A year and two days remain until the textile industry experiences the biggest change in the apparel-production business in more than half a century.
On Jan. 1, 2005, the 146 nations of the World Trade Organization will end the quota system that has regulated the international trade in apparel and textiles for more than three decades. That system allowed importing nations to determine exactly how much and what fabrics and garments they would allow other countries to ship them, and had a major role in determining where garment factories were built and what they made.
The only change in apparel manufacturing over the past century that might rival the importance of this development is the rise of synthetic fibers in the mid-20th century, and it is certainly the most dynamic and controversial change in sourcing since NAFTA was initiated in 1994.
The quota system worked to divvy up the market share pie of wealthy nations like the U.S. and those of the European Union among the often poor nations that tend to rely on apparel manufacturing as a stepping stone on the path to industrialization, similar to what occurred in America and Europe in the early 20th century.
It also forced importers to spread their buying dollars across dozens of nations around the world, and in most cases, to pay more for garments — both directly in the form of quota fees and, importers contend, indirectly in the form of market inefficiency.
Industry executives and observers agreed that, after the quotas are lifted, apparel production is likely to concentrate in a few countries that can offer large pools of low-paid labor and well-developed textile industries. China and India are often mentioned as the most obvious winners, though some observers contend that the speed inherent in local production will give Latin American nations a leg up in the U.S. market.
Domestic mills have been particularly concerned about the potential of a strong surge of goods out of China in 2005. Mill officials and executives from other manufacturing industries argue that China’s managed exchange rate and industrial subsidies give its exporters an unfair leg up.
In testimony to Congress earlier this year, American Textile Manufacturers Institute acting president Cass Johnson, said, “As Chinese and other Asian currencies have been devalued, prices for textile and apparel products from these countries have fallen by as much as 38 percent. With profit margins below 5 percent, a 38 percent price drop by your competitor pretty much puts you out of business.”Those concerns prompted domestic textile concerns to mount an aggressive and ultimately successful campaign to get the Bush administration to impose temporary safeguard quotas on three categories of Chinese imports — a step allowed by the U.S.-China bilateral trade deal that cleared the way for China’s WTO entry.
Sources agree it’s highly likely the U.S. will consider some kind of blanket safeguard action in 2005, rather than waiting for a flurry of petitions on dozens of individual categories.
Following the safeguard decision, Grant Aldonas, undersecretary of international trade at the Commerce Department, said, “If the industry files so many cases, it could be more disruptive to trade….It may be there is a need for a broader agreement.”
Government officials at smaller developing nations, particularly in Africa, which have developed garment businesses in recent years, have begun to express concerns that their economies will suffer if they lose market share to China in 2005. Representatives of Botswana and Mauritius, as well as Bangladesh, took to the floor of the WTO this month to express their concerns.
U.S. officials also have acknowledged that many developing nations are ill prepared for the changes.
“Most of these governments have not a clue of what they’re going to do,” said Deborah Malac, deputy director in the office of agriculture, biotechnology and textile trade affairs at the State Department. “They just don’t react that quickly.”
At the same time, executives at major U.S. textile mills, several of which have emerged from bankruptcy in recent months, are hustling to make remaining strategic moves at their companies to prepare for 2005.
Next year will mark the exit of DuPont from the synthetic fibers business, a category the firm essentially created with the invention of nylon in 1935.
Last month, DuPont agreed to sell its $6.4 billion fibers portfolio, now known as Invista, to the Wichita, Kan.-based petroleum giant, Koch Industries Inc. The companies expect the deal, which was valued at $4.4 billion, to close during the first half.
Koch officials have said they plan to merge Invista with the KoSa polyester business, a move that will create a $9 billion fiber powerhouse and in some ways reassemble the polyester-nylon-spandex triumvirate that DuPont’s fiber operations was for most of its history. Over the past five years, in an effort to cut costs and focus on more profitable operations, DuPont had shed most of its polyester portfolio.The open question remains how the acquisition will change Invista’s culture. Wilmington, Del.-based DuPont has gone through several major rounds of restructuring in recent years, shedding its Conoco oil business, declaring itself focused on the life sciences and later broadening that to include all science.
Invista management has said they believe the move will be a positive one for the textile industry. The day the deal was revealed, Invista president Steve McCracken — who Koch has said will keep his post after the acquisition —said, “We have more clarity than we’ve had in some time….Koch Industries is obviously committed or they wouldn’t be writing the big check.”
Executives said it’s likely that Invista’s headquarters will be relocated to Wichita, which raises the question of how many corporate posts will go with it and whether there will be a significant change of personnel. The day the deal closed, a Koch spokeswoman said substantially all of Invista’s 18,000 employees worldwide would be offered positions with the new company. Koch has since named a board for the new unit, which is to include McCracken and seven Koch officials.
The KoSa business was formerly Hoechst’s polyester business, then a joint venture between Koch and the Mexican conglomerate, Imasab, which Koch bought out in 2001. Industry sources pointed out that through those deals there has been an extensive amount of staff turnover at KoSa, and wondered if the pattern would repeat itself as the Invista operations were integrated into Koch.
The Politics Of Trade
The U.S. textile industry will have its eyes on trade and politics in the New Year, when trade legislation and free-trade agreement negotiations will be judged against a backdrop of 2004 electioneering.
