Global Value Chains

By Felix Maile and Lindsay Whitfield

As part of our ‘Creating and Capturing Value’ project, we seek to investigate the drivers for (uneven) value distribution between fashion brands, supplier firms and workers in the global apparel industry. As we learned during our recent three weeks of fieldwork in South Korea and Hong Kong, understanding value capture outcomes in globalized industries requires moving away from a single country case study focus, and instead consider the global portfolio of transnational suppliers that connect global buyers with a range of producing countries.

In the past two decades, we have seen the rise of strategic ‘mega suppliers’. These transnational apparel suppliers operate manufacturing facilities across different continents, and perform logistics, design and input sourcing functions for global fashion brands and retailers. Some scholars have argued that this novel type of supplier firm shifts the power balance towards a ‘bi-polar’ configuration of the apparel GVC, in which strategic transnational suppliers are able to capture significantly more value than smaller local supplier firms. But measuring and explaining whether these functions, combined with a transnational production portfolio, ultimately change the power dynamics in GVCs is not an easy undertaking.

The most commonly used approach of GVC researchers to investigate buyer-supplier relations and value capture outcomes is centered on semi-structured interviews in a specific case study country. This method is indeed useful to obtain the perspectives of a number of key informants in a particular country, including local supplier firms, government representatives, buyer sourcing offices, or trade unions. But as we experienced during fieldwork in Ethiopia and Kenya in 2022 and 2023, the country case study approach faces substantial limitations in understanding the overall business strategy of transnational mega suppliers and its implications for value capture outcomes.

We thus shifted the focus in our research to a firm centered case study approach, selecting a sub-set of the largest transnational suppliers from Asia. We decided to focus on 8 transnational supplier firms from South Korea (4) and Hong Kong (4), as these firms were vital in the expansion of the global apparel industry, given that they operate giant facilities in major sourcing hubs like Bangladesh, Vietnam or Cambodia and supply the largest global fashion brands and retailers. Some of them also have subsidiary factories in Ethiopia and Kenya. We also benchmarked these 8 firms to the two of the largest apparel suppliers in terms of gross profit volume and margin: Shenzhou (mainland China) and Eclat (Taiwan).

As a first step, we conducted research on each firm based on available information on the web and publicly available profit and revenue data to create an overview of each firm’s history, the development of its transnational production locations and capabilities, its buyer relationships, and its value capture trajectories. As Figure 1 shows, there are significant differences in value capture among the largest transnational apparel suppliers, as some firms capture more than 25% gross profit margin while others fall below 20%.

Figure 1: Annual gross margins (%) of top apparel FTS from Hong Kong, Korea, China and Taiwan

Note: Two of the Hong Kong firms are not in Figure 1 because they are not publicly listed companies and thus their financial data is not publicly available, and the two firms were not willing to share their financial data.

As a second step, we sought to explain variation in the value capture outcomes of the 8 transnational apparel suppliers based on interviews with senior managers at their headquarters in Hong Kong and South Korea, which we conducted during August and September 2024. These interviews provided the unique opportunity to understand the overall supplier firm strategy, the rationale to invest in certain countries and functions, and the inherently contradictory relationship with global fashion brands and retailers. The buyer-supplier relationship, even at this level of transnational supplier firms, is characterized by both strategic collaboration on product innovation and market growth, but also fierce struggle over margins.

Visit at headquarter of Hansae in Seoul, Korea, September 2024

Note: Hansae is one of the largest transnational apparel suppliers and operates factories across Southeast Asia, South Asia and Central America.

Our interviews suggest that neither establishing a transnational production portfolio nor performing additional tasks are sufficient factors to alter the bargaining power of suppliers vis-à-vis global apparel brands and retailers. Rather, what is required to capture more value are unique and complementary capabilities that make that specific transnational apparel supplier indispensable to the business strategy of the apparel brand/retailer (at least for a time period) and allow it to create barriers to entry that keep other transnational supplier firms from emulating those capabilities (at least for a time period).

We discuss these findings in a forthcoming paper: ‘Capturing value in a buyers’ market: Supplier value capture trajectories in apparel global supply chains’. So stay tuned. This blog post was first published on the Creating and Capturing Value in the Global Apparel Industry website: https://www.creatingcapturingvalue.org/post/conducting-multi-sited-fieldwork-to-investigate-transnational-capital-in-gvcs

Felix Maile is a doctoral researcher in development economics at the University of Vienna.

