NEW YORK — Next year is shaping up to be one of the most dramatic that the textile industry has seen in decades.
As the last months tick away until the planned 2005 phaseout of quotas on fabrics and garments among World Trade Organization members, executives are wondering exactly how the biggest change in trade rules any of them have ever seen will affect the industry.
The Bush administration’s decision last month to impose safeguard quotas on Chinese imports in four categories of merchandise that last year were freed of quota restrictions suggests to many that the government will not sit idly by and watch China gain a dominant share of the U.S. apparel supply chain.
With the American public still torn about how real the reported economic recovery is, employment is expected to be a major issue in next year’s presidential campaign. As the textile industry’s concerns —?and overall allegations by manufacturers that China uses unfair trade practices — attract more attention in the capital and among voters, it’s possible that the handling of the quota phaseout will become a political football, no matter how insistently WTO officials assert that it’s an irreversible process.
The question of economic recovery as it relates to consumer spending on apparel will also have a major effect on U.S. mills’ fortunes over the year ahead. While several executives said there are signs that business has been picking up recently, they emphasized that their customers still seem uncertain about where consumer spending is headed and how the holiday season will pan out.
Another major issue in mill officials’ minds is whether early markdowns will further aggravate the price deflation that has been pinching apparel and textile suppliers for the past several years. The problem becomes more pressing given the continued high price of cotton. According to data released by the Department of Agriculture last month, the local price of cotton stood at 74 cents a pound, 46.6 percent higher than it had been a year earlier. Mills have run into intense difficulties in passing along those cost increases, which further compresses their already tight margins.
In a report released last month, the fiber-promotions organization Cotton Incorporated noted one factor driving prices up, in addition to a low harvest for the crop year ended in August, is rising Chinese demand. The report said prices may well remain “above normal” for some time.“The market currently anticipates some relief in the [crop year ended August 2005] as the higher levels of cotton prices should stimulate increased plantings,” the report said.
Finding a way to remain consistently profitable, however the quota issue plays out, will be a key challenge facing executives at several major mills next year. After about two years in bankruptcy, in recent months both Burlington Industries Inc. and Malden Mills Industries Inc. have emerged from court protection. Galey & Lord Inc. and Cone Mills Corp. are also expected to leave bankruptcy in the months ahead.
One person who will play a major role in the redesign of the domestic textile industry is Wilbur L. Ross. The chairman and chief executive officer of the New York investment firm W.L. Ross & Co. last month named himself chairman of Greensboro, N.C.-based Burlington, which he bought out of bankruptcy. Ross has also bid for Cone and has said that if that bid is successful, his plan is to merge the two companies.
Ross has made some initial restructuring moves at Burlington — including clearing out all its top executives with the exception of Joe Gorga, a relative newcomer to the mill who was promoted to president and ceo. But he has indicated that there’s much more to be done.
“Our industry has been very fragmented, both horizontally and vertically,” he said at a recent meeting of the Textile Distributors Association in New York. “There’s too much of everything.”
For large-scale textile concerns like Burlington, verticalization often means getting into actual garment manufacturing. That’s a strategy that Burlington and several other large mills explored in the late Nineties, with often disastrous results. Burlington built two apparel plants in Mexico, one to make jeans and another to make tailored clothing, which it staffed with textile industry veterans. According to industry sources, the company was slow to recognize that the discipline valued at U.S. textile mills, namely the high efficiency possible when a factory produces huge quantities of a relatively basic product, was not as useful in the garment business, where styles can change at a designer’s whim.
Burlington closed its last garment plant, in Aguascalientes, Mexico, last year.While he’d consider verticalization, Ross said he would not repeat the mistakes of the past, which he called a “horrible experience” for the company.
“The discipline of running a textile mill and the discipline of running an apparel plant is different,” he said. If the company does decide to try its hand at garment making again, he continued, “It wouldn’t be by trying to put a mill person in charge of a garment company.”
He said Burlington more likely would consider merging or forming a joint venture with an existing apparel maker.
