In the words of New York Times Columnist Paul Krugman, \”At this point I\’ve lost count of how many times markets have rallied in the belief that Trump was winding down his trade war, only to face announcements that a much-anticipated deal wasn\’t happening or that tariffs were being slapped on a new set of products or countries.\” While this could be the genesis of a new drinking game, the current tariff tumult, which it appears has reached a truce, is hardly entertaining for procurement officers who are trying to strategize around the shifting sands.
Moving on Out
China has been shedding apparel and textile jobs over the last decade, but the exodus of manufacturing in general, is accelerating. The Wall Street Journal reported: \”The moves by U.S. companies add up to a reordering of global manufacturing supply chains as they prepare for an extended period of uneven trade relations. Executives at companies that are moving operations outside China said they expect to keep them that way because of the time and money invested in setting up new facilities.\”
While a reactive manufacturing migration from kayaks to Roombas is underway, an unintended consequence of the race to the bottom pricing model of fast fashion is that the apparel industry began this shift earlier in the decade.
When quizzed by McKinsey in their annual procurement study earlier in 2019, the firm asked 64 chief procurement officers to rank the top apparel manufacturing locations they are considering as alternatives to procuring from China. The names included predictable candidates Bangladesh and Vietnam, but ranking in fourth place was Ethiopia, two percentage points above India.
Out of Africa
Africa has been a bit frothy as of late. Twitter\’s CEO Jack Dorsey recently tweeted that he was temporarily moving to the continent in 2021 after proclaiming that \”Africa will define the future.\” The Business of Fashion 500 class of 2019, which celebrates \”the people shaping the global fashion industry\” included three African fashion models, the Nigerian Retailer Temple Muse, and two publications — Nigerian fashion magazine Genevieve and GQ Africa. South Africa, Nigeria, Tanzania, Kenya and Egypt all feed the textile and apparel supply chain and apparel exports from Africa to the United States have increased exponentially, but Ethiopia was the only African nation represented on McKinsey\’s CPO wish list.
Ethiopia Stakes a Claim
In 2016, Ethiopia made a big play for apparel and textile production. That year, 140 miles south of the capital of Addis Ababa, the government opened the doors on a sprawling, modern industrial park of 56 hangar-sized, uniform, metal factory sheds dedicated exclusively to apparel industries. The state-of-the-art machinery was complemented by environmentally advanced practices including a Zero Liquid Discharge treatment facility that recycles over 90 percent of the park\’s wastewater. Adding to Ethiopia\’s global glow, the country currently benefits from a U.S. free trade agreement, The African Growth and Opportunity Act (AGOA).
PVH, the parent company of Calvin Klein, Tommy Hilfiger, Izod and a group of legacy brands was a flagship tenant and is the only American manufacturer that has built a vertically integrated plant in the park. In 2018, PVH was selected as one of two winners of the 2018 U.S. Secretary of State\’s Award for Corporate Excellence as lead investor in an apparel manufacturing facility in Hawassa Ethiopia that \”inspires responsible industrialization.\”
The PVH website mentions the shift out of China to other areas in Asia and to the Hawassa facility: \”While China remains an important sourcing region for us, we have reduced our exposure to the region over time by growing our sourcing base in other parts of Asia, as well as Africa…Additionally, we began producing goods in Ethiopia in 2017…Through the manufacturing facility in Ethiopia, we are able to produce products at a cost advantage, while also maintaining a strong commitment to corporate responsibility.\”
In Bloomberg Businessweek, Bill McRaith, PVH\’s chief supply chain officer, said via email, \”PVH views itself as a \’supply chain pioneer,\’ because it sets out to develop the production capacity it needs and to directly oversee it.\”
While the 2019 McKinsey procurement survey detailed the supply chain\’s migration from China, the survey\’s key finding was the prioritization of a sustainable supply chain citing, \”Apparel executives increasingly believe that sustainable sourcing at scale is a must-have for their companies and for the industry… Apparel brands and retailers will need to embrace social purpose as core to their missions and business models and set ambitious targets on environmental and social sustainability across their organizations. Those initiatives will have to come on top of a drive to fix the basics in end-to-end product-development and sourcing processes. And they will need to be underpinned by significant investment.\”
The brand-spanking-newness of the Hawassa Industrial park offers vertical retailers and brands an opportunity to deliver on the priorities touted by the survey respondents. First on the list of manufacturing alternatives to China is Bangladesh. Yet Bangladesh has not progressed from the more simple cut and sew functionality, has a dismal environmental record, failing infrastructure and has made spotty progress on improving working conditions since the Rana Plaza tragedy. While Ethiopia is not without problems, it seems to offer an alternative to the race for a new lowest-cost sourcing location.
Ethiopia appears to be at a crossroads. Outside of the glimmering industrial parks, the roads and infrastructure are denigrated. Local politicians, in a rush to appeal to foreign investors, offered the lowest base-wage in any garment producing country. There has been labor unrest over these low wages throughout the country, including at the Hawassa Industrial Park. There is also significant political unrest. Ethiopia, a member of China\’s One Belt One Road Initiative, is deeply indebted to China for both railway and road development, including the construction of the Hawassa Industrial Park. Still, a path to change is showing promise. The 2019 Nobel Peace Prize has been awarded to Dr. Ably Ahmed, a reformer and the Prime Minister of Ethiopia, for establishing peace in a two-decade-long war with Eritrea. He was elected in 2018 on a platform to streamline regulation, improve press freedom, and reduce unemployment.
When facing this crossroads, how Ethiopia\’s journey ends will depend on a series of choices. While the situation in Ethiopia is not without risks, it does provide brands and retailers a canvas upon which to design a next-generation supply chain. The NYU Stern School published five recommendations that will guide Western brands in building a sustainable and moral supply chain at the Hawassa Industrial Park:
- Align business models with Ethiopian realities.
- Build worker dormitories
- Provide extensive training on both hard and soft skills.
- Promote more Ethiopians more quickly into middle-management jobs.
- Foster worker\’s councils.
The McKinsey survey also queried chief procurement officers asking, \”What are the top three areas to adjust apparel sourcing within your company to cope with overall macro trends?\” The topmost response was \”sustainability and transparency.\” If these CPOs back up their words regarding the \”need to embrace social purpose as core to their missions and business models, and set ambitious targets on environmental and social sustainability across their organizations\” with resources, the possibility of Ethiopia creating a modern supply chain seems less far-fetched. If these goals, looking forward to 2025 are to be achieved, the race to the bottom models of the past will be left in the dust, replaced by a credo that reflects the principles of principled businesses and consumers.