Everyone Heading Home?

The repatriation of industrial production to Europe has been debated for years. Will the combination of modified consumer behaviour, economic dynamics, and “Industry 4.0” really trigger a widespread return to Europe? Text: Quynh Tran. Illustration: Claudia Meitert@ Caroline Seidler

The food industry has always been good at anticipating trends. The terms “organic” and “fair trade” were associated with eating first. This trend is still a niche with a 4.4% market share, but revenue with such food products did grow from 2.1 to 8.6 billion Euros between 2000 and 2015 - and it is still gaining ground. It is not yet possible to define to what extent this development is reflected in the fashion industry from a statistical point of view. Numerous horror stories about cheap production facilities in the Far East have, however, triggered a rethinking process that has been confirmed by both companies and consumers. Similarly, regional produce is enjoying an increase in popularity. Almost every major German supermarket not only houses shelves with organic food, but has also added signs that advertise the regionality of the produce. A study titled “Food: Regional is in More Demand than Bio”, which was conducted by the consulting firm A.T. Kearney in 2015, even comes to the conclusion that locally produced food is rated higher than organically grown food. According to the study, this development is a result of the sustainability trend, especially as regional produce is often perceived as sustainable. Other factors are the customers’ identification with the region and the more transparent labelling of local food.

How and Where If one also considers this trend to be a harbinger for the developments in other sectors, one would have to assume that the demand for consumer goods produced domestically or in Europe - instead of in the Far East - could experience a similar boom. This was palpable during the last Pitti Uomo; almost all exhibitors promoted their “Made in Italy” credentials. The situation wasn’t much different in Berlin two weeks later. Especially brands in the mid-price and upper price segments were eager to differentiate themselves from vertically integrated discounters with “Made in Europe” slogans. “Where our products are manufactured is very important to our customers. Naturally, the first question one is asked at trade shows is about the price. The second question, however, is where the product comes from”, says Andrea Curti, the founder and owner of P448. Curti founded his label, which offers sneakers at retail prices up to 200 Euros, in 2012 and has decided to produce his shoes exclusively in Italy. “By producing in Italy we guarantee quality and ensure that we have control of every step in the manufacturing process”, he explains.

Market Proximity is Crucial In view of increasing consumer appreciation, Maximilian Koehler also decided in favour of European raw materials and production capacities when he launched Quantum Courage, his women’s fashion label, in 2013. “The transparency of the production processes is a key decision criterion for our exclusive customers. The ‘Made in Europe’ tag emphasises the aspect of sustainability, the compliance with ethical standards, and thus also affects the purchasing decision of consumers quite significantly. The craftsmanship and processing quality one can find in Europe are truly unique”, he says. On the other hand, production plants in the Far East tend to focus on quantity and favour large customers. In Europe, the production process is more flexible and the service levels are higher. “For us, the close and continuous dialogue with our suppliers is very important. The proximity to our production sites is an absolute advantage. It means that we can execute our product control processes swiftly; it also simplifies and shortens our delivery routes. In turn, this has a very positive impact on our already very high customer satisfaction level. Despite the additional costs incurred in Europe, we are convinced that it is economically viable to produce in Europe in the short, medium, and long term”, Koehler argues.

Reacting Swiftly “The ‘Made in’ distinction may not be the decisive reason for a purchase decision, but it is an additional argument. Consumers appreciate the fact that an item has been manufactured in Europe. In the case of Italy, it translates into a willingness to pay between ten and 15 percent more”, says Daniele Fiesoli, the managing director of WoolGroup, which has its own manufacturing facilities in Italy. In his capacity as a manufacturing specialist, Fiesoli is repeatedly approached by larger brands and private labels that are interested in returning their Asian production orders to Italy. “There is a visible tendency to return production capacities to European countries such as Italy, Portugal, Romania, among others. The main advantages are faster delivery times, the opportunity to place smaller volumes in the form of several orders during the season in order to respond to customer demand more efficiently, and the fact that the rising transport costs and the diminishing wage difference between Europe and Asia make local production more attractive in terms of cost”, Fiesole explains. “One of the main reasons for the strengthening of Europe as a production location is, of course, the logistics advantage. European suppliers respond better and faster; the speed helps us to serve customer expectations and market demands more efficiently”, confirms Michael Azoulay, the chief executive at American Vintage. The brand currently manufactures 60 percent of its products in Europe

and Morocco, while the remaining 40 percent is manufactured in Asia.

