Aritzia, Canadian Tire, Lululemon among Canadian retailers shifting production outside China
Tariffs, forced labour concerns have companies re-examining relationships with China
While recent headlines have focused on Donald Trump's threatened tariffs against Canadian products, retailers in this country have also been considering the possible impact of additional tariffs he's threatened on goods coming from China.
This could affect Canadian brands that manufacture products overseas and sell them south of the border. That includes Groupe Dynamite, Aritzia, Lululemon and Canadian Tire — all of which have been asked about tariff threats during their latest earnings calls.
"Knowing that there's going to be a transition in the first quarter of the year, we've already taken steps — I won't get into the percentage — but we've already taken steps to move more production out of China," said Andrew Lutfy, CEO of Groupe Dynamite, on a recent call with investors.
Groupe Dynamite, a Montreal-based clothing company, has been expanding in the U.S. since 2007, and has 109 Garage stores and five Dynamite stores south of the border, according to its latest investor presentation.
The trend of companies shifting production outside China isn't new. Tensions between the U.S. and China have been escalating for years, and tariffs that started during Trump's first administration were maintained under his successor Joe Biden.
That's prompted businesses to make plans to move, and that's only been accelerating recently. The shoe maker Steve Madden, for example, said it plans to reduce its goods made in China by 40 per cent, up from a previous target of 10 per cent.
And just as the Canadian government has matched U.S.-China trade restrictions with its own tariffs on Chinese electric vehicles, steel and aluminum, rising geopolitical tensions have prompted Canadian companies to examine their trade relationships with China.
"The Canadian business community is seeing those signals and they are realizing that there are potential vulnerabilities in having a significant portion of your supply chain located in China," said trade lawyer John Boscariol, a partner with the firm McCarthy Tétrault.
Forced labour another factor
Setting aside the threat of tariffs, the shift away from China has also been driven by concerns around forced labour. There's mounting evidence of human rights abuses against ethnic Uyghurs in the Xinjiang region in China, a hub for the production of cotton and other goods.
With the passage of the U.S. Uyghur Forced Labour Protection Act, companies now risk having certain goods halted at the border and being made to prove they're not manufactured with forced labour.
"You've had the normal forced labour issue and then the U.S.-China fight on top of that," said Carlo Dade, director of trade with the Calgary-based Canada West Foundation. "That's why businesses are suddenly taking more extreme or extraordinary measures."
Costs may have also played some role in the shift, said Bob Kirke, executive director with the Canadian Apparel Federation. As China has developed economically, "labour costs have increased," he said. "That's very straightforward."
Greg Hicks, president and CEO of Canadian Tire — which also owns the international brand Helly Hansen — told investors it's seen a "sizeable shift" in country-of-origin sourcing outside of China this year alone.
"As it relates to any type of trade escalation between [the] U.S. and China and how that impacts us just from that standpoint alone, we're in a less [risky] position than we would have been this time last year," said Hicks in the fall.
Aritzia, a Vancouver-based retailer that's rapidly growing in the U.S., said this month it's been working on "systematically diversifying" its manufacturing since around the time the company went public in 2016.
"What I can say right now is that the great majority of our product is manufactured outside of China," said CEO Jennifer Wong, in response to an analyst question about tariffs.
Fellow Vancouver brand Lululemon has also told investors it has "very limited exposure" in China.
"We outsource approximately three per cent of goods from China, so exposure there is relatively small," said the company's chief financial officer, Meghan Frank, during its latest earnings call.
Untangling supply chain
It can be difficult for businesses to fully untangle their supply chains from China, given how dominant the country is as a supplier.
Kirke, with the Canadian Apparel Federation, said the country is also extremely capable at manufacturing not just textiles but all the fiddly little pieces needed to make a garment, from zippers to linings to backings.
"There are other [manufacturing] options, but to make sure you can do everything you want is challenging," said Kirke.
Calgary jewelry designer Melissa Victor, who uses materials including wholesale beads, cabochons and rhinestone banding, agreed.
"If I was trying to [fully] source things that weren't made from China, these shelves would be empty," said Victor, gesturing to a wall of supplies inside the downtown office of her Indigenous jewelry brand Kwósel.
To make matters more complicated, Dade, with the Canada West Foundation, said many Chinese manufacturers have invested in supply chains throughout southeast Asia. That means moving production to another country might not solve the issue.
"Even if you try to run away from China, you're just going to run into China," said Dade.
As tensions between North America and China continue, Dade said he'll be watching to see if Canada provides any sort of assistance to companies trying to exit the country. Japan's government, for example, has gone as far as to actually pay companies to move production from China back to Japan or into Southeast Asia.
"That may not be exactly what we have to do," he said. "But I think we've got to get a lot more creative about helping companies that need to leave make the switch."
ABOUT THE AUTHOR
With files from Alexander Panetta