CONSULTING PROJECT
How will the European Apparel Industry face Asian imports?
Agenda
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
2
Cost Analysis
Increased Benefits
Breaking down the problem / Project Roadmap
Industry Overview / Global Value Chain
Apparel Balance Trade / EU & China
Re-evaluate the Sourcing Strategy / Near-sourcing
Near-Sourcing Approach / Challenges & Risks
I
II
III
IV
V
Problem Break Down
There are strong economic and strategic reasons to
European apparel companies to invest in Near Sourcing
Despite Chinas strong exporting attitude, several factors have also generated an opportunity for European apparel
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
3
In the 21st century Apparel Industry has become a
multinational business with a Global Value Chain
Cost competitive advantage and liberalization of quotas
generated a negative Balance Trade with China
What are the challenges and opportunities of moving
apparel manufacturing closer to markets?
Situation
Complication
Question
Answer
I
Project Roadmap
Laying out a clear structure ensures an exhaustive approach to the issue and maximizes the problem-solving process
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
4
Negative
Balance
Trade
Invest in
Near Sourcing
Global Value Chain
Sourcing Strategies
Asia Cost Advantages
How to face it?
I
Costs
Reduction
Increased
Benefit
Shipping Costs
Currency Fluctuations
New China Labor Costs
Inventory Management
Europe & Turkey Sourcing
Reinforce European Identity
Avoid Ethical Issues
Market Opportunity
Fast-Delivery & Customization
Take Advantage of Crisis
In the first decade of the 21ST century, the conditions for
clothing manufacturing changed considerably
Globalization Created new market opportunities, improved communication and distribution channels within the apparel industry
Quotas Liberalization After the end of MFA agreement in 1994, World Trade Organization reduced obstacles to international trade and ensured a level playing field for all
Internet & New Technologies Supported the higher frequency delivery demands from the market side and enabled the supplying service providers to better monitor and control.
Standardization The repeatable pattern and layout techniques took advantage of customization practices that had been decrease every year, reaching its lowest point through 2004
Overview of the main global changes
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
5
II
Start Producing large quantities at a low variable cost, increase the possibility to respond to high-demand
Changes on Companies Strategies
Evolutions on trade and production led companies to start
thinking globally and thus defining new corporate strategies
Global Sourcing Companies started closing factories in Europe and reopening in more labor competitive countries, such as China
Excess Capacity
Worldwide
Distribution
Emergence of distribution centers
and the ability to enter new markets
Invest in communication and marketing, building a strong
market presence and influence
Brand Reputation
Global
Apparel
Companies
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
6
II
Concentration of the Global Apparel Value Chain
Designers Input
Product Develop
Sourcing
Manufacturing
Logistics
Distribution
Retailing
Strong multinational apparel suppliers have their value chain
steps spread all over the world, sourcing especially in Asia
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
7
II
Asian Competitive Advantages
Companies source manufacturing in Asian countries because
they can produce large volumes at very low cost
Sourcing
in Asia
Low
Wages
Excess
Capacity
Access to
Resources
High
Technology
Assembly-
Oriented
Efficient
Operations
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
8
II
Evolution of Apparel Exports in principal markets
20
40
60
80
100
120
140
1990 2000 2005 2010
China exports increased about 300% since the year 2000,
reaching the top rank as the 1st exporter in the world
After the quotas
liberalization China
exceed US and EU
exports
US and EU exports
are growing slowly
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Source: World Trade Organization 9
M
III
Evolution Apparel Exports in China, US & EU
[1990 2010; Basis 100]
Share of World Apparel Exports
The raise on the volume of exports also reflected an increase in
the share of world apparel exports
China has
conquered share
in Total World
Exports
43% 40% 34% 32%
22% 20%
20% 18%
26%
22% 22%
21%
9% 18%
24% 29%
1990 2000 2005 2010
US
EU
CHINA
RW
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Source: World Trade Organization Merchandising Trade Publication, 2010 10
At the same
time, US & UE
are losing it
III
+20%
Evolution of world apparel share of exports
[1990 2010; Basis 100]
Total World Exports by Destination
80% of world exports of clothing are shipped to developed
countries1
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
1Source: World Trade Organization 11
20%
39%
41%
RWEUUSTotal WorldExports
80% of the
Apparel Exports are concentrated in the US and EU Markets
III
100%
Contributions for the Total World Exports
[2010; Share]
European Imports and Exports
The European Union imports almost 60% of the apparel from
Asian Contries and exports to the United States
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
21%
13%
18%
48%
US
Russia
NON-EU
RW
39%
13%
17%
31%
China
Turquey
Asia
RW
EU Imports
EU Exports
Source: Eurostat Apparel Publication, 2011 12
III
Distribution of EU Imports & Exports
[2010; %]
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
China & EU Apparel Balance Trade
Although EU exports have been increasing the Balance Trade
between EU and China, this marker is still negative
50 49 58
12 16 18
-38 -33 -40
2009 2010 2011 Negative
Balance
Trade Between EU & China
Source: DG Trade 13
IMPORTS
EXPORTS
BALANCE
III
Evolution of EU & China Apparel Balance Trade
[2009-2010; M/year]
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Re-evaluating Sourcing Strategy
1Source: New York Times 14
The trade balance problem is being caused by the high volume of
manufacturer operations that European suppliers have in Asia
Years ago, everyone was falling over themselves to get into China to save
money and maximize what they called their shareholder value but, when
you begin to add up the cost of freight, the aggravation of delays, the
lack of quality control, and the money you need to invest relative to cash
flow, youre starting to see people in the boardrooms of the big
corporations reconsider that decision.1
Springfield, CEO Norman Rodrigues
In New York Times
IV
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Main Question
15
Companies start re-evaluating their sourcing strategy,
considering the possibility of moving their operations closer
Is it Near Sourcing a strategic option?
