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The Development Dilemma

NEW YORK — As U.S. imports of Chinese apparel and textiles continue to skyrocket — up a combined 65.4 percent in the first quarter — it’s becoming increasingly clear that the world’s most populous country is going to be...

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J.C. Penney Co,’s Peter McGrath said that in 2005, “Ultimately, some countries will struggle...The question is can they get to world-competitive class.”

WWD Staff

NEW YORK — As U.S. imports of Chinese apparel and textiles continue to skyrocket — up a combined 65.4 percent in the first quarter — it’s becoming increasingly clear that the world’s most populous country is going to be in a position to dominate global apparel manufacturing even further when quotas are lifted in 2005.

China’s growth, which represented more than a third of the overall increase in U.S. imports in the first three months of the year, has come at the expense of dozens of developing countries that rely heavy on apparel exports to earn foreign currency. That trend has some industry executives starting to wonder what will happen to economies in Africa, Latin America and Asia in 2005 if they can no longer compete in the garment industry, which, for a few decades, has been a prime route to industrialization.

The China factor is becoming a topic of concern for apparel executives from around the world.

“China, it’s everybody’s worry, especially for us who work in the apparel industry,” said Carlos Arias, executive vice president of Koramsa, a major Guatemala City-based garment manufacturer.

Arias said he doesn’t believe Guatemalan apparel producers can compete with Chinese prices, but explained that companies are focusing on the speed advantages inherent in local production, which they contend can outweigh the cost disadvantages.

For the year ended March 31, Guatemala shipped $1.73 billion worth of garments and fabrics to the U.S., a 10.4 percent increase over the previous year, which represented a 2.3 percent stake of the $74.95 billion in total imports, according to the U.S. Commerce Department.

By comparison, China in that year shipped $9.77 billion worth of textiles and apparel, giving it a 13 percent market share, the leading position.

Arias noted that apparel, textile and related industries in Guatemala now employ more than 200,000 workers and that Guatemala’s exports of apparel now exceed those of sugar and coffee. He said if Guatemalan garment factories lose business in 2005, those workers would have few other opportunities.

“Guatemala is still a country with a lot of unemployment,” he said. “There are not a lot of opportunities for people without an education. Our economy is still very dependent on apparel. We’re still trying to migrate from apparel to what’s next.”

This story first appeared in the May 20, 2003 issue of WWD.  Subscribe Today.

Guatemala’s apparel exports to the U.S. represented 59.4 percent of its shipments to the U.S. for the year ended March 31, while China’s represented only 7.4 percent of its trade with the U.S.

The labor-intensive apparel manufacturing industry has served as a stepping stone for economies around the world. Many of Asia’s major economies today, including Japan, South Korea and Hong Kong, used the industry as a step on their path to industrialization. While they continue to be major manufacturers of apparel today, they have also diversified their economies into other sectors, like technology and higher-end manufacturing.

Importer executives said Arias and his colleagues throughout the Caribbean Basin don’t have reason to panic. They agreed that quick transit time is a competitive advantage — a delivery can make it from a Central American factory to a U.S. distribution center in a matter of days, compared with weeks for deliveries from Asia. They also noted that the Caribbean Basin Trade Preference Act exempts qualifying apparel imports from the region from quotas and duties. Tariffs on apparel and textiles can range from 15 to 35 percent and represent a significant portion of the cost of a garment.

But they are worried that many other nations will not be so lucky.

“There is going to be a dramatic economic problem in some countries,” said Jeanne Atkinson, a consultant who works with nations that are seeking to develop apparel industries and with the U.S. Agency for International Development, an arm of the State Department. “It’s beginning to show, where U.S. business is less now.”

Atkinson is worried that the governments of many developing countries were not taking seriously the possibility that they would lose apparel manufacturing business, and therefore jobs, in 2005. Industry executives in some developing nations are starting to voice dire concerns about the problem.

At a recent European Union trade summit, Rassel Hassan Kadir, managing director of Warda Textile Mills of Bangladesh, said he worried that his country would face “social anarchy” in 2005, if the dropping of quotas on textiles and apparel among the 146 World Trade Organization members results in a major loss of business. He said the industry currently employs 10 million people in his country, and said he feared Bangladesh would not be able to compete with major players, such as China, India and Pakistan.

His concern is reflected in statistics that show Bangladesh’s shipments of textiles and apparel to the U.S. were off 5.9 percent to $2 billion in the year ended March 31. That compares with a 46.7 percent increase for China. Apparel and textiles made up 93.6 percent of Bangladesh’s exports to the U.S., which represent more than 25 percent of its total exports.

