For many U.S. apparel manufacturers, China is no longer the sourcing paradise it used to be.

In the past few years, labor costs have soared and more workers are opting to move to high-tech factories that pay more.

As China’s sourcing capabilities are challenged, apparel manufacturers are weighing the benefits of producing clothes in other countries that have been growing their own garment industries and offering lower-cost production. Some U.S. manufacturers are even opting to return to the United States.

We talked to a number of financial experts and factors who shared how their clients are approaching the ever-changing sourcing equation.

How are increasing production costs and labor shortages in China influencing U.S. manufacturers’ sourcing strategies? Are apparel manufacturers moving production to other areas—such as the United States, Mexico, Central America, Southeast Asia or the Caribbean—and how is this affecting their business?

Sydnee Breuer, Senior Vice President, Rosenthal & Rosenthal

Rising production costs and labor shortages in China are causing some importers to revise their sourcing strategy. Some are choosing to move production back to the U.S.—or moving more of their production to the U.S.

An added benefit of U.S. production is being able to order closer to delivery, which in turn allows them to better manage their inventory levels and order less on speculation and more on booked orders.

This can also reduce their financing cost if the Chinese supplier was requiring letters of credit, and they are able to obtain open terms domestically. The quality of goods produced domestically versus internationally is similar, if not better.

There are also good resources in other parts of the world. The problem is that it takes time to search out the right international supplier who is reliable and has the quality the customers have grown to expect. It is also costly to travel to other parts of the world to seek out these sources.

Mitch Cohen, Western Regional Manager, CIT Trade Finance

Manufacturers are constantly under pressure to find the best sourcing options available in the market. Our clients are telling us that in some cases that means moving to countries like Vietnam or Sri Lanka, although other manufacturers have brought production back to Los Angeles.

Foreign production typically requires longer lead times and more financing, whereas U.S.–based production provides for shorter lead times, which equates to tighter control. Ultimately, it’s the gross margin on each item that often dictates where the goods are produced.

Ron Garber, Executive Vice President and Western Regional Manager, First Capital

With the rising standard of living in China translating into higher labor costs as well as a dramatic shift of skilled labor to better-paying high-tech factory jobs, the apparel sector’s once-enviable price advantage and ample labor pool secured by Chinese production is being gradually eroded.

Additionally, the Chinese factories, after experiencing heavy bad-debt losses, especially during the recessionary years, have become more selective in offering open-trade terms and are demanding substantial upfront cash deposits or letters of credit from U.S. importers to ensure timely deliveries and advantageous placement along their production lines.

The U.S. manufacturers have responded to the changing dynamics in China by seeking out alternative sourcing venues on a grander scale than in the past. Countries such as Vietnam, India, Bangladesh and the Philippines—along with moving some production back to the Western Hemisphere—have proven to be an effective alternative to the sole reliance on Chinese sourcing.

This transition has not been without its challenges, but with the introduction of skilled management, especially recruited from South Korea, both the quality and reliability exhibited by these alternate production sites have steadily improved over the past few years.

The U.S. manufacturer now has more options when it comes to deciding where to produce apparel, depending on whether price or speed is the priority.

By using Asian resources other than China, the importer most likely is opting for a price advantage. [When] selecting a Western locale, a quick turn is uppermost on his or her mind. They are willing to shave a few points off their margins to ensure meeting a customer’s deadline.

Whether the importer selects to go overseas or stay on this side of the Pacific, the financing challenges are almost identical. Most factories are run by small independent entrepreneurs who are constantly hungry for cash or require letters of credit to guarantee payment.

Although they are less plentiful than in the past, I believe open-trade credit terms are still available to those importers who have developed a sustained relationship with a core group of competent vendors and have established a spotless payment record over time.

Rob Greenspan, President, Greenspan Consult Inc.

Rising production costs and labor shortages are creating issues for U.S. manufacturers. Every time there is a shift in market resources, whether it is fabric costs or labor shortages, the U.S. apparel manufacturer has to respond quickly.

In this case these issues have created opportunities for other countries. It is my understanding that Southeast Asia—in particular, Vietnam, as well as its neighboring countries—has seen increases in their production factories. U.S. apparel manufacturers are moving more and more production to these countries.

I have also been told that sourcing companies in China are moving their production as well to Southeast Asia. Additionally, U.S. manufacturers are also producing more goods in Mexico and Central America.

