From Adidas AG to Nike Inc, garment and footwear manufacturers have been relocating their supply chains away from China, driven by geopolitical concerns and drawn by reduced production costs.
However, as global economic uncertainty grows and consumer demand weakens, many companies are learning that locating alternative manufacturing centers has its own set of obstacles. Some are even uprooting themselves and returning to the mainland.
“That mature ecosystem, established over decades in China, not only ensures competitive price points but also delivers stable quality at mass production that’s hard to copy,” Laura Magill, the global head of sustainability at footwear brand Bata Group, said. “I can’t think of another place that can do the quality, the quantity and the price as well as China.”
Bloomberg News talked with apparel manufacturers and factory owners who shared Magill’s thoughts.
Lin Feng, in his fifties, is a businessman who owns garment companies in and around Guangzhou, China’s southernmost metropolis. His factories mostly produce clothing for customers in the United States and Europe.
As Covid closed borders in 2020, he began a new manufacturing line for ladies’ gowns in Hanoi to “test the waters,” encouraged by workers who were OK with less than half the monthly salaries he was paying in Guangzhou.
But he was surprised by how few orders he received from apprehensive international consumers. He left Vietnam last year and has returned to Guangzhou.
“There’s no point talking about expansion or overseas shifts now,” Lin said. “With weak demand, low labor costs and tariff exemptions are meaningless.”
“There’s no point talking about expansion or overseas shifts now,” he remarked. “With weak demand, low labor costs and tariff exemptions are meaningless.“
This pullback risks erasing part of the US$1.8 billion (RM8.6 billion) invested by Chinese manufacturers in turning to Asian neighbors like Vietnam and Thailand, according to the China National Textile & Apparel Council. Several of these countries’ exports to industrialized countries have grown at the cost of Asia’s largest economy over the years.
Kee, the manager of a Guangdong-based textile firm who preferred to be known only by his first name when addressing politically sensitive subjects, had a similar experience.
His wage in the southern Chinese industrial city of Zhongshan is currently just 30% higher than in Cambodia, a disparity that was considerably bigger ten years ago. Meanwhile, output rates in his Chinese facilities are around 20% higher, and workers are more skilled.
Expanding production in Southeast Asia isn’t a “rational decision,” Kee said. “I’m afraid the business slowdown will continue over the next year or two.”
According to Duong Thi Ngoc Dung, vice chairperson of Vietnam’s Textile & Apparel Association, the country’s apparel sector still depends heavily on Chinese supplies such as buttons, thread, labels, and packaging, with only around 30% to 40% of products created domestically.
“When you start to talk about a chemical supply chain moving, a raw material supply chain moving, do you have the knowledge in the countries for the chemical mixer? Do you have the knowledge in the countries how to do mass production?” Bata’s Magill asks.
Language limitations and culture shock are significant obstacles to managing Southeast Asian workers, some of whom are less experienced than personnel in China.
While political tensions have motivated some of his clients to shift to Southeast Asia — there is a “fear of traveling to China and getting stuck there” — that hasn’t translated into stable orders with local factories, leaving some garment makers struggling to stay afloat, according to Michael Laskau, a Vietnam-based businessman who connects local apparel manufacturers with overseas buyers.
Laskau said that most customers making orders with Vietnamese firms are avoiding longer-term contracts because to concerns about global demand. Without such longer commitments, many garment firms are operating on a month-to-month basis, he added, with some even preparing to reduce to four-day work weeks to save money.
Dung of Vietnam’s Textile & garment Association said the country is still aiming for US$40 billion in garment exports this year, despite some customers in developed countries being wary about relying too much on China. According to her, apparel exports totaled US$18.6 billion in the first half, accounting for 11.3% of total Vietnam exports.
Still, new orders are mostly for final production — not for manufacturing. “The cost of setting up new factories is very expensive and the government isn’t keen to have foreign plants that produce more pollution,” Dung said.
India has benefited from several firms’ decision to diversify away from China. Uniqlo, a subsidiary of Fast Retailing Co, has said that it would seek more manufacturing partners in the nation, while Apple Inc is also increasing production in the country in order to diversify from its primary center on the mainland.
It remains to be seen if any other country, even one with about the same population as China, can compete with its massive industrial environment.
Laskau collaborated with a textile mill that invested $80 million in a plant in Vietnam to make fabric using more ecologically friendly processes. The firm included part of the cost of the new plant in the pricing of the cloth, only to be repeatedly outperformed by cheaper Chinese rivals.
“Therein lies the dilemma,” Laskau said. “Customers want the fabric produced in Vietnam but they don’t want to pay the price. They want everything to be as cheap as it can be.”
