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Winners and Losers

Assessments of 28 key manufacturing countries.

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NEW YORK — When sourcing executives talk about countries that are likely to gain or lose apparel business after trade quotas are dropped, they voice a few universal beliefs.

China and India are most commonly cited as the two sure winners. Most executives also agree that Latin America will retain a significant piece of the U.S. market, particularly if the Central American Free Trade Agreement passes. Conversely, many executives contend that even with the Africa Growth & Opportunity Act in place, many nations in sub-Saharan Africa will be poorly positioned post-2005.

Past those generalizations, though, views vary. Importers do not buy from countries, they buy from particular factories in those countries — and the strength of their relationships and the quality of production from those plants brings out more individualized responses.

Importers generally assert they’ll be reducing the number of countries where they operate after 2005. J.C. Penney Co., for instance, today buys from plants in 53 countries, according to Peter McGrath, president of purchasing. He estimated that the number would drop by half in the coming years.

This means importers will likely have more of an interest in each of the countries where they operate as they transition into their post-quota models. One of the most comprehensive analyses of particular nations’ prospects after the 147 nations of the World Trade Organization drop their quotas on textiles and apparel has been compiled by consultant David Birnbaum of Third Horizon Ltd. In an 87-page report titled “Winners & Losers 2005,” published by The Fashiondex Inc., he rates the prospects of 28 major garment-producing nations.

He grades each country’s industry by assessing three factors: The actual cost of producing goods, the indirect cost savings — such as factories that also offer design and product development services — and development and macrocosts, which account for things like the cost of transporting finished merchandise from the factory to the importer’s distribution center.

The countries fall into four groups:

This story first appeared in the September 28, 2004 issue of WWD.  Subscribe Today.

  • An “A” group of “guaranteed winners” whose advantages of cost, logistics and experience make them clear favorites.

  • A “B” group of countries that have strong garment industries and can succeed if they provide additional indirect cost savings by offering more services.

  • A “C” group of countries that enjoy macrolevel advantages, such as close proximity to key consumer markets or the benefits of trade-preference programs.
  • A “D” group of likely losers with “too little to offer.”,/ul>Each letter group is broken down into three levels. A triple-letter rating, such as “AAA,” generally corresponds to the best prospects in the group; a single-letter rating, such as “D,” generally represents to the worst prospects.

    Birnbaum’s method of rating countries is by no means the only way of looking at the problem. Bruce Rockowitz, president of Li & Fung (Trading) Ltd., the Hong Kong sourcing powerhouse, suggested that one good way of predicting a country’s post-2005 success would be to see how it uses its quota allocation.

    Countries that regularly come close to hitting their quota limits, he said, face strong demand and the potential to grow; countries that use little of their quota are likely being used as backup suppliers.

    “Anybody who utilized their quota up to 90 percent, 100 percent, that’s a restriction,” he said. “Anyone who was unrestricted will probably lose business.”

    Below are Birnbaum’s assessments of 28 key manufacturing countries. Within each group, nations are ordered by the size of their business with the U.S.

    Sure Winners

    Greater China
    Rating: AAA; Current Rank: 1; Shipments: $18.26 billion, +15.8%.

    Birnbaum, along with most observers of the apparel industry, ranks China — including Hong Kong and Macau — as the country most likely to gain significant market share after quotas are lifted. He predicts that China will grow to hold a 27 percent market share in both the U.S. and the European Union. That’s a conservative estimate compared with that of some industry executives, who look to China’s greater than 90 percent share of the U.S. imported footwear and toy sectors as a possible indicator of China’s future growth in apparel and textiles. One reason Birnbaum’s estimate is more conservative is that he notes that more than half of China’s current garment exports are not regulated by quotas — for instance, there are no quotas on silk apparel.

    India
    Rating: AA; Current Rank: 4; Shipments: $3.33 billion, +2.6%
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    The world’s second most populous nation is already one of the U.S.’s top suppliers of imported garments and fabrics, and the report projects that India’s share of the U.S. and EU markets will grow “substantially” after quotas are lifted. Among its competitive advantages are a strong educational system, which has also helped the country to attract more high-tech jobs, and a large cotton farming industry.

