It’s complicated, and China still dominates the trade.
Apparel and footwear manufacturers are getting desperate. With orders backlogged and dozens of ocean carriers anchored off the ports of Los Angeles and Long Beach due to targeted slowdowns by the International Longshore and Warehouse Union (ILWU), officials with the American Apparel & Footwear Association (AAFA) arrived in Long Beach on January 27 to meet with officials to help encourage negotiations.
Based in Washington, DC, AAFA is the national trade association representing US apparel and footwear brands as well as retailers and manufacturers. The leading association for the industry, AAFA represents about 1000 brands.
For months the ILWU’s targeted slowdowns have severely worsened existing congestion at seaports in Southern California by withholding skilled longshoremen, dock workers and terminal operators, who are most essential to clearing crowded terminals, from doing their jobs. Meanwhile, cargo has been sitting idle on ships as they wait – sometimes 18 to 20 ships deep —for their turn to enter the seaports.
Nate Hermann – AAFA VP of international trade
In an exclusive interview with this AJOT reporter, Nate Hermann, AAFA vice president of international trade, commented from Long Beach that the labor slowdown is especially disruptive to the footwear and apparel industry since half of all clothes and shoes come through the ports of Los Angeles and Long Beach. “They’ve been without a contract since July and the situation has deteriorated to where the port slowdowns are causing major delays for our members,” Hermann said.
In Long Beach holding a logistics workshop, officials from the trade organization also planned to meet with groups on January 28 to help facilitate a negotiation.
“We like to think of the AFAA as a ‘first responder’ for the industry on this critical issue,” he said. “Our industry is highly dependent on the ports because we import most of our products and most comes on steamship lines.”
While AFAA has been actively pushing the Obama Administration and Congress to intercede in the negotiations, neither has taken action. Prior to coming to the West Coast, AAFA officials met with White House officials to try to push the issue.
“We were successful in getting the federal government to offer federal mediation,” Hermann said. As a result, the Pacific Maritime Association (PMA) and ILWU accepted and entered into negotiations.
While the two groups appeared to make some progress on a key component of the stalled labor talks, AAFA intends to continue ramping up pressure on Congress and President Obama to monitor the situation and keep the mediation process going. “This is where our efforts are placed,” he said.
Contingency Plans
Hermann explained that AAFA members continue to make short term contingency plans by moving cargo through other seaports. “These include the Port of Prince Rupert in British Columbia, and East Coast ports such as the ports of New York/New Jersey, Savannah, and New Orleans,” he said.
AAFA member companies also have been forced to use air freight. “That’s because they are pressured to ship to deadlines, but air freight is exorbitantly ten times more expensive than ocean freight,” Hermann added.
To counter the problem, shippers are adjusting production cycles and trying to bring product in early. But this “solution” is failing because some of the ships are being delayed at the ports of origin in Asia. “Steamship lines see no point in deploying their ships from port until they know they can get a backhaul,” Hermann explained.
For the footwear and apparel industry, this means shipments are being delayed three to five weeks, which is creating havoc in the supply chain.
“Compounding the problem, since this is not an ‘official’ strike, the US government can take little action,” Hermann added.
Meanwhile, the alternative seaports that are handling the cargo are facing their own problems because of the volume increases. “We’ve heard that the Port of Prince Rupert is having problems handling the volumes, and we’ve also started to hear the same about the Port of New York/New Jersey, in particular,” Hermann remarked.
While much is being written about how East Coast ports are ramping up their infrastructure to handle increases in cargo that they expect from an expanded Panama Canal when it opens in 2016, the West Coast port problem is already shedding light on additional potential problems. Steamship lines are increasingly deploying vessels 8000+ TEUs in size and consolidating cargos through vessel alliances.
“The Panama Canal, when it is finally done, only will be able to serve ships one generation behind those that are now being deployed,” Hermann stated.
Another issue apparel and footwear shippers are facing is the fact that with such large ships pulling into Los Angeles and Long Beach, containers are being placed willy nilly.
“Part of the problem is that for the last two months, no one can figure out where their cargo is,” he said. “They have no idea where it is in the yard. It takes days to find.”
Meanwhile, ports charge demurrage fees for containers that sit in the terminal for typically more than four days. Hermann likens this to a “perfect storm.”
“Shippers are using technology as much as they can to track and trace their cargo, but the port is a key part here,” he explained. “Ports don’t necessarily use the latest technology because of constraints in labor contracts.”
