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Trade war: U.S. inspection demand in China down 13%, other international and regional benefits

2019-07-10 00:00:00

      While a new round of U.S.-China tariff hikes has been shelved, U.S. sourcing sources continue to shift out of China, underscoring the lingering uncertainty facing U.S. companies. European buyers, while less affected by the trade war, have reason to reduce their dependence on China and opt for cheaper and/or closer destinations. This continued trend of diversification creates ample opportunities for new sourcing areas, but with it comes a range of challenges, from product quality to factory safety and social responsibility risks. This quarter's report combines field data collected through tens of thousands of inspections and audits, as well as the results of Madeown purchasing survey of more than 150 global companies in all major consumer goods industries in June


Global Purchasing Trends: Tariffs and Cost Issues Drive Diversification Trends

      The CHINA-US tariff trade war remains the main catalyst for diversification of procurement: in Madeown's latest survey, more than three-quarters of U.S. respondents said they were affected by the U.S.-China tariff issue, citing rising costs as one of the worst impacts on their business, in line with Madeown's internal data. U.S. companies' inspection and auditing needs in China fell 12.7 percent year-on-year in the first half of 2019, the data showed. As U.S. companies increasingly turn to Southeast Asian countries as they look for alternatives to China, inspection and auditing demand in Vietnam, Indonesia and Cambodia grew by 21%, +25% and +15%, respectively, in the first half of 2019. South Asia is also one of the major destinations for U.S. textile and clothing manufacturers, with demand for textile inspection and auditing in Bangladesh and Sri Lanka doubling in the first half of 2019 compared to 2018. This year, the trend for U.S. companies to shift production to neighboring countries continued, with inspections and audits of factories in Latin America and South America soaring 47 percent.

      This diversification drive is not unique to American companies. Our mid-year survey found that companies that have started or plan to start sourcing from new countries this year have a high share of the economy: 80 percent of U.S. respondents and 67 percent of EU respondents, respectively.

     In fact, EU companies may be less affected by the trade war (only 14 per cent of EU respondents said they are buying less in China because of tariffs), but they are also looking to diversify to optimize their mature supply chains, particularly in South Asia, so their inspection and audit ingress demand in the first half of 2019 has increased by 34 per cent year-on-year. Nearshore is also becoming increasingly important for European companies, with Turkey and Africa increasing their inspection and auditing needs by more than 40% year-on-year. In addition, in 2019, EU textile and clothing brands have also increased their purchases in Romania and Portugal.

Interestingly, while China's factory as a developed country appears to be declining, it is still a favored manufacturer in emerging regions: in the first half of 2019, demand for inspections and audits by companies from other parts of Asia grew by 33 per cent compared with the same period last year; Other Western brands have doubled their manufacturing in China because they have a solid strategy for Chinese consumers: Nike, for example, recently announced that it is choosing to further expand its manufacturing footprint in china and that procurement areas are fraught with social responsibility issues and security risks

      According to the Madeown factory audit data collected in 2019, the global trend towards new sourcing markets to date may pose supply chain risk to brands and retailers, as less mature markets face a higher risk of social responsibility violations. Madeown's findings show that the buyer's agenda does not prioritize supply chain social responsibility when selecting suppliers in new countries. In fact, they should be aware of this: South-East Asian countries are finding it increasingly difficult to meet social responsibility norms and sustainability standards, as can be seen from the declining social responsibility scores of Malaysia, Vietnam and the Philippines (down -14.3%, -8.2% and -4.1%, respectively, compared to the 2018 score). By contrast, China's social responsibility compliance continues the slow but steady improvement trend shown over the past year, with particular improvements in hours worked and wage categories, which may reflect companies' response to changes in China's social security regulations that came into effect in early 2019.

      At the same time, South Asian countries, while increasingly popular with Buyers from the United States and the European Union, are still plagued by poor factory security. Specifically, more than 80 per cent of South Asian factories surveyed by Madeown Structural Auditors in 2019 need to be improved in the short or medium term (compared with 57 per cent globally), with 6 per cent of factory facilities posing a direct threat to workers' lives and health.

Brands focus on the quality of products in the new purchasing market - the right choice

      When asked about the biggest challenge of working with new national suppliers, more than 44 percent of respondents to the Madeown survey said product quality was a high priority. In fact, data collected by Madeown inspectors during on-site quality control inspections show that continued diversification of global procurement means that many consumer goods have quality problems.

      Since the beginning of 2019, the quality of products in South Asia has deteriorated significantly, with inspection failure rates in India and Pakistan exceeding 33 per cent and 37 per cent, respectively. At the same time, in Cambodia, more than 40 per cent of all goods inspected in the second quarter of 2019 exceeded acceptable quality limits, as local suppliers did not have the time or resources to establish appropriate quality management processes or train new personnel, making it difficult for quality to keep pace with the growth in demand.

      By contrast, Turkey, as a more mature market, has handled the growth rate of production better: after a brief increase in quality problems after the end of the year, local suppliers successfully kept inspection failure rates below 25 per cent in the second quarter of 2019. At the same time, the quality of Chinese manufactured products increased by 13% in the second quarter of 2019 compared to the same period last year, with 25% reporting exceeding acceptable quality limits.

      The above trends clearly show that the current uncertainty of global trade and the trend of outward shift from China have created opportunities for new procurement regions, but cannot take lightly the social responsibility and quality of the supply chain. Instead, buyers must pay more attention to quality, safety, and sustainability when expanding their supply chains into new markets, especially in less mature markets.

Key KPIs for Madeown Quarterly Report


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