At the same summit, WTO director-general Supachai Panitchpakdi said he feared the end of quotas will leave the economies of many developing countries “highly vulnerable,” unless some steps are taken to protect them.

Some representatives of developing and developed nations have started to band together to agitate for an extension of the quota system, though negotiators from the U.S. and many other countries have strongly argued in recent years that the agreement, which has been phasing out quotas over a 10-year period to end Dec. 31, 2004, cannot be changed. (See related story, page 19.)

Apparel importers acknowledged that many countries that today are major suppliers of apparel and textiles to the U.S. will face severe challenges in 2005. The quota system, which closely regulates how much and what countries can export, has prompted importers to spread their orders around the world just to be able to fill store shelves. As the quota system comes to an end, importers are focusing in on a smaller group of supplying nations, a strategy they said offers significant logistical advantages.

“Ultimately, some countries will struggle,” said Peter McGrath, president of J.C. Penney Purchasing Corp., of Plano, Tex. “The question is can they get to world-competitive class, both in terms of cost and time. Within countries, some suppliers will rise up and others will fall.”

McGrath and other importer executives sketched out four broad factors that would influence what countries were likely to succeed, though they emphasized that buying decisions are made on a supplier-by-supplier basis. They are:

Low-cost production remains paramount: U.S. apparel buyers started shifting their orders abroad in an effort to cut prices and that concern remains a major driver. But executives noted that low cost is a product of both wages and efficiency. A country with a skilled population of sewers can sometimes be cost-competitive even if its wages are higher than another country with an unskilled workforce.

Time is still money: Particularly when the economy is spotty, retailers like to be able to delay their orders as long as possible. For time-sensitive and fashion-driven goods, manufacturing in a nearby country pays off if it means buyers can wait an extra three weeks before they need to commit to an order.

Infrastructure is critical: A factory can have a highly skilled workforce with state-of-the-art machinery, but if it has to shut down twice a week because the power goes out or if its containers miss their connections at the port because of poor roads, it has serious competitive disadvantages.

Verticalization will be key in 2005: Today, apparel companies take fabric that is made in China and ship it to Africa to be cut into garments or take Indian fabric and move it to Sri Lanka because of quota concerns and to take advantage of preferential trade agreements. In 2005, executives agreed, there will be no reason to add to the time it takes to fill an order by having rolls of fabric sit on a boat for a week between being woven and being cut. Countries that do not have their own textile industries are going to be at a severe competitive disadvantage in 2005.

When executives talk about regions that are likely to lose business, they typically start with sub-Saharan Africa. The Africa Growth & Opportunity Act of 2000 extended duty- and quota-free treatment to that region, leading to a spurt of interest and some investment in new factories. But a provision in the act allowing lesser-developed countries to import fabric from anywhere in the world has meant that investors have had little incentive to build new mills.

“Africa will lose out,” predicted Nancy Marino, senior vice president of worldwide sourcing and brand development at Sears, Roebuck & Co., based in Hoffman Estates, Ill. “They haven’t even put fabric mills in, in Africa.”

Africa faces something of a catch-22. Executives said countries that are seeing growth today but rely on foreign fabric, including Lesotho and Kenya, are likely to be vulnerable in 2005. But Mauritius, which has a longer-established, vertical industry, is also facing competitive pressures. Last week, one major Mauritian manufacturer, Novel Denim Holdings Ltd., which has its corporate headquarters in Hong Kong, said it had to close one of its five factories and had concerns about how Mauritian manufacturing could hold its own with Asia.

“We will have to focus on innovative, higher-value products to compete with manufacturing from countries like China, India, Pakistan and Vietnam,” said K.C. Chao, president and chief executive officer of Novel Denim. “We are also exploring opportunities in some of those countries, which may either supplement or replace our existing production facilities.”

Mauritius’ economy is growing beyond the apparel industry, though, with tourism and services taking on a more prominent role. Many Mauritian apparel manufacturers have begun importing workers from China to work in their factories.

Atkinson, whose New York company is called Global Marketing Strategies, said most of the sub-Saharan countries “have everything against them, to tell you the truth, even now when it’s duty- and quota-free. They face distance, inefficiency and a lack of textile mills.”

