GUATEMALA CITY — Little has gone as expected in the two years since the U.S. Trade and Development Act of 2000 extended duty and quota-free benefits to Caribbean Basin apparel manufacturing.
Rather than a surge of profitable new business and investment, the continuing uncertainty about whether dyeing and finishing will be allowed in the region, last year’s general slowdown in the U.S. economy and a sharp dropoff in orders from U.S. companies following the Sept. 11 terrorist attacks, made for a rough period for the region’s factories.
In the last 15 months, more than 40 apparel plants have closed at a cost of 11,000 to 12,000 jobs, according to estimates from Agexpront, Guatemala’s association of exporters of non-traditional products.
But to some observers from U.S. companies working in the region, the pinch of the last year may prove to be a good thing for the Central American apparel industry in the long run. The surviving companies have reinvented themselves, taking a more sophisticated and aggressive approach to the apparel business. Now that sales are picking up again, they forecast significant growth.
One subtle, yet enlightening, change noted by several U.S. executives is the changing use of the Spanish word “manana.” Its literal meaning is “tomorrow,” but for years it had been used by local managers as a vague indication of some time in the future when tasks would be completed, phone calls returned.
“The sense of urgency has set in,” said Paul Acree, national sales manager with Fort Lauderdale-based Jab Textiles, in an interview at the recent Guatemala apparel sourcing show. “This is no longer the land of manana.”
Now, tomorrow means tomorrow.
“I’m seeing more and more changes, and it’s things that Central American companies are doing to be more competitive with the Far East,” said Jeff May, country manager at the Guatemala City sourcing office of Mast Industries, the procurement arm of Limited Brands. “It’s a totally different mindset.”
The change that American sourcing executives — and their Guatemalan suppliers — said will be most meaningful is the realization by most local suppliers that they need to offer full-package apparel production services.
“The big players, they are all in some stage of implementation,” of a full-package system, said Rene Narvaez, the Miami-based senior project and sourcing manager for the Caribbean Basin for J.C. Penney Co. “Some are at 90 percent and some are at 70 percent. Some have not even started, but they at least know that it’s key to their survival.”
As with many of his American counterparts, Narvaez said he believed there was a clear reason for the change in the Guatemalan approach to business over the past year: “A lot of suppliers going out of business.”
Asked if the pain of the past year could have a beneficial effect on the industry over the long term, Marcio Cuevas, president of Agexpront, acknowledged, “Seeing it from an outside perspective, you can say that a bad experience can have a good effect. But for the people that lost their jobs, the last year was not good. We need to grow jobs in the region.”
The Guatemalan industry employs about 138,000 workers: 98,000 in apparel factories, 30,000 in textile mills and 10,000 at trim companies, he said. The unemployment rate in the nation of 12 million is currently about 7 percent, according to local government officials. Agriculture, primarily fruit and flowers for export, remains the nation’s primary economic driver and accounts for about half of all employment.
Cuevas said he believes the industry’s emphasis on developing full-package services will help it to grow and develop more jobs.
“Guatemala can provide all the necessary inputs to full-package business, not only with local firms, but by working with other countries in the area,” he said. “If there is a fear of the Far East, the industry will do what it has to do. It will compete in all areas.”
Guatemala has had a sizable apparel industry for years — last year it was the U.S.’s 18th-largest supplier of textiles and apparel, shipping $1.61 billion in goods. But its industry revolved around the terms of the 807 and 807a programs, part of an earlier package of trade benefits from the U.S., which gave duty breaks to goods sewn in Caribbean Basin countries of U.S. fabric that in many cases also had to be cut in the U.S.
Breaking out of that specialized niche has required more than adding cutting rooms to local factories. Manufacturers also have to develop ways to pay for fabric orders, since under the terms of true full-package sourcing agreements they are not paid until they ship their finished apparel to their customers.
“We were born as service companies,” said Juan Carlos Paluomo, owner of the Canexa factory, which began offering full-package services four years ago. “Now we have to take care of the material and that means a lot more financial support. And this is a big hurdle.”
Guatemala’s largest apparel manufacturer, Koramsa, is also placing its bets on full-package services. As part of its effort to expand in that area, the company held a meeting in Guatemala City on May 14 of its 52 top suppliers from Central America the day before the three-day sourcing show.
“Full package is not a business to be taken lightly. It’s capital-intensive and there is tremendous risk,” said Carlos Arias, the company’s executive vice president, during a recent tour of his company’s 1 million-square-foot compound in Guatemala City. “Being a great manufacturer does not guarantee success in the full-package business.”
