Covid continues to cloud the Chinese supply chain
Since January 2020, when China went into lockdown in response to the first outbreak of Covid infections, the world had no idea of the death and disruption it was about to unleash on the world. Factories in China started closing and global brands had to close their stores.
Although restrictions were lifted two months later, subsequent lockdowns – China has adopted a strict zero-tolerance approach to Covid – have led to continued uncertainty about supplies, rice prices and falling sales in the country.
Shanghai, China’s economic powerhouse, has been back in lockdown for the past two months, but this week announced a lifting of measures from June 1. Plans were also unveiled to support the city’s economy, which has been hit hard by the restrictions, including speeding up local government bond issuance and speeding up building project approvals.
The shutdown of Shanghai, a major center for international trade and home to the world’s largest port, has impacted the supply chains of companies in a range of sectors, from technology and automobiles to beauty and fashion.
Under Armor is among the apparel companies affected. The US fitnesswear brand announced earlier this month that it is canceling some orders affected by supply chain delays in China, rather than stock arriving late at its stores around the world.
“Everyone’s inventory is coming in a bit disjointed,” said outgoing Under Armor CEO Patrik Frisk. “You could say that in our industry in general it was difficult to get the right things in the right place at the right time. We might have things you can bring into the channel, but it’s not necessarily always coordinated.”
In addition to production, sales for many global brands with a presence in China have plummeted as local stores are forced to close. Adidas’ sales in China fell 35% year over year in the first three months of 2022. The company said the drop was due to a “challenging market environment” in China.
In an update released in early May, luxury conglomerate Moncler said 30% of its stores in China were temporarily closed. It has 35 stores in the country.
Several UK-based clothing suppliers have told Drapers that stockpile shipments from China have slowed during the recent lockdown.
“We’ve seen delays of four to six weeks due to lockdowns in and around Shanghai,” said Mark Hollis of womenswear manufacturer Shani Group.
Another UK-based clothing supplier said: “Cargo from China takes almost 12 weeks on the water.”
The delays are the result of a combination of factors. Shanghai’s massive port operations were running at a snail’s pace when the lockdown began six weeks ago and has yet to return to its former capacity.
However, suppliers also said local lockdowns had hit some factories in Shanghai head-on due to China’s strict rules that shut down entire areas following the discovery of a positive Covid-19 test.
“They get a case that tests positive and they lock down the whole city,” Hollis said, adding that fortunately his business has only had a small number of closures.
Chinese leaders have also spoken about the need for a stable economy, leading some observers to hope that business needs will ultimately take priority.
“I think the Chinese government is catching up [on the economy]’ said a supplier of casual wear.
Even the fashion companies whose garments are made elsewhere are struggling with the fallout, as components like fixtures and trims are still sourced in China. More than one supplier Drapers spoke to identified the sourcing of embellishments such as zippers, buttons, buckles and rings as a particular sticking point.
“It’s very difficult to find someone locally who makes zips,” said a representative of clothing manufacturer Basic Premier in Leicester.
“Zippers are the most important thing [item in short supply because of China lockdowns] — and buttons,” said another supplier, adding that problems then delayed the garments’ completion for weeks.
High costs and other challenges
Uncertainty about whether China could impose further restrictions if it continues to pursue a zero-Covid policy is making it particularly difficult for suppliers to make long-term decisions.
Even if Shanghai’s clearance goes according to plan, there are fears that ports in Europe and the US could be congested once China returns to full capacity, causing further delays for customers. After two years of grappling with the twin logistical nightmares of Covid and Brexit, suppliers appear to be facing more challenges.
In addition to delays and lockdowns, there are issues with the rising cost of cotton. With many retailers committed to sustainability in their supply chains, the demand for organic cotton is particularly high.
Saying goodbye to Marks & Spencer on May 25, outgoing CEO Steve Rowe said that while the retailer strives to pass on as little cost as possible to customers, “there are issues with cotton prices due to high demand – for example, is Organic cotton up 40%”.