Product Sourcing
The volume of cargo coming from Asia will not abate any time soon given that apparel and footwear are among the top imported items and China is the No. 1 supplier of these goods. According to AAFA 2014 statistics released in January 2015, China remained the No. 1 supplier of apparel to the US market in 2013, accounting for 41.7% of US apparel imports. This was also the case for shoes where China accounted for 81.4% of US shoe imports in 2013, although that figure was down significantly from 2012.
AAFA stats also show that US apparel imports from countries in the US/Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) lost market share in 2013. They accounted for 11.8% of US apparel imports, down from 12.3% in 2012. US apparel imports from No. 2 supplier Vietnam continued to grow in 2013. Vietnam accounted for 9.8% of US apparel imports, up from 9.1% in 2012. Overall, US apparel imports were up 4.9% by volume in 2013.
AAFA also indicated that the share of US apparel imports entering the United States under free trade agreements (FTAs) and other trade preference programs was 4% in 2013. Only one fifth of US apparel imports entered the US under these programs.
As for shoes, AAFA reports that US shoe imports were up 8.0% (by volume) in 2013. US shoe imports from No. 2 supplier Vietnam continued to grow in 2013, accounting for 9.9% of US shoe imports.
Hermann stressed how these figures reinforce the industry’s need for a China plus 1, or China plus 2 strategy; in other words, the need for one or two countries outside of China from which to source product.
“China is still by far the dominant supplier of US apparel and footwear, but it represents only 40% of apparel and 80% of shoes to the US market,” he explained.
Meanwhile, other markets are growing quickly. Vietnam weighs in as No. 2 of both clothes and shoes to the US market, and has been growing at a double digit rate for at least five years. The reason: Vietnam has developed a solid apparel and shoes industry whereby most factories there are owned by the same suppliers who own factories in China.
“Plus Vietnam has been a good business environment to work in,” Hermann added.
Trade agreements also offer benefits, including the Trans-Pacific Partnership (TPP) although it has not yet come on line.
“We are finding that people are sourcing from Asia regardless of whether or not the TPP goes in effect,” he added.
The situation is different in some other Asian countries. While Cambodia and Bangladesh are major suppliers to the US apparel market, turmoil in both countries over the last couple of years has severely impacted their double digit growth in the clothing industry.
“Bangladesh is making concerted efforts to address their problems,” Hermann said. “The issue right now regards a larger political situation that could dampen growth.”
Meanwhile, Cambodia has not recovered from its political unrest. Today suppliers are more optimistic, although it now appears that the situation has stalled.
Footwear production in these countries has not been as impacted since China holds a monopoly and manufacturers are seeking alternatives. While shoe production in Cambodia and Bangladesh is of small volume, yet big for those countries, the industry appears to be growing. “A lot of people are testing the markets to see if they can be an alternative to China,” Hermann said.
Elsewhere in Southeast Asia, Indonesia has been regarded as an alternative to China for apparel and footwear production, but corruption there has severely hampered its growth.
Still very small, yet up and coming for both clothing and footwear is Africa, particularly Kenya, Ethiopia, and Lesotho.
“The US Congress could impact the trade if they do not extend the Africa Growth Opportunity Act, a trade preference program that allows duty free access for clothes and shoes from Africa to the US market,” Hermann reported. “Everyone from President Obama on down has said that they support renewal of the program, but renewal hasn’t happened yet.” The Act is set to expire at the end of September.
In the Americas, Central America supplies approximately 15% of the apparel for the US market. Suppliers report, however, that business there has been stagnant for the last five years. Honduras remains the fourth largest supplier, but business is slowly declining. Hermann attributes this to CAFTA-DR.
“The rules set out by CAFTA-DR have made access very complicated and restrictive,” Hermann said.
The business model in Central America is also different from that in Asia where the supplier operates under a “full package” business model where everything is done by the supplier. “They source all materials, put together the product, and handle all the rest,” he said.
By contrast, to do business in the Honduras, all material must first be sourced then shipped to the factory that performs the stitching, but not final assembly of the product.
“Companies operating in Central America are getting better, but they do not offer the full package,” Hermann explained.
Brazil once was a good market for shoe exports to the US market – that was until its currency inflated. “That killed their exports,” he said.
Today companies operating in Brazil serve its huge domestic market. Today Brazil is the second biggest market in the Western Hemisphere for clothes and shoes.
Near sourcing continues whereby some US manufacturers have returned to the United States from China. “It’s still small,” Hermman admits. Footwear represents 2% of the US market; apparel, 3%.
