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As the days tick off until the 2005 phaseout of quotas on apparel and textiles, companies are scrambling to prepare their sourcing structures.
This story first appeared in the September 24, 2002 issue of WWD. Subscribe Today.
NEW YORK — In 827 days, quotas on apparel and textiles will be lifted among World Trade Organization members, and the sourcing world will begin a seismic shift.
The question is whether Jan. 1, 2005, will bring a violent shakeup in production patterns, leveling industries in some countries and bringing mountains of orders to others, or if the forces of change will be more glacial — immense and unstoppable, but also slow and therefore somewhat predictable.
One point is clear: The manufacturing industries of the 144 member nations of the WTO will be in for massive structural change. The quota system leaves a clear mark on U.S. sourcing patterns, divvying up the pie of the American apparel market category by category among the nation’s many trading partners. Quota limits prevent any country from cornering the market on a given apparel item, and in the case of some particularly in-demand categories, access to quota rights can help some nations keep a piece of the market, even if their costs of production are higher.
A major concern is how powerful China’s influence in the sourcing world will be. The nation’s low wages and massive population already make it a formidable producer of apparel and textiles — this year, it’s been gaining ground on Mexico, a sign that it may reclaim the position of number one supplier of textiles and apparel to the U.S., which it held prior to NAFTA’s inception in 1994. For the year ended July, China ranked behind only Mexico in imports of textiles and apparel to the U.S., with $7.43 billion in shipments. That month, it pulled ahead of Canada on a unit basis as a key supplier.
In some circles of the U.S. textile industry, China’s status has almost become that of a new Red Menace — ready to flood the U.S. with cut-rate fabrics and garments if the government does not intervene, destroying the remnants of the domestic industry.
Importers tend to be more sanguine about the China factor. Sourcing executives note that few U.S. companies are likely to move all their production into one nation for fear that a breakdown in relations between the foreign capital and Washington could leave a company unable to fill orders.
Observers also contend that even in the post-quota environment, the U.S. government will continue to have some say about what goods cross its borders.
Jeanne Atkinson, president of the New York-based trade consultancy Global Marketing Strategies, noted that the U.S. often uses the apparel and textile industries as a carrot in international negotiations, and has used trade access as a key tool in trying to help developing nations in the Caribbean Basin and sub-Saharan Africa build strong economies.
“Our government has been putting lots of money and expertise into these developing countries. It can’t and it will not double-cross itself. It can’t afford to do that from a world point of view,” she said. “There will be some surge mechanisms put in place in categories where there would be no competition.”
The U.S.-China trade agreement that paved the way for China’s entry into the WTO included a provision that allows the U.S. to limit imports from that country if surging shipments cause “market disruption.” Most observers contend that the U.S. will likely make use of that provision should Chinese exports look likely to wipe out industries in the U.S. or in certain nations abroad. In August, the American Textile Manufacturers Institute petitioned the Commerce Department to impose quotas on Chinese imports of bras, knit fabric, gloves, nightwear and luggage, which have surged since January, when limits on these categories were lifted as part of the 10-year quota phaseout.
Still, while some steps may be taken to curb China’s influence, imports from other developing nations are likely to surge as well. India, which last year was the sixth-ranked source of imported textiles and apparel for the U.S., as measured in dollars, is also seen as being likely to gain ground. That nation grows a lot of cotton and is a major source of imported cotton apparel.
Consultant Nicholas Hahn, who heads Hahn International Ltd. of Stamford, Conn., said U.S. textile and apparel producers will need to have factories or partners abroad to compete in 2005.
“They need to get over to Asia and develop joint ventures over there or alliances and get themselves lined up so they can still be in the game,” he said. “Or completely get out of the commodity apparel fabrics business and concentrate on the high end. But if they want to stay in broad-woven apparel fabrics — denim and khakis — they’re going to have to go over there and that’s the reality.”
