Sheng Lu of University of Delaware: ‘Friendshoring’ Falls Short for Fashion Industry

The international fashion industry moves at the pace of consumer trends and also of sourcing. In the last six years, the international sourcing map has entered into crisis, with disruptions such as the pandemic, the Red Sea crisis or the tariff revolution provoked by the president of the United States, Donald Trump. In this new Insight, sponsored by Sevica, Modaes analyzes the current situation of sourcing in fashion, a sector that plays on a new board with geographical changes, means of transport and customs.

Read here the Insight

Sourcing, the new global chessboard

Professor and sourcing expert Sheng Lu of Delawere University (United States) warns of a more cautious consumer when it comes to buying, which creates a smaller market to be shared among the companies in the industry. Faced with this, and with growing global uncertainty, all of them are committed to diversifying their sources of supply. However, while some are reducing the number of suppliers to focus on strengthening relationships with those who have a presence in more markets, others are betting on including a larger number of suppliers in order to strengthen their supply chain. At a time when efficiency is inexcusable, technology can help to customize orders, working with less stock and therefore taking less risk. Despite China’s loss of weight as a global factory, the other countries would only be able to overshadow it if they manage to cover the full range of products that the Asian giant is capable of manufacturing.

Question: Since the impact of the pandemic, has the global fashion supply chain changed?

Answer: People still deeply remember the lessons they learned from Covid, as well as the ripple effect it had that continues even five years after it ended. One thing companies learned was the importance of flexibility and agility in deciding where to source their products. At the time, many were heavily dependent on sourcing products from China. When the country decreed its confinement, the entire supply chain was significantly disrupted. In this regard, they learned the importance of building solid strategies with suppliers. Even today, to effectively mitigate the impact of tariffs, suppliers are seen as very important partners with whom to negotiate to obtain products ahead of schedule. With the pandemic, consumers began spending less money on clothing. Today, with inflation on the rise, they are doing the same. And tariffs have made the situation even worse, making consumers more cautious. Brands are fighting over a smaller pie: overall demand, especially for new clothing, is declining. As a result, many companies are starting to think more strategically about how to offer secondhand clothing options or strengthen their presence in the digital channel, to proactively reach out to their customers and better understand their demands.

Q.: Is security of supply more critical today than price? Is this being appreciated in companies’ sourcing decisions?

A.: Security and sourcing go practically hand in hand today. There are still companies that think that sourcing is all about looking for the lowest prices, and that’s not the case. They have to consider an increasingly complex and long list of factors when deciding where to source their products. In the past, factors such as speed to market were considered. Today, there is more talk about flexibility and the risk of not complying with important regulations such as environmental regulations. There are more regulations in the European Union, including recyclability and supply chain transparency. There are also in the United States, with laws such as the Unlawful Forced Labor Prevention Act (UFLPA), which require companies to prepare sufficient documentation to demonstrate where their supply chain actually is. In addition, this year, companies are also looking at tariff risk. One example would be India. Until now, India had great potential. Its size, large enough to produce several types of product with a very vertical supply chain, positioned it as an alternative to China. The U.S.-India relationship was strong and growing stronger before Trump’s arrival. However, there is now a 50% tariff on US apparel imports from India. So there is no safe harbor, not even Mexico, which faces the lowest tariff compared to other markets. In short, the threats between the US and China increase uncertainty and directly affect companies’ risk assessment and supply chain security going forward.

Q.: Are companies continuing to reduce the number of suppliers? Why are they doing so?

A.: According to my latest research, which includes 25 leading U.S. fashion companies, 90% of which have more than 1,000 employees, most of them see sourcing diversification as interesting when it comes to mitigating the current impact of tariffs. In particular, they are diversifying their sources outside of China. The U.S. is increasing the amount of imports from countries such as Vietnam, Bangladesh, Indonesia, Cambodia, Pakistan, and even Egypt. According to another of my surveys, which includes thirty leading U.S. companies in the industry, most companies are trying to source products from as many countries as possible to mitigate the current situation. However, there are different strategies in terms of the number of suppliers companies work with. Some try to work with more suppliers to reduce risk or because, as they enter a new region, they need them. It may also be because they are entering new product lines, especially now that companies are looking for clothing with sustainable fibers, and they need suppliers that offer those products. At the same time, other companies are choosing to reduce the total number of suppliers in order to strengthen the relationship with those they consider key and who also have a presence in several countries. This is also a very popular trend in the industry, and many of these suppliers are even based in China.

“There are still companies that think that to source you just have to look for the lowest prices, and that’s not the case.“

Q.: In 2022 you answered no, but the situation has changed appreciably since then. Can you now imagine a value chain without China?

