NEW YORK — For an industry struggling against the evolution of global trade, the outlook for 2003 hinges as much on how Grinchy things get this month as it does on the winds of war and the recovery on Wall Street.
This story first appeared in the December 3, 2002 issue of WWD. Subscribe Today.
Coming to the end of a year that wasn’t nearly as bad for the domestic textile industry as some had feared, mill and sourcing executives said a key factor in determining how business will be in 2003 will be whether retailers wake up on Jan. 1 with a bad holiday inventory hangover.
Extra-lean January inventories this year — the result of a better-than-expected Christmas shopping season last year and tight planning post-Sept. 11 — led to strong demand early in 2002 for replenishment deliveries and set the tone for what has been a surprisingly solid year for the sector in terms of demand, according to most executives interviewed.
While mill sources said they believe their inventory levels are conservative and that apparel suppliers and retailers are well positioned for the expected moderate holiday season, they said retail inventory levels in January will have a major effect on next year’s textile market.
Last year, U.S. textile manufacturers shipped $53.9 billion worth of fabric, according to the American Textile Manufacturers Institute. That figure includes home, automotive and industrial fabrics, in addition to apparel textiles.
“Everybody is waiting to see what happens with the holidays,” said James Martin, president of apparel fabrics at Danville, Va.-based Dan River Inc. “It’s such a critical time, as it is ever year. If they sell goods through, the open-to-buy is available and you get a lift going into next year. Conversely, if things are bad, the open-to-buys are not there, they concentrate on liquidating the inventories and it sets a downward tone.”
But strong January orders will by no means ensure an easy year for fabric firms. Another major worry confronting mill executives and the entire apparel market is how consumer spending will be affected by uncertainties, including how well the stock market is recovering from the economic slowdown of the past two years and whether the U.S. will go to war with Iraq.
Beyond that, every dawn brings the industry closer to Dec. 31, 2004, when quotas will be lifted among all 144 World Trade Organization nations, and domestic manufacturers lose one of the key mechanisms that have protected them from foreign competitors. That event, coupled with the U.S.’ recent proposal that WTO members drop all duties on industrial products by 2015, will vastly change the competitive playing field.
In addition to increasing the threat of direct competition with foreign — particularly Chinese — textile and apparel imports, those two measures would combine to strip most of the benefits given to Mexico, Canada and the nations of the Caribbean and Central America by the NAFTA and Caribbean Basin Trade Promotion Act trade deals.
According to U.S. government data, total imports of textiles, yarns and fibers for the year ended in September came to $14.74 billion, up 5.5 percent from the prior year. China drove the gains, with its shipments soaring 49.5 percent, to $2.81 billion.
Meanwhile, apparel imports slipped 3.6 percent, to $55.36 billion. The continuing trend for apparel marketers to buy completed garments through full-package production deals means that garment imports have also displaced sales of domestic fabrics.
Some of the U.S.’ largest textile concerns remain on shaky financial footing. Burlington Industries, Malden Mills and Galey & Lord all continue to operate under Chapter 11 bankruptcy protection. While Guilford Mills Corp. exited bankruptcy in October — its seven-month period of court protection was shorter than the other major mills to file petitions — it shuttered most of its apparel-related operations and now is primarily a maker of industrial and automotive fabrics.
At Graniteville, S.C.-based Avondale Mills Inc., president of marketing and sales Keith Hull said the final months of the year have brought a slowdown in demand, following strong business for most of the year.
“A lot of that was filling the inventory pipeline that had gotten so lean during 2001,” he explained. “Our business stayed strong all the way through 2002. It has softened recently, but to a controllable level. It’s not like it was during the recession.”
Still, he acknowledged: “Business is soft, retailers are unsure, everybody is watching the inventory. But it’s not a catastrophic drop-off like it was last year.”
According to filings with the Securities and Exchange Commission, for its fiscal year ended Aug. 30, Avondale slipped $100,000 into the red. That was a change for the privately owned denim and twill producer, which unlike many of its public competitors, had been profitable each year for the past decade. Avondale reports its results to the SEC because of a bond issue.
George Henderson, chairman and chief executive officer of Greensboro, N.C.-based Burlington Industries, said he had hopes for a decent holiday buying season, which would bode well for demand next year.
“A month ago people were saying this was going to be the worst Christmas in 15 years, and I don’t think we disagree that it might be a fairly slow Christmas,” he said. “But from what we hear from our customers, it’s not going to be a disaster and we’re not going to have a huge inventory overhang. Some of the fill-in orders and spot business that we’re getting now basically gives us the impression that some people might have been more pessimistic than they should have been.”
Not everyone shared his confidence.
Rick Darling, president of Li & Fung USA, the New York arm of the Hong Kong sourcing powerhouse, had a more conservative view on the holiday season and next year.
“Holiday is going to remain tough,” Darling said. “There’s no indication that things will loosen up. People are being very cautious with their inventories. Our take, going into next year, is the same kind of caution. I’m not hearing any kind of gloom and doom going into next year, but retailers seem to be taking a cautious approach. I’m not going to say they’re pessimistic, I’m not hearing that, but they’re being very prudent.”
Also somewhat gloomier in his overall outlook was John Bakane, ceo of Greensboro-based Cone Mills Corp, who said: “The U.S. economy is weaker than we had thought. Deflationary pressures are building throughout the consumer pipeline and the government’s policy has been to let anybody sell into the U.S. at whatever price they want to dump it at, regardless of what the impact is on jobs.”
Despite the gloomy environment, Cone ended the first nine months of the year with a net profit of $8.4 million. That puts the denim mill in position to break a seven-year streak of net losses.