Several major U.S. mills, including Burlington Industries and Guilford Mills, in the late Nineties regarded expanding into Mexico as the best way to remain competitive on prices in a global market. However, as Mexican wages have risen, that nation has lost ground and both those companies reduced their manufacturing presence there, though both continue to produce apparel fabrics in Mexico.
“I don’t know how competitive Mexico is going to be after 2005,” said Hahn, who has done consulting work for Mexican mills, including Kaltex. “The Mexicans are as concerned about 2005 as the Americans, from a manufacturing point of view.”
Textile companies, including Burlington and Cone Mills Corp., have also in recent years formed joint ventures in India, hoping to take advantage of that nation’s lower wages and closer proximity to major manufacturing centers in Asia. Still, joint ventures with foreign companies can become difficult to manage, and Cone executives said recently it’s still “premature” to declare their four-year-old Indian partnership a success.
Hahn said a good model for U.S. mills might be to offer design and sales assistance to Asian competitors looking to sell to U.S. apparel brands. That’s the approach Burlington has taken in its Hong Kong-based Burlington Worldwide venture.
The question observers have raised is whether Asian fabric mills need help from their U.S. counterparts.
“What’s in it for the Asians is that the American mills have got very sophisticated design and merchandising and product development,” Hahn said. “The Americans have been operating in this market forever and they understand this market very well. There is a place for that linkage between a U.S. mill and an Asian mill.”
He added that U.S. mills could also warehouse Asian competitors’ fabrics, to allow quicker deliveries to North American manufacturers.
U.S. mills are not alone in looking for ways to be more competitive in 2005.
“In Japan, we have high labor costs and high environmental standards. We cannot compete with other companies that are producing in China, Taiwan or [South] Korea,” said Toru Nagashima, president and chief executive of Tokyo-based fiber maker Teijin Co. “What we have to do in Japan is to innovate or create materials that have new specialized functions.”
The company has also expanded its manufacturing outside Japan, opening polyester plants in Indonesia, Thailand and Mexico, and a fabric mill in China. Last year, Teijin cut its Japanese polyester manufacturing operations by 40 percent. Japanese fiber production now represents 30 percent of its total output.
Teijin’s strategy is to develop new fiber varieties in Japan, and after it has perfected the manufacturing processes, move it to its lower-cost factories.
Nagashima said Teijin has considered opening fiber production in China.
“We are now studying it, but we have not decided because the economy is changing very much in China,” he said, explaining that there are still significant hurdles to foreign investment in that country. “After they joined the WTO, their intentions clearly were to become more open. But still, there are all kinds of rules and regulations by the local government. We don’t know how they can change themselves to be fair.”
He said he doesn’t consider China to be overwhelming competition today, but added that he expects the Chinese industry to develop quickly.
“They can produce mostly volume goods — low cost, high volume. Their strength is not in high quality,” he said. But, he added: “Their technological abilities are very high. They will catch up with the rest of the world, maybe in five years, 10 at the latest.”
U.S. fiber companies are also moving more of their production overseas, closer to garment production centers in Asia.
DuPont has expanded its Chinese manufacturing operations in the past year. Likewise, Asian textile companies are boosting their marketing presence in the U.S., recognizing that while they may be selling the bulk of their fibers and fabrics to Asian garment manufacturers, the sourcing specifications are often written by U.S. product managers.
Seoul-based fiber maker Hyosung Corp. has been working to build its operations in the U.S. As reported, the company next year plans to begin selling polyester and nylon directly to the U.S. market, as well as spandex.
James “Rusty” Ford, vice president for the company’s Charlotte, N.C.-based U.S. arm, said his company recognizes that while production will shift in 2005, “a lot of the marketing and merchandising will be done here in the U.S.”
He said that even in the post-quota years, there will be limited demand for U.S.-made fabric.
“The fashion industry changes so rapidly, it will be difficult for the Asians to keep up,” he said. “There will still be a market for U.S. knitting, for a mill that’s specialized. But it will not be huge.”
