Last week, The Wall Street Journal profiled global apparel producer TAL Group’s decision to close its apparel production factory in Dongguan China because of cumulative effects of rising direct labor costs. (Paid subscription required)
The fact that one of Asia’s largest manufacturers of apparel, supplying brands such as Banana Republic, J. Crew and others, came to this painful decision is rather significant, not only for the apparel industry itself, but others with high direct labor cost considerations. Wages and benefits in China are expected to increase by 8.6 percent in 2015 according to the Economist Intelligence Unit. That is incremental to last year’s 10.3 percent increase. Average labor cost in the manufacturing sector of China is reported as $3.27 per hour, considerably below existing wages in Malaysia or Vietnam.
The pants apparel maker is now transferring orders to an existing factory in Malaysia, and is expanding its production presence in Vietnam. However, the report indicates that TAL will keep open its 4000 employee dress shirt production facility within China. Product design innovation and direct to consumer fulfillment strategies among branded shirts has added more cushion for profitability.
We are calling attention to this report because it provides more evidence that competing in the global economy is not merely about sourcing production where the lowest costs exist, but also providing distinct differentiation in the collection and value of the products and services being provided to consumers and customers. Moving factories requires additional capital, training and start-up costs, not to mention tradeoffs in country-specific transportation and logistics infrastructure. As note in the WSJ report, making sourcing decisions with a two-decade horizon is not realistic for today’s more dynamic global economy. Firms need to focus on continuous innovation and supply chains need to have capabilities to accurately quantify cost trends, make leveraged use of innovation and deploy capacity across strategic product demand and supply regions.