California Apparel News

In the clothing business, ongoing sourcing is necessary for an importer to stay competitive. The days of saying that you are “settled in” with your offshore supplier are gone.

Consider the obvious recent events and probable future happenings to know that you need to stay on top of things.China

bull; Labor contract requirements are definitely raising the cost of product.

bull; Tax issues with Hong Kong “pass-through” entities are causing the closure of facilities. These are Hong Kong entities that were set up to avoid taxes and able to send monies to the Cayman or British Virgin islands. The Chinese government has declared these Hong Kong entities illegal, and more than 10,000 Hong Kong–owned facilities have been shut down in China in 2008.

bull; The 25 percent tax on profits now applies to all companies. In the past, apparel factories paid no business tax on profits.

bull; Textile/apparel prime locations on China’s East Coast are in high demand and harder to come by. Many companies are moving inland in search of cheaper labor, many untrained.

bull; A 17 percent increase in the Chinese yuan in recent years makes the costs of goods higher.

bull; Labor compliance issues, strikes and higher interest rates on borrowed money for raw materials result in high production costs. Vietnam

bull; Quality control is a work in progress.

bull; Government controls in manufacturing and raw materials importing are very uncertain.

bull; The country is not blessed with many of the raw materials needed for full-package production, such as local fabric.

bull; Labor compliance, strikes and logistics are sometimes a nightmare. India

bull; India is a democratic country but with labor problems like China.

bull; The rupee versus the U.S. dollar makes for higher prices.

bull; India is lowering tariffs on U.S.-imported cotton because India has a short supply of cotton.

bull; Roads, weather conditions and workplace conditions contribute to logistics problems.

It seems that the export volume that China is losing from the United States is being picked up by Bangladesh, Sri Lanka, India, Vietnam, Central America and a very small amount in a few Sub-Saharan African Growth Opportunity Act countries. It all comes down to needs, such as quick response, raw-materials availability, logistics, supply-line security and delivery. You must look at how you are going to set up your offshore infrastructure, supplier training, the quality-inspection requirements, production financing, work-in-progress reporting methods, product security and documentation requirements.

It is a whole new ball game with a continuous search for vendors. You must understand what it really takes to get a competitive price (landed duty paid is NOT always the best way), the quality of the specifications you ordered and, most importantly, on-time delivery. Common mistakes

Sourcing is the main ingredient for survival. I have been sourcing product internationally since 1960, and 48 years later, the same mistakes are being made.

When advising my clients, I repeat these phrases over and over: “Do your homework!” and “Buyer beware.”

Many old sourcing scenarios still exist. For example:

bull; You arrive in a foreign country to source production and the elevator operator or bellboy speaks great English. He is extremely helpful, and he becomes your new general manager in charge of overseeing your production.

bull; One of your loyal U.S. employees has a relative in the country you are visiting, speaks English and then becomes your agent.

bull; You are the guest of a country’s government trade-investment department and given the deluxe tour. You see many facilities and then try to do business through the government guide to have your samples made.

bull; You try to build a product via the Internet and a courier service, and you do not even instruct your U.S. people about the proper commercial documentation required. Therefore, everything is delayed.

bull; You don’t take the time to understand the cultures of the country you are visiting and get aggravated in the morning when your coffee tastes like acid and costs $15.

The list goes on and on, even with the most sophisticated import infrastructures in place by all those famous designer names.

Remember, when developing your sourcing strategy, the people at the top only remember what went wrong. They never think about how you have been living out of a suitcase and communicating with people in the head office who have never been away from home. They don’t care about geography, time zones, the urgency of critical production questions or your established relationships.

To add to this mind-boggling arena that is called sourcing, Sept. 11 made globalization a very selective business.

Offshore production and sourcing requires establishing the first cost, profiling the facility to produce the proper specifications and making sure the factory adheres to an on-time delivery schedule.

Now, throw in quotas, free-trade agreements, U.S. customs regulations, C-TPAT, labor compliance issues, World Trade Organization rulings, other U.S. politics that put restrictions on our industry, transshipping, letters of credit or trade financing, anti-dumping policies, and the high cost and risk of travel, and it gets even more challenging.

It is amazing to see what it takes to get an $8.50 FOB country-of-origin blue jeans with all the trimmings to be sold at retail from $15.99 to $125, depending on the level of retail and the label identity.

The goods news: Some countries are realizing that in order to do business in the U.S. market, they must set up knowledgeable offices here to deliver product that will pass all the pre-production qualifications in a time frame that will allow for on-time delivery.

Some of these countries are even taking steps with their factory exporters to allow in-country trade financing, eliminating the costly and time-consuming letters of credit. These aggressive countries are realizing that their manufacturers really are an integral part of the country’s economy, that these large factories (in most cases subsidized) are not doing business directly with the import buyers, and that they are at the mercy of second- and third-party brokers.

This change is fueling a very strong effort in these countries. I have been retained by more than one country as an advisor to assist in opening professional offices supporting our industry. I can tell you it is becoming fact and not fiction that you will not have to travel far to accumulate all the data to do business. But you will still need all the safeguards in the foreign country to protect your business. Bruce S. Berton is an officer and director of international business consulting with Stonefield Josephson Inc., a regional consulting and accounting firm with offices in Los Angeles; Irvine, Calif.; San Francisco; Silicon Valley, Calif.; Walnut Creek, Calif.; and Hong Kong. Readers’ inquiries may be sent to Bruce Berton at Stonefield Josephson Inc., 2049 Century Park East, Suite 400, Los Angeles, CA 90067, (310) 432-7437, or send an e-mail to: bberton@sjaccounting.com.