It’s a changed sourcing landscape. With differential tariffs impacting every major apparel producing nation, the industry has naturally looked at ways to make the rate differences a competitive advantage. With it came a focus on diversification as a strategy.
In an attempt to derisk supply chains, companies have been moving away from an overreliance on any one country, creating redundant lines across regions and pioneering operations in new nations. In some cases, much of this is an acceleration of initiatives that were set into place in response to the first Trump Administration’s tariffs on China, or potentially strategies that bubbled up during the pandemic. In others, brands, factories and suppliers are piloting new ideas to address this latest disruption.
But no matter how they’re going about it, the fact remains that building out a truly distributed supplier network takes careful consideration and meticulous calculation. And even factoring the tariff costs in, it’s not always the best solution.
Considerations & Consequences
While tariffs are a financial consideration, they’re just one among many. In fact, the costs of diversifying can add up quickly — and in ways that may not be immediately obvious.
Before making the jump to a least-hit tariff nation, Jon Langman, partner at consulting firm AlixPartners, said buyers need to double check their math. Though he said it happens less frequently now, he still sees some companies focusing on the country of origin for their finished goods without considering what happened upstream. “For example, if a shirt is made in Vietnam but uses Chinese fabric it may still trigger reciprocal tariffs that the retailer’s finance team didn’t model (not to mention the cost of moving fabric to Vietnam which increases cost and lead time),” he said.
Such oversight can add up quickly, zeroing out any anticipated benefits. It would be particularly vexing, Langman said, if that same buyer were to realize competitors that kept a cooler head and stayed put were able to secure discounts from factories attempting to salvage business as orders started to dry up. “It’s a mistake to underestimate the power of supply and demand,” he noted.
But if the situation warrants a move or at least tests in new regions, Eric Fisch, national sector head of retail and apparel, corporate banking at HSBC, advises companies to remember to factor in the potential hit to cash flow that comes with starting over. “When you have a new factory, often you don’t have the same payment terms, so you have to pay earlier or put down a deposit or give a letter of credit, and so that has working capital implications for the U.S. company,” he said. “Also, they have more money tied up in the factory because they don’t have that long credit relationship.”
For Paul Walsh, CEO of Newtimes Development apparel sourcing solutions agency, it’s important to take a big-picture approach when scenario planning to ensure the net result is positive. This is particularly challenging for companies looking to leave China and all of its many advantages.
“When you move from China to Southeast Asia, typically you’re faced with longer lead times, and you’re also faced with typically higher MOQs. So, as you move out of China, you’re gaining on price in some respects, but you are losing on lead time and flexibility,” he said.
It’s a tradeoff the industry can scarcely afford today as brands and retailers are attempting to control inventory, boost sell throughs and account for trade uncertainty by leaning into the chase model, which allows buyers to place shallow initial orders before fully committing to a SKU. Longer timelines and larger order quantities make this strategy almost impossible, Walsh said.
Beyond hard costs, Jason Kra, PhD, president of Li & Fung’s wholesale and distribution business in the U.S., said it is “a big job” to diversify successfully — one that even the largest retailers find daunting.
In 2020, the company went all in on creating a distributed supply chain network, which required switching from a remote-control model to boots on the ground for 6,000 employees, formerly located in Korea, Taiwan and Hong Kong. “Now everything we run is localized in every manufacturing country – production, fit, quality. Nobody’s from another country,” he said. “That is a huge competitive advantage, and frankly, a cost driver, because we’re lower cost in production countries than we are in these big cities, and we’re tighter on information and decision making.”
That, he said, is what a proper pivot to diversification looks like. And unfortunately, it’s not the norm.
Of course, there’s no secret as to why. Most companies don’t have the might to pull it off. But increasingly factories are making moves that could prove beneficial for buyers who want to cross borders without all the hassle.
Diversification’s New Phase
Whenever there’s a massive disruption (think Covid, tariffs or climate emergencies), upstream typically takes the brunt of the beating. With razor-thin margins to start, factories and suppliers can ill afford canceled orders or entreaties to cut costs, but that’s what typically happens. And until now, many have seen little option other than to hunker down and try to ride it out, even when operating at a loss.
This time, some factory groups and local sourcing companies are finding success with a type of diversification of their own. In some ways this is nothing new. Production companies in China and Vietnam have been establishing operations around the globe for years. What’s different now is that more companies are following suit. Whether it’s in pursuit of lower tariffs, a larger labor market or specialized capabilities, these companies are capitalizing on opportunities beyond their borders.
For the Fusion Group sourcing firm, this ability to pick up and go enabled the company to sidestep much of the hardships associated with the 50% tariffs on Indian imports to the U.S. Rather than make the deep concessions in the interest of maintaining relationships, founder Vivek Bhatnagar opened up shop in countries at or around the 20% tariff baseline.