Lindsay Whitfield is a professor of business and development at Copenhagen Business School.

By Rachel Alexander

Do compliance audits incentivise factories to conceal problematic practices? Could a focus on identifying risks encourage brands to collaborate more closely with their factories, fostering collaborative upgrading processes? These were some of the questions discussed by attendees at the OECD Forum on Due Diligence in the Garment and Footwear Sector, which took place in Paris from 19–23 February. During the conference, government representatives, unions, civil society groups and large companies like PVH (owners of Tommy Hilfiger and Calvin Klein, among other brands) and Disney met to discuss topics including climate adaptation, binding company-union agreements, and chemical management.

This yearly event is a forum to promote the OECD Guidelines for Multinational Enterprises and the OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector. These guidelines and related guidance are based on the idea that multinational enterprises (MNEs) should carry out risk-based due diligence in relation to all of their operations, including their supply chains and products’ post-use lives. The OECD has outlined 12 key areas of risk in the garment and footwear sector as (1) child labour; (2) sexual harassment and sexual and gender-based violence in the workplace; (3) forced labour; (4) working time; (5) occupational health and safety; (6) anti-worker policies or practices that impede trade unions and collective bargaining; (7) wages; (8) hazardous chemicals; (9) water; (10) greenhouse gas emissions; (11) bribery and corruption; and (12) responsible sourcing from homeworkers. These risks are most acute in the Global South where garment and footwear production practices typically take place. Mitigating these risks is crucial for the sustainability of the industry.

The due diligence approach promoted by the OECD moves beyond the compliance approach that has often been relied upon by brands and retailers. The compliance approach is epitomised by creating supplier codes of conduct and supplier auditing systems. While compliance systems have been associated with some improvements, they have often been criticised as being ineffective. The risk-based approach, in contrast, involves brands and retailers asking where their biggest risks are and how they can best be mitigated. For example, does auditing a supplier – with a possible outcome being that the supplier loses their buyers -incentivise the suppliers to hide problematic practices? In contrast, could building dialogue with suppliers foster collaboration and help bring potential risks to light?

The forum covered diverse emerging topics related to sustainable fashion. These included circularity and the importance of effective grievance mechanisms. Another key issue was the development of new legislation. An overarching concern for many participants was the delay in the expected approval of the EU’s Corporate Sustainability Due Diligence Directive. This directive, which has been under development for years, would introduce harmonised due diligence legislation across Europe.
While MNEs play a large role in shaping the sustainability of the garment and footwear sector, which can be enhanced through effective due diligence practices, many other actors are also playing important and diverse roles. Together with CBDS’s Peter Lund-Thomsen, I have recently published a short book focused on innovation for sustainability in garment value chains. We highlight the diversity of initiatives that are being developed to address sustainability challenges. These include activities that are being carried out by MNEs, in addition to a wide range of new practices being developed by smaller actors. One example is Bolt Threads, which has created a variety of new materials, including synthetic leather derived from fungus. Other innovative businesses are creating new models of consumption, such as the Dutch company Circos that leases baby clothing to new parents.

Events, like the OECD Forum on Due Diligence in the Garment and Footwear Sector are crucial to foster the dialogues that are necessary to address the complex challenges facing the industry. As policymakers and companies continue to innovate and learn from best practices, in the coming years the industry will grow and develop. At this critical juncture, it is important to learn from experiments which provide insights into more sustainable ways of operating.

Rachel Alexander is a postdoctoral researcher at the Centre for Business and Development Studies at Copenhagen Business School.

By Felix Maile and Cornelia Staritz 

There has been much talk about the reconfiguration of global supply chains in recent years. Intensified geopolitical tensions, the climate crisis, digitalization and supply chain disruptions have fuelled debates about a potential restructuring of the global economy, with terms such as ‘nearshoring’ or ‘friendshoring’ circulating widely across journalistic, academic and policy circles. To make sense of these portrayed shifts, the Research Network Sustainable Global Supply Chains – an interdisciplinary group of more than 70 international scholars that work on global supply chains – recently published its 2023 Annual Report. The report explores the reconfiguration of global supply chains across energy, mineral, food, and manufacturing sectors, and covers a wide range of debates and views on re-, near- and friendshoring, local value addition, and the merits and risks of industrial policies. 

