Does a Trump presidency mean fewer free t-shirts?
Did you ever think about the impact that Making America Great Again would have on your ability to collect free t-shirts at every conference you go to? I’ll bet that was the last thing on the minds of most people last November, save for a few executives in the economic heart of French Canada.
Gildan Activewear Inc (“Gildan”, GIL.TO) is a Montreal based manufacturer of printwear (think promotional materials) and branded apparel. Chances are you have at least one Gildan T-Shirt in your closet – the company has a 53% share of the US printwear basics market. At least one of your free HBS t-shirts is a Gildan shirt.
With large customers [†] in the United States, Canada and Europe and a commodity product, it is essential that Gildan delivers products reliably, on-time, and at the absolute lowest cost. Gildan has does this by vertically integrating its supply chain to maintain visibility and control. To meet the demands of its customers, Gildan has located its production facilities in low cost centers around the world (see the table below) where trade agreements exist with its biggest customer market, the US[‡].
Source: Gildan 2016 Annual Information Form, page 14
With the United States renegotiating or threatening to withdraw from major trade agreements, this value chain is at risk of cost escalation. The potential for further disruption to trade agreements between the United States and the various countries where Gildan operates increases uncertainty, making it difficult for Gildan to price contracts, plan production and make hiring/firing decisions.
The head of Bain & Company’s supply chain practice Joe Terino says that taking a wait and see approach in response to this uncertainty won’t work[2]. In his recent Harvard Business Review article, Terino suggests companies anticipate a range of regulatory scenarios and plan a series of moves that are ‘no-regrets’, create natural options and hedges, or represent significant bets. Gildan has thus far heeded this advice with the moves outlined below:
| Type of Action | Description | Gildan Action |
| No-regret moves | Actions benefitting a company’s competitive advantage, no matter which scenario plays out
|
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| Option building / hedge moves | Investments that companies can make to develop strategic options for different scenarios |
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| Big bets | Large scale investments that have different payouts depending on the scenario outcomes |
Building a diversified, decentralized supply chain like Gildan has is expensive. As prices for its products continue to face pressure, it is in Gildan’s best interest to consolidate its supply chain and enhance its position as the lowest cost supplier. To offset the political risk inherent in geographical consolidation, the company will need to develop earlier visibility into policy developments to shorten its response time. Terino suggests identifying key signposts in the development of policy and tying them to strategic initiatives[6]. In the case of NAFTA this would include closely monitoring the details of negotiations in real time and making strategic decisions about its Canada and Mexico operations based on these signposts.
Gildan needs to get as close as possible to negotiations to gain as early of access to information as early as possible. Other Canadian companies, such as Linamar (an auto parts manufacturer) have gone so far as ‘volunteering’ as advisors to the Canadian government’s NAFTA team, trading off CEO time and resources for advance info on developments and an ability to influence conversations[7]. Gildan should be right there with them.
With this isolationist trend still in its infancy, many questions remain. Will it spread to many more countries around the world? Should Gildan be investing in a full-time lobbying / regulatory team? Should it be investing in full, vertical operations in each of its customer markets?
Regardless of the answers to the above, Gildan needs to get its policy response right, or risk losing its shirt.
(Word Count: 791)
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[*] Assumes US$1.44B of Printwear Revenue in the United States and a Printwear Basics market of US$2.7B in the United States
[†] Two customers combined for 30.6% of revenue in 2016
[‡] 87% of 2016 revenue
[§] Based on November 14 closing price of US$ 30.09/share
[1] Gildan Activewear Inc., “Gildan Investor Presentation” (National Bank Financial Markets 7th Annual Quebec Conference, Toronto), 6–7, accessed November 13, 2017, http://www.gildancorp.com/documents/NBF.June7.2017.Annual.Conference.pdf.
[2] Joe Terino, “Is Your Supply Chain Ready for a NAFTA Overhaul?,” Harvard Business Review, accessed November 12, 2017, https://hbr.org/2017/06/is-your-supply-chain-ready-for-a-nafta-overhaul.
