Impact of ATC on global apparel trade

Eighth of a series

The end of quotas is not the end of the story. Many unknown variables remain, not the least of which is the response of importing governments. Yet while industry players await disparate protectionist moves by the US and other governments, they will not sit still. Instead, they have already begun a process that will lead to a very different industry.

CONSOLIDATION

The most important effect of the ATC on the structure of global apparel trade will be consolidation on both sides of the supply chain. First, there will be fewer countries accounting for a larger share of total apparel and textile exports. The countries that will gain share will surely include China and India. These exporters will offer not only low costs but vertical integration, strong management, and better infrastructure. As for others, winners will be those that have some kind of niche competitive advantage. For example, countries within close geographic proximity to the final market will be favored for fast fashion. Countries that can offer some degree of vertical integration will be better positioned than those whose industries developed purely on the basis of quota rights. Naturally, some countries will suffer grievous losses.

Second, there will be fewer buyers of apparel and textile products. Unrelated to the end of quotas, a process of global retail consolidation has been under way for quite some time and is likely to accelerate. In the past, the leading buyers of apparel in the US, Europe, and Japan were department stores, leading vertically integrated specialty players, and major fashion houses. Yet in recent years, large food and mass merchandise retailers have dramatically increased their share of total retail sales. As they have achieved maturity and, in some cases, market saturation they have shifted their focus from food and packaged goods toward apparel and home related products. Their goal is to obtain a greater share of wallet from existing customers by becoming a destination for fashion. Among the retailers doing or trying to do this are Wal-Mart and Target in the US, Tesco in the UK, and Carrefour in France. These retailers seek low cost products and efficient supply chains. With their vast purchasing power and global reach, they will be influential in dictating the structure of the industry.

Moreover, other buyers will not sit still. In response to the rise of mass merchants, other retail channels will experience more consolidation. Witness the recent merger of Sears and Kmart. Witness the industry talk of further department store consolidation. There will also be consolidation among fashion houses in order to reduce supply chain costs and to have greater leverage with their retail customers.

The overall result will be fewer buyers each with greater power. The result will also be a greater focus on reduced costs in order to compete with mass merchants. This will mean consolidated purchasing in a handful of low cost countries. Yet there will also be a focus on differentiation in order to compete on the basis of something other than price. Non-value retailers will seek to avoid becoming commodity sellers by creating exciting fashions with clear brand identities. Such a focus on differentiation will be beneficial to those countries other than China and India that offer faster turnaround. These include Mexico and the Caribbean for US retailers and Turkey, Morocco, and Central Europe for European retailers.

Within exporting countries, there will be consolidation of sellers. The leading retailers and fashion houses will seek to employ the services of large companies that can offer a fully integrated, low cost, and rapid supply chain. This will likely entail consolidation and rationalization among the Hong Kong and Taiwan owned factories in southern China. In India it will mean that, provided the government cooperates, there will be massive consolidation resulting in very large operations—comparable to what exists in China.

RISK MANAGEMENT

Although the major players in the global apparel and textile trade will seek to optimize efficiency, they will also be mindful of risk. Among the risks they face are protectionism, exchange rate movements, changes in the regulatory environment in both exporting and importing countries, and changes in the tax environment to name a few. To deal with this, buyers will undertake strategies aimed at reducing risk. Principally, this will mean maintaining the ability to source apparel and textile products in multiple locations. Countries other than China and India that benefit from such risk management will have one or more of the following characteristics:

* Close geographic proximity to the final market

* Political and economic stability

* Close economic ties with importing countries (ie; membership in EU or NAFTA)

* The ability to offer vertical integration

* Strong physical infrastructure (roads, electricity, ports)

* Strong managerial skills

Editor’s Note: This is a Deloitte Research study that looks at the changing landscape of the worldwide garment industry in the face of the lifting of trade restrictions in January this year and the potential reverberation of such action on global trade. The report was written by Ira Kalish, the Global Director of Consumer Business at Deloitte Research. The Saipan Tribune is re-printing the study in a series of articles, with permission from Deloitte Touche Tohmatsu.