Emily Lane, Bret Schnitker
October 24, 2022
Emily Lane 00:09
Welcome to Clothing Coulture, a fashion industry podcast at the intersection of technology and innovation. I'm Emily Lane.
Bret Schnitker 00:17
I'm Bret Schnitker. We speak with experts and disruptors who are moving the industry forward
Emily Lane 00:21
and discuss solutions to real industry challenges.
Bret Schnitker 00:24
Clothing culture is brought to you by Stars Design Group, a global design and production house with more than 30 years of experience.
Emily Lane 00:35
Welcome back to another episode of Clothing Coulture. Once again, we were back inside of the corporate office of Stars Design Group. And I'm joined by Bret Schnitker CEO. Welcome to another exciting conversation today, we are going to be talking about looking south for nearshoring opportunities. This is something that comes up nearly daily, if not every day, and we're going to talk about the pros and cons and opportunities that exist, I think it might be start to kind of have a quick look at maybe the more traditional viewpoint, which has been looking east to get a little foundation about where this shift is happening, where the opportunities can exist and so forth.
Bret Schnitker 01:20
Yeah, most brands, manufacturers and apparel have always traditionally looked East. And there's a reason for it. You know, Asia represents about 73% of all production and garments in the world today. And so we're used to going to, and when you're looking at Asia, it's a big block. It's, you know, China, Vietnam, Indonesia, Cambodia, Thailand, to a lesser degree, all of these and certainly Vietnam, these major groups in the Far East, and then Near East and India, places like that represent a pretty large conglomerate along with Bangladesh producing a lot of apparel. And so, you know, the shift is there is this attractiveness to, to manufacturing clothes because of some of the increasing challenges that are occurring there. But I'm not quite sure that there's full solutions to that. looking south, there's people people need to be aware that there is some challenges to looking south part of a portfolio.
Emily Lane 02:17
Absolutely, you know, I would see one of those challenges as being you know, there's vast infrastructure in place, yes, where this manufacturing has been happening for many, many years now in continually invested in so you know, really gearing up that kind of infrastructure and other regions, it takes time, not only from an infrastructure standpoint, but from a skill set standpoint.
Bret Schnitker 02:38
Yeah. And I think you know, there are rising costs going on and in the east, but at the same time, along with those rising costs, they're increasing productivity with technology. So they're able to offset those things, they really have built a very strong machine for production and the infrastructure is there everything from Mills, and trims and dyeing houses and you know, the entire and it's a, it's a robust infrastructure to manage production.
Emily Lane 03:07
Where do you think the bulk of the concern is for moving things closer, we obviously there's some of the obvious things which everybody knows about, you know, logistics and so forth. But there is a demand saying, you know, we want to move away from Asia, what is going on to foster that desire?
Bret Schnitker 03:27
I would say, in some parts of the market, it's emotion, you know, there's a little bit of a tension between China and US that hasn't occurred in some time. And so some of that's emotional, some of it's probably maybe misplaced patriotism, in my opinion, you know, hey, China is bad, we're good. I don't think that's necessarily true, because they're a strong manufacturing partner for us, and we help them get there, frankly. But some of the other challenges that are going on or more tangible, we're seeing an issue with Xinjiang that's coming up right now, Xinjiang is a region in China, where 80% of the cotton production is coming from in China. And there's an ongoing dialogue about the challenge with the Uighur community there, and some of the human rights issues that continually creep up. And I don't think China has successfully quelled the concerns that the international community has, sometimes, and it almost appears like they're not even concerned about calling those concerns. And so, you know, difficult conditions exist around the world. We're seeing that in Ukraine. We're seeing that all over the place. But I think there's some international responsibility, we're trying to make life better for people and so there's going to be some increased scrutiny on cotton coming out of Xinjiang. I think that's going to create some additional issues for manufacturing in China just from a business level. You know, the certifications that are required, you know, you almost take a lot of cotton out of the market if if you cannot have Xinjiang cotton. So people from a business level are certainly looking at that aspect, most definitely, we're still dealing with the duty plus tariff issue. So with rising costs, we're looking at still very expensive freight. And for the first time, in a long time in history, the last couple of years where you had like 11 days, 18 days boat, and you had a couple days, you know, we kind of either side for clearance and export have now become 75 to 90 days. And so it's a combination of things that continue, I'm not quite sure that it is enough for us, too. And we don't have a place to go. Frankly, that's one of the other things, you know, if you look in the Americas for production in the West, if you will, and that's Central America, South America, in general, they represent only about 17% of all production, right? So there's a long way to go for them to be able to manage more business.