[3] Elizabeth Segran, “An Inside Look at Gildan, The Company That Just Acquired American Apparel,” FastCompany, November 15, 2016, https://www.fastcompany.com/3065686/how-to-make-a-t-shirt-in-trumps-anti-trade-america.
[4] “Bloomberg.com | Gildan Activewear” (Bloomberg, November 14, 2017), https://www.bloomberg.com/quote/GIL:US.
[5] Gildan Activewear, “Annual Report for 2016,” 8.
[6] Terino, “Is Your Supply Chain Ready for a NAFTA Overhaul?”
[7] Global Affairs Canada, “NAFTA Council Members and New Diplomatic Appointees,” August 2017, https://www.canada.ca/en/global-affairs/news/2017/08/nafta_council_membersandnewdiplomaticappointees.html.
Super interesting and didn’t know that Gildan was a Canadian company! I wonder if Gildan would be open to a partnership with a company like Li & Fung to help address these concerns. Since Gildan primarily does apparel and owns its manufacturing facilities, it may seem that the natural supply chain play for the company is to increase vertical supply chain integration, but working with a trader and outside vendor may also decrease risk. Gildan probably views Li & Fung as a competitor because of the similarities of the work they do so it may take the executive management some convincing to allow for a partnership.
Agree that this is a super interesting topic! As Gildan I would be concerned about the costs of making bets on uncertain outcomes – especially given the volatility of the current administration. While I like the acquisition of American Apparel, I also worry about making heavy investments in US manufacturing while still maintaining the ability to deliver at the absolutely lowest cost. As Gildan, I would pay close attention to the moves of the industry in general and see how others – even in different industries – are reacting.
To react to your last question, I think it is unrealistic for Gildan to completely vertically integrate in each of its customer markets and still remain the lowest cost player. If the US is Gildan’s priority, then their strategy of ramping up US production seems to be the right one. However, if they want to remain a global player, they need to figure out the right mix of ramping up US production and maintaining production facilities in low cost centers around the world.
Of course Brian would write about a Canadian company, but one question that lingers is…what free T-shirts! HBS has been extraordinarily stingy about handing out free swag.
On a more serious note, I wonder what the endgame is and what the impact on someone like Gildan would be. As noted in the essay, nationalistic tendencies are not unique to the United States. Gildan may have begun making large investments in Europe, but Europe is undergoing a messy transformation as we speak, not only with Brexit, but core EU countries including Germany. Does Gildan need to establish large-scale operations across even more varied markets? If this is a global phenomenon, even large enterprises such as Gildan would not be able to expend the resources required to influence each ongoing situation. I would love to know how the global giants in the auto industry are approaching the issue.
Very interesting, had no idea about this company! I wonder if the move for Gildan is to move its headquarters to the US. Sounds crazy but given that 53% of their business is in the US i feel that this might give them an advantage with the US government. They might be able to better maintain their foreign supply chain if they are a viewed as a US company rather than not only a company outsourcing employment of low cost manufacturing but also outsourcing the high paying jobs to Canada. No offense to the Canadians here but I would be concerned about their future if any of these trade agreements falls apart. In addition, they might consider reinventing the american apparel brand to generate higher profit margins to subsidize their other business lines. It would also help them with the made in america image with i think more than anything else is critical in Trumps mind (more so than the practicalities of where things are actually made).
As Darrin mentioned above, I would worry about Gildan’s ability to vertically integrate in each customer market and still remain a low-cost t-shirt supplier. However, I think that vertically integrating in the U.S. market in particular is possible and advisable, since they already have 53% market share and have made significant investments in U.S. cotton production and t-shirt manufacturing.
I also think it’s advisable for Gildan to get more involved with the NAFTA negotiations, as Linamar has done. They likely already have a regulatory/lobbying team (overseen by this guy perhaps http://www1.gildan.com/corporate/company/bioPI_en.cfm), so they should leverage those capabilities in lobbying for desired NAFTA outcomes.
Gildan certainly faces very interesting challenges as isolationism drives barriers to international trade. This is a problem common to the apparel industry as a whole, but particularly for low value products like “free swag”. The apparel industry supply chain is heavily dependent on unimpeded cross-border flows, with cotton produced in countries like the US and India, spinning and weaving mills in advanced economies, and as the Li and Fung case showed us, accessories like zippers and buttons coming from places like Japan and Korea, and manufacturing done in low cost countries like Vietnam and Bangladesh.
