Finding the Right Balance
VF is a USD 12 billion apparel and footwear powerhouse, with an incredibly diverse, international portfolio of brands and products, including The North Face, Nautica, Timberland, Vans, and more. VF has sourcing relationships with more than 1,000 product manufacturing facilities in Asia-Pacific region countries, including China, Bangladesh, Vietnam, Indonesia, Thailand, Cambodia, Pakistan, and India. China Focus interviews Veit Geise, VP Sourcing of VF, on his opinion of China as a sourcing destination and what trends and challenges to expect when operating there.
How important is China for you compared to other production countries?
This largely depends on the brands and whether we are looking at export or at China-for-China business. Price-sensitive brands continue to move or have already moved their activities to other countries several years ago, while very technical brands with a complicated outerwear segment, for example, still depend on China to a large extend. Growing sales & marketing activities in China continue to result in an increase of the China-for-China volume, which compensates for a loss of export volume. China, therefore, will continue to be one of the most important sourcing destinations in the future.
What factors do you consider when deciding to stay or move your production location?
This, too, depends on the brands that you are looking at. A price-sensitive business will react very fast to labour cost increases or a change in the geopolitical environment. The more technical a brand is, the less you will be inclined to move volumes to other areas for small incentives. A supplier who understands the complexity and DNA of a technically complex brand, is worth a lot more than saving a few pennies by moving countries. Nonetheless, depending on the product, a supplier’s readiness to react and adapt to changes is critical.
Is price the only factor for your customers?
Definitely not, although it is clearly a driver for making sourcing decisions. Gross margin pressure will not become less in the future, and with inflation at the sourcing locations and little chances to increase retail prices in general, the price pressure will not go away. It is the right balance and mix that you need to find and manage for each brand individually.
What are the challenges you face now in China and beyond? How do you overcome them?
The sourcing business has become much more complex over the past years, and we can anticipate even more complexity in the years to come. Today we require a much greater level of transparency from our factories than we have done in the past. CSR requirements, as well as responsible sourcing, have become very important factors in a relationship. The only way to build successful alliances in the future is an even closer partnership between the buyer and the seller. We will continue to see a further decline of purely transactional business.
Chinese factories are under ever increasing price pressure, and I believe this will continue to create challenges for every buyer to find the required level of transparency within the sourcing landscape. Frequent changes within your supplier matrix will result in failures and problems with regards to CSR, and factory and product safety.
What sourcing trends do you foresee for China and globally for VF?
Currency fluctuations create opportunities and risks. Obviously we are keeping a close eye on the respective currencies and react to changes or opportunities that arise from fluctuations. The current Euro weakness definitely creates opportunities for European markets to gain traction, while Asian countries will come under further increased price pressure. We have recently heard much more about Africa as a sourcing destination. While we are already sourcing from some of the East African countries, we are watching further developments there very closely.
What differences have you come across running your operations in China vs. other locations?
The largest difference when sourcing from China is the transparency of the supply chain, or lack thereof. China has, more than other markets, a very active trading and subcontracting base, which needs to be tightly controlled in order to conduct business there responsibly and successfully. With that under control, sourcing from China is much easier in many aspects, as the availability of fabrics, trims, and decorative items is vast and easily accessible. This makes the whole development and production process much faster and simpler.
How competitive is China compared to other sourcing locations?
For the more basic items, China as a sourcing location is becoming increasingly difficult to maintain. Although Chinese factories tend to run at higher efficiencies compared to other markets, the labour cost is too high to allow basic items to still be sourced from China. As mentioned earlier, if your items are more technical or complex, the know-how of Chinese factories is unsurpassed in many areas. This helps China remain competitive, although the true CM component is higher than in other markets.
What is the future of the Hong Kong buying office?
Hong Kong will remain the sourcing hub for any Asia-wide sourcing activity in the mid-term. It is centrally located and provides a wide spectrum of talent and expertise in various areas of the sourcing business.