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Tomorrow’s successful apparel companies will be those that take the lead to enhance the apparel value chain on two fronts: nearshoring and automation. Both must be addressed, and in a sustainable way. Apparel brands and retailers in Europe and the United States can no longer do business as usual and expect to thrive.

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Owing to stagnation in Western markets and to the internet, competition is fiercer than ever, and consumer demand is more difficult to predict. Mass-market apparel brands and retailers are competing with pure-play online start-ups, the most successful of which can replicate new styles and get them to customers within weeks. Furthermore, apparel companies have lost much of their clout in setting the tone. In most mass-market categories, today’s hottest trends are determined by individual influencers and consumers rather than by the marketing departments of fashion companies. Pressure on profitability due to decreasing full-price sell-through, as well as increasing concerns regarding the environmental impact of overproduction, call for agile production in smaller batch sizes and for on-demand replenishment.

In light of these factors, speed to market and in-season reactivity are now more critical than ever to an apparel player’s success. Indeed, nearly two-thirds of US apparel executives and about 80 percent of international chief procurement officers say that these two capabilities are top priorities . The problem is, most of the established fashion players are burdened with slow commercial processes and legacy supply-chain and sourcing setups—and therefore struggle to keep up with more nimble competitors.

Mass-market apparel brands and retailers can’t win in the next decade without speeding up and transforming to a demand-focused model. Apparel companies are applying four key levers to support the transformation. One lever is optimizing the apparel-production model. And this is the focus of our new report, Is apparel manufacturing coming home? Nearshoring, automation, and sustainability: Establishing a demand-focused apparel value chain, which touches on elements such as nearshoring, automating new delivery models around customization, and shifting toward sustainable, circular value chains.

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Two decades ago, European and US mass-market apparel brands and retailers were rushing to move as much production to Asia as possible to gain a cost advantage. Since then, the trend has been a unit-cost play, which focuses on adjusting the sourcing footprint and moving from China to even more cost-efficient frontier markets. Apparel players that have successfully done this—while still ensuring high quality, speed, and compliance—have been able to deliver relevant products to consumers at the best prices. So, the question is: Is apparel manufacturing coming home?

Today, the industry is at a crossroads where speed beats marginal cost advantage and basic compliance is upgraded to an integrated sustainability strategy. The traditional supply chain setup is now challenged, and as labor costs converge, brands and retailers are starting to rethink their sourcing and production models more broadly. Moves to increased nearshoring and more automated production models have the potential to enable sustainability further and to support the adaptation of a circular economy in the apparel sector (Exhibit 1).

Exhibit 1 We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Consumers are becoming increasingly aware of the environmental impact of the traditional linear apparel production modes, and the public outcry concerning overstock liquidation is becoming louder. Some 78 percent of respondents to our survey state that sustainability is also somewhat or highly likely to be a key purchasing factor for mass-market apparel consumers by 2025. Mass-market apparel players that embrace automation technologies to become faster and more sustainable will likely be tomorrow’s winners.

For many apparel companies, this might seem a daunting task. Their lead times are long; their production processes are laborious and linear. So, what can they do? The answer is to make bold yet disciplined and balanced investments in nearshoring, automation, and sustainability—and to do it immediately. Given these market shifts, it isn’t surprising that 79 percent of respondents in our survey believe that a step change in nearshoring for speed is somewhat or highly likely by 2025, especially as the economics of nearshoring are starting to add up.

Today, even from a mere landed-cost price perspective, nearshoring can be economically viable in certain cases, mostly due to savings in freight and duties. For instance, a US apparel company that moves production of basic jeans from either Bangladesh or China to Mexico can maintain or even slightly increase its margin, even without higher full-price sell-through (Exhibit 2). For Europe, unit costs remain significantly lower when sourcing from Bangladesh, but reshoring from China to Turkey is economically viable. Landed-cost prices for denim, for example, can be 3 percent lower when sourced from Turkey. Onshoring the production to Germany or the United States, however, will not result in breaking even.

Exhibit 2 We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

As the mass-market apparel sector is moving to a demand-focused, agile supply model—and as labor costs are rising—automation will play a key role in increasing labor efficiency, throughput, and flexibility. In the future, automation will be crucial to increasing the financial viability of on-demand nearshoring or onshoring models.

Before being able to comprehend fully the prospect of automation for apparel manufacturing and its potential impact on nearshoring or onshoring, companies need to have a granular understanding of the technology landscape. But the message is clear: for certain products, automation not only makes nearshoring more attractive for European and US apparel retailers and brands but also makes onshoring to the United States economically viable.

The need for speed: Capturing today’s fashion consumer

Our new research aims to help apparel brands and retailers embark on this journey. It makes transparent the upcoming demand-led apparel-sourcing and -production models, their current economic viability, and the future outlook.

Part of the research was created in collaboration with the leading institute for textile technology and textile manufacturing research, the Institut für Textiltechnik of RWTH Aachen University, and the Digital Capability Center Aachen helped analyze current and potential automation technologies. We also worked with the McKinsey Global Institute to understand the future of factor costs better. Additionally, we conducted interviews with a broad range of international experts and practitioners in apparel manufacturing and retailing, robotics, and sustainability. Finally, we asked apparel-sourcing executives and Sourcing Journal readers to comment on the industry disruptions of nearshoring, automation, and sustainability in a survey conducted in September 2018.

Download Is apparel manufacturing coming home? Nearshoring, automation, and sustainability: Establishing a demand-focused apparel value chain, the full report on which this article is based (PDF—9.8MB).