Even before the U.S. Supreme Court struck down Trump’s IEEPA tariffs, production companies were once again more or less on even footing with each other with tariffs ranging from 18 to 20% for most. But after months of ups and downs—mostly downs—the apparel industry is left scarred, battered and untrusting of what comes next as it waits for the next shoe to fall in the U.S. trade war.
In the meantime, the turmoil has reshaped sourcing in ways big and small as brands, retailers and their upstream counterparts attempt to balance big-picture considerations like flexibility and speed against category-level concerns
Paul Walsh, CEO of apparel sourcing solutions agency NewTimes Development, breaks down how brands are recalibrating their options, where capacity constraints have created unexpected reversals and why flexibility and speed still command a premium. He also highlights how sourcing volumes have changed, favoring Vietnam, Cambodia, India and Bangladesh—and where China’s enduring hold on the market is most pronounced. Lastly, Walsh shares the strategic moves mills and factory groups are making to mitigate their own risks and how the U.S. trade war has affected sourcing decisions for the rest of the world.
HGI: Despite the tariffs, are you seeing brands and retailers sticking with China?
Paul Walsh: When the China tariffs got to 50%, at that point customers felt like, ‘I just have to get product out.’ And what’s left in China today for our customers is stuff that really had to be there, because it was either a very niche capability, it needed a very flexible MOQ, or it needed a very fast lead time.
Now I think that as we’ve hit 37.5%, the Chinese FOB prices landed are still competitive in general on certain things. So that urgency to look at other options has definitely decreased. In fact, what we have seen is that even some orders which had moved out from China starting to move back. Those orders that needed flexibility and speed. We’re starting to see some of those move back in in a small-scale way, but we’re not seeing any further reduction from China.
But for most of our customers in general, the China penetration is typically only single-digit numbers. Countries like Vietnam, Cambodia, India, Bangladesh, those three or four key countries are where we’ll see the bulk of the focus in the sourcing volumes. China always has a place to play, but it basically has to make sense for the strengths of China. And customers are much more conscious now, in general, not to overload any country.
HGI: How did the tariff situation impact assortments, especially when we talk about categories that are harder to move? What have your customers been doing?
PW: I think sweaters is probably the one that springs to mind the most, because we’ve seen sweaters generally in the last 18 months dramatically shift away from China and predominantly into Cambodia—and I’m not just talking about NewTimes customers, just generally. Probably 70% into Cambodia, with the other 30% into Vietnam, Indonesia, Bangladesh, and surprisingly, even some sweaters in India, which was never seen as a strength for that country. But there’s some good pricing and capability there.
But the challenge is China has such a massive capacity. We’ve found in the last 18 months [production is] completely overloaded in Cambodia to the point where we’ve seen orders that were planned for Cambodia had to move back to China to handle the capacity. But I think over time, we have seen the capacity in Cambodia increase. A lot more factories are setting up, and a lot of satellite factories are setting up. But with sweaters typically, we’ll do some tests to react preseason, and it’s very hard to do that in Cambodia, so typically China will still do a lot of tests to react, smaller runs, fast and flexible. Other countries will do the bulk of the orders. So, we’re kind of balancing things out a bit.
Sweaters is the only major category that was left in China in a large way, because everything else has pretty much moved out, even technical jackets, performance jackets. You can get all of those capabilities in Vietnam and Indonesia.
What I’m saying here is all very much reflective of the U.S. market. It’s different for the European market, because as you see things moving out of China for the U.S. exports, I’ve definitely seen a lot of increase of European countries into China to soak up some of that excess capacity, to take advantage of some of the opportunistic pricing. Even to a certain extent, we’ve seen European orders move out from Bangladesh into China. So, where a vacuum is created or there’s a gap, other countries where the tariff or duty situation is different can take advantage.
HGI: Well, that’s a good segue, because production countries keep saying they’re trying to make up shortfalls in orders by going more heavily after European buyers. Is that possible, especially given that Europe has many more options right now and is demanding better pricing?
