The fashion calendar doesn’t stop so despite the geopolitical turmoil brought on by the U.S. reciprocal tariff saga, the industry must move forward with spring orders—whether the August 1 deadline provides definitive answers or not. In this new environment, managing risk is about building agility, managing relationships and evaluating how to deliver the best product at the best price with the information you have.
“The one thing that we’re certain of is that we’re going to continue to be uncertain, because whatever gets finalized doesn’t mean it stays that way. And we live in a volatile place where we need to be used to disruption that is going to be continuous. Going back to the pre-COVID years, when you had 20 years of predictability is kind of not in the cards,” said Jason Kra, PhD, president of Li & Fung’s wholesale and distribution business in the U.S.
Kra along with Munir Mashooqullah, founder of M5 Groupe, a network of 10 leading supply chain companies, and Steve Lamar, president and CEO of the American Apparel & Footwear Association trade group, joined Edward Hertzman, founder of Hertzman Global Intelligence, for a conversation about what’s next.
This discussion, which took place during HGI’s Tariffs: 90 Days Later—What We Know & Where it Leaves Us call, provides a framework for planning for Spring ’26, the outlook for sourcing if the trade deals include rule of origin language, and ways to manage as the pressure of the trade war puts some factories in precarious positions.
The following has been excerpted and condensed from the July 16 call. Watch the entire Tariffs: 90 Days Later—What We Know & Where it Leaves Us call here.
Edward Hertzman: What’s your sourcing strategy as we round out the year and start planning for Spring ‘26 goods?
Jason Kra: Today, it really is about, should my diversification just be excessive diversification? So, it’s not ‘Okay, I should run in two places.’ It’s how do I think about the world with total diversification to leverage the entire footprint? Just like a financial manager would be managing your 401K portfolio… You’re going to balance that portfolio.
If we look at the 35 percent as really a negotiation ploy, which we all know it is, and everything is the byproduct of a bullwhip effect. It’s not going to be way down here, and it’s not going to be way over here. It’s going to be somewhere [in the middle]. And if Vietnam becomes the medium between a 10 percent UK world and what’s potentially a 30 percent China world, well the baseline now becomes 20 percent. And if 20 becomes what we should be expecting, that’s still going to be a 10 percent worsening of where we were in the pause. So, you have to assume that the tide just went up for everybody.
If you’re a country, you need to be working to be better than 20, because then you have a competitive advantage relative to your peers relative to 6 months ago, where the world was before. And conversely, if you get a 25 percent tariff, you’re in a 5 percent worse off position versus the average of your peers. So, it’s really more about where am I relative to everybody else in the landscape of competitiveness.
EH: You’re placing billions of dollars. You have a huge leverage when you’re going into the factories. How does excessive diversification work for someone placing $50-$200 million? Does it dilute the economies of scale and make you less meaningful to partners or is it worth the risk these days?
JK: Well, you can’t turn your supply chain upside down. If you have a 20-year relationship, you’re not just saying, ‘Goodbye, I’m going somewhere else.’ You’re taking excessive risk because you have the unpredictability of the new.
It’s not about all or nothing. It’s about the right proportion. So, you’re not leaving your core supply chain. But you’re going to balance it off a little bit more. And if you’re a $100 million firm, you’re probably producing in 6 or 7 countries. And within that you can think about regionalization. We like to think about China as a region. ASEAN is a region. The Indian subcontinent is a region. Africa is a region. You don’t have to be in all regions. Let’s say you’re in 3 of them. But you don’t want all your eggs in one region because if something happens in a certain area, you have nowhere else to go. So, you still have some diversification within region in your sourcing approach. It just doesn’t mean that you take everything from here and move it to here, and the capacities, frankly, are just not available for the whole world to be pivoting all over the place.
EH: You’ve said you’re intentionally placing a portion of your goods for spring in China. That made me start to wonder, as much as the administration is anti-China, is China going to be a benefactor from everything that’s happening in the world? Because sometimes the devil you know is maybe better than the devil you don’t.
JK: We’ve never said in Li & Fung, we are not doing business in China.
We’ve always said we’re going to manage the right ratio for all countries based upon what’s the right value. And if you want to be in the speed business and be able to do chase businesses and turn them in 30 days to FOB, there’s almost nowhere else to go if you really want to work that fast in scale.
And some people are saying, ‘I don’t want to use China, and I don’t want to use Bangladesh because it’s potentially 35 [percent]. And I don’t want to use Cambodia because it’s potentially high 30s.’ At the end of the day, you’re going to have to take your best bet and take an educated guess and be comfortable with that. Things are probably going to average out at around 20. And what’s the right place to make product without having too many eggs in one basket? So under that concept, we wouldn’t say we’re not using China. I’m not saying I’m going to make China my feature country of our entire supply chain. But the right product in the right country, with the proper diversification—looking for that portfolio effect and leverage our entire base absolutely is in effect.
EH: I don’t think there’s enough conversation talking about the health of the factories and what is the factory financial health look like right now. Can these vendors absorb higher tariff rates? And what do you expect in terms of things like closures or consolidation at the factory level?
