NEW YORK — Innerwear firms are facing a major dilemma as 2004 looms.

Makers of intimate apparel, a $12.2 billion business at retail, are being rocked by what a majority see as the single biggest challenge of the past decade: the Bush Administration’s bombshell last month to cap imports of bras, robes, dressing gowns and knit fabrics from China. It comes at a time when smaller, independent companies have begun to commit a substantial portion of production to China, which will be regarded as new business with a quota limit increase of 7.5 percent over the previous year.

The sudden upheaval in trade relations follows several dismal seasons at retail that have pounded merchants and manufacturers. One spark of hope emerged last week with the announcement by the National Association of Business Economics that the U.S. economy, primed by tax cuts and low interest rates, should grow next year at the fastest pace in two decades. The Gross Domestic Product is projected to grow by 4.5 percent in 2004. This is followed by other bullish news that the economy roared ahead at an astounding 8.2 percent rate in this year’s third quarter, the fastest pace in nearly two decades and a much stronger performance than previously thought, according to the Commerce Department.

The upcoming trade reforms, though, could be a boon for entrepreneurial fashion firms, mainly because they are not involved in huge private label or branded programs, and the smaller orders could allow more wiggle room in sourcing. An example is Ying Li, who was born in China and has a design studio in Manhattan. Li turns out luxurious silk and cotton sleepwear and robes that are hand-painted by her mother in China. There’s also Lisa Cohen, who designs Lola, a Hoboken, N.J.-based sleepwear and daywear brand, and New York designer Leigh Bantivoglio, who does signature lace and silk daywear. Each produces the collections locally.

But a majority of the major makers, such as The Warnaco Group, Vanity Fair Intimates at VF Corp. and Sara Lee Intimate Apparel at Sara Lee Corp., as well as midsize firms like NAP Inc., Richard Leeds International and St. Eve International, with roots in China for a decade or longer, are weighing the impact of the new trade rules. Several executives of these companies said they expect to continue receiving preferential treatment, with the first batch of quotas doled out to the biggest and best customers.But without a guarantee, these established companies have implemented one- and two-year strategies with fail-safe methods such as diversified operations and personnel in different countries, including Indonesia, Jordan, Egypt and Turkey. A number of bra specialists also continue to conduct huge cut-and-sew programs in Puerto Rico, Mexico, the Caribbean and Central and South America. While bra manufacturing is practically nonexistent in the U.S., some companies are using American-made components for bras.

Rich Murray, president of Wacoal America, the U.S. subsidiary of apparel giant Wacoal Japan, said: “With the new China quotas being imposed for 2004, many companies, including ourselves, make sourcing and manufacturing decisions almost a year in advance, whether it would be changing from the Caribbean to domestic, or Mexico to Asia. Those guys are in motion for a long period of time.

“But if you are in the process of taking a substantial portion of manufacturing to China, and all of a sudden it changes to include an additional 7.5 percent over the previous year, you’re at the point of no return. That would be a significant problem.”

Rene Rofe, chief executive officer of International Intimates, a maker of fashion bras and daywear, said, “We are actually very perplexed by Bush’s decision to impose safeguards on bras, mainly because there are no longer bra manufacturers in the U.S. Who do they want to protect? I suspect it’s complaints from other bra manufacturing countries like Sri Lanka and Thailand who stand to lose the most to China.”

According to IBERC, a Washington-based quota service agency, imports of bras from all countries to the U.S. totaled about 40 million dozen in 2002. Total bra imports from China to the U.S. represent 35 percent of domestic market share at all channels of distribution.

In a preemptive move, industry observers generally believe the cap on imports from China could stimulate imports from a range of countries, such as Bangladesh and Canada, both of which have quota-free and duty-free status, creating competitive price advantages. In addition, a continuation of preferential trade agreements with countries such as Panama, Columbia, Bolivia, Ecuador and Peru could offer alternatives to manufacturers caught in the squeeze.Others, including the Victoria’s Secrets and Wal-Marts of the world that have invested immensely in China, are most likely examining cost efficiencies of moving production to countries like Vietnam and the Philippines.

