Adapting to Political Shifts in Fashion Production

Bret Schnitker  00:02

There's a conversation that those tariffs will increase to 50 or 60% and today in our industry, we should be taking those seriously. There are things that are cut offset up. There are things that it could be a negotiating tactic. Those are all possibilities, but in the light of tariffs that have been increasing already, and that both parties are kind of unwilling to have more of a conversation. The reality of a 50% additional tariff on top of 32% let's say, on a synthetic means that the garment almost doubles, and so that becomes one of the largest taxes on the American consumer that ever exists.

Emily Lane  00:52

Welcome to Clothing Coulture, a fashion industry podcast at the intersection of technology and innovation. I'm Emily Lane.

Bret Schnitker  01:00

And I'm Bret Schnitker, we speak with experts and disruptors who are moving the industry forward and discuss solutions to real industry challenges.

Emily Lane  01:08

Clothing Coulture is produced by Stars Design Group, a global design and production house with more than 30 years of experience.

Emily Lane  01:18

Welcome back to another episode of Clothing Coulture. Today we're going to talk politics. Run away.

Bret Schnitker  01:26

Does anyone want to talk politics?

Emily Lane  01:28

This is the conversation you're never supposed to have.

Bret Schnitker  01:32

We're diving right in. Well, the ratings are too high. We need to drive the ratings down. It's kind of like inflation control,

Emily Lane  01:41

right, right, right, yeah, let's, let's scare everyone away. Well, the truth of it is, we have recently had an election which

Bret Schnitker  01:48

I didn't notice.

Emily Lane  01:51

Well, this means that things are going to be changing with with a regime change. And there's always, you know, some shifts that happen when

Bret Schnitker  02:01

shift happens,

Emily Lane  02:01

when shift happens. So so I think this is a perfect time for us to set the expectation for those in the industry of what's around the corner based on some of the things that we're seeing about shifts in policy and, you know, challenges on the horizon. So let's talk tariffs. Let's start there.

Bret Schnitker  02:27

Yeah, you know, basically America's voted. Half of America's happy. Half America is pretty depressed. And I think in and when you really talk from an economy perspective, and a lot of econmists will tell you that, you know, well politics always have these kind of polarizing elements, and it's unfortunate the US, you know, everyone talks about bringing everyone together, we're more polarized than ever, and that's not a healthy place in America. But on the ground, when it comes to the economy and business in general, it has in the past, it's had little to no impact. There hasn't been a major shift as governments change or or government people change, personnel change hasn't really had a major impact on on the day to day America that we know this one might be a little bit different to be honest. You know, everyone has their own way of managing global challenges. You know, we have we live in a connected world, and we rely on different countries for imports, for categories that we've abdicated. Some of them, we've abdicated years ago. And those countries have benefited in a in a positive way. They've built their own, you know, industrial economy. They've picked up in Slack where, you know, frankly, Americans don't want to do many of those jobs today, and and those countries have fulfilled those, those kind of goals, the big the big conversation is this whole balance of trade conversation, or countries that might not be playing fair with with intellectual property and things like that. And while that's an ongoing debate, the reality is, is what's going to be thought about it, and over the last really, through both regimes, Trump's regime and then even Biden's regime, both parties have really upped the ante in their conversation, using tariffs to send a message to China about some things that the politicians aren't super happy about that comes at a cost. It doesn't come at a cost, traditionally, to China, unless the tariffs get very, very high. If you ask any economist, tariffs don't really work, because there's punitive tariffs coming back. There's trade wars that exist. But the you know, any time that tariffs are increased, just. By the way, of logic, when you think about this, incremental tariffs, we've always had tariffs in place in most categories. They're called duties in our industry, duties are a percentage of the cost of goods that America brings in that's paid to the US government, basically a tax, if you will. Then there's punitive tariffs that are added when a particular government or entity of the government believes that trade is