The news on the safeguard decision came as somewhat more of a surprise to domestic textile firms, which have become accustomed to not persevering in their lobbying efforts, than to importers, who said they had sensed the political winds on China shifting. The U.S. has lost 312,500 textile and apparel manufacturing jobs since President Bush took office in January 2001.
Sources said the decision to limit Chinese imports of knit fabric, dressing gowns, robes and bras was less important in its specifics, than it was as a sign that further limitations on China might be in the cards. The safeguard measure, which was included in the U.S.-China bilateral trade deal that cleared the way for China’s WTO admission in 2001, said the safeguards would limit the growth in Chinese imports to no more than 7.5 percent above the previous year’s level.
Since the quotas on those four categories of goods were lifted in 2002, as part of the 10-year quota phaseout that ends Jan. 1, 2005, Chinese shipments in those categories have grown exponentially as China leaped to be the number-one supplier in those categories. All that means that if the safeguard quotas use the year ended Sept. 30 as the baseline, for the following year China’s shipments of knit fabric to the U.S. could be more than 3,000 percent higher than it had been in 2001, the last year the quotas were in effect. Shipments of dressing gowns and robes could be more than 1,000 percent higher than they were while quotas were in effect, while shipments of bras could be 425 percent higher.
“The particular categories they took the actions on are relatively minor, but it indeed sets the stage for action to be taken in the future,” said Keith Hull, president of marketing and sales at Graniteville, S.C.-based domestic denim maker Avondale Mills Inc.Referring to the current administration, he said, “I think it’s going to be positive and they’re finally getting the message that it is important to our industry, and taking some constructive action. I see some genuine interest to make sure the textile interests are taken care of.”
Andrew Parise, president of New York-based Texfi Marketing, which deals in domestic and imported fabrics, said of the safeguard decision, “That is sending some sort of signal. I think there’s going to be some caps on certain categories. We just don’t know at this point.”
Rick Darling, president of Li & Fung USA, the New York branch of the Hong Kong international sourcing powerhouse, said he had expected the decision.
“Our thoughts on this for the last year and a half or so was the U.S. would replace quotas with some restraining system that would be some form of protectionism, which is exactly what we’re seeing,” he said. “From a business standpoint, our take on it is it will continue. Categories will continue to be challenged, both on a safeguard basis and on an antidumping basis. We’re not going to see, as it relates to China, a wholesale reduction of quotas.”
China has been the particular target of the ire of U.S. manufacturers for several reasons. Its apparel and textile export growth, on a dollar-for-dollar basis, has dwarfed that of most other nations. For the year ended Sept. 30, according to Commerce Department data, its shipments to the U.S. were up 38.5 percent, to $11.04 billion, making it the U.S.’s leading supplier, with a 14.3 percent market share and an almost $3 billion lead on its nearest competitor, Mexico.
While China was not the fastest-growing supplier for that period — that honor goes to Ghana, which saw its shipments surge by 1,346.5 percent, to $3.9 million — the combination of its large size and fast growth has caught the attention of the apparel sourcing industry.
Domestic manufacturers have criticized many Chinese policies that they claim amount to illegal export subsidizes. Among them:
That China’s fixed yuan-to-dollar exchange rate undervalues its currency by as much as 40 percent.
That state-owned Chinese banks lend money to unprofitable manufacturers they know will not be able to pay the loans back.
That China rebates much of its value-added taxes to manufacturers of exported goods. China plans to reduce the amount rebated beginning in January.
Importers said the political controversy has convinced them to avoid becoming overly reliant on Chinese suppliers, at least for the time being.
“The interesting aspect is it [the political heat] seems to be focused on China and only on China,” said Darling of Li & Fung. “There is very little discussion on other WTO member countries. So it provides a lot of opportunity for countries that aren’t the target of what appears to be U.S. protectionism.”
The issue of China’s potential to dominate the textile and apparel industry has started to catch the attention of government officials and executives in other developing world nations that are heavily dependent on textile and apparel exports as a source of foreign currency.
