Surging demand and supply disruptions are driving up prices for raw materials, labour and shipping in fashion’s largest manufacturing hub.
BoF Professional — May 25, 2021
China is fashion’s most important manufacturing hub, so when prices started rising in the run up to Chinese New Year, the ripples were felt throughout the supply chain.
Raw materials, textiles, labour and shipping have all become more expensive this year, raising concerns about spiking inflation just as fashion emerges from its toughest year since the financial crisis.
China’s producer-price index, a gauge of factory-gate prices, rose 6.8 percent in April, the fastest pace since October 2017, according to China’s National Bureau of Statistics. The increase could become more pronounced in the second and third quarters of this year, according to a recent report from China’s central bank.
There are signs higher costs are spilling into prices in consumer markets too. In America, the consumer price index jumped 4.2 percent in April compared to a year earlier, its sharpest increase since 2008.
The link between production prices in China and consumer prices in Western markets “has become particularly evident in recent months,” said Nick Marro, global trade lead at The Economist Intelligence Unit. “The supply chain disruptions we’re now seeing, in terms of sky-high sea freight prices and limited container space, are also having a compounding effect.”
Rising prices risk dampening the prospects of a swift recovery for the fashion industry, even as major Western consumer markets emerge from lockdowns. Brands are still managing liquidity and debt issues, leaving them resistant to any increase in price, especially if it risks jeopardising sales.
The current rise in prices is in large part a pandemic hangover. Demand that has been dormant for a year is roaring back in Western markets, amplified in the US by the arrival of government stimulus cheques.
“Now that two of the biggest consuming countries, China and America, see their economies well and truly opening back up, people are trying to get ready,” said Ophelia Chen, co-founder and chief executive of genderless fashion label, Bobblehaus.
Everyone is scrambling to get fabric
Chinese cotton prices rose 4 percent between January and March to hit 15,948 yuan ($2,479) per tonne, according to market intelligence firm Texpro. The company expects prices to remain above 16,000 yuan ($2,487) per tonne in the coming months.
Raw materials account at least 50 percent of textile costs, according to Anson Zhou, a consultant in sourcing and supply chain management for clients including Macy’s, JC Penney and Tommy Hilfiger, meaning a rise in raw material prices immediately creates a profit squeeze for manufacturers.
It’s not just cotton. Rising oil prices, combined with tight supply and strong demand are pushing up the cost of synthetic materials too. The price of spandex has risen around 30 percent, according to Yossi Nasser, chief executive of intimates manufacturer, Gelmart International. Prices of other materials have also increased, but slightly less, he said.
Even leftover “deadstock” fabric is in short supply, according to Chen, who used to have no problem finding abandoned treasure troves to enable Bobblehaus to meet its goal of using no new material. Now, “fabric is running out like crazy,” she said.
Meanwhile the trade disruptions of the last year have created imbalances in the flow of goods that is turning into a costly logistical headache. Freight rates have increased amid trade bottlenecks, the Suez Canal blockage in March and a scramble for empty containers.
If you are booking a container today…
Chances are, you have to book both ways, so the price doubles
Most industry players expect raw material prices and logistical costs to normalise throughout the year, though few expect that either will fall as precipitously as they have risen.
“Manufacturers are aware that these bottlenecks will be transitory and with business confidence recovering this is likely to mean that firms will invest in production capacity to alleviate some of these price pressures,” said Robert Sierra, economics team director at Fitch Ratings. “We expect bottlenecks to ease over the course of the next year.”
But there are longer-term pressures at play as well. China’s dominance of the fashion supply chain rests on its vast labour force. But the country’s birth rate is falling and its population ageing. That points to a looming rupture in the country’s ability to maintain its huge manufacturing volumes at competitive prices, particularly as cheaper rivals are already nipping at its heels.
Greater automation may help manage costs over time. Though there’s still a technological gap in what is possible. Today, only some kinds of garments and seams can be manufactured entirely by machine without human intervention. In the near term, suppliers in China say they are working closely with customers to find solutions to production bottlenecks and price increases. Some are planning raw material orders ahead of time to lock in volumes and prices, while others are negotiating new material mixes that contain lower-cost alternatives. But cost-cutting opportunities are limited after years-long efforts to maximise efficiencies.
“Supply chains have become pretty much commoditised and transparent enough that there’s no hidden avenue to try to find a way to maximise savings somewhere” Nasser said.
Some manufacturers see an opportunity to reset after a decades-long race to the bottom on pricing. That’s fuelled a boom in cheap fast fashion, but also fed into a culture of discounting and price erosion that has hurt profitability across the supply chain.
Training consumers to accept prices that reflect the true cost of manufacturing could benefit manufacturers in China, where prices are likely to remain higher.
“I think what you are seeing, in general, in the retail marketplace is brands and retailers are looking at ways to increase price points at retail,” Nasser said. “That’s the environment you are dealing with right now, so that’s one of the things that could help with this entire situation and the costs.”