The leisurewear supplier told Drapers that cotton prices have been rising steadily for more than a year: “It’s so strong that in certain cases countries closer to the UK are more competitive than other countries, such as those on the UK, because of freight traffic Indian subcontinent is also an issue.”
He said the depreciation of the Turkish lira means the Middle East country is now better positioned to compete with South Asian cotton producers. The currency has plummeted in response to lower interest rates.
However, another activewear supplier who spoke to Istanbul-based Drapers said rising cotton prices and Turkey’s minimum wage meant manufacturing in the country was still expensive compared to China.
The experience since the start of Covid has caused many in the garment industry to reconsider their high exposure to China.
“There are many [suppliers] moving [production] get out of China and look elsewhere,” said a womenswear supplier who sources from India, adding that orders in the subcontinent have increased as a result of the crisis.
“People are sensibly moving their business away from China because there are all these obstacles and threats. I think China will see a downturn in business due to its shutdowns.”
A menswear supplier agreed: “Some of the bigger companies are rethinking their sourcing and saying, ‘We need to scale down our pie chart from China.'”
Some are even looking to local UK suppliers to reduce the risk of supply uncertainty overseas. Reshoring has already been taken over by other sectors over the past two years due to Brexit and supply shortages. A report by the manufacturing industry association Make UK, Operations Without Borders: Building Global Resilient Supply Chainsreleased in May, showed that almost half (42%) of 132 UK manufacturers surveyed had increased the proportion of their UK-based suppliers in the last two years.
“Once lockdown is lifted in China things should return to normal but there is that risk [of further lockdowns]said the Basic Premier representative.
He noted that even without the problems in China, suppliers still face other pressures, such as fuel costs.
“We now need to invest in local suppliers,” he concluded, saying that Basic Premier would look for more UK-based manufacturers where possible, but conceded they were difficult to find.
Vietnam will also benefit from new orders channeled away from China. But footed suppliers in both countries say Vietnam’s garment factories rely on imported Chinese raw materials and face shortages.
A menswear supplier who works with factories in both countries said it would try to do more business in Vietnam but stressed that it hadn’t lost confidence in China: “Once it starts opening up again, it will.” it better.”
A footwear supplier whose production in Vietnam and Indonesia has been hit by a shortage of raw materials from China said it would impact deliveries in Autumn/Winter 2022 but was optimistic for the following season. “Hopefully these issues will be resolved by spring/summer ’23.”
Many companies also don’t have the option to sever ties with China due to its dominant role in the global supply chain. For example, the country is the world’s largest producer of silk, leaving little choice for designers wanting to use the fabric.
Outlook for the future
The start of development in Shanghai has given some hope to the industry. But the effects of the lockdown are still being felt.
Commenting on Adidas’ latest results earlier this month, CEO Kasper Rorsted said: “We will return to growth in Asia-Pacific in the second quarter while expecting the challenging market environment in Greater China to continue.”
The supplier, who spoke to Istanbul-based Drapers, said the expectation in Turkey is that problems sourcing materials from China could last until at least July. “At least in the short term, it looks like things are about to get worse.”
Even if China’s supply chain returns to normal, inflationary pressures around the world mean suppliers could face tough times for much longer, said Santoshan Sangha, chief executive of apparel maker Sweats & Tees: “I think we’re going to get through a fight.” for about two years,” citing the war in Ukraine and rising wages in the UK as aggravating factors.
“You just don’t know overnight what you’re going to wake up to, which cities are going to be on lockdown, so you can’t plan,” Hollis said. “Because it’s literally impossible to work with from one day to the next.”
“Nobody has a crystal ball,” the casualwear supplier concluded.
Despite the ongoing uncertainty affecting fashion suppliers and retailers who source clothes and shoes from China, for many suppliers moving all business out of the country is not a viable option. They face an uphill battle over the next few months against costs, delays and retailers reluctant to pass on the pain in the form of higher prices to customers already struggling with increased living expenses.
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