Another puzzle that apparel importers will face next year, which could benefit domestic manufacturers, is how to handle the quota carry-forward issue. As quotas fill toward the end of a year, importers whose goods would otherwise be embargoed will often work with their exporter suppliers to carry forward some of the next year’s quota allocation, to allow the shipment to move on to the customer. To use some of the next year’s quota, the exporting country typically must also agree to reduce its quota allocation for the next year by an additional penalty amount above the amount of quota being used.
At the end of 2005, in theory there would be no carry-forward available, since there will be no 2006 quota allocations to borrow against. That has many importers predicting that there will be supply-chain chaos at the close of 2005.
“I can tell you that nobody…has a firm handle on what the impact is going to be,” Darling said. “It will be probably the most chaotic six months that most of us in the sourcing industry will ever see in our careers. Smart sourcing programs are balancing their sourcing in both hemispheres and in nonquota countries, as well as quota countries.“Many will be shipping a little early, which frankly is a double-edged sword, since it can mean that we bring on our problems faster,” because it would lead to a faster use rate on quota, he suggested.
Some sources suggested that quota runout problems at the end of 2005 could lead to some last-minute orders being diverted to domestic suppliers.
James Gutman, president of New York-based Pressman-Gutman, a fabric importer that also provides full-package garment production services, said he’s not yet sure how he’ll handle any carry-forward issues.
“I don’t know how that’s going to play out,” he said. “People probably at the end of the year will want to not ship because they would like to ship without quota costs.”
In most major supplying nations, quota rights are traded essentially as commodities and the cost of quota can sometimes equal the cost of producing a garment.
“The last six months of the year is going to be a nightmare, between the election and all the implications that will have...and the imposition of the safeguard quotas,” Gutman said. “It’s a complete black hole.”
Until then, mill executives and textile importers are still faced with the issue of how to handle the high cotton prices. While they said that prices have started to ease in recent days, cotton still remains at a high premium over its price last year. Given the overall deflationary nature of the apparel industry, they’ve had a hard time passing those costs along.
Asked how he was handling the increases, one executive quipped, “We’re in denial.”
Avondale’s Hull said, “The prices are for real and there’s going to have to be some pass-through. I don’t think there’s a mill in the world that can have these types of raw-materials price increases and just absorb them.”
Asked if he’d been able to pass along any price increases, he said, “We’ve been able to — to some degree, in some areas. But the advice we’ve given our customers is to keep things as close to the vest as they can and just wait and see what happens. If it comes back off [the price’s current high] then we’ll be in much better shape. If it stays high, it will be quite a challenge for the supply chain.”Likewise, Gutman said, “We’ve been able to pass along some on the cotton side, because everybody knows that this is a reality, but not the full extent of it. It’s going to be a struggle, given the economic environment.”
Noting that about 70 percent of the fabric Pressman-Gutman sells comes out of China, Gutman added, “With the reduction in the refund of the value-added tax in China and the pressure on currency, we’re seeing a lot of cost increases, which are bad for us.”
Despite the cost pressures, executives said they have seen sales pick up somewhat in recent weeks. With major companies returning to solvency and the government seemingly more interested in protecting the domestic industry than it has been in many years, executives said there’s some reason to expect a better year in 2004.
But given the many agonizing years that the textile industry has been through, fewer were willing to predict big things.
Michael Herzon, director of women’s wear at the New York office of the Turkish woolens mill Yunsa, said, “Everybody is still very cautious. Right now, if something doesn’t sell one season, [customers] just never go back to it. The retailers have everybody so paranoid that...if they don’t sell something one season, they never want to see it again.”
Avondale’s Hull said, “It’ll probably take two to three months of some positive business and positive news to get people in a more optimistic mood. There’s a strong possibility that next year will be better than the past few years we’ve had. But you’re not going to have people with a warm feeling about what may happen next year. It’s just not the way we’ve been conditioned.”
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