As one contribution to the report, we analyze key shifts in global apparel supply chains: Since the outbreak of the Covid-19 pandemic, the global apparel industry has been subject to intense market volatility. Massive numbers of order cancellations and related losses in supplier countries were followed by a rapid recovery in orders, only to be succeeded by supply overstock and declines in demand. At the same time, key transformations that were already underway have been intensified: First, as e-commerce boomed during the pandemic, fashion brands and retailers are expanding their online distribution channels to increase sales and reduce inventory. Second, new regulations to curb the industry’s notoriously high emission and pollution levels led to lead firm initiatives around energy-efficiency, renewable energy, and less carbon-intensive materials. Third, as geopolitical tensions between the US and China mounted, lead firms intensified ‘de-risking’ from China and ‘China+1’ sourcing strategies. As a result of these shifts, some industry participants argue that manufacturing activities will move closer to the two large consumer markets of the EU and the US, which is commonly termed as ‘nearshoring’. In that context, our article assesses the extent to which these shifts are materializing, the factors that drive them, and whether they will culminate in shorter apparel supply chains.  

Reducing excess inventory through online sales? 

An increasing number of lead firms aims to scale their e-commerce presence, which is mainly driven by an attempt to reduce high inventories. The main distribution channel for fashion brands and retailers remains physical outlets. But as these stores provide limited options to generate consumer data and anticipate demand, many lead firms end up with high mark downs, unsold goods and high inventory costs. Figure 1 shows that for the largest 10 apparel lead firms, inventory costs have steadily increased since the financial crisis of 2008.  

Figure 1: Share of inventory costs on revenue (%), top 10 apparel lead firms, 2000-2021 

Source: Capital IQ database.  The largest apparel lead firms by revenue include TJX, Nike, Inditex, Adidas, Shein, H&M, Fast Retailing, VF, PVH, GAP.  

In contrast, online retailers such as the UK-based ultra-fast fashion firms Asos and Bohoo, or Chinese-owned Shein, are able to access and analyze large amounts of consumer data to avoid forecasting errors. Based on data generated on social media platforms and their sales websites, online retailers deploy a ‘test and react’ model, in which a variety of micro collections are brought to market within less than two weeks. Those orders that perform best are then produced at a larger scale, which allows to minimize forecasting errors and therefore reduce unsold goods and inventory costs.  

Major apparel lead firms such as Zara or H&M want to emulate this strategy and have intensified their investments in online distribution networks, websites and data analysis. Deploying a ‘test and react’ model requires supply chains that build on small batch production, textile verticality and pronounced multi-tiered sourcing structures, which include ‘onshore’ distribution and assembly facilities located within or ‘nearshored’ facilities located in direct proximity to end markets, in addition to offshore facilities. Instead of a fundamental relocation of supply chains, the related geographical changes are likely to occur as gradual shifts. Even for e-commerce retailers such as Asos, the majority of suppliers remains located in ‘offshore facilities’ in China, Vietnam and India. Further, fast fashion lead firms rely already to a certain degree on multi-tiered sourcing structures, and while the majority of lead firms aims to increase online sales, this is not yet the case for all brands and retailers.  

Sustainability as the new norm? 

The apparel industry accounts for 8 to 10% of global emissions, represents 20% of global industrial water pollution, and contributes to high levels of landfill as well as oceanic microplastic pollution. In that context, policymakers in major end markets have introduced a set of regulations that aim to curb the industry’s environmental footprint.      

Mandatory corporate sustainability reporting across Europe, the US and Japan now require lead firms to report the emissions of their own operations, but also those of their supply chains, where the bulk of emissions accrues. Further, several European countries have introduced mandatory supply chain due diligence laws that require to conduct environmental risk assessments and due diligence. As the most ambitious regulation, the EU Strategy for Sustainable and Circular Textiles contains a package of 16 regulations, including minimum requirements on recyclability of apparel goods and recycled content. 

