Financial Times

DHL study on how apparel exporters could compete with Chinese producers
Sri Lankan apparel exporters will be able to survive the expected onslaught from low cost Chinese producers with the end of textile quotas next year if they link up with top retail brands and compete on service and quality but would have to face severe price competition.

“Exporters like Sri Lanka who don't have a low cost advantage against China will need to be more selective and successful in targeting winning customers and brands, and out-compete on service and quality,” said Charlie Taylor of McKinsey Consultants.

"Sri Lanka needs to target winning customers and compete on service and quality," he said at a presentation of the findings of a study commissioned by DHL on challenges faced by Asian exporters with the end of quotas.

It was done to help the express cargo and logistics company to better understand future sourcing and distribution patterns of top retailers and apparel manufacturers.

The study for DHL, which serves many players and can see first hand trends in sourcing practices, said there were concerns that competition from China could wipe out less competitive exporting countries such as Sri Lanka.

Prices are expected to come down once quotas end as already seen in baby garments and bras, following the removal of quotas where there were "significant reductions in prices because of China's better productivity," Taylor said.

Over the past two years, exports of these categories to the US increased between 10 and 20 times, capturing a market share in the US of 40-60 percent. There was a 10-20 percent price reduction in certain categories. "We can expect the same at the low end of other categories coming off quotas," Taylor said.

The success of a number of larger Sri Lankan exporters in supplying leading brand owners and retailers without quota restrictions was important for the industry and should help offset losses by smaller manufacturers, Taylor said.

There would be opportunities for exporters like Sri Lanka despite the expected dominance of China because leading retailers and brand owners would not want to "put all their eggs in one basket" and would look for alternative sourcing for at least half their requirements.

In the five-year strategy prepare by the apparel industry to survive the quota-free era, among the reforms required that were particularly important were labour market reforms and improving infrastructure.

Private sector firms also need to improve organisation and technology. In the international apparel market, the share of specialised retailers is growing, largely driven by polarisation of customer demand between high end and low end, Taylor said. During the last decade, the share of discount stores such as Walmart and vertically integrated speciality stores such as Nike grew by around 10 percent and as a result they now command almost 40 percent market share in the US and Europe.

Consolidation to achieve scale among retail players had led to a decline in their numbers so it was important to target winning customers, Taylor said. He also said there was a "continuing trend of direct sourcing driven by the growth in vertically integrated specialists and retailers doing more direct sourcing to improve their margins."

Exporters need to address supply chain requirements and optimise time to markets and logistics costs because the product lifecycle was getting shorter. The Spanish fashion label Zara has set the benchmark by pushing production to retail time down to four weeks.

"Gap and Nike want to reduce apparel product development lifecycle to nine months from around 12 months." Optimising transport was important for exporters from Sri Lanka and India given their distance from key markets like the US, Taylor also said.

Big brands were moving their decision making to Asia to reduce time frames. "Sri Lanka needs to move fast to make use of the window of opportunity that is closing."

Ashroff Omar, head of the industry outfit Joint Apparel Association Forum, said Sri Lanka has several advantages like low import duties, a friendly tax regime, labour compliance that was internationally recognised and its aggressive push for signing bilateral agreements with key buying countries.

"We need closer relations with customers. Previously, because of our quotas customers had to come to us - now it's different."

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