If isolationism is a trend that is here to stay, there is no doubt that apparel costs will increase. Many of the skills required for apparel manufacturing are no longer available in advanced economies and companies that have tried to re-initiate apparel production in the US are having a difficult time finding trained pattern makers and sewing machine operators. Adjusting to this change will be a long term process, with extensive training of the labor force, and perhaps investing in higher levels of automation like laser pattern making and cutting, and companies like Gildan will need to bear the brunt of this investment.
I think that it would be prudent for any company with this sized exposure to a foreign country to have touch points with that government. Whether it is in a formal organizational structure such as a regulatory or lobbying team or having the senior management team begin dialogue with the government in less formal manners, a company with a 53% marketshare of a segment in the U.S. needs to be plugged in. S. Banks’s suggestion to be involved in the NAFTA negotiations is a good one, and there are other ways they can get involved such as having a presence on relevant government committees. Separately, I also do believe that isolationism is a trend that will continue to spread globally, so it would be smart for Gildan and other companies to all become smarter in how to navigate in an increasingly isolationist environment.
As I read this, I couldn’t help but think about an interesting convergence of trends: increasing interest in isolationism from the U.S. government on one side, and increasing demands from many consumers for local production and more transparent sourcing practices. In one sense, the Trump administration and “Buy Local” advocates are seeking the same outcome. By looking to move more of its supply chain to the U.S., Gildan could be killing two birds with one stone. For one, Gildan would be mitigating the risk of potential changes to free trade agreements or new protectionist policies by the U.S. government; at the same time, Gildan would potentially be creating a competitive advantage with “local-minded” companies and consumers through its sourcing strategy.
Nice work on this post – particularly the punny closing! I agree with my colleagues above in that vertical integration in each market would eat in to margin to a degree that I believe would damage their core business model as a low-cost player and would tie them down to a load of fixed costs and long term assets. I am also wondering about what they set in motion with vertical integration by country if isolationism is, in fact, going to continue to spread. Will Gildan be married to vertical integration as their only play?
Interesting idea about Gildan hiring a lobbying team as a possible way to influence the emerging trend of isolationism. I would guess that collaborators withing Canada could be and are interested in joining forces to lend their weight to these discussions. I would not recommend that Gildan collaborate with the Canadian Dairy Industry though, as their opinions on the issue differ significantly.
Your question about further vertical integration is a great one that applies across all industries being effected by isolationist policies. While there is an obvious temptation to take more control of production to avoid being seen as an outsourcer or as “part of the problem,” I’d argue that the greater value is still to be found in focusing on core competencies. While trade policies may change, Gildan can still adapt by proactively building the best supplier relationships possible in each segmented market instead of fundamentally changing their value proposition. That said, consumers would likely notice the difference in cost if Gildan chose to work with more expensive “in country” suppliers instead of consolidating and hoping for increased efficiency.
Great article, Brian! I particularly liked your point around staying close to the NAFTA negotiations. While this is absolutely a threat they need to take on aggressively, I do also worry about over-reacting and investing in U.S. manufacturing at great cost before there is sufficient likelihood of a change in NAFTA that would drastically affect their business. Using decision trees and other scenario planning techniques could be particularly useful for Gildan as they weigh the probabilities and costs of different outcomes.
Very interesting article. Many companies in my country are suffering from this issue too. Hyundai is waiting for the results of US-Korea FTA renegotiation, which could decrease their profit by 5-10%, and Samsung has faced safe guard restrictions, which were filed by Whirlpool regarding its washing machines sales in U.S. Samsung is expanding its factories in U.S. to mitigate the risks regarding protectionism. Gildan could review possible options they have and prepare multiple action plans to move quickly when the result is released.