As a response, large apparel lead firms have announced to reduce the emission levels in their supply chains in the next years. It has been argued that this also requires nearshoring to cut shipping emissions, which however only account for 3% of the industry’s emissions. Instead, lead firms increasingly require from their supplier firms and supplier country governments to make investments into renewable energy supply, energy efficiency programs and waste management, as it is the case in Bangladesh, Vietnam or Ethiopia. Another response by some lead firms has been to invest into start-ups that work on new recycling technologies and fibers from bio-based feedstocks. At the moment, these firms are predominately based in the US and in Europe, so that we could see a geographical shift in the segment of sustainable textiles. But this remains to be seen, as the share of sustainable textiles thus far remains relatively small, and suppliers from the Global South could also enter that segment.   

De-risking from China? 

The ‘China+1’ sourcing strategy has been already underway since the early 2010s, when labor costs in China began to rise. This is reflected in China’s declining share in global apparel exports, which peaked at 43% in 2010 and dropped to 31% in 2019. In recent years, this trend was further reinforced by two key policy shifts. The US-China trade war placed tariffs of up to 7,5% on US imports of textile and apparel products from China, and the introduction of the Uyghur Forced Labor Prevention Act (UFLPA) places a ban on US-imports of goods, including cotton, that contain components made by firms that operate in the Xinjiang region.  

As a result, apparel brands and retailers seek to further diversify their supply chains away from China, and particularly the Xinjiang region. These shifts take place however largely within Asia, with key winners being Vietnam and Bangladesh. At the same time, a full ‘decoupling’ of apparel supply chains is highly unlikely, given the ongoing reliance of lead firms particularly on fabrics supply from China, as well as ancillary components such as trims, buttons, and zippers. Further, the Chinese consumer market has been the main growth engine for many lead firms such as H&M, Nike or Adidas. They therefore aim at complying with US and EU regulations while at the same time trying to avoid confrontation with the Chinese government that could easily cut them off from (online) market access.  

Supply chains become shorter, but within existing multi-tiered sourcing structures  

A number of industry surveys suggested that these ongoing transformations will result in geographical restructuring of apparel supply chains. For example, in a recent survey, more than half of 400 sourcing executives that were interviewed expected that nearshoring will increase in 2024. A quick materialization of these proclaimed nearshoring strategies is however not yet visible in trade statistics, as the share of regional suppliers, which experienced a secular decline in the 2000s, has remained stagnant in the 2010s and early 2020s. As Figure 2 illustrates, regional supplier accounted for 16% in the US, and 17% in the EU in 2022.   

Figure 2: Share of apparel imports from regional suppliers (%), 2000-2022 

Source: UN Comtrade. Note: EU regional suppliers include CEE20, MENA4 and Turkey; US regional suppliers include Mexico, Central America, South America and the Caribbean.  

But trade date is slow to pick up geographical relocations, given the time lag between nearshoring investments and actual start of production as well as delays in the reporting and publishing of trade data. Therefore, we conducted a systematic media analysis of the two main apparel industry journals (Just Style Magazine, Sourcing Journal) that captures the time frame between the start of the pandemic, when discussions on nearshoring began to spark, and July 2023. The data suggests that there are a number of investments in onshoring and nearshoring facilities in apparel assembly, but also importantly in the ‘verticality’ of textile and apparel production, aiming to increase the local or regional supply of textiles inputs in established apparel assembly locations.  

Overall, there were announcements on 21 nearshoring investments, 6 onshoring investments and 28 investments into textile verticality. The combination of verticality with scaling up nearshored assembly production was particularly pronounced in Central American countries and in Mexico. This is also related to the US government’s ‘strategy for addressing the root causes of migration in Central America’ which includes a ‘Partnership for Central America’ that incentivises textile and apparel investments.  

Table 1: Announced investments in verticality, nearshoring and onshoring (3/2020-7/2023) 

Country	Verticality	Nearshoring	Onshoring
Mexico	4	5
Haiti		1
Guatemala	3	3
Dominican Republic		1
Costa Rica	1	1
El Salvador	2	3
Honduras	5	3
Brazil			1
US	7		5
Sri Lanka	1
Bangladesh	1
Vietnam	2
India			1
Italy	1
Jordan		1
Egypt	2	3
Turkey	1

Sources: Based one key word search for ‘verticality’, ‘nearshoring’ and ‘onshoring’ in Just Style Magazine and Sourcing Journal; March 1 2020 to July 31 2023.  