A.: It depends on how you define the value chain. In terms of final products, finished garments, it is clear that U.S. companies continue to reduce their exposure to China. Instead, more finished garments are now coming from the rest of Asia, from countries like Vietnam, Bangladesh and others. However, although China is losing market share in finished garments, it still dominates the supply of textile raw materials. Moreover, although some suppliers are in other countries, many are owned by Chinese companies. Thus, even if a product is labeled as made in Mexico, for example, it is likely that the content, the investor or the factory is owned by Chinese companies. In this regard, according to OECD data through 2022, approximately 30% of apparel exports from Southeast Asian countries include Chinese content. This is why U.S. President Donald Trump has taken an interest in the Chinese content of products. If much of the content is not manufactured, for example, in Vietnam, the products could be subject to an additional tariff. The Trump administration’s intention is therefore to motivate Asian countries to decouple from China in the supply chain. However, the reality is different. Although China’s share of apparel imports is declining, its share of textiles has reached a record level, which means that China remains highly relevant in the supply chain. It is neither practical nor realistic to try to completely disengage China from the supply chain.

Q.: Which countries could take advantage of China’s declining role in global sourcing?

A.: Right now, there is no single country that is an alternative to China. Because today companies are not only sourcing from China because of the low price. In fact, made in China is not so cheap anymore. They do so because you can get virtually any type of product in China. To be considered an alternative to China, a country should be able to offer a wide variety of products, which is no easy task. Therefore, to replace China’s role, the best option continues to be to source from several different countries, which together can match what China currently offers to the market. Companies do not want to have too much exposure to any one country. Therefore, it is not just about finding the new China, but about keeping the supply base very diversified, especially given the current situation, where all countries could face instant tariff increases and the supply chain can be easily disrupted.

“Even if a product is labeled as made in Mexico, for example, the content, the investor or the factory is likely to be owned by Chinese companies.“

Q.: Do aspects like friendshoring apply to a sector like fashion?

A.: The idea of friendshoring is that companies only trade with countries that share the same values, or are aligned. It’s interesting, but in practice, especially for the fashion industry, it’s very difficult to implement. U.S. companies have strong strategic partnerships with European countries, but Europe is not the region where most products can be manufactured or sourced. In contrast, Asia still accounts for more than 70% of U.S. apparel imports. However, most of these Asian countries are not necessarily US allies. These factors should not be predominant in sourcing strategy. Friendshoring may seem attractive politically, but it is not practical for textiles and fashion products.

Q.: Will geopolitics and the trade war change the fashion supplier network in Europe or the U.S.?

A.: The tariff war is the most significant concern for fashion companies, even more so now than it was at the beginning of the year. The current situation has a very broad impact on their business operations: from profit margin, to sourcing, inventory management and pricing. So their primary focus has become mitigating the impact. And there is no single strategy for doing so. Some measures are short-term, such as working with suppliers to receive products ahead of schedule; others are more strategic, such as building a stronger supply base, reducing operating costs or strategically rationalizing product mix. On the supply chain side, companies are looking to be able to make last-minute changes if a country faces an additional tariff, working quickly with suppliers or even their in-house customs team. They also explore new regions with sourcing potential: for European brands, it may be Eastern Europe or local sourcing; for U.S. brands, the Western Hemisphere. Even domestic production is being considered, with more and more factories setting up in the US. Another important factor is sustainability. Once a more conceptual issue, it is now an essential part of business operations. According to a survey conducted with the US Fashion Industry Association, most companies source at least 10% of their products with recycled or regenerative fibers, and many have targets of using 100% recycled fibers by 2027 or 2030. Creating these sustainable products requires different supply chains, new suppliers and strategies to make them attractive to consumers. In addition, companies consider recycling, resale and second-hand clothing markets, balancing this with their new clothing business. The reality is that Europe is driving new sustainability standards. Fashion is a global business, so global brands must comply with European regulations, even if they are not based in the EU. There needs to be more collaboration between countries, regulatory consistency and support for SMEs that do not have sufficient legal resources to meet these standards.

“More collaboration between countries, regulatory coherence and support is needed for SMEs that do not have sufficient legal resources to comply with European sustainability standards.“

Q.: Is deglobalizing production a possibility? Can we really relocate value chains?

A.: Sustainability is becoming more and more integral to business. It is no longer just about regulations that apply to materials, but today many requirements are about transparency. Companies will have to provide more specific data to show where the product is manufactured or to show how they treat their workers. Because of these legal requirements, they need to be close with their suppliers to request the data. And this type of collaboration will become even more widespread. Companies need their products to last longer or be recyclable, rather than products that can only be used once or twice, and they need to make sure they have sufficient quality.

Q.: Are there sufficient incentives to drive production automation in fashion?

A.: Of course there are. In developed countries, such as the United States, it is very expensive to produce. It is not easy to have factories with thousands of workers. But we have money, we have capital, and machines can be considered a good option. They can improve efficiency and do many more things that people can’t do. Automation can be combined with AI to change how we design, create or even manufacture clothing. Product offerings can be customized. One of the main problems facing the fashion industry is that a lot of clothing never sells because it has to be produced well in advance of the selling season.