    Indonesia
    Rating: AA; Current Rank: 8; Shipments: $2.47 billion, +3.2%.

    This archipelago nation has maintained a strong growth rate in the U.S. market in recent years, and the study predicts Indonesia will continue to gain share in the U.S. market while losing share of the EU market. One reason for Birnbaum’s confidence is that Indonesia recently has gained market share in synthetic-fiber bras, a category where quotas were lifted in 2002, which means it’s stood up to unrestricted competition with China.

    Turkey
    Rating: AA; Current Rank: 19; Shipments: $1.69 billion, -4.1%.

    A nation that straddles the Asian and European continents, Turkey already enjoys duty- and quota-free access to the EU market, which, when combined with its proximity to major European powers, has made it an attractive supply source for the region. Turkish firms have also moved aggressively to boost their standing in the U.S., trying to position themselves as offering quality similar to what Italian mills can offer at prices not much higher than China’s. Turkey has lost ground in the U.S. over the past year, though. Nevertheless, Birnbaum projects that the diversification of Turkey’s industry will allow it to grow rapidly in the U.S. after quotas are lifted.

    Canada
    Rating: A; Current Rank: 5; Shipments: $3.12 billion, -0.7%.

    Canada’s continued strong position as a supplier of garments and fabrics to the U.S. flies in the face of the perception that low wages — and poverty — are prerequisites for a nation to be successful in the apparel industry. Heavy investment in cutting-edge technologies, as well as North American Free Trade Agreement benefits, have allowed the U.S.’ northern neighbor to retain a significant position. Birnbaum predicts that Canada’s share of the U.S. market will rise after quotas are lifted.

    Vietnam
    Rating: A; Current Rank: 9; Shipments: $2.40 billion, +4.7%.

    After the U.S. granted Vietnam permanent normal trade relations status in 2002, Vietnam’s shipments to the U.S. took off, almost tripling in 2003 from their prior-year levels. The subsequent imposition of quotas on Vietnam slowed the growth rate markedly, however, and for the first seven months of this year levels were off by 5.1 percent. Since this nation is not a member of the WTO, its exports will continue to be restrained by quota limits in 2005. Nevertheless, Birnbaum predicts that Vietnam’s industry growth on higher-quality garments will allow it to continue to increase U.S. market share even after quotas are lifted from its competitors.

    Romania
    Rating: A; Current Rank: 56; Shipments: $108.8 million, -10.2%.

    Romania remains a bit player in the U.S. apparel market, but it holds a 7.1 percent share of the EU market, enough to rank it fourth there, according to Birnbaum’s report. The former Communist bloc country is a major producer of tailored apparel, including suits and blazers. The study predicts Romania will gain share in both the U.S. and EU markets when quotas are lifted.

    Morocco
    Rating: A; Current Rank: 62; Shipments: $72.9 million, -11.5%.

    The U.S. currently imports little Moroccan apparel, though that could change if a recently negotiated U.S.-Moroccan free trade agreement is approved by Congress. Morocco is a significant supplier for Europe, and Birnbaum predicts it will gain ground there and in the U.S. next year.

    Tunisia
    Rating: A; Current Rank: 75; Shipments: $38.6 million, +8%.

    Tunisia also plays a bigger role in Europe’s apparel supply chain than it does in the U.S.’ Its factories produce a wide range of goods, from sweaters to suits to bras, and already enjoy duty-free and quota-free access to the EU. With that in mind, the report projects that Tunisia’s share of the U.S. market will grow, while its position in the EU will grow “slowly.”

    Indirect Advantages

    Cambodia
    Rating: BBB; Current Rank: 22; Shipments: $1.32 billion, +7.5%.

    Exceptionally low wages have made Cambodia an appealing location to manufacture apparel of late. Birnbaum calls it “everyone’s flavor of the month” in his report. Still, he notes that so far the nation’s manufacturers have focused on low-cost, simple cotton garments, which are among the most competitive categories in the apparel industry. According to the report, that makes the future of Cambodia’s industry unclear, even though U.S. sourcing executives often include Cambodia on their lists of countries likely to gain from the end of quotas.