In light of the discussed transformations, it can be expected that the geographies of the apparel industry will change gradually towards more nearshoring and textile verticality, but within multi-tiered structures and with offshore production in Asia remaining dominant. Nearshoring has been selective – it is currently focused on Central America, Mexico and potentially Turkey – and reshoring back to the US or Europe has so far been limited to the area of small batch assembly and, more importantly, the new emerging recycling textile segment.  

Although de-risking from China will provide opportunities for other supplier countries, the increased requirements of buyers (CO₂ emission reductions, renewable energy, shorter lead times, higher production flexibility, multi-country production facilities, verticality, recycling) raise the entry barriers for supplier firms. It is therefore likely that larger transnational first-tier supplier firms are better positioned to fulfill these requirements, which can be expected to lead to further consolidation among supplier firms.   

Read more in our article in the 2023 Annual Report of the Research Network Sustainable Global Supply Chains.  

Felix Maile is a PhD Researcher at the Department of Development Studies at the University of Vienna. His PhD investigates the role of financial markets and shareholder value on the sourcing strategies of apparel retailers and brands, the related power dynamics along the apparel GVC, and what this means for value capture in supplier countries.  

Cornelia Staritz is Associate Professor in Development Economics at the Department of Development Studies at the University of Vienna and Research Associate at the Austrian Foundation for Development Research (ÖFSE) and at Policy Research on International Services and Manufacturing (PRISM) at the University of Cape Town. Her research focuses on development economics and policy, international trade and trade policy, global production networks and value chains, and commodity-based development.  

By Lotte Thomsen, Karen P.Y Lai and Stefano Ponte

Entanglements of value and wealth are essential features of contemporary global capitalism. Still, value and wealth have until now mainly been studied in isolation from each other. For our understanding of how value and wealth entangle, gold is a case in point. The Singaporean state has become a key player in the gold industry – establishing the country as a key gold hub – and not least in the shaping of value and wealth entanglements. Essentially, gold is allowed to flow unhindered to/from and within Singapore. It is placed behind a veil of secrecy that embraces free flows of gold among banks, corporations, refineries, consolidators and other key actors within the Singapore gold hub.

In our newly published paper State action and inaction in the shaping of value and wealth entanglements: The role of Singapore in the global ‘gold chain’, we reveal the entanglements of value and wealth in the gold sector. We unpack the roles played by the Singaporean state and distinguish between state actions and inactions in shaping the ways in which both tangible and intangible assets are configured and mobilised for value creation and capture, and for wealth accumulation and protection. While specific state actions are prominent in areas such as developing capital markets and allowing tax and license-free gold trading, we show how state inaction is also essential in value and wealth chains. Such inaction includes not monitoring the buying, selling and storage of gold. Thus, we pinpoint how the Singapore state is involved in the gold industry in ways that relate to its well-established functions as a financial centre and low-tax platform for Asian and global elites. Its functions embrace relations to gold mining beyond Singapore, gold refining, jewellery production, retail, pawning, and also to finance, trading and storage. Gold is both a financial instrument, and involve physical gold, bullion operations and vaulting infrastructure as key elements in the country’s wealth protection system. 

Based on our examination of the gold sector, we suggest a typology of state roles in value and wealth entanglements, arguing for the importance of including and distinguishing both active and inactive state roles. Such roles are highly interconnected and may change over time as a way of further supporting and shaping value and wealth entanglements. Examples include the carving out of ‘spaces of exception’ such as ‘luxury Freeports’ with discrete vaulting of gold bullion, ‘investment grade’ jewellery pieces and other collectibles for the super-rich. State inaction thus has bearings on attracting and retaining ‘the wealthy’ (to Singapore in our case) through a practice that we term ‘turning a blind eye’ on grey-zone activities. Thus, we pinpoint how state roles may not always address existing inequalities, but sometimes even develop new patterns of inequality, catering to protection of the rich rather than mass consumers or poorer households, shaping the processes and outcomes of value and wealth entanglements.

Read more in our newly published paper – it is open access:

Thomsen, L., Lai, K. P. Y., & Ponte, S. (2023). State action and inaction in the shaping of value and wealth entanglements: The role of Singapore in the global ‘gold chain.’ Environment and Planning A: Economy and Space, 0(0). https://doi.org/10.1177/0308518X231181128