The United States Fashion Industry Association (USFIA)'s annual report has revealed most of the key challenges facing the US fashion industry in 2022 are related to the economy.

The USFIA’s 2022 Fashion Industry Benchmarking Study, which features 34 fashion companies of various types from within the industry, has revealed the main issue facing the sector right now is increased production and sourcing costs.

The USFIA’s president Julia K. Hughes explained: “Inflation and rising cost pressures are the top concern for the fashion industry and, for the first time in our nine-year history, every survey respondent says they expect that costs will increase, including for yarns and fabrics.”

In fact, three out of the top five challenges facing the industry this year are related to the economy, according to the University of Delaware’s associate professor of fashion and apparel studies, Dr Sheng Lu, who wrote the report in collaboration with the USFIA.

The five main challenges facing the US fashion industry

In a live webinar yesterday (18 July) he said the three economy-related challenges are:

• Increasing production and sourcing costs
• Inflation and the economic outlook in the US
• HR issues related to recruiting talent and retaining them

The two non-economy related challenges facing the industry are:

• Shipping delays and supply chain disruptions
• Managing the risk of forced labour within the supply chain

Dr Lu explained the aim of the report is to uncover how fashion companies feel about the overall business environment, their detailed sourcing strategies and how trade policy is affecting companies’ business sourcing strategies.

Understanding the key themes

He told Just Style exclusively there are three key themes from this year’s results:

1. Inflation and hiking sourcing costs
2. China and forced labour concerns
3. Sourcing diversification and new excitement for expanding sourcing from the CAFTA-DR region (Central America and Dominican Republic)

He said: “The three themes are also closely related. For example, the concerns about hiking sourcing costs and managing the risks of forced labour in the supply chain resulted in the growing popularity of sourcing diversification this year.

Also, US fashion companies demonstrated more interest in exploring apparel sourcing opportunities beyond Asia with the new implementation of the Uyghur Forced Labour Prevention Act (UFLPA).”

Hughes pointed out: “Asia remains strong but 2022 could be the year that Western Hemisphere sourcing really takes off.”

CAFTA-DR is a growing sourcing opportunity for US fashion industry

Dr Lu agrees and believes CAFTA-DR is a natural choice for companies wishing to diversify production due to its advantages in speed to market and the duty-free benefits.

The report states: “There is considerable excitement about increasing apparel sourcing from members of the
Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Respondents also call for more textile raw sourcing flexibility to encourage apparel sourcing from the CAFTA-DR region.”

The report reveals that 20% of respondents place more than 10% of their regional sourcing orders from the region compared to only 7% of respondents in 2021.

It also suggests that over the next two years, more than 60% of respondents plan to increase apparel
sourcing from CAFTA-DR members as part of their sourcing diversification strategy.

CAFTA-DR is seen as critical for promoting US apparel sourcing from the region with around 80% of respondents taking advantage of the agreement’s duty-free benefits when sourcing apparel, which is up from 50%-60% in the past.

The respondents say the exceptions to the “yarn-forward” rules of origin, such as the “short supply” and “cumulation” mechanisms, provide essential flexibility that encourages more apparel sourcing from CAFTA-DR members.

However, those who took part in the study also say improving textile raw material supply is critical to encouraging more US apparel sourcing from CAFTA-DR members. Particularly, “allowing more flexibility in sourcing fabrics from outside CAFTA-DR” and “improving yarn production capacity and variety within CAFTA-DR” are the top two priorities.

Dr Lu agrees that the key bottleneck in the CAFTA-DR region is the lack of textile raw material.

He suggested that if CAFTA-DR had access to textile raw material and was able to make new kinds of products it could help companies get more from the duty-free benefits that exist in the region.

However, he explained, right now garment factories in the region are making relatively basic items like t-shirts and trousers.”

He added that to make more advanced textiles the industry would need technology and machinery, which is why most textile materials currently come from elsewhere, but he said: “If we expand it will create more incentives for investments.”

He also noted however that not all of the problems facing the CAFTA-DR region can be solved by the fashion industry alone. For example, he said: “There needs to be more infrastructure with investments on things like new highways.”

Ethiopia’s loss of AGOA and its effect on the wider fashion industry

Ethiopia lost it eligibility to the African Growth and Opportunity Act (AGOA) in January 2022 due to civil unrest within the country.

Dr Lu pointed out, however, Ethiopia’s loss of AGOA benefits is negatively impacting sourcing from the country and the entire AGOA region.

He said: “Companies say they’re not moving their sourcing orders to other AGOA regions. This means the entire AGOA region has lost out from Ethiopia’s loss of the benefit.”

Notably, the report shows no respondent plans to move sourcing orders from Ethiopia to other AGOA beneficiaries.

However, the report highlights that three quarters (75%) of US fashion companies do strongly support another ten-year renewal of the African Growth and Opportunity Act (AGOA) and believe it will encourage more apparel sourcing from the region and allow for investment commitments.

Respondents are sourcing from Lesotho, Ethiopia, Kenya, Madagascar, Tanzania, and Ghana this year, but for less than 10% of their total sourcing value or volume.

The respondents also explain that despite the tariff benefits and the liberal rules of origin, there are concerns about the region’s lack of competitiveness in speed to market, political instability, and having an integrated regional supply chain.

Optimism for the next five years despite rising inflation

Despite the challenges US fashion companies are facing from rising inflation and rising costs from every aspect of the supply chain (labour, materials, shipping, compliance and trade regulations), most respondents (77%) still feel optimistic about the next five years.

In fact, 90% of respondents expect their sourcing value or volume to grow in 2022, but more modestly than last year. Plus, nearly all respondents (97%) plan to increase hiring over the next five years.

Sourcing diversification to reduce risks

The report highlights US fashion companies are adopting a more diverse sourcing base in response to supply
chain disruptions and the need to mitigate growing sourcing risks.

It should be noted that Asia remains the dominant sourcing base for US fashion companies with eight of the top ten most-used sourcing destinations being Asia-based, led by China, Vietnam, Bangladesh and India.

However, over half of respondents (53%) are sourcing apparel from over ten countries in 2022, compared with only 37% in 2021.

Reducing the reliance on China is one crucial driver of US fashion companies’ sourcing diversification strategy with a third of respondents sourcing less than 10% of their apparel products from China this year. In addition, exactly half of respondents are sourcing more from Vietnam than China in 2022.

Managing the risk of forced labour in the supply chain is seen as a top priority in 2022, especially with the new implementation of the Uyghur Forced Labor Prevention Act (UFLPA).

Most (95%) of respondents expect the act’s implementation to affect their company’s sourcing and over 85% of respondents plan to cut their cotton apparel imports from China, and another 45% to further reduce non-cotton apparel imports from the country.

Over the next two years almost 40% of respondents plan to source from more countries and work with
more suppliers, which is up from only 17% last year.

Mapping the supply chain

Almost all respondents currently track Tier 1 and 2 suppliers and with the help of new traceability technologies, 53% of respondents have started tracking Tier 3 suppliers this year (i.e., those manufacturing yarn, threads, and trimmings). The report explains this is a substantial increase from 25%-36% in the past and this mapping will be used to address the forced labour risks in the supply chain.

By Just Style