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US apparel companies can't see a future without China
Brands are finding few factories outside the country that can produce the quality and quantity they require.
Bloomberg10 March, 2023, 06:40 pm
Actively Black founder Lanny Smith. Photographer: Michael Tyrone Delaney for Bloomberg Businessweek
When Lanny Smith founded Actively Black Inc. in 2020, he hired factories in China to produce the brand's athletic wear. But last year, concerned about production delays caused by China's Covid lockdowns, Smith explored buying elsewhere. He shipped samples to a supply chain agent who'd assured him there were alternatives in Latin America. "He hit me back the next day and said, 'You're not going to find anybody who can do this in the Western Hemisphere,' " says Smith, 38, a former basketball star at the University of Houston.
For American companies like Actively Black, buying from China has become more challenging in recent years because of increased tariffs, snarled supply chains, factory shutdowns under Beijing's Covid Zero policy and rising geopolitical tensions that have forced America Inc. to contemplate the fallout from a possible invasion of Taiwan.
Those concerns have led to a surge in pledges by executives to reduce their reliance on Chinese suppliers. But quitting China isn't easy, and most progress has been concentrated in industries such as semiconductors that US lawmakers consider vital to national security. Producers of lower-tech, lower-margin products such as clothing, shoes, housewares and luggage are finding that few factories outside China have the machinery or the skilled workforce to, for instance, sew what's known as a six-needle, flat-seam stitch—needed for Actively Black gear like sports bras and shorts because it doesn't chafe skin.
Since the 1990s, China has spent hundreds of billions of dollars transforming itself into the world's premier location for manufacturing. Its factories have the machinery and expertise needed to produce quality products at a volume and pace that's difficult to match. Along the 80-mile stretch from Shenzhen to Guangzhou, companies can weave, dye, sew, trim, label and package anything from T-shirts to tuxedos. And China's investment in highways, railroads, air hubs and seaports has created a smooth path from factory gate to consumers worldwide. "Twenty years of concentration of manufacturing has created this, and busting it apart and moving it to other places on the planet is really hard," says Kurt Cavano, chief executive officer of Nimbly Inc., a software platform that connects clothing brands with factories and suppliers.
Despite growing tensions, US-China trade continues to thrive. In 2022 the US imported $537 billion in goods from China, slightly below the record $539 billion in 2018. For apparel, China remains the largest exporter to the US, topping 10 billion units last year alone, about double what came from No. 2 Vietnam, according to the US Department of Commerce. A majority of suppliers for Levi Strauss, Nike and North Face owner VF Corp. are in China. And the country remains the top source of furniture, bedding, lamps, toys and sports equipment that Americans buy, according to the most recent US government data.
China's advantages are so great that some US companies that have tried to move away have returned at least a portion of their production there. Shoe and accessories maker Steven Madden Ltd. shifted about half its handbag manufacturing from China to Cambodia in recent years to diversify sourcing and take advantage of lower duties. But those tariff advantages expired in 2020, and Congress hasn't renewed the program. "It's caused us to slow and in some cases even reverse the shift of production out of China," says Madden CEO Ed Rosenfeld.
While lawmakers have a record of eventually reinstating lapsed tariff reductions, the uncertainty makes it more difficult for businesses to commit to leaving China. "Congress has started the conversation about diversification, but they haven't provided any sort of clear, predictable guidance or policy prescriptions on how to continue it," says Steve Lamar, CEO of the American Apparel & Footwear Association, an industry group of nearly 600 retailers and suppliers.
And when companies move manufacturing out of China, they often end up working with Chinese-owned suppliers or sourcing components and materials from the country. Thomas Nichols, president of Pretika Corp., which makes skin-care devices, has shifted production of some electric facial brushes from China to Malaysia for a trial run. But the batteries, motor and other parts for the brushes still come from China. Even though the cost per item will likely be higher because of the extra step of bringing parts in from China, he aims to start shipping Malaysia-made brushes to the US this summer. "China has just done a very effective job of ensuring world-class production and having the component supplies within the country," Nichols says.
Shoe and accessories maker Steven Madden has returned some of its handbag manufacturing to China from Cambodia in the past couple of years. Photographer: Jordana Bermudez/Bloomberg
The dominance of some Chinese suppliers can make it difficult to find alternatives. Textile manufacturer Texhong International Group and its dozens of subsidiaries account for almost two-thirds of global trade in certain grades of cotton-spandex materials, according to researcher Altana Technologies. That is further complicated by US and European regulations restricting the use of cotton from China's northwestern Xinjiang region because of human-rights abuses there. But it's often difficult to figure out where materials come from, and alternatives aren't always readily available, says Leo Bonnani, CEO of supply chain consultant Sourcemap. "The actual task of redesigning supply chains to meet these standards can take many months after the initial discovery of a risk," Bonnani says.
Part of the difficulty is that many Chinese companies have set up shop abroad to diversify their own production and benefit from lower labor costs. Garment manufacturing giant Shenzhou International Group Holdings has invested heavily in Vietnam and Cambodia, and today only about half its factories are in China, down from 90% in 2013. But Chinese manufacturers more typically rely on the same dense web of suppliers that keeps US companies there. "Imagine you want sequins to put on 100 T-shirts," says Vicky Wu, owner of an apparel factory with more than 60 workers in downtown Guangzhou. "You can just get them in a store on the same street." Despite lower labor costs elsewhere, "we just can't afford to leave this ecosystem," she says.
US Vice President Kamala Harris is trying to boost investment in Central America to counter China's dominance and to create jobs that would help stem migration from the region to the US. The White House says her efforts have yielded more than $4 billion in investment commitments. Columbia Sportswear Co. has pledged to buy up to $200 million of products from factories in Central America over the next five years. That will likely be simple sportswear such as fishing shirts, says Peter Bragdon, Columbia's chief administrative officer, because the region lacks the diversity of fabrics, threads and other materials available in Asia. Growth there "happened over the course of decades," he says. "It's not going to happen overnight anywhere else."
And alternatives come with their own political and economic complexities. Haggar Clothing Co., a top seller of men's trousers in the US, moved about 5% of its production from Asia to Kenya and Ethiopia several years ago. But the Kenyan factories took too long to source fabrics, and Ethiopia lost its duty-free status with the US in 2022 because of human-rights violations during the country's civil war, so Haggar stopped producing in both countries. Still, Tony Anzovino, the company's sourcing chief, says he was impressed with Ethiopian factories: "I'll be back there as soon as duty-free status is put back."
While Haggar assembles only a small percentage of its products in China, it gets about 20% of its raw materials from the country. That's down from the 60% to 70% five years ago, but Chinese fabrics remain essential for Haggar's dress pants and suits. "China is still the workhorse with regards to fabric," Anzovino says. "Everyone is finding it difficult to move a lot of things out of China because China does so many things so well. The expertise is there, the equipment is there."
US apparel companies can't see a future without China
Brands are finding few factories outside the country that can produce the quality and quantity they require.
