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Global Sourcing Trends

Global Sourcing Trends. 2014 Hot Topics Re-Shoring/Near-Shoring Trends Implications for AAPN Prepared for: 2014 AAPN Annual Meeting Miami, FL May 2014 Roger J. Gilmartin Managing Director. 2014 Sourcing Issues Hot Topics. Trans-Pacific Partnership (TPP)

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Global Sourcing Trends

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  1. Global Sourcing Trends 2014 Hot Topics Re-Shoring/Near-Shoring Trends Implications for AAPN Prepared for: 2014 AAPN Annual Meeting Miami, FL May 2014 Roger J. Gilmartin Managing Director O'Rourke Group Partners LLC

  2. 2014 Sourcing Issues Hot Topics • Trans-Pacific Partnership (TPP) • Timing, Terms—Far Reaching Consequences • Re-Shoring/Near-Shoring & New Textile Investments O'Rourke Group Partners LLC

  3. TPP-Its all about Vietnam. • Key rung on the ladder of planned industrialization. • Employs 2.5 million direct + indirect. • 10% of the Industrial Work Force. • 3 million by 2020. • Every US$ 1 billion creates 150,000 new jobs. • Significant in-balance between textile & garment capacity. • 75 to 80% of fabric is imported. • Mostly China O'Rourke Group Partners LLC

  4. TPP-It’s all about Vietnam • Yarn +Fabric imports from China > US$ 4 Billion • US Yarn+ Fabric exports < $100 million. • A “command economy”. • VINATEX • 28 Mills, 44 Garment Companies • 160K tons of yarn, 280 million sq meters of fabric, 330 million garments. • 3500 stores • 210,000 employees. O'Rourke Group Partners LLC

  5. TPP- It’s all about Vietnam. • Claim that Government owns less than 5% • Blatant distortion of the truth. • Employment not profit is the target. O'Rourke Group Partners LLC

  6. TPP – It’s all about VietnamImpact to US & Regional Partners • Today, the main US Regional FTA Partners (Mexico, CAFTA-DR, Peru, Colombia), successfully compete with low cost Vietnam due to tariffs/duties currently in place. • Removal of Vietnam duties effectively eliminates any cost competitive reason for sourcing in the region, unless: • Initial duty reduction is very low. • Total duty phase-out is very long term. • Yarn forward rule prevails. O'Rourke Group Partners LLC

  7. TPP – It’s all about VietnamImpact to US & Regional Partners • Vietnam hourly labor cost (and other Asian countries) increasing at faster pace than US regional partners: • Time is our friend. • Effective Vietnam labor CM cost same as Nicaragua by 2018. • Long term duty phase out will target high cost China apparel sourcing. • China is already over! • Less impact to our Regional Partners in this hemisphere. O'Rourke Group Partners LLC

  8. Apparel Manufacturing Labor Costs2012 -Average Hourly Cost with Social Charges- US $ CAFTA-DR/Mexico Labor Productivity approximately 75%-85% of International Standard. Vietnam (Bangladesh & Cambodia) Labor Productivity approximately 45%-55% of International Standard. Vietnam (CM) will be comparable to Nicaragua by 2018. Source: O'Rourke Group Partners Factory Audits O'Rourke Group Partners LLC

  9. TPP Potential Rules of OriginImpact to US & Regional Partners • Single Transformation (Vietnam still feels likely). • Yarn, fabric inputs may be from ANY source country (i.e. US, China, Pakistan, India, etc.) • Regional apparel cost competitiveness eliminated. • Significant regional apparel/textile production (and employment) losses. • Yarn Forward (USTR Support to Date; Likely to Prevail). • Yarn, fabric inputs must originate from one or more of the 12 TPP PARTNER countries. • Potential for less regional production/employment losses. • Potential for US yarn exports to Vietnam (and other TPP countries). • Some limited opportunity for US fabric exports. O'Rourke Group Partners LLC

  10. Impact Single Transformation Rule in TPP U.S. Textile Industry Job Losses (direct & indirect): - 165,189 Textile Exports to Western Hemisphere: - $3.8 billion CAFTA, NAFTA, ANDEAN region Job Losses (direct & indirect): -1,400,975 Exports of Apparel to U.S.: - $4.5 billion Total Western Hemisphere Job Losses (direct & indirect): -1,566,164 Eight year projection – note losses continue in following years. Figures do not include collateral damage to other textile sectors (industrial, home furnishings, military) which are likely to be significant as overall industry capacity declines. Many U.S. textile companies serve multiple sectors but require significant capacity levels in order to do so.

  11. TPP - Duty Elimination/Phase Out SchedulesMany Scenarios . . . The Latest . . . • Products by HS code line item, categorized by perceived level of sensitivity, then placed into three baskets: • “A” – Least sensitive products; immediate duty-free treatment • “B” – Moderately sensitive products; 5 year linear duty phase-out • “X” – Most sensitive products; currently about 80 HS codes, representing nearly 70% of current US regional imports. • Likely significant duty reduction day one (20 - 35%? off prevailing rates), followed by a hold on residual tariff level for extended period: • Knit apparel: 10 years, then immediate 0 duty rate • Woven apparel: 15 years, then immediate 0 duty rate • Currently under discussion to be included in the “x” basket are mainly MMF knit and woven tops/shirts, woven bottoms, most Cotton knit tops, cotton underwear, cotton jeans, woven pants; some wool products. O'Rourke Group Partners LLC

  12. US Apparel Imports w/o TPPRegional & Vietnam Market Share Regional Market Share Stability Sets In following years of decline driven by Quota Elimination, with China Quota totally eliminated 2009, narrower cost gaps and fast fashion/QR demands. O'Rourke Group Partners LLC