Reshoring is the Magic Word While this may sound hopeful, one should note the hard figures that warn against falling victim to a pink-clouded view of the situation. In its Reshoring Index 2015, the consulting firm A.T. Kearney states that there is selective back-reshoring (return of production to the domestic market) and near-reshoring (relocation of production to neighbouring countries), but highlights that offshoring is still higher in proportion. Especially in the clothing industry, which must be increasingly focused on the customers and react ever faster, the option of reshoring offers enormous potential. “We have seen a sporadic return to our association in Europe by German brands; there are definitely selective tendencies of that sort. It remains to be seen whether this develops into an actual trend. However, the decisive factors are the shorter delivery routes and the potential to react to market changes quicker due to market proximity”, says Hartmut Speisecke, the spokesman for the Confederation of the German Textile and Fashion Industry. What’s quite ironic is that the likes of Zara and H&M, which initially triggered the shift of manufacturing to low-wage countries, are also tapping into European production capacities despite the high cost of labour. Speed is simply too important for them too. Uni-Club MoRe, a research group created by the co-operation of five Italian universities, has been looking into this topic since 2005. It believes that - alongside the pioneering US - countries such as Italy, Germany, Great Britain, and France have been the profiteers of reshoring since the financial crisis of 2009. The study says that 50 percent of the returnees operate in the clothing segment. The reasons speak volumes: 25.1 percent state cost and product-related aspects as the reason, while 21.9 percent state logistics costs. At least 19.7 percent claim that the “Made in” distinction is decisive, another 19.7 percent point to increasing labour costs in the Far East, 18.9 percent have quality concerns, and 17.8 percent highlight the struggle with delivery delays and lack of customer service. According to the study, it is becoming clear that these reasons could lead to an increase of return activity in the future.

Local Production has Potential A survey by the Boston Consulting Group among major US companies in December 2015 concluded that 31 percent of the companies will expand their respective production capacities in the US within the next five years. The downside is that 20 percent also plan to increase their respective capacities in China. This suggests that large corporations are more interested in a geographical diversification of their production structures than promoting a pure return initiative. A practical example is Walmart’s reshoring initiative, which intends to return goods production to the tune of 250 billion US Dollars from overseas back to the US by 2023. Nike also announced plans to create 10,000 production jobs once the Transatlantic Free Trade Agreement (TTIP) takes effect. An example in Europe is UK-based Burberry, which announced its intent to invest 50 million British Pounds in local factories early this year.

Communication of “Made in” Remains with Company Although there are many reasons that justify reshoring, the lack of obligation in terms of “Made in” distinctions - and the lack of transparency in terms of the actual origin of a product - remains a real problem on a regulatory level. If a pair of sunglasses is assembled in Italy despite all the components being produced in China, one can still claim that it was “Made in Italy”. A solution to this problem is not in sight, at least not one implemented by the public sector. “To this day, many of our customers aren’t aware of how high the degree of added value for our products is still generated in Germany and it is our aim to communicate this aspect more. We are willing to utilise more provocative advertising campaigns that challenge the customers to think about production conditions”, says Mey’s Matthias Mey. This means that companies need to communicate the origin of their respective clothes in a more pro-active manner. “Mey has an extremely vertical business model that, to a large extent, creates value within the company. 85 percent of the materials are produced in-house, while 100 percent are cut to size internally. The last step concerns the manufacturing itself, which is, however, usually the most expensive part of the process”, Mey says. In addition, the company launched the label mey story, which deliberately works with the “Handmade in Germany” distinction. “It is scientifically proven that customers appreciate handmade items more. In the case of mey story, we created an independent brand based on our own values. The products are ‘Handmade in Germany’ - from the yarn to the finished item. It’s about values, convictions, and the essence of what Mey stands for as a company. Especially in Japan and Korea, the appreciation for handmade items and interest in the respective background story is particularly high. We are doing very well in Germany too, but there is still a lot of development potential here.”

Driving Force Industry 4.0 Does this mean that producing in Europe, as well as returning production capacities from abroad to Europe, is only a sensible option for brands that serve the medium and upper price segments of the fashion industry? Innovations in the field of digital technology offer other options. Under the heading “Industry 4.0”, an increasing number of research groups and companies have started working on interlinking industrial production with modern information and communication technologies. The pioneers in this area are sportswear manufacturers. For example, Adidas is currently working on its Speedfactory, a system that utilises 3D printers to produce tailored sports shoes locally within a very short period of time. “At present, it takes up to 18 months until a product reaches a store. This includes the design process, product development, sell-in, production, shipping etc. This timeframe could be reduced significantly by using the Adidas Speedfactory. This not only allows us to react to trends quicker, but also enables us to fulfil the wishes of the creator in terms of speed, aesthetics, and performance more efficiently”, says Katja Schreiber, the spokeswoman for the company. “When I joined Adidas, the production capacities were migrating. Now they are returning to Germany”, Herbert Hainer, the chairman of Adidas, told Handelsblatt in September 2016. The Speedfactory in Ansbach is expected to produce the first 500 pairs of shoes as early as this fall. In perspective, the factories should become an integral production component: “In 2015, we produced a total of 301 million pairs of shoes. Based on our strategic business plan - titled ‘Creating the New’ - we expect annual revenue growth in the double digits until 2020. As part of this plan, we will produce approximately 30 million additional pairs of shoes per year. In this context, the Speedfactory facilities provide additional production capacities. To put this into perspective for you, each of the factories is expected to produce 500,000 pairs of shoes in the medium to long term”, Schreiber explains. It is a development that puts the strengthening of Europe as a production location into a completely different light. This development doesn’t - as so many hope - create jobs but replaces workers with industrial innovations such as 3D printers. The Boston Consulting Group predicts that 25 percent of production in Germany will be executed by machines by 2025. In 2015, it was 10 percent. Nevertheless, added value is about to return. 71 percent of the managers that took part in the survey by the Boston Consulting Group quoted earlier in this article said that new manufacturing techniques make production in the West more economical.