During times like these, U.S. manufacturers have to have good people and good systems to follow through on their production, quality control and timeliness of delivery. They need to manage their production flow very closely so they don’t get put into a position of having late deliveries or poor-quality goods.

Nick Hart, Managing Director, Bibby Financial Services

Trade practices continue to change in China. The challenge for the developing brand is to get the factories sufficiently interested in taking the order and developing a suitably strong relationship that will fulfill orders in a timely manner and to a quality level that is agreed upon as well with a supply-chain financing vehicle that works for both the brand and the manufacturer.

Factories continue to be somewhat disinterested in small orders looking for sustainable volume. Terms for emerging brands are not beneficial unless the brand owner has experience with the factory and a historical trust is already in place.

As such, it can be easier to develop initial critical-mass manufacturing in the U.S. (if your target market and price points permit) and then look abroad for cheaper manufacturing once volumes are established. The unseen cost benefits here are reduced lead times as the production cycle is dramatically reduced. This reduces supply-chain finance costs—both in terms of capital that was committed that can be redeployed and from the type of financing that needs to be in place to fund the supply chain.

The other area of unseen savings is in the volume of inventory that needs to be held or committed to. With local manufacturers, production runs can be shorter with reorders being placed midseason if demand rises. This works with the shorter lead time local manufactures deliver. It also significantly reduces the risk of overstocking.

We have also seen clients looking south to Central America for manufacturing, which helps with the cost and also the reduced lead time—albeit longer than the U.S.

India, Vietnam, Pakistan and Bangladesh remain very attractive from a price perspective, but our experience is that quality control needs to be more constantly monitored than with China, particularly in Bangladesh.

We have seen several brands come significantly unstuck with mixed-quality product and inconsistent delivery not being tolerated by large retailers.

For emerging brands we would recommend spending the time to ensure that you have a supply chain you can rely on and then review the whole cost of it. The unit cost is only a part of the overall cost. If you don’t get the quality and logistics right, the retailers will not be understanding.

Sunnie Kim, President and Chief Executive, Hana Financial

Many Southeastern Asian countries—such as Vietnam, Cambodia and Laos—and even African countries such as Ethiopia are the beneficiaries of production leaving China. Many U.S. manufacturers also want to diversify their production instead of being solely dependent upon one source, such as China. Additionally, some companies are concerned about the current political climate in China, specifically regarding some of the social unrest that has occurred recently.

Some of the countries where production has moved to are not as technologically advanced as China, and therefore many manufacturers are experiencing growing pains. Issues such as production delays have become common. However, as these countries gain greater experience they will indeed become greater rivals to China and more intriguing to U.S. manufacturers.

Don Nunnari, Regional Manager, Merchant Factors Corp.

Most of my clients are sticking with the relationships they have built up, whether in China, India or elsewhere.

In the apparel industry, there will always be the challenge of moving on to the cheaper source of production. Today you hear about Vietnam, Bangladesh, India and other places that can offer cheaper production. However, it’s not that easy. An importer needs to invest time and resources in developing these new manufacturing relationships. Larger importers can send production people overseas and invest in these potential new sourcing options.

Our clients are concentrating on strengthening their existing relationships with their factories to ensure quality and timely deliveries. Some production has returned to the U.S. for some items because the stores are demanding quick turn and the prices here are competitive.

Mexico is also being used by some clients for cut-and-sew and good deliveries. Overall, despite the rising prices and work shortages in China, our clients, experienced in importing, are doing well.

Dave Reza, Senior Vice President, Milberg Factors

Most of our clients continue to import from China even though labor costs are on the rise and labor availability has definitely gone down. Our clients are making up for it by moving to Bangladesh, India and Vietnam, and, in some cases, sub-Sahara Africa, and, in one case, Kenya.

It definitely has an impact on the cost of goods, and logistics costs have gone up. I don’t know if our clients are absorbing it. But China is still the mainstay.

I have a couple of clients who have been in Mexico before, and they have brought some production back—but only in a small way.

Tri Sciarra, Executive Vice President and Los Angeles Regional Manager, Capital Business Credit

At Capital Business Credit, we don’t expect our U.S. importers to abandon China as a core manufacturing destination. However, over the past two years, we have seen importers start to shift some of their production outside the country.

