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Quota Savings May Fall Short

The price cuts expected to come from the end of the global quota system haven't been as steep as importers thought, an AAFA panel said.

NEW YORK — The windfall for importers from the end of the global quota system probably won’t be as great as originally anticipated.

Most executives predicted that costs would drop by as much as 20 percent after the 148 nations of the World Trade Organization dismantled the three-decades-old system of entry restrictions. Now that 2005 has come, the price breaks aren’t quite as pronounced as they’d hoped. The main beneficiaries will probably be consumers, either in terms of quality or price.

“Stockholders always ask…‘I hear quota’s being eliminated, that’s about 10 to 15 percent, isn’t it? And shouldn’t that drop straight to the bottom line?’ If it were only that easy,” said Peter Boneparth, chief executive officer of Jones Apparel Group. “The reality is, that’s not true. We suspect that, in the end, if you take 15 percent and use it as a number — and it’s arguable whether that’s the right number — there will really be a sharing of that. It’s going on right now. There will be clearly some margin buildup with the stores. We hope to capture some of that, but I think ultimately the consumer’s going to capture a lot of that.”

Quotas contributed to the cost of apparel in two ways. First, in many countries quota rights traded informally as commodities, and by the end of a year the cost of quota for a garment could equal the cost of the garment itself. Second, executives contend that over the long term the dismantling of the quota regime will increase competition and thus reduce prices.

Boneparth was part of a panel of six apparel and textile executives who spoke Tuesday at a Manhattan seminar on quotas sponsored by the American Apparel & Footwear Association and Emanuel Weintraub Associates.

The panelists cited a number of factors interfering with the expected price drops. Key among them is the rise in the price of oil, which is up more than 38 percent from its level last year, driving up the cost of everything from synthetic fibers — an ingredient in many fabrics — to plastic bags for shipping garments, to the bunker fuel that powers the cargo ships that sail the Pacific Ocean.

Harris Mustafa, executive vice president of private brands and product development at Saks Inc.’s department store unit, said “while there is no doubt in my mind that the cost of goods will go down,” his suppliers so far have been “enormously resistant” to changing prices.

Robert Zane, senior vice president of manufacturing, sourcing, distribution and logistics at Liz Claiborne, said his company has seen prices become “a bit lower” on products it’s reordered from last year. But on new styles, he said, “We tend to take advantage of lower costs by putting more into our products.”

Boneparth said Jones was taking a similar approach, trying to improve the quality of the fabric in its garments rather than pushing for price cuts.

“The stores, in my opinion, are not as anxious as they were a few years ago to get lower prices,” he said, explaining that retailers instead are focused on raising average unit prices in a bid to strengthen revenue.

Saks’ Mustafa, however, said that over time any cuts in production costs will likely trickle through to the consumer level. “Retailers will find it difficult to bank this entire windfall,” he said.

Another variable that could raise sourcing costs is a potential revaluation of the Chinese yuan. China has been under mounting pressure in recent months over its exchange rate, fixed at 8.28 yuan to the dollar, a level that economists estimate undervalues the currency by 10 to 40 percent.

Jones’ Boneparth said, “It’s inevitable that there will be some revaluation of the yuan,” which would likely raise the cost of sourcing from China.

Wilbur Ross, chairman of International Textile Group, predicted that any moves by China on its currency “are more likely to be gradual and symbolic than rapid and dramatic.”

For the time being, Claiborne’s Zane said, “I don’t think we can take this into account on sourcing decisions. China will do what they are going to do when they are going to do it.”

But he acknowledged that a substantial rise in the value of the yuan would influence sourcing decisions. “Nothing trumps cost,” he said.

Speakers said they face a number of other variables on China that will prevent them from shifting additional large volumes of orders into that nation. Key among them are the potential safeguard quotas that the U.S. could impose on Chinese apparel and textile imports through 2008.

“Within the next several months, say within the period of April to July, we will see new quota on China. I don’t know if it will be threat-based or market-disruption based, but it will be one of the two,” said Zane, alluding to an ongoing court fight between U.S. importers and the federal government over the interpretation of the safeguard measure. “The good news is whatever happens, it will be temporary.”

Not all the hurdles to China’s expansion are regulatory, though. With the nation’s manufacturers now ramping up to take advantage of the end of quotas, speakers said it’s increasingly likely that some factories will stumble.

“There is no question that management is going to be a key issue when it comes to this rapid expansion of Chinese factories,” said Homi Patel, president and ceo of Hartmarx Corp.

Ross told the importer-heavy crowd that recognizing the shift toward China, ITG is “moving aggressively to make our map correspond with the sourcing maps of people in this room.”

In addition to its existing presence in the U.S., Mexico and India, a dyeing and finishing plant under construction in Guangzhou, China, and a proposed Guatemalan mill, he said ITG is planning further investments in China.

“Our pending projects in China are large ones in denim and twill,” he said.