Emily Lane  05:33

you need to reset the playing field,

Bret Schnitker  05:35

reset the playing field right? And those punitive tariffs have been employed as of late, and they've impacted a number of different categories. It started with like solar panels and technology like that technology, and it's moved its way through all sorts of different categories. And ours is no exception. Our tariffs in the apparel and fashion area have been between 7.4 and 25% and those are punitive tariffs that are in addition to our normal tariffs andor duties that we've been paying. And those have been on actually a subtle decline over many years. You know, where they were much higher, and now they've come down. And those range from things that, like linen and then things like that at three or 4% all the way up to synthetics and knitwear that are 32% yes. So when you take 32% plus 70, almost 40% of that FOB, you're paying to the US government in taxation to import that that gets passed along with with profit loads to the US consumer, and in return, they end up paying more for products. And who benefits the US Treasury, sure, right?

Bret Schnitker  05:42

But we are going to see an even greater increase now.

Bret Schnitker  06:46

So that's the challenge. There has been some rhetoric and some conversation that could be actualized, that, you know, China is the one that's been singled out right now. They're targeted. They're, you know, we've built such a an engine in China with our consumerism, that they fulfilled that engine, and we don't. It would take us years to build that infrastructure in the US. But for whatever reason, and I don't think it's completely wise, I think there's other things to have conversations with China, other than tariffs, but there's a conversation that those tariffs will increase to 50 or 60% and today in our industry, we should be taking those seriously. There are things that are could offset, that there are things that could be a negotiating tactic. Those are all possibilities, but in the light of tariffs that have been increasing already and that both parties are kind of unwilling to have more of a conversation the reality of a 50% additional tariff on top of 32% let's say on a synthetic means that the garment almost doubles, and so that becomes one of the largest taxes on the American consumer that ever exists. Now there have been tariffs. Let's say Mexico did a tariff on China because they just didn't want Chinese goods for a while. And those are, I think, in the 1,000% tariff range. Those tariffs can be effective because you just basically shut down trade with a country, you know, in protest of whatever. And if a country, if China, or any other country that gets these tariffs imposed on them. They got to play ball to help lower those in the case of these type of tariffs, there still we don't have any place to really replace all of that volume. So therefore there's going to be an impact. Then, in addition to that general conversation, there's a another conversation where the goal is to increase tariffs. Again, these are penalty, additional tariffs on top of already taxes that the US consumer is paying of 10 to 20% across the board in all countries. So and the theory is, oh well, it balances trade. The reality is it doesn't traditionally at that level. The reality is it helps pay the government out of the it builds the coffers of multi trillion dollar debt, or it covers some of the agendas that a certain administration might have. We have to be prepared for that, sure.

Emily Lane  09:19

So people have a choice, you know, if they, if they don't think that, you know, a brand, for example, doesn't think that the consumer will be able to bear that 80% price increase on those items, the option is, all right, we're gonna migrate to a new country of origin for manufacture, and we've seen a lot of that. We've you know, people have been making plans in anticipation of this for some time, and we're starting to see some stresses in other countries, with people migrating their production to these other countries. Factories filling up, and things that. That nature. So that's, that's one plan. Or the other plan is, you know, in this interim period right now, before these tariffs come into or additional tariffs come in place, there's some things that you can do to kind of try to get, I don't know, yourself, in better position before

Bret Schnitker  10:19

you could. And those are all kind of independent decisions that each brand or company needs to make. It's true that that there has been a migration from China in 2020 there was about almost 40% of apparel imports into the US and units were coming from China. Today, it's somewhere in the in units is somewhere in the 27% and value at somewhere around 20% so it has declined over years. And that's that's both been that China has wanted to upgrade to doing things that pay more, right? You know, appliances and technologies, etc, as opposed to apparel. They still want to produce textile and have other people cut and sew it. But it's also been that these particular tariffs, people have started to search for other opportunities elsewhere, and that's been some of the decline. But it's not specifically tariff related. It's, you know, other countries are more affordable. China's gotten more expensive. They've made decisions to abdicate apparel to so but the reality is the reality today, and it's about 20% of our apparel imports come from China. That's still a big number, and behind the scenes, out of all the countries in the world, China generally produces apparel better and quicker than any other country. And their infrastructure is really built for speed. They have a lot of very, very talent, talented sewers and and factories. And so the outcome is great. The costings traditionally affordable and and delivery is is relatively quick as that 20% once you hit a 50% tariff, I think that it people are going to become much more aggressive. The other thing that people don't consider, and is at play too, is the whole conversation and the and the politics behind it, outside of tariffs that most people just don't want to see made in China anymore, because the rhetoric that's which is impacting it. So people want to move in, the decision where people want to move, they have to realize that every other country is not built the same way as China. So you're going to have different challenges. You're going to have longer lead times. You might have less capability. So

Emily Lane  12:39

give me an example, like a traditional lead time out of China versus what they can anticipate.

