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NEW YORK — The industry spent the last decade waiting for the day when the members of the World Trade Organization, now totaling 148 countries, would drop the quota restrictions that governed the global trade in garments and fabric for more than 30 years. That day has come, but importers aren’t planning a headlong rush into China or any other country right away.
Changes will come more slowly, playing out over the next two to four years, executives said. But after all the dust has settled, apparel manufacturing — a $330 billion bootstrap industry employing more than 30 million workers that dozens of countries have used as a stepping stone into the global economy — will look dramatically different. Companies that today buy goods from 40 or more countries expect to consolidate their buying to half that many nations.
This story first appeared in the January 3, 2005 issue of WWD. Subscribe Today.
“This thing has become a significantly smoother transition than any of us would have predicted a year and a half ago,” said Rick Darling, president of Li & Fung USA Ltd., an arm of the $5.47 billion Hong Kong-based sourcing powerhouse. “I don’t want to say it’s a nonevent, but it’s been very well managed by the major importers.”
Importers assert that they’re not rushing to move substantially more of their production into China, which is already the leading supplier of textiles and apparel to the U.S. It shipped $14.07 billion worth of those goods to the U.S. in the year ended Oct. 31, giving it a 17.3 percent share of the $81.03 billion market.
They have good reason to step cautiously: There are many uncertainties surrounding just how free China’s trade will be for the next few years. China joined the WTO in 2001, more than halfway through the 10-year quota phaseout. Fearful of the nation’s potential to dominate the apparel trade, many smaller countries called for continued restrictions on China. The world’s most populous country agreed to a safeguard measure, which allows importing countries to place temporary, one-year quotas on specific categories of Chinese goods if imports of those products are shown to cause market disruption in the importing nation.
Earlier in the year, according to industry sources, Chinese officials indicated they were unwilling to cooperate in the administration of safeguards if the U.S. imposed them. That, importers feared, could lead to nightmare situations in which they would place orders at Chinese factories only to learn they would not be allowed in when they reached American ports.
The Chinese government has not commented on its motivation to impose export tariffs, which were detailed last week, and consular officials in the U.S. did not respond to calls seeking comment.
Observers also speculated that the intent of the export tariffs could be to recapture some of the revenue that Beijing is losing as a result of the end of quotas. In China and in some other major exporting countries, quota rights have informally traded as commodities and could represent as much as half the cost of a garment late in the year.
Presuming that the end of quotas would lead to the extinction of these charges, many importers early in the year projected their costs would drop anywhere from 15 to 30 percent as a result. While importers said prices have dropped somewhat, the cuts seem to be more the result of competitive pressures than of the lifting of the charges.
“There have been reductions in prices,” but there are many reasons behind the cuts, said Ted Sattler, group executive vice president of Phillips-Van Heusen Corp., based in New York. “You’ve got a significant oversupply of textiles in the world….That oversupply has caused a reduction in the cost of fabric, which, in some cases, is more than half the cost of a garment.”
He declined to quantify the price reductions he’s seen, noting that changes in design and materials make it hard to provide a direct comparison with last year’s prices.
Some manufacturers assert they’re trying to raise their prices.
“I have been giving out prices slightly higher that last year,” said David Chan, director of Moregoal Industries Ltd., a maker of knitted garments with factories in Dongguan, China, adding that he was raising his average charges by 3 to 5 percent, which allows the firm to focus on slightly higher-end goods. “I’d rather do less quantity and handle those who are willing to accept my price.”
As a result of the questions surrounding China, Li & Fung has not increased the percentage of its orders it places in China for early 2005, Darling said. Chinese factories remain less than 20 percent of the firm’s supply, a number he described as “not particularly aggressive.”
Likewise, Sattler said he’s not stepping up PVH’s operations in China.
“There can’t be many legitimate apparel companies or retailers planning a significant increase of their position in China without more clarity,” he said.
Still, Sattler acknowledged that PVH’s sourcing footprint will start to change in the coming weeks.
“Certain countries we will be exiting,” he said. “For example, the Ukraine and the [Persian] Gulf states. I can’t say that it’s all on Jan. 1, but shortly thereafter, we’ll be doing business with fewer factories.”
At the end of 2004, he said PVH regularly sourced goods from about 40 countries. Over the next few years, he expects to cut that to between 15 and 18.
Darling also said Li & Fung will reduce its presence from 40 countries to about 25.
“Certain countries existed only for quota that probably don’t have a competitive model without it,” he said. “But that doesn’t mean we’ll be leaving them wholesale in 2005.”
Under the quota system, companies were often prevented from buying as much as they would have liked from certain countries — such as China, India and Indonesia, for instance — because of the limits. This forced them to shift orders into some out-of-the-way countries — such as the island nations of Madagascar and Sri Lanka — that had available quota.
This resulted in many nations having a small share of the U.S. market. After China, which held a 17.3 percent share, and Mexico, which had a 9.5 percent share, 21 countries had market share ranging from 1 to 4.7 percent.
With the quotas lifted, executives said orders will concentrate on nations that have large workforces, a strong supply of textiles and other raw materials and well-developed logistics chains.
It’s not only manufacturers in the developing world who are waiting anxiously to see how the months ahead affect their business. U.S. manufacturers — who lobbied hard against the quota lifting — fear for their future.
“I’ve never seen my customers this confused,” said Jim Chesnutt, president and chief executive officer of National Spinning Co., a Washington, N.C.-based yarn maker. “We need to see if the retailers are going to turn their backs on us.”