After 40 years of economic reform, China has become a superpower. Since reforms imposed by Deng Xiaoping — to look to the west instead of the traditional economic model of communism – they have grown from an agricultural economy to an industrialized massive economy with huge power and influence in the world. We could spend the length of this article illustrating the advantages and opportunities this poses, however with limited knowledge on the subject I want to focus on what has become evident: China is no longer competitive for low-priced products that are labor-intensive like apparel.
For the past few years following the appreciating of the renminbi in China’s currency, the growth of the middle class and the increase on oil prices have increased the cost of manufacturing. The final push came thanks to COVID, which has made logistics extremely expensive. For anecdotal purposes, let’s say that to move a container of tires pre-COVID from China to the U.S used to cost about $2,000; now the same container costs around $8,000.
If a small or medium-size company is to manufacture and produce [in South or Central America], it is possible to find a balance between ethics, prices and quality.
Nowadays, big apparel companies are moving their production to places like Vietnam, Cambodia, Bangladesh, Sri Lanka and other low-income countries with horrible track records for labor and human rights — this is not a secret to anyone, but it seems that the industry prefers to turn a blind eye.
China, like most developed countries, has now become a producer of high-end or capital intensive goods, and is increasing exports of textiles to the mentioned countries. This trend has been accelerated this past year by COVID. Not to mention, there’s also the impact of the so-called trade war that’s also considered to be among the main factors.
Why should you look elsewhere, and where?
As these countries capture the bulk of manufacturing for the biggest apparel brands in the world, what are medium and small-size companies that need a low minimum order quantity to do? Where do they gain access to sourcing alternatives and reasonable pricing? The challenge appears when small and medium-size manufacturers start to learn that dealing with Vietnam, Bangladesh and other countries is not the same as with China. Forty years of a full-package experience is not learned overnight, and there are cultural challenges in addition.
However, the solution has always been in America’s backyard. Central and South America have remained well-kept secrets, or frankly have been overlooked by the industry for years. Many of these countries are just hours or a few days away from ports and airports in the Gulf Coast or hubs like Miami.
Historically South and Central American exports to the U.S. have been mostly composed of commodities, foods, flowers and coffee. The reliance on Chinese manufacturing didn’t impede countries like Peru, Chile, Colombia and Brazil in creating industrialized sectors in automotive, apparel, hardware and more. Through investment in education and infrastructure, some of these countries have become as competitive as Asia and with a huge difference when it comes to labor laws. While manufacturing in foreign territories may not be all rosy, and there are challenges and the reality of poverty and corruption, based on personal experience, if a small or medium-size company is to manufacture and produce there, it is possible to find a balance between ethics, prices and quality.
Lower Minimum Order Quantity
Due to the nature of the many domestic markets to which most companies in these countries tend, factories are set up to manage way lower volumes than China. If you are H&M, Walmart or Target, then South America is probably not for you, but if you are one of those leading lingerie or pleasure products brands that advertise here in XBIZ Premiere, then I’m pretty sure you will be able to find a good supplier. Additionally, with a U.S. work force, that likely includes a portion of Hispanics, which means that there are chances that you already have someone on your team (or perhaps even you yourself) that can help start your exploratory mission.
Free Trade Agreements and Logistics
Below is a list of countries in the region that have free trade agreements with the U.S. and Canada:
- Chile — both
- Colombia — both
- Cost Rica — both
- Dominican Republic — U.S. only
- El Salvador — U.S. only
- Guatemala — U.S. only
- Honduras — both
- Mexico — both
- Nicaragua — U.S. only
- Panama — both
- Peru — both
In laymen’s terms, let’s say you manufacture panties for women that are made of synthetic material in China for 50 cents. Now, you must add to that the cost freight and duties. By using subheading 6108.22.90, it will add 15.6 percent — roughly 7.5 cents per unit for the U.S. — and 18 percent for Canada. Now some would say that the difference in duties would be absorbed by a cheaper price —well, that’s the kicker. It won’t, because after adding freight and minimum quantities that you will end up liquidating — and hence adding an additional cost of capital you would be better off sourcing in any of those countries.
Finally, when it comes to logistics, nothing will beat geography. Most of the countries listed are only two or three hours by plane. Since a lot of their exports already come by plane due to their nature, you can have the peace of mind that there will always be a great logistics infrastructure behind them.
Raul Valencia is the founder of MaleBasics.com and ColombianCoffee.us. He can be reached at raul@malebasics.com.
