NEW YORK — The end of the quota system next year is expected to bring a marked decline in apparel prices, ranging anywhere from 5 to 50 percent, importer executives and market observers increasingly agree.

There is less consensus on the question of who will benefit from those price declines.

Some prominent executives held out the hope that lower costs wouldn’t have to translate dollar-to-dollar into lower retail prices, but rather would allow vendors and retailers to improve margins. Others suggested that, given the highly competitive and price-promotional nature of today’s retail environment, it’s likely that all the cost savings will be given up in the form of markdowns and price cuts.

“That’s the $64,000 question and I don’t have the answer to that,” said Peter McGrath, president of Plano, Texas-based J.C. Penney Purchasing Co.

McGrath said he’s expecting a 17 to 18 percent decline in prices after the nations of the World Trade Organization drop their quotas on textiles and apparel on Jan. 1, but he said it will take time for that to occur.

“If the expectation is that it will be an immediate thing, I think people are mistaken,” he said. “We see this happening over a 24-month period.”

There are two forces that will contribute to the expected price declines, sources said. One is that, today, importers have to pay for access to quota rights, which typically account for 15 percent of a garment’s cost, but can be much higher. The cost of quota rights varies widely by category, country and time of year, but it is a simple cost that most importers figure can be left out of their equations next year.

The second and more complicated force is increased competition. The country-by-country system of quota allocations has essentially assigned market share to most of the world. When the quotas are taken away, orders are expected to shift into a handful of countries that offer the best combination of low labor costs, strong infrastructure, ready supplies of raw materials and responsive customer service.

China, India and Pakistan are repeatedly cited as likely winners on this front, with other Asian nations and some Central American countries seen as falling into place behind them. Sources noted that orders will also concentrate in the hands of the most efficient suppliers within each country.In China particularly, investors have been building apparel plants in anticipation of the end of quotas, and that increase in supply, coupled with the relatively flat demand for apparel in many major markets, is expected to drive prices down further.

“In the case of China, you will see an abrupt decline in prices as quota charges go away,” said McGrath. “That will impact initial pricing around the world.”

William Fung, group managing director of the Hong Kong-based sourcing powerhouse Li & Fung Ltd., summed up the situation this way: “China’s problem is that there is overcapacity and the overcapacity is caused by the prospects of China.”

In a report on the future of the Mexican apparel industry, consultant David Birnbaum of Hong Kong-based Third Horizon Ltd., wrote that the prices of Chinese garments in key categories will fall by 40 to 50 percent in 2005.

Willie Tan, executive vice president of Luen Thai International Group Ltd., a multinational apparel contractor with its headquarters in Hong Kong and production in China, the Philippines, Mexico, Cambodia and the Northern Mariana Islands, said he expects the cost savings to be passed along to the consumer to some degree.

In an e-mail interview, he said retail prices would “definitely” decline as a result of supplier price declines, but he also hoped that vendors would be able to keep some of the cost savings to boost profits.

“Deflation has to stop, as it is not normal,” he said.

Penney’s McGrath said he also hoped retailers would be able to avoid passing on the full extent of price declines. He said the apparel industry’s approach to this change should be to ask itself: “What can we do to enhance the product, to give greater value to the consumer?”

Fung, who spoke in a conference call last month sponsored by the investment bank Lehman Bros., said it’s likely that most of the cost savings will be passed along to consumers.

“This whole price issue will be a major issue because, obviously, it affects everybody’s business as costs go down. Nobody knows how to deal with a deflationary environment yet,” he said. “You basically have retailers whose business model is to pass on all the cost savings to the consumer, so, to the extent that you base everything off the actual cost of the merchandise, there will be discounters, there will be merchants, who will basically pass the cost on. We expect the whole price structure of apparel to drop.”James Gutman, president of the New York converter and full-package garment supplier Pressman-Gutman, said, “Retailers will give a lot of it back to the consumer, because they’ll start competing on price even more, as they’ll have more room. They’re going to look to cut us and our customers back. The temptation to discount will be so great.”

The question of continuing price declines is a critical one to retailers and vendors because with margins tight in much of the industry and fixed costs significant for many businesses, substantial declines in selling prices and no major margin improvements would mean that companies would have to sell more merchandise to prevent profits from declining. With consumers increasingly turning their attention to other consumer goods, like electronics, getting people to buy more clothing has proven a difficult challenge.

“I don’t like deflation,” said Fung. “The only one that benefits from deflation is probably Wal-Mart.”

Gutman said, “Every time they reduce price, they have to sell more units to make the same dollars, and the units are not increasing all that much.”

Some sources also suggested that it’s possible Asian prices won’t drop as sharply as many expect.

“I’ve got a fair degree of skepticism that you’ll see prices fall that much,” said Keith Hull, president of marketing and sales at Graniteville, S.C.-based Avondale Mills Inc., which produces denim and khaki fabrics in the U.S. “The Asians are getting business now on certain price points and I don’t think they have to be 15 percent cheaper.

“As I’m constantly reminded on both directions, the underlying costs don’t necessarily determine market price. The market determines the market price,” he said, referring to the inability of U.S. mills to raise their prices over the years simply because expenses rose.

Sources have also speculated that some overseas suppliers appear to sell garments at cost and make their profits solely on the quota rights. Companies that had adopted such a model likely would be unable to sustain themselves if they cut their prices by the full amountthey had been charging for quota.

Gutman also noted that the Chinese government has made money over the years by selling quota as well. He pointed out that China last month reduced the export-tax rebate to 13 percent from 17 percent, a move that he called “the first salvo in what I think is a subtle way the [Chinese] government is going to recoup some of the revenue they’re going to lose from the loss of quota.”China is seen as the nation most likely to drive a decline in prices, but sources also pointed out it appears increasingly likely the U.S. will move to limit Chinese imports. The Bush administration last year decided to place temporary safeguard quotas on three categories of Chinese imports that had surged after quotas were lifted on them in 2002, a move allowed under the terms of the U.S.-China bilateral deal that paved the way for China’s entry into the WTO.

“The probability of the U.S. reimposing some sort of restriction on China after 2005 seems to be very high,” said Fung.

The U.S. textile industry is seeking across-the-board restraints on China in 2005. Euratex, a trade organization representing Europe’s textile industry, last month asked the European Commission to consider placing limits on Chinese exports. A move by the U.S. or EC would serve to ameliorate some of the pressure on prices.

Sources have also pointed out that as China develops economically, it will become a more important consumer market.

“A lot of companies would be wise to take advantage of their sourcing in China to gain access to that market,” said Ira Kalish, global director of Deloitte Research.

Some have raised the theory that as China climbs further up the development ladder, wages and operating costs there will rise. Sources pointed out that even today the wages of China’s garment workers are not the lowest in the world, though the efficiency of its operations is widely praised.

“China is not that cheap, as people predicted, as compared to Indonesia and Cambodia or even the Philippines,” said Luen Thai’s Tan.

However, China’s population is massive — 1.29 billion people live there and sources estimate that 70 percent of the population still reside in rural areas. Millions are now migrating into the cities. In addition, China’s many state-run enterprises, which had long been managed with the goal of maximum employment, are now privatizing, and massive layoffs are resulting. These two factors suggest that finding a workforce willing to work for the relatively low wages common in the garment industry will be no problem for quite some time. Kalish has estimated that it will 20 years before China prices itself out of the apparel business.“There seems to be an unlimited amount of labor and as such there is significant overcapacity” in China, Fung said. “It’s not a pretty situation. There’s a lot of real cutthroat price competition going on in China as a result of the overcapacity.”

To access this article, click here to subscribe or to log in.

load comments
blog comments powered by Disqus