Bret Schnitker  12:44

What's shocking is that China is such an engine that sometimes, in terms of peace goods, they can turn fabric of specific volumes in 14 days, you know, two weeks. And some other countries, it's four to six weeks. So,

Emily Lane  12:57

oh, wow.

Bret Schnitker  12:58

You know, there's, there's, there's differences even from fabric. They just they've built such speed within their infrastructure, their productivity is higher than most other countries, in general, in terms of cm on the line. So all these things start adding time to it, then you complicate the landscape where demand exceeds supply. So we're even hearing in places like India, where certain key factories are at 130% of their capacity,

Emily Lane  13:26

Playing the airline game,

Bret Schnitker  13:31

and they can pick and choose. So the pure economics are, is that as business moves and demand increases in a country and space minimizes, then it's going to be natural business, competitive capitalism, whatever you want to call it, that the prices are going to go up because now the factory has choices to decide who they want to produce for right in the past, the leverage was maybe more on the buyer's side. When there was when supply exceeded demand, you could negotiate more effectively. Now, when demand exceeds supply, the factories in the driver's seat and can make more decisions on Oh, well, this guy's going to pay me X percent more. I'm going to do his goods. And this guy can sit there and wait, and we have good friends in the industry that have reached out to us, and it's like, man, I've tried to do production. What do we do here? I'm sitting waiting six months for product. And those are signs of of a system that that is changing it that can't absorb them, the sheer shift in that percentage leaving China to other countries. But preparation is important. You know, not every country does everything well. There are certainly things where countries are building infrastructures to understand that some people are further along the path. Some countries are fully booked. Vietnam. Yeah. I mean, really, they're, they're really booked, and so it's going to be extremely hard pressed for someone newly shifting into Vietnam to really get some presence, unless they have either a mighty large pencil to figure out some strategy or have the willingness to pay considerably more. We know that India is a really good opportunity. We've invested in India in a big way as an organization. And you know, it's the only other country with population density, manufacturing of scale

Emily Lane  15:36

and a skill set that's been at it for quite a while, sure, right there. What are some other countries that are on the horizon? Certainly

Bret Schnitker  15:44

Cambodia. The Chinese are investing heavily in Cambodia. There's a workforce that can do that. It's an affordable workforce. Factories are going up in a big, big way, far flung places like Ethiopia. I was early in Ethiopia that was a very visionary quest. And Africa has its own challenges, but there's a lot of investment in the Chinese going into Ethiopia and other African countries where there's these large bastions of inexpensive labor. They know that they're going to have to use their investments and go offshore to manage the Made in China tariffs that are happening Indonesia. Sri Lanka, to a smaller degree. It's not a very large island, but you're starting to see that a little bit Bangladesh, I would say for sure, is going to see a benefit. But for quite some time, with the volatility and the regime change and going on and labor unrest, people were fleeing Bangladesh and moving all those into India, which were complicating those issues. We are seeing some signs that Bangladesh is settling down a little bit. Business is returning a little bit more to normal, but there is some volatility, and so we have to be careful to continue to monitor that country. Burma and Myanmar has been a really big topic of conversation for a long time. I think it's the least expensive labor in Asia today. The problem is there's a lot of political unrest, and there's some human rights issues in that country, and we're seeing more and more on shelves in America today made in Burma, but, but that's a country not for the weak of heart. You want to go in and make some pretty strong positions, and you want to have kind of consistent product coming in and realizing that it could be volatile going in, knowing that I see, yeah,

