Coronavirus (SARS-COV-2 which causes COVID-19) is causing drastic changes to the supply chain, a key retail operation already in flux. For the last three years, geopolitical turmoil and shifting priorities have been setting the stage for gradual changes. Studies show that there has been a marked shift away from China to countries like Vietnam, Bangladesh, India, and Mexico. However, the coronavirus has accelerated action despite the fact that China seems to be recovering from COVID-19.
No other country matches the current manufacturing dominance of China, nor do any yet have the established infrastructure to support such a huge business. But with the end of the quota system, development of new capabilities and evolving environmental attitudes, the competitive playing field is changing. It is forcing retailers to confront a more complex situation and carefully review all of these factors before moving from an established, trusted entity. And, now the virus further complicates the supply chain conversation.
China has been, and still remains, the biggest country for soft goods production. According to a CGS (Computer Generated Solutions) survey, 30.75% of U.S. imports came from China as of October 2019. As of that date, for the 12-months ending in October 2019, imports from China declined 5.6% to $22.13 Billion. Expectation at the time was that, despite any trade wars, China would continue to produce a major share of goods bound for the U.S even as that share declined somewhat. The infrastructure and know-how are unmatched in the rest of the world. I think, however, that the full effect of the Coronavirus has not yet been measured. While some plants have reopened, reports suggest that productivity has not yet reached anywhere near capacity. Covid-19 seems to have abated to a point where some stores are reopening some locations.
The CGS report points out that while China had cheap labor 20 years ago, it is no longer recognized as a source of very cheap labor to produce goods. However, it has become a very efficient country as a result of investing in the apparel industry. One must also note that shipping time from Shanghai to Los Angeles is 23 to 31 days; shorter than from any other country except Mexico.
Let’s look at some of those beneficiary countries in the shift away from China.
Bangladesh. This is the second largest garment exporter after China. Its $30 Billion garment sector produces apparel for some of the biggest retailers in the world. That manufacturing activity accounts for 80% of the country’s export earnings. In the period ended October 2019, apparel shipments to the United States were up almost 10% to $5.1 Billion. Footwear imports increased a whopping 32.6% in the same time period. Bangladesh is making its logistics more efficient. It did raise wages in 2019 and brought most of the garment workers under one digital wage system. Shipping time from Bangladesh to Los Angeles is 28 to 34 days.
Vietnam. Apparel exports from Vietnam to the United States in the period ended October 2019 increased 10.9% over the prior time period. There was also an increase in value in the exports of about $11.7 Billion caused by an increase in wages. Vietnam has received an influx of investment according to the CGS report. The country is enjoying benefits of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, an agreement which gives partner nations duty-free access to Vietnam made goods. Since Vietnam is right next to China, it was easy for companies to transfer production there. They have built factories, mills, and wholesale supply chains according to one source. While all of this enhances Vietnam as a production site, there is some concern that a growing trade deficit may elicit tariffs. Shipping time from Vietnam to Los Angeles is 29 to 35 days, similar to Bangladesh.
India. In the period ended October 2019, imports to the United States were up 6.9% to $3.6 Billion. Footwear imports increased by 5.4% during the same time. In addition to cut-and-sew capabilities, India is building up its vertical resources. 74 textile parks have been approved; 18 are operational, and 32 are under development. To address human rights issues, the government is inspecting thousands of factories. In Spring 2019, the United States changed India’s designation as a beneficiary developing country under the Generalized System of Preference program. More action could follow as the administration views what it deems to be a trade imbalance. Shipping time from India to Los Angeles is 31 to 37 days.
Mexico. As activity increased in these other countries, apparel imports from Mexico fell 5.6% in the first 10 months of 2019. Notable is that denim products increased 2.9% to $690.4 Million. However, a new United States, Mexico, Canada Agreement was recently signed that will likely lead to more products from Mexico. The uncertainty of implementation of the agreement has forced companies to balance risk and opportunity factors. The country also faces some labor rights issues which could be disruptive. In addition, the government also raised the minimum wage by 20% on January 2020. Footwear exports fell by 13.2% in the first 10 months of 2019. Shipping time from Mexico City to Los Angeles is about 6 to 7 days.
Conclusion. While there is a shift from China to other countries due to geopolitical reasons, a decision on where to source goods is still not clear cut. I see additional transfer activity happening because of concerns due to the Coronavirus discussed above. Retailers were already seeking options outside of China to produce apparel. While there is operational sophistication in China that other countries still have to learn, I believe that China’s recovery will be slow and painful even if new virus infections decrease.
Major U.S. retailers cannot wait. Orders have to be placed now for Christmas 2020, and deliveries must be certain. Transferring to a nearby country makes sense as some companies have already done. My figures only go to October 2019, but they give an indication of the shift. The Coronavirus adds uncertainty to near-term planning and adds urgency to accelerate the shift in production now. One could ask, “Who will be inscribed in the book of life?” when 2020 draws to a close.
