At the Shoptalk retail industry conference last week, Gap Inc CEO Richard Dickson touted the apparel maker’s limited exposure to China and the tariffs about to be imposed on imports from there after years of efforts to diversify its supplier base.
“Big credit goes to our supply chains. We’ve been working on diversifying our manufacturer footprint for quite some time. Less than 10% of our product is coming out of China,” said Dickson. Now Gap’s biggest supplier country is Vietnam, followed by India and Indonesia, all well ahead of China.
Dickson’s counterpart at Levi Strauss & Co Michelle Gass echoed the reduced exposure to China at Shoptalk too, saying “Of what we know today, right now it is fairly minimal.”
In recent years, many U.S. apparel makers have gradually reduced their reliance on China because of rising costs there, the abundance of capacity in Southeast Asia, and the threat of a trade conflict with the U.S. always looming.
But Dickson and Gass’ sanguine reactions of course came before the Trump Administration’s announcement on Wednesday that it planned to impose punitive tariffs on 60 countries, including across-the-board levies of 46% on imports from Vietnam and 26% from India. Suddenly, Gap Inc and Levi’s don’t seem inoculated at all from Trump’s tariff war with the rest of the world.
Gap Inc shares were down 22% in early trading on Thursday, while Levi’s were down 11%. Other apparel-heavy retailers saw big drops like Macy’s, down 16%. (Home goods retailers, also very exposed to tariffs on Asian suppliers, similarly got dinged, with Restoration Hardware down 42%.)
When President Trump this winter announced his first salvos in the tariff wars, focused initially on China, Canada and Mexico, many retailers rushed to reassure investors that over time, they had lessened their exposure to China, long known as a maker of cheap items for Western brands. Target’s Chief Commercial Officer said in March that Chinese goods now represent 30% of its merchandise, down from 60% in 2017. Yet Target’s shares were not spared in Thursday’s stock market bloodbath, falling 12% as it became clear that less China exposure had its limits.
Ditto for Nike, which said in its most recent annual report that factories in Vietnam made half of the shoes it sells and more than a quarter of the apparel in Vietnam. The sportswear giant, trying to carry off a turnaround amid waning interest in its wares, saw its shares fall 15%.
What has investors worried is that it is very difficult to shift production elsewhere with any speed, and there are few new options left anyway.
“The advantages of chasing low cost bases of manufacturing has effectively reached its limit,” TD Cowen analyst John Kernan wrote in a research note. “Tariff mitigation practices will occur (e.g. sharing cost with manufacturing partners) but there are zero countries with factory capacity for companies to shift production.”