Great writeup Brian and Great response, Dylan. I worry that the increase in the US cost structure (Like today’s United Interconnect case) will cause firms to decide to exit the US markets altogether because of the lack of ability to compete. This is one of the reasons that pickup trucks are expensive in the US (For more info, check out the Chicken Tax; https://fee.org/articles/chicken-tax-makes-trucks-expensive-and-unavailable/).
It seems that an end result of protectionist policies is that consumers must pay more for inferior products. Because of the nature of demand curves, this means that less consumers are involved in the marketplace and many transactions go unmet. This makes markets less efficient and destroys value in the country that these policies are designed to protect.
Thanks Brian – as if I didn’t have enough to worry about in this brave new world of ours. It’s interesting to me that companies like Gildan face so many choices regarding the use of their resources in this situation. The first set of choices seem to revolve around whether the company assumes a largely proactive versus reactive position: should the company time and energy (and possibly even lobbying capital) to try to actually influence the outcome of negotiations in their favor? Or should they focus on setting up supply chain bolsters capable of responding regardless of how the negotiations turn out? The second set of choices involve the company’s comfort with risk: do they try to predict the outcome as best they can and then invest accordingly to make the most of a new regulatory environment, or do they hedge and spread their resources around in a more defensive posture? While having a “mole” in the negotiations would be helpful to inform decisions, these things can move quickly, and it’s necessary for the company to place some of its bets well in advance of any final verdicts coming through from the negotiating table.
Brian’s article raises interesting questions on the impact of isolationist policy on t-shirt distribution and pricing for Gildan. It is clear the company faces significant risk given its supply chain exposure to international markets that could potentially be affected by new policies under the Trump administration.
I am particularly intrigued by the local, vertical integration proposition Brian raises at the end of the article. Of all the proposed countermeasures to isolationist policy, this seems the most “bullet-proof.” At the same time, I would also expect it to be extremely expensive for the company, as it represents a structural overhaul of major processes. As a shareholder, I would be eager to learn more about how Gildan prices the risk associated with policies that potentially damage the company’s operations, and would want to evaluate the costs of an aggressive strategy such as local, vertical integration against this priced risk to make a more informed decision. If the company competes on price and has major exposure to policies that could threaten this competitive advantage and, in turn, lower its market share, management could potentially justify paying a premium to make a major supply chain overhaul.
Who knew Gildan was Canadian! Great write up Brian. In response to your question “Should Gildan be investing in a full-time lobbying / regulatory team,” I believe they should. This can be justified by framing it as an integration of the supply chain. In discussing supply chains we consistently focus on reducing variability and shortening the time required for information to reach every point of the chain. To build a cross border business without taking every opportunity to influence or at least respond quickly to potential policy decisions, seems to ensure the “whiplash” effect will be exacerbated within your business.
Thanks for writing about isolationism and given the Canadian company perspective. I think Gildan is genius for getting ahead of potential changes to trade agreements. The diversified, decentralized supply chain, the purchase of American Apparel, and efficiency changes all great opportunities for Gildan to succeed and potentially win over competitors if and when any major trade agreement changes happen. I love when companies are brave enough and have the foresight enough to be proactive. I find that in our cases so many companies are reactionary and therefore in less control of their own business than they should be. Bringing their supply chain in the US ahead of time means they can make the moves that work for them, and the basket of opportunities to do so are larger. Players like Walmart, Target, and Macy’s will be scrambling to find manufacturing if the US pushes away its trade partners and Gildan will be ahead of them in optimizing their supply chain in the US. Go Gildan!
I did not realize the cheap T-shirt market was so concentrated! Thanks for a great post on the impact of trade uncertainty. One of the approaches you listed was purchasing American Apparel. To my mind, the higher price of the shirts produced in the US means that Gildan may be shifting to serve a very different customer. To get a sense of the price differential, I took at look at the relative cost of purchasing one shirt online. A Gildan shirt is $6 while one from American Apparel is $18. I’d be curious about the amount of substitution that occurred between their old T-shirts and those from American Apparel. One implication of globalization I had not previously considered is that as companies respond to potential trade barriers it may actually cause them to change their customer promise.
1) https://www.gildan.com/shop/men/t-shirts
2) http://www.americanapparel.com/en/men-s-t-shirts-tanks_cat33192