Should we bring operations to Europe?
What are the risks and challenges?
Would it increase the value for the costumers?
Can European Apparel get a competitive advantage of that?
What are the main drivers to implement near sourcing?
IV
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Near-Sourcing Analysis
There are a lot of opportunities of moving apparel manufacturing
closer to headquarters, but also some risks to take into account
16
Challenges Opportunities
Shipping Costs
Increasing of China Labor Costs
Currency Fluctuations - Yuan appreciation
Weaknesses of other Asian Countries
Europe & Turkey Sourcing
Market tendency for Customization & Fast-Delivery
Increased Costumer and Company Benefit
Production Scale
Lack of qualified manufacture workers
Volatile Demand
Asian competition (Bangladesh, Vietnam, etc)
V
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Evolution of Crude Oil Prices
With the raise of oil prices, companies can save a lot on shipping
costs by manufacturing products next to domestic markets
1Source: Ernest & Young study 17
0
20
40
60
80
100
120
140
160 $
Fuel costs have been
increasing and its
expected an raise of
43% until 20201
Historically, companies
use to spent 15% of their
shipping costs on fuel and
nowadays it represents
almost 40%
The high oil costs have a
huge impact on long haul
transportation costs
FORECAST
V
Evolution Oil Prices
[2002-2020E; $/B]
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
China Manufacturing Index Cost
Its expected that the cost to manufacture in China to soar twofold
or even threefold by 20151
1Source: The Economist/AlixPartners Study; 2 New York Times 18
Land prices are also increasing as the environmental and safety regulations/taxes 40
50
60
70
80
90
100
2008 2009 2010 2011 2012 2013 2014 2015
FORECAST
% of US costs
China less attractiveness is an incentive for European companies to reconsider their factories location
V
China labor costs soar as wages rise 22%2
Evolution of the Manufacturing Index Cost of China
[2008-2015; %]
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Approaching Yuan Fluctuations
Chinas decision to let his currency move more freely will
increase the Chinese buying power1
1Source: New York Times 19
A stronger Yuan its contributing for the booming of Chinas middle class
Mew market opportunity Once Chinese can more readily afford European exports
Chinese imports are becoming more expensive
0,135
0,14
0,145
0,15
0,155
0,16
2009 2010 2011 2012
$ per Yuan
+11% Yuan Appreciation
V
Yuan Currency Fluctuation
[2009-2012; $/Yuan]
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Impact of changes on Sourcing Costs
20
These cost and currency changes allow the European companies
to redesign a profitable mix of production costs
PRODUCTION
SHIPPING
INPUTS
PRODUCTION
SHIPPING
INPUTS
Sourcing
in China
Near
Sourcing
Apparel
Sourcing
Costs (generic
composition)
Chinese operations
become more costly as also the shipping costs
As the opportunity cost of producing in China becomes lower, Near Sourcing becomes more competitive, even with high production costs
V
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Asian countries disadvantages
Source: The Economist 21
Ethical Problems The child labor practices and the threat of other unethical issues, such as the poor work conditions
Less Efficiency Can be compared to the technological advance of China - Quality risk.
The cost competitive advantage of other Asian countries, such as
Vietnam, is not enough to justify moving the operations
Lack of reliable suppliers Of Services such as nickel plating, heat treatment and special stamping
Poor Distribution Channels The lack of infrastructures and accesses of the developing countries complicates and delays the distribution process
V
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Europe & Turkey Sourcing
Source: FedEE 22
There are different type of advantages that European suppliers
can get from near-sourcing, according to the market trend
V
Western
Europe
Eastern
Europe Turkey
Lack of Expertise
Language Barriers
Low Labor Costs
Scale Production
Specialization
High-Techniques
Quality
Inputs Quality
Production Speed
Expertise
High Labor Costs
Low Scale Production
Disadvantages
Advantages
Distance
Cultural Differences
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Market Tendencies
Near-sourcing can respond to the actual challenges that Apparel
Market is facing
23
Apparel Market Drivers For the Future
Fast-Delivery
High-Frequency
Quality
Customization
Near Sourcing The right response
Close to Distribution Centers
Flexibility to Marked Demand
European Techniques
Small & Specialized Factories
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Costumer Benefits
24
European Identity Protecting and promoting 100% European production
Fast-Delivery Closer sourcing allow efficient
factory-floor-to-shop-floor timescale
Customization Near sourcing will allow the production of more customized products
Increase Costumer
Benefit Ethical Standards
Consumer become skeptical about cheap clothes
manufactured in Asia
V
Near Sourcing can fit the increasing customer demand for
customized products with low price and at the right time
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Companies Benefits
European companies gain agility to adapt to market constant
changes and a more efficient inventory management
25
Cash Flow Usually payment conditions in
Asia are less attractive on pay front basis & 90 days wait
Agility Forecast and adapt to market tendencies and delivers quality products with speed and integrity
Control
& Monitoring Reducing the danger of legal, fiscal, product quality or financial import/export surprises.
Increase Companies
Benefit Inventory
Management Closer production allow high match between supply and
demand changes, reducing the risk of stockout
V
CONSULTING PROJECT | EUROPEAN APPAREL INDUSTRY & ASIAN IMPORTS
Take Aways & Main Conclusion
There are strong economic and strategic reasons to European
apparel companies to invest in Near Sourcing
Near
Sourcing
26
Global
Sourcing
V
Sourcing in China is
becoming less efficient due
to the raise of wage and the
appreciation of Yuan
Its possible to reduce costs
and make an efficient
inventory management
sourcing in domestic markets
The tendencies of Apparel
Market are customized
products and fast-delivery,
what is aligned with the
opportunities of Near Sourcing
CONSULTING PROJECT
Thank you.