Munir Mashooqullah: So here without any conflict of interest, I can assure you that Jason’s principal company, my company, and some of those companies and retailers who have offices in some of these larger sourcing countries have now put financial compliance [on their to-do lists].
If the company doesn’t have money to open back-to-back [letters of credit]. Or the company cannot pay its workers or cannot pay for the local raw materials, you can be in trouble. Financial compliance is going to be an essential part of sourcing starting now. I am aware of certain large European retailers who have already initiated that aspect from the end of last quarter.
EH: When you’re going into a factory, are you doing a lot of research on who their major clients are and how much exposure they have to certain retailers?
JK: We always look under the hood, and we want to know that if we’re 40 percent of a factory’s total business, what’s going on in the other 60 percent. Is 30 percent with a customer that has insolvency issues because that’s going to spill over into risk for us.
Because in the environment today of tariffs going up, with uncertainty, with pushback all the way through the supply chain of ‘I’m going to pay this. You pay that,’—those debates that are going on continuously—there’s a whole elk of supplier out there that’s saying, ‘This is not financially viable for us right now. Maybe I should start cutting my capacity by half until this whole thing shakes out. Maybe I should take a season off until this shakes off, until we know what’s going down and knowing what’s going on in the P&L.’ The psyche of the leadership of your partners is more important than ever when there’s volatile times.
We’ve seen in the last couple months that the volatility makes the logical turn illogical very quickly. Just knowing your customers, knowing your vendors, knowing your mills, knowing your partners, knowing your logistics provider—any one of the things in supply chain can catch you off guard at any one time, but in volatile times it becomes that much more important. So yes, you have to look under the hood. You have to look upstream and downstream, up towards customers, back towards total supply chain tier 2, tier 3, whatever it might be.
“The capacities, frankly, are just not available for the whole world to be pivoting all over the place.”
—Jason Kra, Li & Fung
EH: When you talk about financial compliance, with the 10 percent tariff, you probably ate a little, the factory ate a little, the retailer ate a little, and it’s kind of worked its way through the supply chain. But now, who’s going to eat the new tariffs?
MM: I think the next 90 days is going to be very telling in terms of relationships, both upstream and downstream. In 2026, it will go down to the consumer. It’s not sustainable, so part of it will go to the consumer sooner than later. So, it’s only about another 90 to 120 days in this game of who’s going to absorb it, and what discounting will take place, and who’s going to share what. There’s going to be a new norm, and there’s going to be a new price, and we all have to wait. And any shortcuts, any ruthlessness, it will start telling in time to come.
JK: You have to look over the horizon to next year. What’s going to be the state of the consumer? In good times of economic growth, times when there’s low interest rates, low inflation, people are more aspirational. When they feel under pressure, they actually start becoming more value driven. So now, the question really is, what’s coming next? In the future is the customer going to want more value products or aspirational or something status quo? And that’s going to determine the retails. Yes, things cost more because there’s tariffs but if you engineer more into value products and make that a bigger percentage of your total then it’s not as noticeable. So it’s where is the consumer going? What’s coming next with the economy, inflation, unemployment? And how does it affect spending? And that’s how we need to engineer and build product to what people are looking for based upon their needs eight months from now.
EH: I’m concerned about this rule of origin. I have to imagine the majority of inputs are still coming from China, from Taiwan. How much exposure is there? How does this change your sourcing strategy?
JK: Co-locating materials where you produce it is good business, even just from a sustainability standpoint. You’re not moving product an extra 3,000 miles. So, it makes perfect sense. And it’s good business. How do you shorten supply chains? Co-locate your materials and your production, or somewhere in the same region. So as supply chains get shorter, the pressure is to co-locate. That’s been going on for a while, and that trend has been happening.
But China has been this great luxury for the longest time based on price. It’s been a great price. It’s easy to work there. There’s limited financial needs in terms of LCs and opened account, and how you can do business. It’s been great. And there’s also this 30-year history of know-how and experience and engineer capability. They can get it right the first time, because they have the experience. And so, there’s value in that. But the world has been moving to balance raw materials as you balance sourcing.
Are prices in other countries a little different? Yeah, on some items, but not all items. And are there opportunities? Definitely. And will it fast track? For sure. And will there be capacity built in material supply chain? Absolutely. Those investments will now take shape at a much faster rate.
But it’s there already, and most firms, if they’re producing outside of China, are 50 percent or so leveraged to Taiwan, China, Korea in terms of raw materials. It might have been 75 and 80 percent 5 years ago.
It doesn’t mean that China is wrong for raw materials. It means the right product, for the right country, for the right quality level and timing that you have. And if we use that lens, it actually works fairly efficiently.
MM: I’m an old school guy, you know. I still work on excel spreadsheets. The AI gives you all the answers, but I think the old school spreadsheet needs to come out with all the sourcing executives, putting in all the different tariffs, duties, classification, make a baseline—call it Jason’s 20 percent—and see where you fall. And you keep plugging those numbers in, and start synthesizing your buyers and your retail partners and everybody else that this could be the new out-of-the-door price. Because MSRP doesn’t mean anything. It’s dead for last 15 years. It’s off price, clubs and big discounters you can count on your fingers. So, I think this is the kind of exercises which needs to be done as we speak.