In fact, Capital Business Credit’s 2012 Fall “Global Retail Manufacturers and Importers Survey” found that one-quarter of importers surveyed had already moved some of their manufacturing out of China.

In addition, 40 percent were considering moving some of their production out of the country. When asked which countries they are moving their manufacturing to, the U.S. was most popular, at 31.3 percent. Other countries respondents cited included Vietnam (18.8 percent), Pakistan (10.9 percent), Bangladesh (9.4 percent) and the Philippines (3.1 percent).

While there is a slight shift taking place, China will continue to remain the dominant player in manufacturing for apparel and accessories companies.

However, depending on price points and the amount of control an importer would like to have over the production, there are a myriad of high-cost and low-cost manufacturing options cropping up.

Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance

Sourcing continues to be top of mind for all of our clients. While some have been successful in identifying alternative sources, both in other Pacific Rim countries and in Central America, most continue to believe that the quality of product coming from China still necessitates a large percentage of production continuing to come from that region.

Not all retailers have been willing to accept price increases, although some have, which can somewhat offset the increases in China. We still see a limited amount of production being handled domestically but haven’t seen a dramatic uptick recently.

Moving to other countries varies according to the product. We’ve seen producers of athletic apparel utilizing more technical fabrics move into Mexico and Central America while T-shirt and fleece companies are tending to shift into other parts of Asia.

Companies in the juniors segment still do quite a bit in China, but the needs of a fast fashion–oriented marketplace dictate the need for a certain amount of domestic production as well.

Anytime a company undertakes a shift in sourcing partners, there is always a need for a strong focus on continuing to ensure that both pricing and quality remain very competitive. Manufacturers and importers also remain keenly aware of the need to diversify sources of production.

Just as an extreme concentration in a customer base can lead to issues if that customer is lost, most of our clients understand that a heavy exposure to one or two vendors can add risk to the equation if the vendor(s) begin to encounter issues.

Now, more than ever, we see clients diversifying into different global regions in an effort to minimize concentration risk, take advantage of specific capabilities in a given region, and take advantage of a vendor mix that enables them to meet both quick-turn shipping needs and larger program needs that can accommodate longer lead times.

Ken Wengrod, President, FTC Commercial

In China right now you are going to pay a garment worker $250 to $275 a month. Wages rose 25 percent to 30 percent in the last year, and in Mexico wages are running about $250 to $350 a month.

U.S. manufacturers are looking to other areas, and where they go depends on the quality they want to buy and the number of units.

If you have large quantities and it is simple, there is Bangladesh. But if you want that better-quality item, then the Chinese are setting up factories in droves in Vietnam. In Vietnam, the labor costs are close to $170 a month.

But you have to be aware of cluster manufacturing. You may be able to get it cheaper in Cambodia, but they don’t have the infrastructure and the manufacturing tied with the cut-and-sew trade. One country outside of China that has that is Mexico.

Yes, people are moving their sourcing, and they are looking to go to other areas in Southeast Asia, primarily Vietnam as well as Indonesia. Bangladesh is already there for larger runs and basic units.

I think you are going to see a stronger migration from Guatemala to Mexico. Labor costs are about the same in Guatemala or a little higher than in Mexico.

I really feel that Mexico is going to outpace Central America because of the North American Free Trade Agreement versus the Central American Free Trade Agreement, where everything has to [be] fiber forward to quality for duty-free entry. Mexico has more mills.

Paul Zaffaroni, Director of Investment Banking, Roth Capital Partners

Gross margin is one of the most important financial metrics when an investor or acquirer is evaluating an apparel manufacturer because it’s a proxy for the strength of a brand and the quality of its supply chain. Higher production costs and labor shortages in China have negatively impacted gross margin for many U.S. apparel manufacturers, which has made sourcing/supply chain a priority for many of our clients who are preparing for a mergers-and-acquisitions transaction in the next 12 to 18 months so they can show stable or expanding margins.

Premium-branded apparel and fast fashion are two categories that have seen a gradual increase in U.S. manufacturing. Some premium brands are using “Made in America” as part of their marketing messages because they have more margins to play with while fast-fashion manufacturers are selectively using U.S. manufacturing to meet tight deadlines for their monthly collections. Vietnam and Indonesia are two other important sourcing markets, but neither will replace China in the near future given the domain knowledge of factories and labor in China along with its established ecosystem of apparel-component providers.