At center stage will be the recently negotiated Central America Free Trade Agreement, covering four countries in the region. CAFTA will be heading to Congress for a vote, likely by early spring. The pact covers El Salvador, Honduras, Nicaragua and Guatemala, which now supply 13.6 percent of all apparel imported into the U.S.
Scoring a victory in the House, CAFTA’s first stop, is expected to be a struggle. The issue of trade’s impact on U.S. jobs is ablaze on Capitol Hill, where the entire House and one-third of the Senate are up for reelection in November.Anti-CAFTA lawmakers, including several GOP members from textile-producing states, hope to forge alliances with members from other industries, including agriculture, to defeat the first of many free-trade pacts the Bush administration hopes to complete. CAFTA supporters, however, argue the pact will help boost demand for U.S. textiles in the region.
Costa Rica, which pulled out of CAFTA talks, and the Caribbean nation the Dominican Republic — which together account for almost 6 percent of the U.S. apparel imports — might be annexed to the pact in time for the Congressional vote.
Several factions within the flagging domestic textile industry are bent on defeating CAFTA because they maintain it makes too many allowances for garments to receive duty-free treatment even if they’re made from non-Central American or U.S. textiles. However, there’s a contingent in the textile industry with production in Mexico supporting CAFTA. The agreement would allow certain fabric from NAFTA partners Mexico and Canada to be used in Central American apparel receiving U.S. duty breaks.
American Textile Manufacturers Institute chairman James Chesnutt, who also serves as president and chief executive officer of yarn market National Spinning Co., told members of Congress in a statement last week, “Defeating this agreement will be a top priority for the textile industry and its workers in 2004…On this vote, you can either be on the side of your workers or you can be against them. There is no middle ground.”
Industrialist Wilbur Ross, the owner of Burlington Industries, is a textile voice that has supported the CAFTA compromise.
The textile industry will also be eyeing legislation renewing duty-free breaks for apparel produced in 19 least-developed sub-Saharan African countries that are allowed to use fabric from outside the U.S. or Africa — which in practice means fabric imported from Asia. These countries were given a special textile-origin exception under the Africa Growth & Opportunity Act of 2000 and the exception expires in December. The extension is expected to be granted since there is strong bipartisan support for AGOA and the region’s apparel shipments only account for 2 percent of all U.S. apparel imports, thus limiting U.S. textile industry concerns.
Another knotty trade issue in Congress next year will be legislation repealing an export subsidy now enjoyed by U.S. multinational companies operating abroad. The World Trade Organization has deemed the subsidy to be anti-competitive and gave the European Union the OK to start levying retaliatory duties Jan. 1, starting at 5 percent on $4 billion worth of U.S. exports, including textiles and apparel.U.S. textile makers want the subsidy to be quickly repealed to avoid prolonged punitive duties, but also want a U.S. manufacturing tax break to be enacted to replace the multinational tax break.
Other political issues facing the textile industry include the ongoing free-trade talks between the Bush administration and an array of countries. The White House hopes to pen more agreements next year, with nations such asMorocco. But with the November election looming, it’s unclear whether the administration would immediately seek Congressional approval on any new deals.
The administration in any event will remain under pressure by the textile and other industries to limit imports from China and to pressure the Chinese to allow the value of its currency to be set by global markets. The Chinese yuan is often cited as being undervalued, thus making prices of exports sold in the U.S. unrealistically low.
The Ross Factor
One of the biggest surprises on the textile scene this year has been the emergence of Wilbur L. Ross as a major player.
Ross, who is chairman of the New York-based investment concern W.L. Ross & Co., startled the industry in February when he stepped up to challenge Warren Buffett’s Berkshire Hathaway’s $579 million bid for then-bankrupt Burlington Industries Inc. In a textile industry that was saturated with bad news, observers had been surprised to see anyone, let alone an investor of Buffett’s stature, step up and offer a significant sum for a bankrupt mill. The idea that someone would challenge the offer had apparently not occurred to anyone.
That is, to no one but Ross, the head of Burlington’s creditors committee, who immediately derided the offer as inadequate. He eventually put together a $614 million deal in which his firm bought Burlington’s apparel fabrics business and Mohawk Industries purchased Burlington’s Lees Carpet business.
He closed on the Burlington acquisition in November, and immediately started cleaning house, naming himself chairman, appointing Joe Gorga, a relative newcomer to the firm, president and chief executive officer, and giving most of the company’s top-level executives their walking papers.
Ross has also made a $90 million bid for Cone Mills Corp., which filed its Chapter 11 petition in September. That bid was challenged by some minority shareholders of Cone and Ross has since agreed to hold off until January to see if anyone else comes forward to top his offer.If he is successful in acquiring Cone, Ross has said he expects to merge it into Burlington. That’s a model he followed in creating the International Steel Group, a company he created out of the wreckage of three bankrupt steel companies.
Ross said there are many advantages to combining companies. “There is also a lot of duplicative overhead, that, for starters, can be cut,” he said. “Most important of all, you become more important to your customers as you get a bit bigger.”
While Ross has been very active politically, he has not yet made clear what his specific plans are for Burlington, beyond a generalized plan to cut costs, improve technology and put more muscle into marketing.
The test ahead for Ross will be whether he can overcome the market challenges that have crushed many of Burlington’s competitive rivals.
That’s a point Ross acknowledged when he bought the company: “The big question will be, ‘Were we right?’”
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