PW: To some extent, yes, but not fully. Because, of course, the order quantities and volumes from the U.S. are typically much higher versus Europe. There are some exceptions to that. There are some very large European big-box ecommerce retailers out there, but generally, I would say that the order volumes in Europe are smaller. The other thing is if the China factories are not used to doing European orders, it’s a very big learning curve [in terms of] the European ways of working and regulations, particularly around sustainability and compliance. I wouldn’t say better or worse than the U.S., but definitely different requirements. Europe tends to be a lot more regulatory, a lot more detail orientated.
But I do think that based on a combination of strong domestic demand within China, plus European orders and Australia, for example, where probably 80% – 90% of their apparel is based in China and has been for a long time, there are other markets that can soak up some of that capacity. But there’s still a lot of factories out there that are maybe 60% – 75% full.
HGI: Let’s talk about India. Prior to the announcement that the U.S. and India had reached a deal that lowered that country’s tariffs to 18%, how would you characterize the factory situation there since August?
PW: Initially, there was shock. And then, denial. People really couldn’t believe that 50% was slapped on virtually overnight with no warning. In the short to medium term, we’ve seen that vendors have been a lot more flexible in offering tariff support to customers to maintain the orders. Because everyone thought this 50% would be a very short-term thing so their view was to support customers so that customers wouldn’t move orders out of India.
To do tariff support pricing would be more advantageous, as opposed to laying off workers and restructuring because that comes at a cost as well. What happens if the tariffs change in a month’s time and you’ve done all this restructuring? How can you get back again? So as time went on, two things happened: Those vendors who wanted to maintain the orders had to continue the tariff support to incentivize the customers to retain orders in India. And in parallel to that, as month three and four went on, we found a lot of Indian vendors started to look offshore at multi-country options, and we saw a very increased interest in Sri Lanka.
HGI: After months of doing what they needed to do just to keep the doors open, what’s the state of the factory landscape in India now? Did you see a lot of factories going out of business?
PW: I think there’s minimal impact, because a lot of the factories we work with are well set up. They’ve been in business for many years. These are typically private companies, which either reinvest in their business or have sufficient cash reserves to see it through. If there were no deal by Q3 or Q4 this year, I think the situation would have changed. Customers would have moved programs out anyway, because how long can vendors sustain tariff support pricing?
HGI: You mentioned the multi-country strategy that some factories are pursuing. Chinese companies have been pursuing that for a while, particularly in Vietnam. Do you have a sense of the number of factories and mills that are Chinese owned there?
PW: On the factory side, it was typically around about 8% in vendors. I think that’s increased in the last 12 months. In mills, we’re seeing a lot more on Korean, Taiwanese, even joint ventures with Vietnamese. So, yes, Chinese, but my perception is there’s not a huge increase, because when you start to relocate mills, it’s a big decision. And these things take typically 12-24 months for planning, because unlike a factory where you can open a factory pretty quickly, with the mill, it’s a very heavy capital investment where you need the seven- or eight-year return on investment.
So, we have seen an increase in mills, but I do think over the next two to five years, we’re going to see that trend continue, particularly because if you look at the Chinese vendors and mills, they’re very used to multi-country setups. We’ve seen a lot of Chinese mills going into Egypt, for example, and a lot of Chinese moving into Egyptian production. And of course, you have a lot of Chinese factories in Cambodia. So, this is not new for China. And I think that, as we see a very strong demand in Vietnam, the trend of Chinese mills, whether it’s joint ventures or standalone, will continue.
HGI: What else in your view may have long-term impacts on the industry directly tied to the tariff situation?
PW: We didn’t talk about de minimis. Even though it’s different from tariffs, de minimis going away happened pretty much at the same time. When you have typically ecom customers who were getting a double benefit of no tariff, and selling duty free, you had a lot of customers who were under a lot of pressure, because you’re not just facing tariff pressure, but you have de minimis pressure. Your costs have exponentially gone up. And then you have a lot of customers moving their warehouse from Mexico into the U.S. You have customers dealing with two major issues at once.
But what it has created is other options to land product more cost competitively. We’ve seen an increase of interest on first sale, which, of course, is a legal way to land product more competitively. We’ve seen a lot of customers that did first sale, but are more aggressively pursuing [it because] your benefit increases when you land product with higher tariffs or duties. That’s another knock-on effect of how customers are trying to find ways to minimize the impact by using all those legal ways at their disposal.
