwear Producers?

The Asian Apparel and Footwear Industry Looks to Recovery

The Path Forward for the Asian Apparel and Footwear Industry

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Daniel Cooper

Founder, Alba Capital

Mr. Daniel Cooper is the founder of Alba Capital, based in Hong Kong, China. In this role, he helps corporates in and around Asia Pacific understand the working capital optimization options from the rarely considered aspect of operations. Prior, Mr. Cooper held various roles during his 24-year tenure at HSBC helping corporates worldwide in their working capital journeys. In the latter part of his career, he was the Global Head of Supply Chain Finance and the Asia Head of Working Capital Advisory. Mr. Cooper earned a Bachelor of Science (BSc) in applied software engineering from UCE (now Birmingham City University).

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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.