Emily Lane  17:33

you know, we did have a conversation a while ago about the strengths and weaknesses of different countries. And you know, as you said earlier, not every country does everything well. So we there is a earlier podcast you can reference that has some insights on some of those, some of those details. We even have a download available for those. We probably need to update that download based on on some of this evolution. You know, you talk about how China is investing in Cambodia. There's another country in Europe that China invested in. You know that a lot of the product that's coming out of Italy is actually made by the Chinese. Is this something to be looking at? Well,

Bret Schnitker  18:15

I would say that was a unique quote, joint venture, the Italians being very, very shrewd, realizing, much like, Americans don't really like to sit at a sewing line heavily, the Italians don't want to do that either. And, you know, there's this massive cachet about Made in Italy, right? Oh, wow. Very Italian. It's fantastic. Well, going throughout Italy, in a lot of places, it looks like China, because they import massive Chinese workers into places like Prada, etc, and it's actually made in Italy of Chinese workers, right. There was, you know, a lot of people really confused when Italy was sadly hit pretty heavily within COVID. And we're kind of like, Why did Italy get so hard hit with COVID when it came initially, well, it was the migration and the daily transportation of Chinese workers coming in and out of the country in Italy, and I think that exacerbated their COVID concerns. So that, you know, Italy's still going to remain the price of Italy. You're not going to see this great price out of Italy any day soon, because they maintain the mystique and the and the allure Made in Italy. But that is, that is, you know, there are a lot of Chinese workers in Italy manufacturing Italian product.

Emily Lane  19:30

Okay, so for brands that have production in place now, they're currently producing in China or regions where we're gonna see some shifts happen. Yeah, what do you recommend?

Bret Schnitker  19:44

Yeah, that's boy that those are sometimes tough decisions. I can tell you within assortment plans, that if you're if you've got large commodity products in basics that you're purchasing, one of the things we talked about in other episodes is the one of the first. Things I learned in as a buyer is that you either over buy or under buy. You don't buy the right amount. And if you're going to over buy, you over buy the things that are not linked to seasonality. You you over buy your core basics, if you will, and those things remain in stock because you don't have this pressure to mark down right then you under buy things that are more fashion driven, fad driven, that can be in and out, and that you want to create demand in and so with that basic premise, premise in mind, if you're making decisions and saying, Look, you know, these tariffs could come, I may not have homes or same costing realities after whatever decisions that the new government politicians will make is to in place, start ramping up and booking this volume. Now, if you can, you know, going deeper in these basics provides you a runway to be able to start establishing these other areas of production. And I think that's always a good decision. What's the risk? You have a few more weeks of supply, if you have the warehouse, you have the financial resources, spending a little bit more money and time and and going a little bit deeper on core basics is a good rule of thumb in an in a situation like we're dealing with today. Yeah,

Emily Lane  21:20

you know, and I suppose too, if you know, if you kind of ramp up now and then all the sudden boom, the tariffs come into play, you do have the option at that moment in time to maybe choose to air your goods in it could be cheaper than the extra tariff

Bret Schnitker  21:37

could be. That's always the risk that you play. You know, there's been a lot of dialog about when those tariffs are going to come in and and, you know, the current administration controls House, Senate and Chief Executive, right? Yeah. And so whatever decisions are made, there's, there's unlikely to be any resistance. And so when you figure that, you know, the the new regime will take place somewhere around the mid or end of January, right in full place, there's going to be dialog, and there's going to be, you know, repositioning within all of those things, getting things organized. You really, you probably have 60 days before there's some serious intent on on duty and additional tariff changes. And then, if it's anything like the other administrations, there's always this window, yeah, you know,

Emily Lane  22:36

takes a few months

Bret Schnitker  22:37

well, and there should be a window providing people warning that, saying, Look, get all your goods that are in production out of the country, because you are impacting American companies. After all, you're not impacting the Chinese you're impacting American companies. If American companies have production in place in one reality, and you're going to change the reality, you've got to give them time to make that shift, or you're impacting the very companies that you promised to protect, right? And so there has to be some type of a period, and usually it's six months, three to six months timing, saying, Look, get your production through, get it shipped, because these tariffs are going to go into enforce in that period of time. So we can be hopeful that the current administration is mindful of that. And so, you know, I think that it's a fair risk that if you plan those things in place now, you try to get that production in place and get it booked, and you move as quickly as you can to get it shipped latest in the March, April time frame, then you should be in pretty good shape.

