Why clothing makers are finding it hard to break with China’s supply chain

onebyone · Oct 31, 2023

Garment workers make clothes at a factory in Phnom Penh, Cambodia. Apparel makers are seeing increasingly thinner profit margins as minimum wages creep up in the country. Photo: Xinhua
Business

Why clothing makers are finding it hard to break with China’s supply chain

Apparel makers and factory owners who shifted their production to Southeast Asia are now moving back to mainland China
Rising wages in Southeast Asia have reduced the region’s cost competitiveness with China, which also has better labour productivity

From Adidas to Nike, apparel and footwear makers have been shifting their supply chains out of China, pushed by geopolitical tensions and pulled by lower manufacturing costs.

But amid mounting global economic uncertainties and weakening consumer demand, many are discovering that finding alternative production hubs comes with its own challenges. Some are even upping stumps and moving back to the mainland.

“That mature ecosystem, established over decades in China, not only ensures competitive price points, but also delivers stable quality at mass production that’s hard to copy,” Laura Magill, the global head of sustainability at footwear brand Bata Group, said. “I can’t think of another place that can do the quality, the quantity and the price as well as China.”

Apparel makers and factory owners that Bloomberg News spoke to echo Magill’s sentiments.

Workers at a garment factory in Guangzhou, China. Photo: Bloomberg
Lin Feng, in his 50s, is a businessman who owns apparel factories in and around China’s southern city of Guangzhou. His plants make clothes primarily for US and European clients.

In 2020, as Covid-19 closed borders, he started a new production line for ladies dresses in Hanoi to “test the waters”, heartened by workers who were happy with less than half the monthly wages he was paying in Guangzhou.

But he soon found himself shocked by how few orders came in from wary overseas customers. Last year, he exited Vietnam and shifted his focus back to Guangzhou.

“There’s no point talking about expansion or overseas shifts now,” Lin said. “With weak demand, low labour costs and tariff exemptions are meaningless.”

That retreat risks undoing some of the US$1.8 billion that’s been spent, according to the China National Textile & Apparel Council, by manufacturers in China on turning to their Asian neighbours like Vietnam and Thailand. Several of those countries have over the years seen their exports to developed nations grow at the expense of Asia’s biggest economy.

Kee, the manager of a Guangdong-based apparel factory who asked only to be identified by his first name discussing issues that may be politically sensitive, has a similar story.
For more than 20 years, he operated production lines in Cambodia that made jeans. Over the past decade, however, he saw increasingly thinner profit margins as minimum wages crept up.

The amount he pays his workers in the southern Chinese manufacturing city of Zhongshan is now just 30 per cent more than in Cambodia, a gap that was much wider 10 years ago. Output rates at his Chinese factories are meanwhile about 20 per cent better, plus the workers are more skilled.

Expanding production in Southeast Asia isn’t a “rational decision”, Kee said. “I’m afraid the business slowdown will continue over the next year or two.”

Indeed, so integral is China to the global apparel supply chain that even shifting countries doesn’t really reduce reliance that much.

Vietnam’s clothing industry still relies mostly on Chinese materials such as buttons, thread, labels and packaging with only about 30 per cent to 40 per cent of the materials made locally, according to Duong Thi Ngoc Dung, the vice-chairwoman of Vietnam’s Textile & Apparel Association.
“When you start to talk about a chemical supply chain moving, a raw material supply chain moving, do you have the knowledge in the countries for the chemical mixer? Do you have the knowledge in the countries how to do mass production?” Bata’s Magill asks.

Language barriers and culture shocks are also hurdles to managing workers in Southeast Asia, some of whom are less experienced than employees in China.

Michael Laskau, a Vietnam-based businessman who links local apparel manufacturers with overseas buyers, said while political tensions have motivated some of his clients to shift to Southeast Asia – there’s a “fear of travelling to China and getting stuck there” – that hasn’t translated into stable orders with local factories, leaving some garment makers struggling to stay afloat.

Laskau said most clients placing orders with factories in Vietnam are shying away from longer-term contracts, worried about weak global demand. Without those lengthier commitments many garment companies are living month-to-month, he said, with some even planning on cutting back to four-day work weeks to trim costs.

Vietnam’s Textile & Apparel Association’s Dung said the country is still targeting apparel exports of US$40 billion this year, with some clients in developed nations hesitant to rely too much on China. Apparel exports were US$18.6 billion in the first half, she said, accounting for 11.3 per cent of Vietnam’s overall exports.

A worker operates a sewing machine at a garment factory in New Delhi. India has been a major beneficiary of some manufacturers’ shift to diversify from China. Photo: Bloomberg
Still, new orders are mostly for final production – not for manufacturing. “The cost of setting up new factories is very expensive and the government isn’t keen to have foreign plants that produce more pollution,” Dung said.

India has been one other beneficiary of some manufacturers’ shift to diversify from China. Fast Retailing’s Uniqlo has said it will scout for more manufacturing partners in the country while Apple is also scaling up production there, looking to diversify from its main hub in the mainland.

However, it remains to be seen whether any other nation – even one with about as many people as China – can compete with its vast manufacturing ecosystem.

One garment mill Laskau worked with spent US$80 million on a factory in Vietnam to produce fabric using more environmentally friendly methods. The company reflected some of the cost of the new facility in the price of the fabric – only to find itself consistently beaten by cheaper competitors in China.

“Therein lies the dilemma,” Laskau said. “Customers want the fabric produced in Vietnam but they don’t want to pay the price. They want everything to be as cheap as it can be.”