Still, Bakane said he expects the environment next year to be “just as tough, perhaps even tougher.”
“The U.S. economy shows no real engines of growth, as the Federal Reserve has warned, and there’s growing deflationary pressures and risks around the world,” he continued. “Everybody wants U.S. dollars and is willing to sell in at subsidized costs.”
Last month, the Federal Reserve Board cut the federal funds interest rate a half-point to 1.25, its lowest level in over four decades. That was the first cut this year, after 11 cuts last year, though the Fed has warned this year that inflationary pressures could also arise in the U.S. economy, in which case it might begin to raise rates again. Every word of Fed chairman Alan Greenspan is closely analyzed by watchers of the economy, though even within the textile sector, interpretations vary.
Avondale’s Hull said, “I believe Greenspan and the hype that we are not going into a double-dip” recession in explaining his more upbeat forecast for next year.
“I’m actually more optimistic,” he said. “I think it will be an OK holiday selling season and think that the economy will gradually start to recover. We may not see that bounce-back of the inventory pipeline, but we will see a steady increase in consumer confidence and better business.”
Henderson said, after a year of retrenchment, Burlington is also planning for growth next year.
As reported, Burlington closed its fiscal year Sept. 28 with a net loss of $100.8 million on sales of $993.3 million. In the year since its bankruptcy filing, the company has continued to shutter domestic manufacturing plants, in attempt to cut its capacity down to a core group of price-competitive mills. That’s well below the level of $2.2 billion in revenue reached in 1995.
“We’re planning on growth in almost all of our businesses,” Henderson said. “We’ve downsized so much and taken so much capacity out, but from the base we’ve taken it down to, we think there’s upside potential. I can’t say we’re going to grow from where we were a year ago because we’ve taken a lot of capacity out, but having hit a level for the new company, we think we have upside potential in just about all of our businesses, unless a disaster hits the economy.”
The Burlington venture that is the furthest step from its traditional operations has been its Hong Kong-based Burlington Worldwide arm. Headed by president Peter Liu, that unit is working as a sourcing company, buying and selling fabrics manufactured by other mills in Hong Kong, China, Taiwan and South Korea. It also handles sales for Burlington’s company-owned mills in the U.S., Mexico and India.
Still, Henderson said it will be some time before sales of outsourced fabrics grow to represent a large chunk of Burlington’s revenue.
“It’s growing very fast and certainly it has the potential of being very significant, but not this year,” he added. “We’ve got to execute on every order and we’re not going to sacrifice precision for growth.”
Burlington is not the only U.S. textile company looking to cover its bases with alliances overseas. Cone Mills this year entered into a joint venture with the Turkish denim mill Isko Dokuma Isletmeleri Sanayi Ve Ticarter A.S.
Bakane described that venture, which will supply Levi Strauss & Co.’s European operation, as a way of guarding against changes in trade policy between the U.S. and European Union. The venture is called IsKone Denim Pazarlama A.S.
“If you look at global trade patterns and the higher risk in regards to U.S. exports of textile fabric to Europe, we had to hedge against higher tariff rates and other issues with trade that could affect our partners,” he said.
Textile products often wind up getting pulled into trade disputes — for instance, imported European cashmere was slapped with punitive duties during a U.S.-EU trade dispute over bananas.
While overseas alliances have been an obvious strategic choice for U.S. mills struggling against foreign competition, they haven’t been a cakewalk. Cone in 1998 took a stake in the Indian denim producer Ashima. Bakane said of that operation: “Quite frankly, it hasn’t really done as well as we had hoped.”
But domestic mills aren’t focusing all their efforts on expanding overseas. Delta Woodside Industries Inc. by June aims to complete a modernization of its Wallace, S.C.-based cotton-fabric finishing plant, intended to improve quality and cut costs at the plant. It’s part of the mill’s ongoing effort to prepare its U.S. operations for 2005.
Likewise, Denim North America, a Columbus, Ga.-based company formerly owned by the Japanese textile firm Marubeni, which was acquired by U.S. investors this year, continues to hone its operations to remain competitive.
“We’ve driven a lot of costs out of our operations and been able to secure some good programs,” since the company separated from its former parent, he said. “We’re being very conservative and relying on the most basic business model — your revenues have to exceed your expenses every week.”
Dan River’s Martin said a key part of preparing any U.S. manufacturer for 2005 is recognizing both a company’s competitive advantages and its limits.
“What we try to use as an advantage here in the Western Hemisphere is speed-to-market and we work very hard on turn times and trying to accelerate production, so it becomes an advantage,” he said. Otherwise, he continued, “there are no competitive advantages because in most cases the product can be made cheaper in Asia. I think our quality is excellent, but so is Asia’s. If we’re going to have any advantages, it has to be speed-to-market.”
Beyond speed, he said, local manufacturers have to focus on their assortments, so, “we’re developing more new products today than we ever have.”
Despite the price advantages and high quality in Chinese manufacturing, domestic manufacturers are hoping their closeness to market will be enough to protect them when quotas are lifted.
“Hopefully, in 2004 and 2005, the battle will be between China and the rest of the world,” said Avondale’s Hull, adding that he believes, “we’ve somewhat stabilized the base of domestic production necessary to service the quick-response business.”
Overall, while most executives said they were planning for either flat sales next year or modest increases, all admitted the threat of war and nervousness about the stock market will likely make for a volatile environment.
“You still have consumer confidence, employment and all the other factors, from the stock market to the weather” to worry about, said John Heldrich, president of the Atlanta-based Swift Denim division of Galey & Lord. “There are always variables that can knock the business off center for a period of time.”