apparel industry

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


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


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


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


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


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


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


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


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


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


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; %]


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]


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


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


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


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


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]


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; %]


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]


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


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



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


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


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


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


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.

apparel industry

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