Major players in the fashion industry are beginning to shift their manufacturing out of Asian countries like Vietnam. While the cost of production may be higher closer to home, relocation can help companies to alleviate delays and reduce other logistical challenges created by COVID-19. However, because the uncertainty caused by COVID-19 makes it difficult to determine if the grass is truly greener somewhere else, fashion companies should be sure to conduct due diligence before pulling up roots.
Is Vietnam Losing its Allure for Footwear and Apparel Companies?
Over the past decade, many fashion brands have shifted their production to Asia. Due to its relative political stability, lower costs and skilled workers, Vietnam has become preferable to China in recent years. In 2020, Vietnam sold $29 billion worth of apparel and became the world’s second-largest supplier of apparel and footwear, overtaking Bangladesh while still trailing China for the top spot.
Unfortunately, COVID-19 hit many of Asia’s manufacturing hubs extremely hard. After successfully containing the virus, cases in Vietnam soared this summer with the arrival of the Delta variant. In response, the government imposed the “three on site” requirement, which mandated that factory workers eat, work and live within the confines of the factory in order for it to remain operational. According to the Vietnam Textile and Apparel Association (VITAS), approximately 30% to 35% of textile and garment factories in Vietnam shut down. According to media reports, many factories struggled to provide adequate food, facilities and medical care, and hundreds of workers contracted COVID-19.
While Vietnam lifted the restrictions in October, it is expected to take several months for production to rebound, with delays projected to last into the first half of 2022.
Factories are offering higher salaries and free transportation in an effort to lure workers back. While these initiatives are having some success, labor shortages are expected to continue for the foreseeable future. Given the risk that COVID-19 variants could fuel another surge, additional restrictions — including factory closures — are also possible in 2022. To avoid another lockdown, the American Apparel and Footwear Association (AAFA) is calling on President Joe Biden to provide vaccines to Vietnam and other “key partner countries.” As of November, less than a third of Vietnam’s population was fully vaccinated.
Does it Makes Sense to Shift Manufacturing Back to China?
With Vietnam factories struggling to meet demand, apparel and footwear companies are facing product shortages and delays. Because 80% of its footwear factories are located in Vietnam and almost half of its apparel factories were forced to shutter, Nike lowered its revenue growth forecast for 2022 after losing 10 weeks of production.
Companies are also exploring their relocation options. Golf retailer Calloway and women’s clothing maker Chico’s are among the companies that have already announced that they are moving production out of Vietnam. For many, returning to China is their first consideration, as it continues to produce a large majority of the apparel for U.S. and European companies.
However, the country is facing its own manufacturing issues. Although China has weathered the pandemic better than many of its neighbors, its factories are still facing challenges. Under the country’s “zero COVID” policy, factories and even entire towns can be shut down at a moment’s notice if an outbreak is suspected. Most recently, power outages have also forced factories to shut down. Additionally, getting products from China to the United States also remains difficult due to supply chain bottlenecks.
Given the likelihood of production delays in China, some companies are exploring manufacturing locations outside of Asia. According to Reuters, clothing and shoe manufacturers are looking to Bulgaria, Ukraine, Romania, the Czech Republic, Morocco and Turkey as alternatives. Steve Madden has left Vietnam and moved half of its footwear production to Brazil and Mexico from China. Fellow shoe company Crocs recently announced it is shifting production to countries including Indonesia and Bosnia.
What Legal Issues Should Fashion Companies Consider Before They Relocate Production?
The COVID-19 virus has proven to be unpredictable and continues to pose challenges for footwear and apparel brands. As highlighted by the recent factory shutdowns in Vietnam, one of the best ways for brands to minimize risk is through diversification.
Prior to relocating manufacturing, fashion companies should review the cancellation and/ or termination clauses in their agreements with suppliers to determine their rights and obligations, i.e., the right to unilaterally cancel orders, grounds for contract termination and whether notice must be provided. Going forward, companies should also take steps to ensure that future contracts address the ongoing risks posed by COVID-19 and the resulting supply chain disruptions.
Howard D. Bader serves as general counsel for clients in a wide range of industries on an international scale. With over three decades’ worth of legal experience, he has represented clients in numerous legal matters, including commercial litigation, intellectual property, bankruptcy and creditor’s rights and mergers and acquisitions, as well as numerous corporate transactions and business law matters.
hbader@sh-law.com
(212) 784-6926
www.sh-law.com