Emily Lane 05:57
Yeah, I can imagine it's a mathematical equation. You have you take globally, the production that's happening in Asia and try to move that to a new zone or Central America or South America now all of a sudden that demand is going to quickly outweigh what can realistically happen from a production standpoint,
Bret Schnitker 06:16
That actually happened within Asia this year, a lot of people moved out of China moved to the neighboring Vietnam. Yes. And Vietnam demand exceeded supply. And there were a ton of delivery delays within Vietnam.
Emily Lane 06:29
Right. Yeah. And I also imagine when, when a certain region gets so much volume, they really get to pick and choose, of course they want, you know, and so it's like, well, let's, let's do the thing, that's the quickest and easiest to turn so we can keep our lines moving and things of that nature. Do you see that? Or is that just an assumption.
Bret Schnitker 06:49
Just economics 101. When demand exceeds supply, a couple things happen. One, the suppliers become a lot more selective, they're able to streamline customers, along with the best way that the factories will work most efficiently. But also costs go up. Because especially in our business, we haven't seen a ton of profit taking occurring for a number of years, even now, in our business, the profit taking is happening with the shipping lines, it's not really happening wholesale with the manufacturers, you know, they're still, you know, having to figure out ways to become competitive in a more increasing environment. But when you get into a situation where demand is exploding, and the supply base is less than certainly they're, they're going to eat up prices, I would imagine. Yeah. And we're seeing that also.
Emily Lane 07:33
So for us, it stars we were invited two and a half years ago on the cusp of COVID, to participate in a project with the US Department of Trade. And we went to El Salvador to help foster relationships help consult on how they can bring manufacturing to the levels that we would require to export to the United States. And it's been a really interesting consulting project over the last two and a half years. Having recently gone as kind of a conclusion of that project, it has been exciting to see the development that has happened over the last two and a half years, I do see great transition. But obviously, there's still some work to be done. Bret I'd love for you to share some insights as to, especially with your expertise, on you know, what we saw maybe two and a half years ago, and maybe some of the development of where it's at now. And then after that we can kind of talk a little bit more about its application with the demand that's happening now.
Bret Schnitker 08:29
Yeah, I would say we see transition, but it's a microcosm. You know, it's a small group of factories that were kind of selected to make that transition. You know, El Salvador, in general makes up a part of Central America, Costa Rica, Guatemala, Honduras, Nicaragua. And that group, each country within that group has experienced probably more success in manufacturing growth or industrial growth as it relates to manufacturing or elastin. El Salvador sort of lagged behind for for a number of years, the previous government probably didn't feel like it was that important. They kind of wanted to leapfrog that and jump into technology. That's not how economies that I know of work. I think that you have to learn the steps of industrialization along the way, every main country that we can kind of talk about in Asia, you know, moved along that path. And that's the great thing about apparel is that it's an easy place to begin that journey of industrialization. And I've seen it happen in a number of countries over my career and in the countries that I've worked with. And today, the current governments are receptive. I think that the trade minister of economics and trade is a sharp person. She really understands the need to establish you know, more volume business, and I think-
Emily Lane 09:55
She's very technology.
Bret Schnitker 09:57
Oh, I agree. I agree. In general, Maria Bravais really knows that this is a pathway toward more hope for the country. And so that's a positive for sure. And so it's just the country today, almost 80, or 90% of the country is still made up of small maquinas. And small operating units that aren't efficient, that aren't really looking heavily for export. And the free trade zones kind of dominate the majority of what they recognize as export volume, which I think is over a third of their, their export volume is in apparel today. But there's a huge potential to grow that number. And so, you know, being down there, I think the people are wonderful, I think that they they've got the mindset for doing that. They just continue to need more, you know, guidance and assistance to organize in the country organization, I think is really critical. Today, it's not super organized is kind of organized within different cliques and groups, but not organized together in a common goal to grow that country's production efficiently,
Emily Lane 11:06
and build the resources and their own kind of internal supply chain.
Bret Schnitker 11:11
Yeah, they certainly have some resource for sure we've, we've seen some pretty dynamic resource, some of that resources dated, and needs to be kind of, you know, brought to the modern day, maybe offering more opportunity. But you know, to qualify for CAFTA, you've got to, which is duty free to the US under under that agreement, you've got to make sure that your products, for the most part are all developed within CAFTA regions. So, you know, they can certainly source some of that, you know, from neighboring countries, but there is some infrastructure, but I think El Salvador has a long way to go. There's some excitement for sure. Yeah, they've got a long way to go.
Emily Lane 11:50
So you know, El Salvador isn't the only country that's a part of the CAFTA countries. And, you know, we've had some experience and other countries as well, Guatemala, Honduras, are there some challenges or advantages that you see to some of those neighboring countries?