Sourcing executives also said Asian countries with well-established apparel industries but higher wages will have a hard time competing with China in 2005. Several sources cited the Philippines, Singapore and Sri Lanka, respectively the U.S.’s 12th, 20th and 41st-ranked sources of imported apparel and textiles, as particularly vulnerable.

“Countries like the Philippines and Thailand, that have moderate labor rates and longer lead times, I think will be struggling,” said Penney’s McGrath.

Apparel executives have been revamping their supplier structures for a couple of years in an effort to position themselves for 2005, generally increasing their presence in China and pulling back from other countries.

Many of the U.S.’s top sources of imported textiles and apparel have seen their shipments decline during the past few years. Of the current top 15 countries, eight have seen their shipments slide over the past year: Mexico, Hong Kong, South Korea, Indonesia, Thailand, Taiwan, the Philippines and Bangladesh.

One country that’s gaining ground is Vietnam, since the U.S. established permanent normal trading relations with it last year. For 12 months, Vietnam has shipped $1.96 billion worth of textiles and apparel to this country, more than 20 times as much as the previous year. This month, quotas regulating Vietnamese imports took effect, which will sharply curtail that growth rate. Since Vietnam is not a member of the WTO, those quotas will continue to regulate its trade in 2005.

For countries that count heavily on apparel exports to generate foreign exchange, a loss of business to China could be disastrous, according to some observers.

“I think 2005 will be a disaster for the Americas, Africa, the rest of Asia, because I think China will swamp them,” said Bruce Raynor, president of UNITE.

Raynor said he believed without quotas, China would dominate the apparel business like it dominates the shoe trade. According to the Commerce Department, in the first quarter China shipped 446.3 million pairs of shoes to the U.S., representing 80.5 percent of all imports in the sector.

“We have a very unusual situation, where we have one country that is so dominant that they can take all of worldwide production,” said Raynor, adding that if China grows to dominate the apparel industry in the same way, it could destroy the economic opportunity that apparel manufacturing presents to many developing nations.

“The whole idea of economic development will be lost,” he said. “Take Central America, where the apparel industry has done some things, but the wages are low, the workers don’t have unions, living conditions are terrible. But now when they pull the jobs out, it’s going to be worse. It’s not like they’ve now gotten beyond that and they’re going to make cars in Honduras. That’s not going to happen.”

The U.S. is the primary export market of many Central American and Caribbean Basin countries, which generate half or more of their exports in apparel.

U.S. apparel executives said they’ve invested a lot of time in developing a manufacturing industry in the Caribbean region and said they won’t be pulling out of there in 2005. The proposed Central America Free Trade Area, which would extend NAFTA-like benefits, would also boost the region.

“We really feel we spent a long, hard time in cultivating our vendor bases,” said Marino of Sears. “They have really changed, to be competitive from a world scale as well.”

Still, she said areas that are now developing apparel industries will have a hard time ramping up to be competitive in time for the end of quotas. Marino pointed out that sourcing decisions are typically made six months to a year in advance, which means that beginning with next year’s orders, it will start to be clear which countries are going to win and lose in 2005.

Penney’s McGrath said the main strategy that developing nations will have available to them post-2005 in preserving their apparel industries will be working out free-trade deals that give them advantages over China and other WTO countries.

“If you can craft out an agreement…that would made a country more attractive,” he said.

The Bush administration currently has an ambitious agenda of free-trade agreements, with more than 10 bilateral and multilateral deals in the works. But Atkinson said many governments aren’t being aggressive enough in preparing their industries to compete post-2005 because they don’t understand the scope of the problem they’re facing.

“There is not an acknowledgement by these governments of the importance of this,” she said.

Sources said investing money in helping companies to modernize and market themselves internationally is as important, if not more so, than pursuing trade deals.

Marino said: “What I find ironic is I don’t see the bar being raised, even by some of these small countries. You’d think those were the guys that would be saying, ‘What am I going to do?’ But it’s been very quiet.”

Some fear that if 2005 brings a sharp drop in apparel business in developing countries, it could lead to widespread social instability. That concern has attracted the attention of the State Department, which since the fall has been working on a study of what the economic fallout of 2005 might be in the developing world. A State Department source said the study is not ready to be released to the public.

“If 2005 is permitted to happen, it will hurt the developing world and us,” said UNITE’s Raynor. “It means political instability in Central America, Latin America and Africa. The trend in Latin America now is left-wing governments and that’s what you’ll see, people turning to someone to change things. And they’ll see the U.S. as the enemy because we’ve allowed this to happen.”

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