Zara case

703-497 ZARA: Fast Fashion

Production

Apparel production was very fragmented. On average, individual apparel manufacturing firms employed only a few dozen people, although internationally traded production, in particular, could feature tiered production chains comprising as many as hundreds of firms spread across dozens of countries. About 30% of world production of apparel wasexported, with developing countries generating an unusually large share, about one-half, of all exports. These large cross-border flows of apparel reflected cheaper labor and inputs—partly because of cascading labor efficiencies—in developing countries. (See Exhibit 2 for comparative labor productivity data and Exhibit 3 for an example.) Despite extensive investments in substitutingcapital for labor, apparel production remained highly labor-intensive so that even relatively large “manufacturers” in developed countries outsourced labor-intensive production steps (e.g., sewing) to lower-cost labor sources nearby. Proximity also mattered because it reduced shipping costs and lags, and because poorer neighbors sometimes benefited from trade concessions. While Chinabecame an export powerhouse across the board, greater regionalization was the dominant motif of changes in apparel trade in the 1990s. Turkey, North Africa, and sundry East European countries emerged as major suppliers to the European Union, Mexico and the Caribbean Basin as major suppliers to the United States, and China as the dominant supplier to Japan (where there were noquotas to restrict imports).3

World trade in apparel and textiles continued to be regulated by the Multi-Fiber Arrangement
(MFA), which had restricted imports into certain markets (basically the United States, Canada, and West Europe) since 1974. Two decades later, agreement was reached to phase out the MFA’s quota system by 2005, and to further reduce tariffs (which averaged 7% to 9% in themajor markets). As of
2002, some warned that the transition to the post-MFA world could prove enormously disruptive for suppliers in many exporting and importing countries, and might even ignite demands for “managed trade.” There was also potential for protectionism in the questions that nongovernmental organizations and others in developed countries were posing about thebasic legitimacy of
“sweatshop trade” in buyer-driven global chains such as apparel and footwear.

Cross-Border Intermediation

Trading companies had traditionally played the primary role in orchestrating the physical flows of apparel from factories in exporting countries to retailers in importing countries. They continued to be important cross-border intermediaries, although thecomplexity and (as a result) the specialization of their operations seemed to have increased over time. Thus, Hong Kong’s largest trading company, Li & Fung, derived 75% of its turnover from apparel and the remainder from hard goods by setting up and managing multinational supply chains for retail clients through its offices in more than 30 countries.4 For example, a down jacket’s filling might comefrom China, the outer shell fabric from Korea, the zippers from Japan, the inner lining from Taiwan, and the elastics, label, and other trim from Hong Kong. Dyeing might take place in South Asia and stitching in China, followed by quality assurance and packaging in Hong Kong. The product might then be shipped to the United States for delivery to a retailer such as The Limited or Abercrombie &Fitch, to whom credit risk matching, market research, and even design services might also be supplied.

Branded marketers represented another, newer breed of middlemen. Such intermediaries outsourced the production of apparel that they sold under their own brand names. Liz Claiborne, founded in 1976, was a good example.5 Its eponymous founder identified a growing customer group...