Q.: Why aren’t we already seeing machines working to produce clothing?

A.: It is true that labor is still needed to cut and sew clothes, but at the same time, factories, including Asian factories, are equipped with more advanced tools. Even in a garment factory today, you see more and more automated tools on the production line. Certain production processes can now be automated, such as cutting fabric or automatically placing the necessary materials to allow sewing workers to do their work more efficiently. Much investment in technology is being made in garment manufacturing. While workers are still needed, we can use these tools to improve their efficiency. In fact, automation can strengthen the manufacturing of certain types of products. In the United States, for example, we see some resurgence in sock production. And it’s not because we hire a lot of workers to make socks, but because for the most part, these socks are made by machines. Another example is the new sustainable products. There are many innovations to automate the sorting of products such as used clothing. This can improve recyclability. So even if it’s not all production, I still see a lot of new opportunities to automate processes within the supply chain. Also, today, because there is a lot of uncertainty, instead of ordering or stocking thousands of pieces of the same model, orders are reduced. In the past it was very difficult to do this, because factories needed a certain quantity to be able to produce without losses. But now, with these automation tools, it is easier to reduce the total number of products you need to manufacture.

“One of the main problems facing the fashion industry is that a lot of clothing never sells, because it has to be produced well in advance of the sales season.“

Q.: In the midst of the U.S.-China trade war, what options does Europe have to continue to play a relevant role in the fashion industry?

A.: Europe is a leader on the global apparel supply chain map. In fact, it continues to be a very important territory in apparel and textile manufacturing. Almost half of the products sold in the EU are manufactured locally, also from high-wage countries such as Italy, Germany, France or even the UK. In addition, due to the relatively high level of income, the EU is one of the largest consumer markets for clothing in the world. And that is the reason why many Asian countries today, when facing higher tariffs in the US market, are interested in exporting more products to Europe. It is clear that the tariffs imposed by President Trump will also have an impact on these products available on the EU market. This, in a way, intensifies price competition, because the EU starts to receive a flood of Asian markets that have been diverted from its market. On the other hand, the EU is still seen as a leader in terms of sustainability, especially regulations. Brands feel that, if they can meet EU standards, they can do so worldwide. In addition, the EU is known as the origin of many luxury brands. Consumers like labels made in Italy, France or the UK, regardless of whether they are more expensive. Origin still has an impact on consumer choice. Finally, the EU is more proactive in reaching trade agreements with the rest of the world. Here, although developing countries can manufacture, they need to find a source of textile raw materials. They are currently very dependent on those coming from Asia. But, perhaps, through these trade agreements, some EU countries can start exporting theirs to Asia, and then the Asian countries can use them to make them into finished garments and send them back to the EU.

Q.: What role is Africa playing? Why has it not yet emerged as a viable option for textile production?

A.: The African Growth and Opportunity Act (Agoa) is a U.S. trade law enacted in 2000 that grants duty-free access to products from African countries. However, it expired on September 30 of this year, which is of real concern to African countries because they depend on this trade preference program to access the U.S. market. U.S. companies would not consider sourcing from many African countries without this trade preference program. For the EU, this can be a great opportunity, and supply chain collaborations can be opened up with African countries, especially for recycled textile raw materials.

Q.: What can European or U.S. companies learn from Shein in terms of sourcing?

A.: Shein is considered ultra fast fashion, and its business model is very different from that of fast fashion convention retailers, such as Zara or H&M. The latter place a lot of importance on product replenishment. Fast fashion is successful because it can always offer consumers the popular items on the market, and they rarely forecast. It is a risky thing to do. So they use their data analytics tools to try to understand what consumers want, and they leverage a very agile supply chain to make those products available quickly in the marketplace. But Shein is different, because their business model is to constantly keep bringing products to market. Shein doesn’t care about replenishment. At the same time, it also uses data to design clothes, and it has a very agile supply chain that draws on products made in Asia. Despite having a wide range, it places very small orders. Currently, that can only be done China, in the Guangdong area, where there are many small and medium-sized factories, with a vertical supply chain. Their business model is based on manufacturing there and using air shipments to get the finished products to consumers around the world. And their business model is not easily replicable, as not all companies have this digital capability or can access consumer data as easily. However, Shein faces many adversities. First, the end of de minimis, which helped it reduce its shipping costs and avoid paying tariffs to its end consumers. Now it not only has to do so, but it also has to adapt to all legal requirements, like other brands, at a time when many regulations specifically target companies like it. For example, additional fees and even penalties are charged for companies that sell low-quality products, or if they are not durable enough. The overall pressure is to apply more regulations and pressures to the ultra fast fashion model. Finally, Generation Z is becoming increasingly aware of the environmental impact of manufacturing and consuming apparel products. Many of my students are very critical of Shein. They are against buying this type of cheap clothing and advocate for a more sustainable industry. So, although Shein is still relevant in the market, but it seems that all the winds are against it.