    Thailand
    Rating: BB; Current Rank: 13; Shipments: $2.05 billion, -7.3%.

    Thailand’s shipments of textiles and apparel to the U.S. have been slowly declining in recent years, although the nation has remained an advocate of the retirement of quotas. The nation’s manufacturers have been finding ways to reduce their prices, providing a somewhat stabilizing influence. Birnbaum projects that Thailand’s role in the U.S. and EU supply chains will remain stable.

    Bangladesh
    Rating: BB; Current Rank: 16; Shipments: $1.86 billion, -6%.

    This year, Bangladesh has served as something of a poster child for fears that China’s gains after 2005 will wipe out the rest of the developing world. After the International Labor Organization forecast that Bangladesh could lose as many as 1 million of its 1.8 million apparel jobs after quotas are lifted, the country in July sent a letter to the WTO asking it to think about ways of protecting the world’s poorest nations from intense competition. That prompted J.C. Penney to fire back with a missive threatening to pull its orders from Bangladesh. The report projects that Bangladesh’s poor infrastructure and the high cost of operating in the country will cause it to continue to lose ground in 2005.

    South Korea
    Rating: B; Current Rank: 6; Shipments: $2.64 billion, -1.8%.

    As South Korea has turned into a significant economic power, the wages and costs in its garment factories have risen steadily, causing some of its manufacturers to focus on higher-end, higher-value products. That trend also provoked a wave of emigration, and there are now South Korean-owned and -managed factories in many parts of the developing world. The report projects that South Korea’s exports to the U.S. and EU will continue to decline.

    Philippines
    Rating: B; Current Rank: 15; Shipments: $1.9 billion, -11.8%.

    The Philippines, in Birnbaum’s estimate, is another nation that will lose share post-2005 because its costs do not compare favorably to nearby Asian competitors.

    Sri Lanka
    Rating: B; Current Rank: 20; Shipments: $1.44 billion, -4.9%.

    An island off the coast of India, Sri Lanka has developed a reputation as a country with modern garment factories and well-paid, highly skilled workers. Unfortunately, these factors also mean its prices are higher than those of nearby competitors India and Pakistan. For that reason, the report projects Sri Lanka will continue to lose apparel exports after 2005.

    South Africa
    Rating: B; Current Rank: 49; Shipments: $189.3 million, -26.2%.

    Of all the nations offered duty- and quota-free treatment under AGOA, South Africa has the best chance of maintaining its role in the apparel industry after quotas are lifted, largely due to the sophistication and integration of its textile and garment plants.

    U.S.
    Rating: B; Current Rank: N/A; Shipments: N/A.

    The U.S. apparel manufacturing industry has been in sharp decline for three decades. In August, domestic garment makers employed 282,400 workers, less than one-fifth the 1.5 million people employed at the industry’s peak in May 1973. The U.S. government does not track the size of this industry. Nonetheless, Birnbaum suggests that a focus on quick response and plant modernization could allow the industry to at least hold its own.

    Macro Advantages

    Guatemala
    Rating: CCC; Current Rank: 17; Shipments: $1.83 billion, +3.1%.

    Guatemala pulled down the top rating among Central American nations for its manufacturers’ focus on higher-quality items. Combined with the region’s close proximity to the U.S., existing benefits under the Caribbean Basin Trade Partnership Act and the proposed CAFTA led the report to project that Guatemala’s shipments to both the U.S. and Europe will grow.

    El Salvador
    Rating: CC; Current Rank: 18; Shipments: $1.73 billion, -0.7%.

    When the quotas are lifted, El Salvador and the other nations of the Caribbean and Central America will continue to enjoy duty-free access to the U.S. for garments that meet certain standards, which will set these countries apart from other nations. While the report asserts El Salvador hasn’t done enough to create other advantages for itself, Birnbaum — who is currently consulting for the Salvadoran industry — believes there are signs the nation “might just see some real progress.”

    Mexico
    Rating: C; Current Rank: 2; Shipments: $7.7 billion, -8.1%.