Emily Lane  23:41

Should people be considering different fabrications? I mean, China is known for its synthetics.

Bret Schnitker  23:49

Synthetics, you know, they require a completely different skill set for an operator than cotton does. So that's also something that's going to have to come up to speed in India, right? You know, I think you certainly make some decisions along that way. But the reality is, is that your assortments are going to be your assortments, and you've got to figure out offshore options outside of China, especially if that happens. Okay?

Emily Lane  24:17

You know, you have often said that the United States, one of our greatest export is our brands. Do we anticipate there being a challenge that comes to our exports as a part of

Bret Schnitker  24:32

it's already happening there, you know, there's, there's, you know, there's a whole conversation about trade war. There's, you know, for every penalty we lay on a country, there's reciprocal penalties coming back. I mean, the farmers we we had to subsidize with some of the last tariffs, right? So I we're not going to change what politicians are going to do. And America has voted for these particular groups of people, and they're going to do what they what they're going to do, and the chips will fall where they lay, and maybe, and like all human beings, some of the decisions are going to be great, and some of the decisions aren't going to be great. And our job in terms of what we do as part of the US economy and our livelihood, is to understand what's likely to happen and then figure out solutions. And you know, out of all the things that we've also talked about, it's going to be even more important to plan your production and forecast your production with particular factories. You know, when supply exceeds demand, you can pretty much say to a factory, I'm going to book X amount of units and then go silent for a few months and then walk back in and say, Hey, I'm going to place another 5000 I need to fill in. But when factories are really full, if you're not kind of scheduling production for them, it could get tougher and tougher to fit within timelines, and so timelines will be stretched. We talked about that a little bit more. But not only is cost elastic to supply and demand, time is also elastic. So as factories get full, more full or over full, you're going to see lead times on production go out so where traditional, standardized lead times are 90 to 120 days, depending on a particular product. And China can move faster than that, but they're out of the equation. Now the rest of the world is going to be 90 to 120 days. 90 to 120 days will become 110 to 140 days. We've seen situations like we talked about with our colleagues that they're crazy lead times they're six months, they weren't important to the mix, and they had other things more important, so they got shoved completely off the grid in terms of production. These are things that are gonna become more of a reality. So planning and communicating with your factory and manufacturing partners about particular units that you plan to do by month, and trying to maintain that level, if you can, if you have that kind of a business, is going to be really important here in the next year. Yeah,

Emily Lane  27:16

so start working ahead.

Bret Schnitker  27:18

Yes,

Emily Lane  27:18

yes. Any other piece of pieces of advice?

Bret Schnitker  27:23

There's no crystal ball. And so, you know, this could be a great negotiating tactic, really help position America in a better way, or it could go pretty horribly wrong and be the largest tax on American consumers. That's the bandwidth. That's the, you know, that's both ends of that spectrum, I would assume it's somewhere in between. I would assume that we should plan for tariffs we did. We should plan for longer lead times. We should plan for more exits out of China. And if you plan that way, and and and proactively work to overcome those obstacles, the pain of this transition globally are going to be a little less for you.

Emily Lane  28:05

And certainly we're here to help. If you need help with that pivot planning, don't, don't hesitate to reach out. Yeah,

Bret Schnitker  28:11

we, we've certainly had those conversations with our clients over the last three or four months. I mean, we, we kind of forecasted this to happen right many months ago, and so we've got plans in place in terms of production outlets, but it's it. It's still not going to be a complete solution without planning efforts and dialog and communication to ensure that your production is properly placed and place timely understanding these these changes.

Emily Lane  28:40

Well, thank you for joining me on this dreaded conversation of politics. Thank you for joining us. Don't forget to subscribe to stay apprised of upcoming episodes and politics with Clothing Coulture.

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