In the third instalment of a four-part series of blogs, Thomas Gronbach, Director of Marketing at Lectra Germany, continues to explore the revolution in fashion sourcing. This blog focuses on global alliances.
The fashion industry is close-knit; if you work with a brand, manufacturer or supplier it is valuable to know that particular entity’s ecosystem.
The world of fashion can be structured in geographical manufacturing hubs:
- Greater China, composed of mainland China, Hong Kong, Taiwan
- ASEAN region with specific focus on Sri Lanka, Vietnam, Indonesia, Myanmar and Bangladesh
- India and Pakistan, with strong domestic markets
- Mexico and some key countries in Middle-America (such as Venezuela, Costa RicaNicaragua, and El Salvador)
- Northern Africa, Egypt, Morocco, Tunisia, Sub Sahara Belt (mainly US-Exports) & Turkey
- Europe: Romania, Poland, Bulgaria, Czech Republic, Slovenia, Slovakia, Hungary, Adriatic region (Serbia, Bosnia, Montenegro, Moldavia), Portugal
- Turkey, Jordan, Dubai (strong domestic markets serving all Arabic speaking countries, some 30% export to EU and especially Jordan to US)
Whilst those regions have formed in a quest for cheaper labor, migrating to the next cheaper wage-region some decades ago, the economic-situation, market conditions and demand has changed throughout the years.
There are important factors influencing China’s formerly attractive conditions for sourcing in fashion:
- Manufacturing wages rose to less competitive levels
- Proximity sourcing in fashion gained significant importance
- Exploding domestic consumer market
In a study from the Boston Consulting Group (BCG) manufacturing cost was compared between the US, China and other regions in 2004, 2014 and predicted for 2018. Taking US wage as the base point, Chinese manufacturing cost rose from 14% cheaper in 2004 to only 4% cheaper in 2014 and will surpass US manufacturing cost by 2% more expensive in 2018 (not taking into account currency changes).
Only currency change will leave Chinese wages marginally cheaper than the US in 2018, according to the BCG predictions. However the same affect will make manufactured products in China up to 15-20% more expensive in Europe, as mentioned in my earlier article.
Proximity Sourcing has become more and more important for fast fashion companies as collection cycles have reduced due to competitive pressure and the customers’ thirst for newness. Faster deliveries to the European market enable shortening deliveries of up-to 4-6 weeks compared to Chinese deliveries. Fast fashion companies rely on vertically integrated manufacturers geared for speed – orders come in Monday, ship Friday and are available in stores the following Thursday. This can only be achieved with manufacturing alliances in Europe.
A survey conducted by McKinsey&Company confirms:
- 81% of mid-market fashion companies view proximity sourcing as very important
- while 53% of the interviewees in the value fashion segment confirmed this trend
Proximity sourcing becomes an important component in the integrated supply chain and drives an ecosystem of vertically integrated fashion brands with a premium manufacturing partner network.
Rising wages and proximity sourcing for specialized fast fashion companies in Europe are the factors that are starting to reverse the heavy production focus on China.
Eastern European manufacturers not only offer low wages; their proximity to European brands, their competitiveness and know-how in niche markets, and focus on quality differentiate their offer.
Manufacturers in Poland, Romania, Bulgaria, Hungary, Czech Republic and the Adriatic region (among others) offer specialized expertise in niche markets, and a high quality orientation in production make them a preferred choice in markets such as lingerie, sportswear, luxury men’s and women’s wear. These companies are developing their production taking into consideration requirements such as more complex material handling (lingerie and sportswear), complex design (women’s wear) or very high quality standards (menswear) of international European brands, where demand is characterized with preference to smaller series’ of fashion products.
Apart from the niche expertise and proximity advantages, Eastern European manufacturers started to focus on developing their own products and develop their own brand. An increasing number of companies target regional and international markets, invest in promoting their brands and build retail sale networks under their own logos. A hybrid business model is emerging as Eastern European manufacturers start mutating their production DNA to adopt a brand-oriented direction like their clients. These tier-1 manufacturers for established fashion brands build their own production alliances and act like a fashion brand.
Historically, large share of clothes destined for the European market were being produced in (mainly Eastern) Europe. With the current trends this will likely solidify and rather increase in coming years.
In summary, the fashion market and ecosystem embarked on a path, which is comparable to the drive of efficiency, process orientation and principle partner network in the automotive market. The main competitive driver – ‘cheap labor’ – will shift. The level of process integration via digital innovations within or across companies (alliances) will influence fashion-sourcing decisions significantly stronger than pursuing low wages.
The next and final instalment in this series will cover how digital integration in fashion collection development emerges as a competitive driver for fashion sourcing.