  13. US Apparel ImportsRegional/Western Hemisphere Regional Stability/Recovery Assumes Total Annual US Consumption Growth of 2%. Assumes 2015/2016 TPP Signing/Implementation. Duty Reduction Schedule Announced/Known end of 2015. Assumes Vietnam double-digit labor cost increases thru 2018. In our view, 20% or less Initial Duty Reduction is NOT likely. Such a reduction would likely result in 2018 volume of 4 billion SME. O'Rourke Group Partners LLC

  14. Minimum Apparel Cost Reduction Potentials Given a 25% Duty Reduction Cost Reduction Points Where Brand Owner/Retail Importers Consider Sourcing Shift China & Other Asia Suppliers Lose Share to Vietnam, as well as US REGIONAL PARTNERS O'Rourke Group Partners LLC Source: OGP Apparel Importer Interviews

  15. Most Vulnerable Categories Given 25% Duty Reduction O'Rourke Group Partners LLC Source: OTEXA; OGP Projection based on 9 months 2012 data; US Tariff Schedule 2012

  16. Most Vulnerable Categories Given 25% Duty Reduction O'Rourke Group Partners LLC Source: OTEXA; OGP Projection based on 9 months 2012 data; US Tariff Schedule 2012

  17. Commercial Availability Short Supply Inputs – TPP Proposed • The TPP Agreement intends to allow for broader Short Supply inputs from non-TPP (third party) countries, whereby apparel could be made in a TPP country using non-TPP yarn and fabric. • More than 200 products were targeted (but not yet approved). • US government intends to eventually segregate Short Supply products into two groups: • Permanent Short Supply Items – Little or no (US) production exists and/or unlikely candidates for new investment. • Temporary Short Supply Items – Those where significant debate/controversy about products’ availability in US & TPP region, or potential for new investment in such products. • Exempt for first 3 years, then revert to yarn forward requirement. O'Rourkei Group Partners LLC

  18. US Trade Promotion Authority (TPA) • Would grant President Obama “fast-track negotiating authority” on international trade agreements. • Administration desires to renew TPA in order to fast-track the Trans-Pacific Partnership (TPP) trade agreement. • Congress would be required to approve or disapprove trade agreements, with no ability to amend or delay consideration. • NOT likely to go through. • Surprisingly, both key Democratic and Republican groups are now opposing presidential TPA. O'Rourke Group Partners LLC

  19. TPP Status . . . • Momentum has slowed considerably. • Multiple issues unresolved, beyond textiles/apparel. • Japan focus is food-related and automotive. • US government still insists a TPP will be in place by year end. • WON’T HAPPEN! • Congressional approval will be required; much debate and resistance expected. • Most major participants see 2015/2016 before approval. • Meanwhile, textile and apparel investment in Vietnam continues, and market share grows. O'Rourke Group Partners LLC

  20. Re-Shoring/Near-Shoring & Still-ShoringNotable Regional Textile Investments • What’s going on here? • More to come and why? • Gildan $250 million US expansion • 3 Other US Yarn Spinning Mills • Grupo Karim’s Denim (former ITG Nicaragua) • Standard Textile (US towel expansion) • Kayser Roth (socks) • Culp (mattress covers) O'Rourke Group Partners LLC

  21. Re-Shoring/Near-Shoring ShiftsKey Drivers Remain . . . • Net Product Cost relative to Quality and Cycle Time Requirements--Can compete with Asia: Example • Power Supply, efficiency + cost • Money Supply, cheap + plentiful • State Incentives + Support • Beneficial Trade Legislation • Fast Fashion: H&M, Zara, Turkey; US pays attention • Lead Time/Inventory Requirements • Technology Enabling Reduced Cycle Time/PLM • Wal-Mart: $25 Billion in the decade? • CSR Compliance; “flavor of the month”? O'Rourke Group Partners LLC

  22. Notable RTW/Active BrandsRe-Shoring/Near-Shoring or Still-Shoring • Karen Kane • Nanette Lapore • Nicole Miller • Jason Wu • Lafayette 148 • Kayser Roth • HSM • Joseph Abboud • AG Jeans • Earnest Sew • UjEANA • Rag & Bone • American Apparel • City Lights • Fresh Produce • Norma Kamali • Lululemon • Spanx • Varsity Brands • Teamwork Athletic • Augusta Sportswear • Wickers • Under Armour • King Louie O'Rourke Group Partners LLC

  23. Next Source Hot Spot: Ethiopia • Textile + Garment Industry Growth: #1 Target for the government. • Private Sector is the driver of Industrialization strategy. • Duty Free access to US + EU, 16 Bi-lateral FTA’s • “Water Tower of Africa”; Organic Cotton • Energy: 5 cents/kwh • Labor: 25 cents/hour • Financing: 70% loan to 30% Equity • Creation of Industrial Zone by Turkish Companies • AYKA ADDISS • AKBE; $175 million. O'Rourke Group Partners LLC

  24. AAPN Member Considerations • TPP: A “Watershed” for our Industry. • Get involved in the process or others will determine your fate. • Re-Shoring/Near-Shoring • You already have the business model: • Easier, Faster, Safer, Better and Frequently, Direct Cost Competitive • Your “Rediscover the Americas”market development vision is spot on and the timing is right. O'Rourke Group Partners LLC

  25. For further information: O’Rourke Group Partners, LLC 109 N. Derby Avenue Ventnor, NJ 08406 917-567-3540 www.ORourkeGroupPartners.com MORourke@ORourkeGroupPartners.com Roger J. Gilmartin RJGilmartin@ORourkeGroupPartners.com O'Rourke Group Partners LLC

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