How do apparel supplier firms capture value?

Supplier firm value capture in global value chains (GVCs) has typically been approached through the lens of economic upgrading. In the seminal work, Gereffi’s (1999) argues that East Asian apparel suppliers could increase value capture by moving beyond assembly into input sourcing, transnational subcontracting, and design within the apparel GVC. The prevailing assumption was that progression from contract manufacturing to design and eventually to own-brand production would generate higher returns for suppliers.

However, twenty-five years of research on apparel GVCs shows that suppliers in the global South have struggled to achieve greater value capture through economic upgrading. Product and process upgrading within contract manufacturing largely became survival strategies to retain buyers rather than a pathway to higher unit prices. Moving into design or branded production proved even more difficult, as these functions require distinct capabilities, substantial financial resources, and often face resistance from buyers unwilling to support suppliers’ entry into activities they control.

Given this gap between theory and empirical evidence, we argue that economic upgrading must be rethought. We need a new answer to an old question: how do supplier firms capture value in the global apparel industry? In our new paper, we offer one reconceptualization, building on the work by Tokatli, who proposed shifting the focus from upgrading typologies to identifying suppliers that secure exceptionally high profits and then examining the sources of their divergent financial performance.

The puzzle of variegated value capture among apparel suppliers   

The apparel GVC literature largely concludes that supplier firms do not capture significant value. Most contributions document how fashion brands and retailers continually raise supplier requirements while lowering unit price, which has been a coined as ‘supplier squeeze’. Lead firms generate profits through open costing and standard allowed minute (SAM)-based pricing systems, which enable them to benchmark suppliers, appropriate the suppliers’ efficiency gains, and play off the suppliers against one another by threatening to sourcing from lower-cost countries suppliers. As a result, apparel assembly is seen as a dead end for value capture.

Yet, as Figure 1 suggests, there is important variation among suppliers important variation. It presents the gross profit margins of 12 publicly listed top apparel suppliers from the mid-2000s to the early 2020s. The top three firms (Shenzhou, Eclat, Youngone) achieve substantially higher margins than the others, and since the 2010s their margins have risen while those of most competitors have declined. The results therefore suggest that not all mega-suppliers experience low value capture, and it shows that value capture changes over time. This creates an empirical puzzle: how do some apparel suppliers escape the supplier squeeze?

Figure 1.  Annual gross profit margin (%) of giant apparel suppliers, 2005-2022

Why Product Innovation Cycles explain supplier value capture

We explain variation in supplier value capture through the concept of product innovation cycles. Drawing on the Schumpeterian perspective and the work of Sako and Zylberberg (2019) and Yeung (2016), we develop a product innovation cycle framework to show how innovation reshapes competitive dynamics and value capture opportunities for suppliers. The framework assumes that buyers seek to escape intense competition by commercializing innovative products that generate strong consumer demand and sustain high retail prices. To do so, they however need suppliers with co-specialized manufacturing capabilities necessary to bring these innovative products to market. Such a strategic partnerships can force the lead firms to make concessions on profit sharing, enabling suppliers to capture higher margins. However, these arrangements are temporary. As product innovation cycles mature and rival suppliers replicate the required capabilities, competitive pressures re-emerge.

Table 1 shows how we apply the framework to the global apparel industry. Product innovation in the global apparel industry is driven less by technological change and more by marketing tools, because there have been no significant technological developments in the industry since the introduction of synthetic fibers based on petro-chemicals. Apparel brands introduced minor technical changes in the fabric and used novel marketing techniques to embed the products in a new lifestyle trend. The technical changes tended to emerge first in a niche market and then diffuse to mass markets through specialized marketing and distribution capabilities that were novel in form and scale, as explained below.

Table 1. Product innovation cycles in the global apparel industry

From the mid-1980s to the 1990s, high revenues in casualwear/denim and lingerie were driven by LBrands, Marks & Spencer, Levi’s, and GAP. After acquiring Victoria’s Secret in 1982, LBrands expanded lingerie through aggressive marketing and product innovations such as foam and silicone push-up bras and synthetic fabrics. Casualwear grew with the ‘casualization’ of office wear and youth markets, led by Levi’s and GAP. GAP focused on private-label basics and mass advertising, increasing revenues from USD 1.5 billion to 13.6 billion in the 1990s.

The activewear innovation cycle emerged in the 1990s and scaled in the 2000s. Established brands like Nike, Adidas, and Puma expanded from professional athletes to mass consumers, offering functional apparel for hobby sports and gyms. Cotton shifted to lightweight, moisture-wicking synthetics, with products like Nike’s Dri-Fit and Tech Fleece. Marketing centered on superstar athlete endorsements across major sports.

Activewear now overlaps with the athleisure cycle, which began in the early 2010s, blending performance features with comfort for sports, leisure, and work. Growth was fueled by continued office casualization and the yoga boom. Premium brands target affluent consumers willing to pay over USD 100 per item. Lululemon exemplifies this shift, with revenue rising from USD 712 million in 2010 to USD 9.5 billion in 2023, driven by products like its Align yoga pants. Marketing relies heavily on social media, celebrities, and niche influencers such as yoga instructors.

How suppliers entered strategic partnerships in apparel product innovation cycles

Figure 2 show the profit margins of 12 publicly listed top apparel suppliers in relation to their buyer and product portfolios. The results show that suppliers producing for activewear and athleisure lead firms achieved much higher profit margins than suppliers focused on basic fashion segments.

Figure 2. Supplier profitability by product segment, 2010-2019

How did the suppliers depicted in the red line came to appropriate such significantly higher profit margins? Our interviews with senior executives shows that it was about building specialized complementary capabilities suppliers to support the pioneering lead firms in the activewear and athleisure product innovation cycles. These capabilities in complex synthetic textile production allowed suppliers to innovate in fabrics as well as organizational capabilities and economies of scale to assemble the products using their fabric at large scale and high efficiency. This combination of assets was rare among the top apparel suppliers, notably Shenzhou from China, Eclat from Taiwan, Youngone from Korea, and MAS from Sri Lanka. It gave the few suppliers that had them a high degree of bargaining power with the pioneering lead firms and thus the ability to capture more of the wealth that those lead firms gained through high retail prices in growing product market

Notably, despite a large global pool of apparel suppliers, only a few had the necessary capabilities for product innovation cycles. This is arguably because countries with petro-chemical industries and producing synthetic fibers had a clear advantage, highlighting the important inter-industry spillovers that underpinned apparel supplier firms’ complementary assets. Thus, firm-level complementary assets are shaped by larger industrialization dynamics in the supplier country, which explains why Taiwanese, South Korean and Chinese apparel supplier firms have been the most successful in capturing more value.

Felix Maile, Lindsay Whitfield

Read more in our new open access Paper ‘Rethinking economic upgrading in apparel GVCs: Value capture through strategic partnerships in product innovation cycles’