    The prospects for Mexico’s apparel and textile industry have changed dramatically over the past decade. When NAFTA took effect, U.S. fabric and garment makers rushed to open factories in that country to take advantage of benefits that included lower wages. Mexico’s exports surged, and it overtook China to become the U.S.’ leading supplier in those categories in 1997. However, it gave that title back to China by 2002 as the Asian giant surged ahead in the handful of categories that had already been freed of quota restrictions. The Mexican state of Yúcatan is one of Birnbaum’s past clients. The report declares the future of Mexico’s industry “unknown.”

    Honduras
    Rating: C; Current Rank: 7; Shipments: $2.52 billion, -1%.

    Its proximity to the U.S. and its well-developed industry leads many importers to cite Honduras as a nation that is likely to retain or increase market share post-2005. Birnbaum notes, however, that a heavy reliance on T-shirt and polo shirt exports is a vulnerability, leading him to conclude the Honduras’ industry is likely to be stable but will not necessarily grow.

    Dominican Republic
    Rating: C; Current Rank: 14; Shipments: $2 billion, -9%.

    The Dominican Republic currently is part of the CBTPA program and is slated to get CAFTA benefits if that agreement is approved by Congress. However, Birnbaum asserts that the nation’s manufacturers need to do more to ensure they will be competitive post-2005.

    Losers

    Nicaragua
    Rating: DDD; Current Rank: 31; Shipments: $507.8 million, +5.5%.

    Although Nicaragua is close to the U.S. and would be part of the CAFTA trade bloc if Congress approves the agreement, Birnbaum asserts that the nation’s relatively underdeveloped industry leaves it poorly positioned to compete.

    Poland
    Rating: DDD; Current Rank: 66; Shipments: $62.7 million, -1.3%.

    As with many Eastern European nations, Poland’s apparel industry is a legacy of the Communist era. The region has been marketing itself as easier for Western Europeans to do business in than Asia, but with lower wages. The report still projects that Poland is poorly positioned.

    Malaysia
    Rating: DD; Current Rank: 24; Shipments: $732.5 million, -7%.

    Higher prices than others in Southeast Asia leave little hope for the future of this nation’s apparel industry. However, Malaysia’s economy is fairly diversified, and it is home to a significant electronics sector.

    Lesotho
    Rating: DD; Current Rank: 34; Shipments: $431.7 million, +22.6%.

    This landlocked nation is among the least-developed countries of the AGOA region, a status that allows it to import fabrics from Asia, manufacture them into garments and still qualify for duty- and quota-free treatment under the program. That has allowed for low prices and rapid growth. However, many U.S. importers have expressed skepticism about shipping goods from Asia to the U.S. via Africa — essentially going the long way around the world — when quotas are lifted.

    Costa Rica
    Rating: D; Current Rank: 29; Shipments: $531.4 million, -21.5%.

    While Costa Rica is among the nations covered by CAFTA, its relative prosperity and high wages make it a minimal player in the apparel industry. Tourism and electronics play a greater role in this nation’s economy. Birnbaum predicts its share of the U.S. and EU apparel markets will collapse post-2005.

    Mauritius
    Rating: D; Current Rank: 45; Shipments: $227.8 million, -17.5%.

    A tiny island in the Indian Ocean, Mauritius is home to a significant apparel industry set up by Asian investors looking to avoid quotas. However, rising prosperity on the island has led to increased costs, and many manufacturers have pulled out of the island. Tourism and financial services are a growing source of employment. Birnbaum holds out little hope for the Mauritian garment industry’s future.

    NOTE: RANK REFERS TO THE COUNTRY’S STANDING AMONG SUPPLIERS OF IMPORTED APPAREL AND TEXTILES. SHIPMENT FIGURES ARE NET VALUE OF FABRICS, GARMENTS AND YARN TO THE U.S. FOR THE YEAR ENDED IN JULY. PERCENTAGES OF CHANGE ARE FROM THE PREVIOUS YEAR. SOURCES: “WINNERS & LOSERS 2005,” BY DAVID BIRNBAUM, PUBLISHED BY THE FASHIONDEX INC.; U.S. COMMERCE DEPARTMENT; CIA WORLD FACT BOOK.

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