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The Asian Apparel and Footwear Industry Looks to Recovery

Companies and Markets

By Daniel Cooper  |  August 3, 2022

In this series, we have been examining the impact of the COVID-19 pandemic on the global apparel and footwear industry, with a focus on Asian producers. In this article, we look at some of the high priority items that are dominating the boardroom agenda in 2022. The key six priority themes are:

  1. Recovery from the pandemic
  2. Managing inflation risk
  3. Next-generation supply chains
  4. Online strategy and customer fulfillment
  5. Sustainability
  6. Managing hybrid workforces

As we discussed in the previous article, corporates are facing significant challenges with bloating of the liabilities side of the balance sheet and the challenges that this brings in the highly volatile interest rate environment in which we find ourselves. Corporates that have previously underinvested in their online capabilities may have found themselves in a more degraded revenue position during the pandemic period than those that had solid e-commerce strategies.

These strategies are complex, and the consumer expects a first-class experience or they will go elsewhere. Managing remote workers, providing them with the right tools to do their jobs, and promoting mental health and overall employee engagement is going to require an investment in technology but also in management time. Tone from the top is going to be a key success factor.

There are two big agenda items that are going to affect the apparel and footwear industry: delivering on sustainability commitments and evolving supply chains from a focus on cost efficiency to a balanced and agile supply chain focused on environmental impact and speed. Next-generation supply chains will not have unmanageable concentration risks, as the supply will be spread across many suppliers and many trade corridors.

The Sustainability Agenda

The United Nations’ Fashion Industry Charter for Climate Action looks to achieve greenhouse gas neutrality by 2050 with several key milestones along the way. The most immediate is halving emissions by 2030 from a 2019 baseline. Since its launch in 2018, nearly 130 brands, manufacturers, and textile producers have signed up.

Much of the low-hanging fruit has already been achieved by the major brands executing plans to reduce carbon emissions that are directly under their control. However, the real wins are hidden deep within the supply chain in layers over which the major brands may not necessarily have direct control.

Key to the reduction of carbon emissions is replacing inefficient machinery with more modern and efficient machines.

Key to achieving these objectives is replacing inefficient machinery with more modern and efficient machines. A lot of this equipment is costly and can have a long economic lifespan. This is possibly the biggest concern for these big brands given we are now in 3Q22—they have just over seven years to fix the issues.

The most cost-effective way to achieve this is to understand where each piece of equipment sits in the overall life cycle and whether there is an opportunity to naturally replace it with more efficient alternatives—and to execute on this before 2030.

Given the complexities of the supply chains, this is a huge exercise. Without proper planning, suppliers could find themselves investing additional capital to replace machinery before it is economically due.

With the additional debt this industry has taken on over the last few years, questions need to be asked about further debt capacity to address this new requirement. If new capital expenditure is required, what else must take a lower priority to accomplish this? Keep in mind that many strategic plans may have already been lowered in priority during the pandemic period.

Many of the suppliers that are downstream from the main contracted finishing factories may find themselves in a difficult position. If they cannot provide the right product to the major brands within the new emissions parameters, the buyer could move production to a supplier that can. It is inevitable that some unplanned investment in plant and equipment is going to be necessary over the next few years.

The suppliers need to work out how the make the jigsaw puzzle fit back together—or they may see significant revenue streams dry up before their eyes. Buyers will want suppliers to carry the cost but in practice the consumer will end up bearing the brunt of the increased costs. This will further compound current global inflationary pressures.

In the first article of this series, we discussed how buyers are trying to understand their concentration risk and whether imports should be pulled from multiple locations to manage the impacts of tariffs, as well as political and geographical disruptions.

Delivering on sustainability commitments has now become mission critical.

Maritime shipping is a significant contributor of greenhouse gas creation. When buyers re-evaluate their supply chain configuration, they should be asking whether they can nearshore the supply to reduce greenhouse gases. Achieving the same unit cost or product profitability is going to be hard to achieve in the short to medium term but delivering on the sustainability commitments has now become mission critical.

Next-Generation Supply Chains

The U.S.-China trade war has been a trigger for corporates to re-evaluate the configuration of their supply chains and take a fresh look at where risks lie, together with processes that can be implemented to control them. The underlying questions being asked are, “How concentrated is my revenue to a single point of failure such as a single supplier or single country? What happens to my revenue if this single point actually fails?”

Today’s supply chains are configured for optimal cost efficiency with buyers looking to obtain the lowest unit price possible. Tomorrow’s supply chains are going to be much more complex, and unit price won’t be the only priority that needs to be managed. Quicker delivery times will ease pressure on inventory levels throughout the supply chain but can only be achieved if the manufacturer is much closer to the buyer. The deployment of the latest technology will improve processes and reduce the amount of waste this industry produces.

The largest component of any future supply chain decision is going to be reducing the environmental impact of producing apparel and footwear.

However, the largest component of any future supply chain decision is going to be reducing the environmental impact of producing apparel and footwear. It is inevitable that consumer prices are going to have to increase to make this new equation work—and in today’s inflation-sensitive environment, this will only compound current pricing issues.

Changing the dynamics of a supply chain is no simple job and can take a long time to complete. Opening relationships with new suppliers come with a variety of risks that are more easily controlled in a mature relationship. These risks include regulatory, reputation, credit, and performance risk. Protecting a company from these risks can cost considerable money and time, so there needs to be a real commercial reason to go down that path.

For buyers in the United States, having the ability to import from more than one country would be an ideal solution to navigate around future tariff challenges. However, the more you think about concentration risk, the more areas of exposure come to light. Consider this picture, showing the shipping activity around the eastern seaboard of China during the pandemic lockdowns.

shipping-activity-around-chinas-eastern-seaboard

These ships were unable to dock into port because the ports were closed or operating at reduced capacity.

While the focus of this paper is apparel and footwear, which are not perishable, imagine some of those containers contained food products that could be spoiled by such a delay. Not only is this a complex insurance claim but it is a disruption in supply that will have a knock-on effect on revenues up and down the supply chain.

For the apparel and footwear industry, if the goods in these containers were component parts required to make a pair of running shoes, not having the inventory available because it’s stuck on a ship could bring an entire production line to a halt—and that is never cheap.

We have already seen that the United States has a huge concentration risk on China for its imports of apparel and footwear products.

Over the next 20 years, we should expect supply chains to become less centralized and sourcing spread across multiple countries and multiple suppliers. This will give buyers the flexibility to navigate around expected and unexpected geographical or political issues. We should also expect to see these new supply chains becoming more nearshore to help deliver on the sustainability agenda as discussed earlier.

Over the next 20 years, we should expect supply chains to become less centralized and sourcing spread across multiple countries and multiple suppliers.

Any transition away from China is not going to happen overnight. Suppliers and governments need time to prepare for such a change. Factories may need to be built and equipped and workers employed. This may even require new cities to be created. Quality needs to be assured, and that could take several years to perfect.

For some countries like Vietnam, this journey has already started, and the expansion could be quicker and easier to achieve, especially as there has been a foundation of Chinese investment in Vietnam factories developed over recent years. For other countries, this could be more of a challenge, as there is potentially a lot more to do, including the improvement of infrastructure to support the movement of goods in and out of the factories.

In the next and final article in this series, we will summarize our findings and discuss the outlook for the global apparel and footwear industry.

Other articles in this series:

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

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

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.