Bret Schnitker 12:07
I think some of those countries are certainly further along. They've, you know, at one point 92, 93, I was one of the largest exporters out of Guatemala and our company, at the time was one of the largest exporters out of Central America, I believe, in multiple categories. And the two strongest manufacturing countries we were focused on at the time in that region, because they throw Dominican Republic in there as part of this capital agreement. But we're Guatemala and Honduras, they, they kind of embraced large production, they used kind of international investment into the country, that international investment was pretty aggressive in those in those countries. And they those countries also cater to the international investment, those two countries are what I would consider the most stable for the longest period of time in Central America. So that makes people comfortable with investing, you know, because large factories are certainly long term investments,
Emily Lane 13:04
There are a lot of benefits. Looking at this region, one of them that we've experienced a few times now is just the travel is so much easier, we can get there in a few hours, and easily come back home. And so looking at a trip to Central America versus going going east. It's quite a time and cost savings so I can see some of those benefits. Are there other benefits that you think people should consider as they're exploring this region?
Bret Schnitker 13:34
Yes, certainly, the US trade department has allowed for duty free imports, as long as you know, a large majority of the product is built in those in those countries. And that can be a definite benefit. You know, sometimes the rising costs that are occurring in Central America times the productivity levels that are occurring, you know, defuse that benefit a little bit, but there is certainly a benefit to that for some of the key operations down there. If companies are strategic about how they build and develop plans, their production can be done rather quickly. More on Basics of course, but you know, you can build 3545 day turns out of Central America and production, stocking gray stocking died, you know, and I'm talking more T shirts, sweatshirts, more basic items, but that's great. You know, a lot of people love to be able to react to business and that's, that's becoming more and more challenging in Asia, both near and far. So that's a benefit. The other thing too, certainly is the transit times. So we've talked at nauseam about all the issues that are going on today. And I don't think in freight they're they're not going to go away anytime soon. And so when you're looking at really 75 to 90 days, including clearance out of Asia at the best your ability to to ship and clear in Nine to 10 days out of Central America seems drastically better.
Emily Lane 15:05
Of course, of course, for those who are more excited about chasing demand?
Bret Schnitker 15:10
Well, I think in general, if you buy closer to business, maybe you make better decisions, hopefully. But I would say in addition to that, the actual cost per container, so you know, costs are starting to, and I really put heavy quotation marks on this stabilize in container costs, you know, they had skyrocket to 22,000 24,000 container, when things got really nuts, maybe were eight or 10,000, and container now and a 40 foot, and they might, they might come down, but they're certainly nowhere close to where they were couple years ago. But out of Central America, your container costs are three to 4000. So when you're amortizing shipments there, that cost is certainly better. Also, I think the desire to do business in the countries exists. Yeah. You know, also I, again, I think our business is made of people and and there's a desire, and an aggressiveness from the people that we've met to, they really want to change their lives, they you know, they want to improve their lives.
Emily Lane 16:10
Yeah, building relationships over the last couple of years. It's certainly something we've fallen in love with a lot of people there and want to see their lives improve.
Bret Schnitker 16:19
Yeah, everywhere I've gone good business solves a lot of issues if you can scale.
Emily Lane 16:23
Yeah, what are some of the key challenges that you see still remaining in this region?
Bret Schnitker 16:27
People want to transplant some of the things that they can do in Asia and Central America. And that's where the challenge lies, and especially where demand far exceeds supply. So everyone is looking south. Now, everyone wants to go south, because like, for all the reasons we've mentioned, the challenges you have or that that business in the South has been built on commodity basics for a lot of years. And it makes sense, it's easiest to go through lines, you're maximizing your profit on each line. And so it's going to be challenging some of the conversations that we've had were there, they want to implement some challenging difficult garments into a factory that's doing basics. And they want to have a ton of flexibility in terms of orders. Look, when demand far exceeds supply factories aren't going to be super keen to do that, you know, they're going to be focusing on the most efficient production possible that's going through there. There's also some limitations on the type of products that you can produce in the region and qualify for duty free. So those are things to be aware of to
Emily Lane 17:34
Yeah, well, you always say evolution, not revolution, right. So absolutely. There are some opportunities brewing that will help support a lot of nearshoring roles, but we always recommend moving slowly and thoughtfully have a plan in place and you know, you don't have to just make a sudden move tomorrow.
Bret Schnitker 17:54
Yeah, it's part of a portfolio you know, when you when you diversify your stocks, you diversify your production similarly.
Emily Lane 18:00
Yeah. Well, thank you so much for sharing this conversation with me today, Bret. And if anyone out there needs a little help navigating this complex world of manufacturing, of course at Stars Design Group, we can certainly help. Thank you for participating in our conversation today. And don't forget to subscribe to stay apprised of upcoming episodes of Clothing Coulture.
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