While quotas will be dropped among WTO members in 2005, that won’t signal the end of all trade barriers. Quota rights are traded as commodities in many Asian nations and are a profit center for some companies and governments. That has led some observers to suspect that some Asian countries may put in place alterative systems to limit or monitor trade.
In addition, WTO members will continue to use duties to regulate trade. Nations in trade blocs that lift duties, such as NAFTA and the regions included in the Caribbean Basin Trade Partnership Act and the Africa Growth & Opportunity Act of 2000, will continue to have the advantage of duty exemptions. Duties on fabrics and garments range from 7 to 30 percent.
While most observers expect to see China and underdeveloped nations, including Vietnam, gain manufacturing share, and developed markets like the U.S. and Japan lose ground, another concern is how countries including Sri Lanka, Turkey and Thailand — which have substantial apparel manufacturing industries and have benefitted from quota rights in key categories — will fare.
“The more mature countries — Sri Lanka, Turkey, India — these are countries who had had a long-term investment in apparel in the U.S.,” Atkinson said. “They are the ones that are going to suffer immediately and have the largest economic impact. It’s going to be in these countries that have the high wage levels. They will lose out on labor costs, unless they become more competitive.”
Fears in these countries have prompted some Sri Lankan executives to begin investing in plants in lower-cost locations like Africa, said Atkinson, who has consulted for Sri Lankan apparel manufacturers.
“They are covering their bases, so when quota is wiped out, they will have a toehold in low labor-cost countries,” she said. “They have to look to other foreign bases where they can move in, establish themselves, bring their technical people in, spend money building a factory and take advantage of low labor costs.”
The possibility of old reliable manufacturing locations becoming noncompetitive in 2005 should prompt sourcing executives to seek out other options, Atkinson said.
“Few American sourcing people that I know really take the time to think through their sourcing,” she said. “They need to become more knowledgeable.”
Atkinson said buyers need to get over the tendency of simply choosing the cheapest option, and also consider factors like reliability and growth potential in making their sourcing decisions.
The decision of whether to invest in overseas sourcing offices is governed by the size of the company and the amount of resources available, she noted. The Leslie Fay Co. this year opted to outsource all its sourcing decisions to Li & Fung Ltd.
That is something of a quantum shift for New York-based Leslie Fay, which a decade ago still owned about eight factories in Pennsylvania. Chief executive officer John Short said the decision reflected the fact that retailers’ success in the private label arena has proven that stores “do not need somebody to make product for them.”
“The only reason they would need Leslie Fay as a brand is if we are bringing them innovative product,” he said. “This allows us to take financial resources and focus those on design, product development and marketing.”
Having Li & Fung handle sourcing also makes the ready-to-wear vendor more flexible, he added: “They’re in markets today that we may want to be in tomorrow.”
For larger companies who opt to open offices overseas, Atkinson said having a presence in sub-Saharan Africa, Hong Kong and Eastern Europe could be advantageous. Africa and Eastern Europe are areas where manufacturing industries are developing, but companies may be in need of oversight, while Hong Kong offers a jumping-off point for China and the rest of the Far East, she said.
As more apparel manufacturers pop up in developing nations, Atkinson said, a key function of regional offices will be to keep a close eye on quality control and labor and legal compliance issues. Labor issues — primarily the fair pay and treatment — have become key factors in sourcing decisions, as unions and other activists have been quick to single out major brands who are found to be buying from sweatshops.
Legal compliance can also be a huge hurdle, particularly in countries that negotiate preferential trade deals with the U.S., since factories can lose their access to benefits if the U.S. Customs Service finds them to be in violation of the terms of trade agreements — for example, if they are using all Asian fabric in a garment made in the Caribbean and trying to ship it to the U.S. without paying duty or quota.
While the abolition of quotas will change many traditional buying patterns, Atkinson said there is one rule of thumb that will remain valid.
“The primary rule is to be as close to the raw materials as possible,” she said. “They have to look for places where they can save time and money by getting the raw materials right in that country instead of shipping it from Taiwan to Kenya, for example. They need to really analyze the potential that is available.”