Norman Katz, a 40-year veteran of the intimate apparel industry and a consultant, stated, “Everybody’s in the same boat, including Victoria’s Secret. Everybody is scrambling to buy at the lowest cost. Wal-Mart is strictly interested in price. If it’s $2.00 in China, $1.90 in South Korea, or $1.88 in Vietnam, you can be sure Wal-Mart will go to Vietnam.”

Richard Leeds, ceo of Richard Leeds International, a maker of novelty sleepwear, said, “It is worthy to note that although China might lose the manufacturing of the finished product, all of the fabrics and most of the accessories will continue to be purchased from China. They will then be exported to neighboring countries like Indonesia, Cambodia and Bangladesh for quota-free manufacturing.

“The reimplementation of quotas and possible phaseout through 2008 will have no major impact on our company. We have already well thought out our strategic plans in place to expand in the areas we have been manufacturing within the past 10 to 20 years. Some are in Asia, some closer to the U.S., and undoubtedly all are using higher quality, better value fabrics, freely available without restriction from China.”

However, Leeds added that the firm’s French Jenny division imports knit pajama separates from China and has plans under way to expand into bras. “We will now be forced to rebook our commitments in other Asian countries free of these quota restrictions,” he said.

Tom Ward, president and ceo of Maidenform Inc., said, “In anticipation of the China safeguard, we have arranged for additional product sourcing from alternative countries. We anticipate no interruption in service.”

He outlined three strategies to improve Maidenform’s bottom line: product innovation development, strict expense control and reduction of stockkeeping units to improve productivity.

Meanwhile, Victor Lee, president of NAP Inc., said his company’s biggest challenge is dealing in a cost-efficient manner with the “retail results of our customers and the ripple effects of the overall economy on our customers.”“I think the biggest issue is trying to meet the price demands of our customers,” Lee said. “We are being more vigilant with our costing analysis to secure better prices, and investing in technology and efficiency procedures are top priorities.”

He noted the company has invested more than $100,000 this year in updated softwear and plans to continue investing in 2004.

Lee said investment in product development, particularly new proprietary fabrics such as an ultrasoft Hollywood velour, as well as a successful luxe business with European labels Princesse Tam Tam and Argentovivo, and a full lifestyle collection by Bill Blass sleepwear and at-homewear, has beefed up the firm’s bottom line.

David Komar, senior vice president of marketing at Charles Komar & Sons, a sleepwear specialist, said, “The lack of at-once inventory is the biggest issue for us. We can ship immediately, sales are trending ahead of plan and then we don’t have enough stock to service them. Stores don’t want to place too much money and they think they can place deals at the last minute.”

Charles Komar, ceo, added, “Overall sales are up approximately 20 percent due to an increased share of our Aria, Liz Claiborne, Eileen West and the new launch of Lucky Brand [sleepwear and at-homewear]. We’ll be going into Lucky Brand daywear in January.”

Regarding strategies that have improved the bottom line at Movie Star Inc., Howard Radziminsky, senior vice president of marketing, stated: “As a company, we have continually worked to improve our bottom line in many ways. Our sourcing and quality control in the countries we are in [including China] has been a primary focus to get quality product out at great prices while allowing ourselves better margins. We have also worked on shortening lead times and we are tightening our inventory to keep us in a fluid position.

“Our fiscal year ended June 30 and we had a record year. Our first quarter of fiscal 2004 ending Sept. 30 had a 27 percent increase in profits and a healthy sales increase.”

Radziminsky singled out his biggest industry issue: available open-to-buy.

Todd Demakos, ceo of St. Eve International, a maker of women’s and girls’ sleepwear and daywear, said, “Although sales have been flat over last year, we feel good that we did not lose business in 2003. We lost two big accounts — Kmart and Express — but compensated with sales from new accounts and growth with existing accounts. Also, 2002 was a banner year for us, so the fact that we kept up those numbers in this sluggish retail environment is an achievement. Retail is picking up and we have great new product to introduce.”From a designer’s perspective, Mary Green, whose San Francisco-based company Mansilk specializes in silk knits for men and women, said, “I think less specific concern about the bottom line and more concern about designing and selling from the heart will surprisingly lead to better profitability. I would like to see department stores become less generic, and take a chance on particularly creative and innovative designers. For a lingerie design firm, the biggest issue it faces is to keep the creativity and beauty of design in the forefront of the retailer.”

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