Europe's Embargo Crisis Brings Balance

PARIS — When millions of sweaters, bras, trousers and blouses were seized and held hostage in European customs warehouses last August, it hardly resembled the end of the quota regime everyone had imagined.

But it did serve as a wake-up call to an industry already heavily dependent on imports from Asia, particularly China, that had hoped the abolition of quotas earlier that year would be an invitation to unfettered cheap production.

Executives said it behooved them to reevaluate their sourcing strategies and redistribute the mix, moving away from an overdependence on China and balancing it by bulking up in countries such as Bangladesh and India.

"We were all incited to recalibrate our sourcing," said Richard Simonin, president of France's Etam fast-fashion chain.

"It taught us that we needed to have a more balanced and diversified sourcing strategy," added Glenda Wee, senior vice president of global sourcing at French cataloguer Redcats Group. "We didn't want to be stuck with all of our eggs in one basket."

Companies likewise worried a drawn-out snafu would dent margins considerably or, worse, result in empty shelves. Others saw it as an ominous sign that politics in the socially volatile European Union is always just one small step away from impeding business.

Yet, after a whirlwind of high-profile negotiations between Chinese and EU trade ministers, which ended the reintroduction of quotas on certain sensitive categories, the situation blew over. When the dust settled, there seemed to be surprisingly little impact or lasting ramifications. It was — politics aside — a return to the status quo, albeit with different semantics.

"There has been very little impact since the small one in August 2005," said Simonin. "It hit margins a bit last year, but the new quotas are so high that no one has a problem producing to his heart's content in China. Really, [what happened] was a false debate because those that suffered from the end of quotas were China's real competitors, as Morocco and India. We haven't been sourcing in France for years. To reinstate quotas wasn't going to move us back into France."

Nils Vinge, head of investor relations at Hennes & Mauritz, also minimized the effect of last year's trouble, saying that the Swedish fast-fashion giant may have been forced to move production of some sweaters from China to Bangladesh, but with minimal impact on margins.

Since the end of the trade dispute, he said it was back to business as usual.

"We have been able to produce in China this year because the quotas haven't been utilized," he explained. "The value for money has been favorable to place orders in China."

Vinge noted that H&M sources roughly 60 percent of its merchandise in Asia, with 30 percent of that coming from China. Vinge said that, last year, when import quotas first were abolished, H&M improved its gross margins.

"Instead of lowering our prices even more [prices were lowered about 10 percent between 2002 and 2004], we added some details to the garments and used more expensive fabrics, giving our customers even more value for their money," he said. "When the quotas were reimposed, we did not increase our prices. But we have almost managed to keep our margins at the same level."

Vinge said that, while China has not always made the best in terms of quality, the country has made strides recently, a sentiment echoed by many firms.

Meanwhile, he added that H&M was working on improving its lead times — a leitmotif in sourcing — but even if China can produce higher fashion garments, often it remains more advantageous to have those garments made in Europe for proximity's sake.

"From Turkey, we can have garments trucked to Austria in a day," he said. "It's longer shipping to Europe from China. We can, or course, fly them, but that has an environmental aspect and is very costly."

Nonetheless, he noted the dynamic is changing as H&M expands internationally.

"It's not faster to ship from Turkey to the United States," he said. "And we are opening in China now, too. It puts things in a different perspective."

Risks always exist in sourcing, companies acknowledged. Limiting risk while courting the best price and quality is the key to a successful sourcing strategy today.

"Social and environmental problems can play a roll," said a spokeswoman for Adidas, the German sports giant that manufactures 96 percent of its shoes and 78 percent of its apparel in Asia. "Political unrest and illnesses such as SARS or bird flu must also be taken into account."

"Natural catastrophes or political instability can also present a risk," added a spokesman at Puma, which has increased its Asian sourcing from 81 to 89 percent of its whole. "We want to increase the number of Asian countries where we manufacture. This diversification is meant to decrease dependence on any one individual supplier."

Countries from India and Bangladesh to Vietnam and Thailand are sure to profit.

"Indians are faster [than China], they are more flexible and have a better fashion sensibility," said Franca Mocali, woman's apparel manger for Italy's Upim department store chain.

Other Italian manufacturers increasingly are turning to sourcing partners closer to home, including North Africa and Eastern Europe.

For instance, denim label Meltin' Pot has focused much of its production in the Mediterranean region, namely Italy, Tunisia, Egypt and Albania. Augusto Romano, Meltin' Pot's general manager, said quality can be better controlled at those closer-to-home countries.

Accelerating lead times also has prompted some companies to search for so-called proximity partners.

Italy's Coin SpA, which owns the Coin and Oviesse retail chains, sources about 60 percent of its private label apparel in Asia. But the retailer currently is evaluating the possibility of boosting production in Turkey, North Africa and other Mediterranean countries.

"We are working hard to speed up all aspects of the [production] process," said Antonio Margotti, Coin's manager for sourcing and supply.

Nonetheless, some companies are moving to consolidate their sourcing in Asia.

Germany's KarstadtQuelle department store and mail-order group is working on an agreement with Li & Fung Ltd. in Hong Kong to serve as a procurement provider for all global imports.

The partnership is expected to save Germany's largest textiles retailer up to 10 percent in purchase prices, improve payment conditions from 20 days to 120 days and thus reduce working capital by 500 million euros.

At present, the group imports about 60 percent from Asia, the remainder from Europe.

KarstadtQuelle previously worked with midsized importers in Germany as well as KarstadtQuelle International Services AG, based in St. Gallen, Switzerland. The Swiss company employs 1,100 people on location in factories all over the world and will be sold to Li & Fung as part of the deal.

The group's import volume is on the rise, and the goal is to expand it to 3 billion euros, or $3.82 billion, spokesman Jörg Howe said. Industry sources placed KarstadtQuelle's current imports at well under 2 billion euros, or about $2.5 billion.

"It's just much more efficient," Howe said of the link with Li Fung, which, as a procurement partner for international operations such as Marks & Spencer and Abercrombie & Fitch, brings KarstadtQuelle greater buying power.

Besides more competitive pricing, the partnership offers greater flexibility in procurement processes and will make it possible to offer up to 12 collections a year in the future, the group said.

While KarstadtQuelle's key decision-makers will remain at headquarters in Essen, Germany, design centers to set collection specifications will be set up in Europe and Asia over the coming months.

— With contributions from Melissa Drier and Damien McGuinness, Berlin, and Amanda Kaiser, Milan