[ Page - 4 ] 2018-11-16
 
It's time RMG strategy was reset as West chooses nearshoring and automation
 
MS Siddiqui:

Some decades ago, mass-market apparel brands and retailers in the West were rushing to outsource their production to Asia particularly to China as much as possible in order to gain a cost advantage. The western retailers and brands were not very experienced or aware of Bangladesh's capabilities till the end of '80s when some test export were done by a typewriter mechanic named Jakaria and a retail garment shop-owner named Reaz. The buyers were surprised by the inexpensive labour costs and product quality, driving them to consider sourcing apparel products from Bangladesh against backdrop of excessive import tariff on raw materials and lead time as constraints in other countries. In course of time, China also began to demand higher prices for apparel products forcing most retailers and brands to move from China to more cost-efficient frontier markets such as Bangladesh.

The consumers were traditionally influenced by advertisement and designs developed by apparel wholesaler and retailers. For decades, this 'push' model worked for apparel players. But in the last decade, western apparel companies have off-shored the bulk of their manufacturing to China and other Asian countries to take advantage of the dramatically lower labour costs.

Today, the market has changed significantly in the West. Now the retailers are engaged in the 'pull' model. Some celebrities and stylish consumers, with large followings on social media, have become the trendsetters and tastemakers.

Another challenge is from online sellers and stagnation in key markets, competition is fierce. Consumer demand is now more difficult to predict. Apparel brands and retailers are competing with pure-play online start-ups, the most successful of which can replicate trendy styles and get them to customers within weeks.

Consumers take their style cues from Instagram, user reviews, and their peers, and not so much from big brands' marketing gurus. This makes it easy for a shopper to browse many apparel collections on a variety of websites within a minute.

A consequence of this migration to e-commerce is greater volatility in apparel companies' sales. Some online companies are emerging as a new generation of ultra-fast fashion players, who are overtaking the first-generation fast-fashion leaders in speed to market and growth rates.

The retailers in the West are under pressure on profitability due to decreasing full-price sell-through, as well as increasing concerns regarding the environmental impact of overproduction, call for agile production in smaller batch sizes and for on-demand replenishment. Eventually, the retailers transfer the pressure to manufacturers.

A lead-time of minimum six-months of fashion was considered 'fast' in the recent past. The next decade will be very difficult for apparel brands and retailers unless they speed up the manufacturing and delivery process and transform to a demand-focused model. Brands and retailers are looking for faster time to reach the market in order to cope with the ever-changing taste and fashion choice of consumers. While moving to a demand-led model requires apparel companies to pull levers in all phases of the fashion cycle, bringing production back closer to consumers with near- or onshoring offers them with the opportunity to eliminate big chunks of lead time.

Nearshoring is the practice of transferring a business operation to a nearby country, especially in preference to a more distant one.

Consumers are becoming increasingly aware of the environmental impact of traditional linear apparel production modes and sustainability. This concern will also be somewhat likely a key purchasing factor for mass-market apparel consumers by 2025. Apparel players, who are producing high quality products, have speed in production, and are environmentally compliant, have been able to deliver relevant products to consumers at the 'best' prices.

The growth of export from Bangladesh has a relatively lower increase rate. But other factors are at play in the minds of buyers.

A study on 'Nearshoring, automation, and sustainability - establishing a demand-focused apparel value chain' was conducted by McKinsey Apparel, Fashion & Luxury Group in October of 2018. The study raised the question whether apparel manufacturing is coming back to Americas and Europe. The report observed that tomorrow's successful apparel companies will be those that take the lead to enhance the apparel value chain on two fronts: nearshoring and automation.

The nearshore markets are also getting ready to take over the western market. For example, Mexico is a potential nearshore market for the US and Turkey is one for the European market. At present, Mexico is offering lower average manufacturing labour costs than China. The hourly manufacturing labour costs in Turkey were more than five times higher than those in China in 2005. This diminished to only 1.60 times by 2017.

The other plan of apparel companies are to optimise the apparel production circular model, including elements such as nearshoring, automating new delivery models around customisation, and shifts toward sustainable, circular value chains. They are going for automation of the deals in order to overcome probable challenges. They are focussing on 'central cross-functional merchandising teams, reduction of approval iterations, and closer collaboration with suppliers'.

Digitisation of processes now exists in all phases of the fashion cycle from intelligent consumer insights to virtual design and prototyping to integrated vendor-management tools and digital selling. Nearshore apparel industries can invest in resource-efficient design process. They are also actively considering inbound logistics with an aim to strike an effective balance of air versus sea freight and establish highly-efficient warehouse processes.

A circular (zero-waste) design process through improved recycling by eliminating shipping, reducing unsold items and automated finishing significantly reduces use of energy, water, and chemicals. It also includes automated production of high-quality and customised garments, on-demand distribution and retail sales, co-located collection and recycling of textiles, sustainable technology. A proposed automated finishing can increase the value of (fast) fashion items for consumers and pro-long garment life.

Nearshoring is economically viable in certain cases, mostly due to savings in freight and duties due to various Free Trade Agreement (FTA) and Preferential Trade Agreement (PTA). For instance, USA and Mexico have a Regional Trade Agreement (RTA). Under this, an apparel company based in the US can move its production from Bangladesh or China to Mexico. By doing so, the company can maintain or even slightly increase its margin. Similarly, Turkey can offer similar prices to European countries.

Decisions about the future production footprint of each product type depend on the basis of two main criteria: cost reduction from nearshoring and the commercial value of reducing lead times. A shorter lead time will have high commercial value for on-trend items since customers' taste change very fast. Shops will get items into stores faster, it will be able to test and scale more styles. This will boost sales volumes and sell-through rates. The company can also reduce inventory levels and mitigate brand dilution resulting from markdowns and clearances.

There are some challenges as well for western brands and retailers for nearshoring. One of the biggest challenges of nearshoring in west is sourcing of raw materials, fabrics, and ingredients. Only a co-located value chain without closer sources of raw materials can off-set the benefits of nearshoring options.

In nearshore countries for USA and European apparel markets, the existing capacity is limited and local yarn and fabric supply varies greatly. The well-developed European fabric and yarn industry is focused on premium and luxury customers. The option of new yarn-spinning and fabric mills takes time and requires high capital expenditure. Industry insiders presume that fabric production will move toward nearshore in order to support regional supply chains by 2025.

By this time there will be a shift of economic growth centre to Asia from Europe. Bangladesh and other Asian manufacturers are likely to get alternative market opportunities in other emerging markets of Asia including China. Consumers in Asia are buying more clothes than ever before and apparel sales in Asia are projected to grow by 6.0 per cent each year, accounting for about 40 per cent of global sales by 2025.
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