“We went and opened offices in Sri Lanka, Bangladesh, Indonesia, and we started placing business there,” said Bhatnagar. “So, we’re not giving discounts today at all. Rather we’re [hitting] the same price points or slightly better — 5 to 7% better — than last year in the new countries.”
Bhatnagar said this is how the business is migrating. It’s less about brands and retailers identifying new partners in new-to-them countries and more about factories establishing more global operations. “If I were an Indonesian factory [for instance], and I have a commitment to buy, I will actually take my team, set up in a country which has zero or low tariffs,” he said, adding it’s a win-win because it gives buyers peace of mind. “Retailers will go with partners that they’re already working with for many years. That’s essentially how the business will move.”
In some cases, these operations are results of joint ventures or other legal entities, while others are popping up much more informally.
During the height of the retaliatory tariff situation in India, Bhatnagar reported seeing a factory in Sri Lanka comprised of 65 beaders, who had been brought in from India to complete an order for a customer who needed the Indian expertise but couldn’t take the margin hit. With that buy-in from the brand, the factory owners were able to make it happen.
The outsized tariff rate for India has pushed a lot of people toward creative solutions they maybe hadn’t considered before. And one country is proving to be the biggest beneficiary, according to Walsh of NewTimes.
“As month three and four went on [of the 50% tariff], we found a lot of Indian vendors starting to look offshore, at multi-country options, and we saw a very increased interest in Sri Lanka,” he said, adding that other countries like Egypt are also in the mix but to a lesser degree. “Sri Lanka, from an academic point of view, makes the most sense. And of course, you can use a lot of the Indian fabric in Sri Lanka as well.”
Walsh added that this natural migration is already affecting investments. One company he knows of has already moved dollars it had allocated toward establishing a factory in India to a similar project in Sri Lanka.
Even with the announced tariff reprieve for India [now down to 18%], Walsh thinks contracting work and joint ventures across the border will continue. “It might slow down interest in Sri Lanka, but it’s not going to stop it, because a lot of the Indian factories have just realized that in this day if you want to survive in a world of volatility and trading chaos, it’s good to have other options, and customers like to work with vendors here in multi country.”
Winners & Losers
Whether U.S.-based brands and retailers are going it alone, working with sourcing companies or have the advantage of partnering with factory groups with tentacles all over, the trade war has sparked a shift in sourcing that could permanently change the landscape. But not every country is positioned to take share.
Bhatnagar rattled off a quick list of reasons why some places don’t have real growth potential for the U.S. market from his perspective. Chief among them are Turkey’s inflation, labor constraints and exhausted capacity in Vietnam, and political uncertainty in Bangladesh. While he said India also has labor issues, the pros there outweigh the cons now that the country’s tariff rate is comparable to others. Plus, he said there are up-and-comers of note.
“India is actually going to grow, because there are going to be new factories and larger factories coming up under the Indian government’s PLI [production-linked incentive] schemes,” he said. “Uzbekistan is coming up for jersey and flat knits.”
For Walsh, Vietnam continues to rise above competitors. One advantage he noted is the increasing number of mills with better and better capabilities there. That alone differentiates it from places like Indonesia, which are reliant on Chinese fabrics, making them a drag on timelines.
“More and more we’re seeing customers trying to focus on optimizing local fabric sources to avoid the lead time to import in,” Walsh said, adding in this regard Vietnam “is a more natural, easier option for flexibility and chase.”
Even as buyers attempt to thread the needle of lowest tariff rates, best capabilities and least amount of hassle, the whole concept of diversification, which is designed to mitigate risk, is in and of itself a risk in this political climate.
David Swartz, senior equity analyst, consumer equity research at financial services firm Morningstar, points to Jordan, as a prime example. Until last year, the country enjoyed free trade with the U.S., which prompted interest from investors and brands alike. Since Trump’s “Liberation Day,” Jordan has faced something of a reversal of fortune now that goods originating there are subject to a 15% tariff.
“One of the companies I cover, VF Corp, had moved significant production to Jordan because of [the duty-free status]. And there’s a public company called Jerash Holdings, which is manufacturing in Jordan. They built out their capacity and invested in building new factories and dormitories for workers based on the idea that there would be free trade between the U.S. and Jordan, and then now there’s a tariff, and they have to rethink it,” he said.
The ongoing uncertainty of if tariffs will continue and where they might strike next is one reason why Swartz said companies are hesitant to tear up their sourcing maps and start fresh.
“The companies I cover are still operating under the assumption that these tariffs are not permanent. Trump won’t be president forever. And so, they don’t want to make massive changes based on tariffs that they don’t think are going to be in place in five years, because they have to manage these companies long term,” Swartz said. “These relationships with the factories are long-term relationships that can last for decades, in theory. So, you don’t want to blow that up on a tariff that may go away.”
—additional reporting by Lauren Parker