Arias — who also serves as president of Vestex, the association of Guatemalan apparel and textile makers — said his company is in the process of making the next step in its business evolution, to become a “full full-package supplier.”
Full-package orders can work two ways, he explained.
At its simplest model, it can mean no more than a transfer of financial burden, in which a U.S. buyer tells its apparel supplier what fabric and trim to buy, where to buy it, how much to pay, and then calls on a near-daily basis to make sure each step of production is being handled quality. Arias said Koramsa currently does about 30 percent of its business this way.
True full package, he added, comes when a customer can place an order — 100,000 pairs of stonewashed, low-rise women’s blue jeans, for instance — and then hear back from the supplier when the order is complete. That hands-off approach, developed by Asian trading companies, has become popular with U.S. retailers and branded wholesalers. To offer that level of service, which Arias said represents about 10 percent of Koramsa’s sales today, the company has built up its staff of merchandisers and pattern makers.
More than 500 of Koramsa’s 10,200 employees now work in areas including merchandising, administration and management, which includes all workers whose responsibilities extend beyond a single production line.
Many of the first apparel makers in Guatemala to begin offering full-package services were part of vertical companies that also manufacture fabric, either in that country or abroad. That model is particularly common among foreign-owned factories, which represent 75 percent of Guatemala’s apparel manufacturers. About 60 percent of the nation’s apparel makers are owned by South Koreans. Asian investors own many Central American garment plants, with Korean investment predominant in Guatemala and substantial Taiwanese investment in Honduras.
For Koramsa, which had to build two new factories to handle cutting and finishing, going completely vertical isn’t the plan.
“We don’t want to be vertical, but we need to seem vertical,” Arias said. “If we are going to be a full-package supplier, we need to incorporate into our supply chain all our vendors.”
As Koramsa and its competitors try to take more direct control over their operations and supply chains, mills from the U.S., Latin America and Asia are trying to raise their profiles in Central America. About 150 mills, trim makers, garment makers and other service providers exhibited at the sourcing show with that goal in mind.
“We’re down here to see if we can do more direct business with these companies,” said Sam Hiatt, vice president of the New York-based knitter Fab Industries, who said that while his firm has shipped a lot of fabric to the region, most of it had previously been ordered by U.S. customers. “In the last couple of months, more and more [Guatemalan] manufacturers were seriously talking with us.”
Several local apparel makers and their suppliers said they’ve seen a surge in demand over the past two to three months, as U.S. retailers look to rebuild their inventories in the hopes of a pickup in consumer spending. Local suppliers, which tend to be the first to feel the pain of a downturn, in this case also seem to be the among the first beneficiaries of the pickup.
Daniel Lee, operations manager at Shin Won Guatemala, a maker of T-shirts and polo shirts with 3,000 workers, said that his plant has seen orders rise this year. Still, he acknowledged, selling prices remain down after last year’s soft market.
“Stocks are low and they are rebuilding inventories,” said Juan Fernando Mandujano Saenz, a representative of the Guatemalan arm of thread supplier American & Efrid. “We hope it continues.”
Charles Fazio, director of export sales with Danville, Va.-based Dan River Inc. said, “The rebound has been very substantial.” The company and its customers are now receiving orders from retailers demanding short delivery times, he said, “and it’s hard, because we’re fully sold.”
He added that several Guatemalan apparel makers had approached his firm to see if they could work together to offer full-package services, something the mill already does in a limited way through its Mexican shirt factory.
Their interest seems to be to use Dan River fabrics and to rely on the mill as a U.S. sales arm, but, Fazio added, “It’s difficult to break the traditional mold of doing business.”
For his part, Agexpront’s Cuevas said he hoped American and Guatemalan companies would find ways to join forces.
“There are a lot of Guatemalans in the industry who would be interested in making joint ventures with Americans or other investors,” he said. “We would like to see more companies owned by locals, and not only Korean investors but also American investors.”
Several sources pointed out that Guatemalan companies that have survived the weak apparel market of the last year and started down the road to full-package production now need to prepare themselves for 2005, when quotas will be dropped among all World Trade Organization members, erasing some of the trade advantages the region currently enjoys.
Arias, of Koramsa, said he’s not in a panic about the end of quotas.
“If we well position ourselves for 2005, it will be like Y2K,” he said. “Much ado about nothing.””