Trade Wars, China Hack and Fast Fashion Put Reshoring of Jobs in Spotlight

The likelihood of reshoring jobs to the U.S. or Europe from places like Asia seems to be gaining momentum in light of ongoing trade wars, fears over the possible China microchip hack that attacked the U.S. supply chain, and the reality of market forces like “fast fashion” and customer demand that typically drive business decisions.

Current events and a recent study of the apparel industry can help gauge the state of the world as it feels the push and pull of globalism versus the rise in national policies.

Tariffs by the Trump administration are focused on helping businesses at home, but an all-American company like Harley-Davidson decided to move motorcycle production overseas. Why? Because its biggest sales growth is in Europe — which put its own tariffs on U.S. products like bourbon, jeans, orange juice and motorcycles.

In the U.K., Brexit aims to help the homeland there, but no formal trade deal has been worked out with the European Union, so uncertainty is mounting for companies that want to do business in the U.K. BMW even went so far as to schedule its yearly maintenance shutdown of its Mini auto factory in England to coincide with the Brexit deadline in March. The German automaker fears the break in relations will disrupt its supply chain, and the move appears to be a no-confidence vote in the U.K.’s trade planning.

And the story of the China hack that was reported by Bloomberg this month raises the specter of spies tampering with products upstream in the supply chain. The production of electronics is entrenched in Asia, and companies likely could not move their supply chains anytime soon to avoid security concerns. Some have even called this another step toward a Cold War with China.

In the apparel industry, a McKinsey study released in October gives some insight into the prospects of reshoring those jobs to the U.S. or Europe. For the near term, it concludes that “nearshoring” production closer to places like Mexico or Turkey is more likely than the jobs going to the U.S. or Germany — but that timetable could change as automation improves.

Source: McKinsey & Company

McKinsey said the study relied on interviews with industry experts, practitioners, retailers and automation innovators, like the Institute of Textile Technology at Aachen University in Germany.

The factors driving disruptions in the apparel industry, the study says, include rising labor costs in Asia, increased demand for clothing in China, automation and the fast fashion trend — where customers demand to buy designs they’ve seen on the runway or from trendsetters online, not a corporate clothing campaign.

The study said Mexico offers lower average manufacturing labor costs than China now, making the U.S. neighbor an attractive near-shoring location. The same goes for Turkey, where hourly labor costs are still higher than in China but closer to the Chinese rate, so it’s a competitive option for the European market, the study said.

The market in Asia also has changed, the study said. Clothing demand there is rising and local factories are serving customers there instead of overseas markets. That competition could make labor costs rise.

Labor costs and speed to market play key roles in the fast fashion trend, which recognizes that the window to reach customers can be short, so it’s inefficient to design a new clothing line, mass produce it overseas and return the products in time to satisfy the market demand, the study said.

Instead, retailers are thinking small.

Reshoring Initiative founder Harry Moser, a U.S. business executive who wasn’t part of the study, said one fast-fashion retailer believes it’s better to make clothes in smaller batches to meet demand and sell all of items at full price than it is to produce huge amounts at a lower cost, miss out on customers who want that style and end up discounting so much of the supply that it hurts your business. He sees that development meshing with the study’s finding that nearshoring is likely.

“It seems that the brands and the retailers are starting to understand that” pricing and being fast to market do matter, Moser said, “and as that happens, the U.S. will be the closest location and then Mexico will be second.”

Automation also may drive manufacturing closer to where the customers are, the study said.

In the survey, 82% of respondents believe that simple garments will be fully automated, creating an 80% labor reduction by 2025. It said that 70% believe it is highly or somewhat likely that more complex garments, such as dresses and jackets, will be significantly automated, resulting in a 40% labor reduction.

“Within five years, semi-automated factories could enable nearshoring and selected lighthouse projects of new business models, such as store factories, which could help build customer excitement,” the study said. “Within five to 10 years, suppliers with fully automated factories could enable full onshoring. More complex silhouettes will be semi-automated within a decade and to such a degree that companies can scale up new, high-margin business models that include customization.”

For a more near-term example, the study noted that the intense labor needed to sew and otherwise produce apparel requires a human touch, but the finishing of products can be automated. So raw materials may be cut and sewn in Asia, but the final work may be done by machines at a fraction of the time and cost in the U.S. or Mexico, the study said.

Moser favors bringing a lot of manufacturing jobs back to the U.S., but he’d take a slice of the apparel finishing work over nothing.

“I’d rather finish it than not touch it at all,” he said.

Fabrice Saporito, CEO of Koble, a business-to-business service that connects suppliers and customers globally, sees a redistribution of supply chains across borders but not necessarily that U.S. businesses will reshore their operations.

Saporito, who also was not part of the study, said Harley-Davidson and BMW made smart moves by looking for ways to deal with tough trade situations. He also believes the countries that are pulling out of alliances or taking tough trade stances are just isolating themselves.

“It’s ultimately going to backfire,” he said.

Saporito does predict that supply chains will shift across borders but that they are not necessarily going to countries using tactics like tariffs. “The grounds of globalization are solid,” he said. “It’s the way forward.”

And he doesn’t see smooth sailing after the U.S. trade wars or the UK exits the European Union.

“As the reality hits, things will change — and it will hurt,” he said.

The apparel study concluded with a call for the C-suite to be prepared and pay attention to procurement.

“The supply chain has rarely been the main topics apparel CEOs think about,” the study said. “Although it is the engine that needs to run smoothly to ensure good service levels and margins, it is not seen as the primary source of growth and winning in the fierce apparel market. But this will change. The disruptions ahead are so profound that mass-market apparel players making big moves and capturing the advantages of nearshoring and automation have the opportunity to build business models that drive growth and are hard for others to replicate.”