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Lingerie Firms Struggle With Higher Costs in Asia

Expenses, coupled with dismal sales, create challenges.

Soaring freight, labor and raw materials costs are hammering U.S. manufacturers.

Caught in a global financial crisis and dismal retail sales, lingerie companies that manufacture in Asia are being hammered by higher material, labor and transportation costs.

This story first appeared in the October 20, 2008 issue of WWD.  Subscribe Today.

At the heart of the problem are crippling double-digit increases in freight expenses and petroleum-based fabrics this year, although oil prices have dropped by about 50 percent in recent weeks after hitting $145 a barrel in July.

Major companies such as Warnaco Group Inc., VF Corp. and Maidenform Inc. that have downsized or exited their own Central American operations have turned to China as their chief sourcing destination because of cheap labor, low operating costs and production prowess. Hanesbrands Inc. said last month it was closing nine plants across five countries and eliminating about 8,100 workers in the U.S. and Central America, while the company plans to add 2,000 jobs in Asia.

But the toxic combination of global inflation, tight credit and the decline of the dollar has begun to have an impact on U.S. and European importers and their alliances with Asian factories, notably in China and Sri Lanka, industry executives said. When the dollar was strong at the beginning of this decade, part of the economic equation that permitted Asian factories to maintain fixed prices was the dollar appreciation that offset small spikes in raw material and labor costs, including those related to compliance issues. But the situation has come full circle, with Asian factories plagued by in-country inflation rates of 7 to 12 percent combined with double-digit dollar deflation over the past two years.

Richard Murray, president of Wacoal America, the U.S. unit of innerwear giant Wacoal Japan, said: “Most of our production is done in our plants in the Dominican Republic, but we do a certain extent in China and Thailand, where there’s been pressure on freight prices. The prices are definitely going higher and higher for raw goods and labor in China. But the pressure on fuel doesn’t seem to be what it was, and hopefully this will be reflected in more stable freight and raw materials pricing, mostly petroleum-based goods.

“However, you absolutely have to be flexible and on top of freight and raw material charges,” he said. “We are concerned that some raw materials people will have bankruptcies, a couple possibly within the year.”

Addressing planning and forecasting, Murray said, “We used to think what will next year be like? Now it’s such a volatile market we plan every three-to-four weeks. Over the last month or so, there’s been a downward trend of confidence. The last three to four weeks have been scary.”

Josie Natori, chief executive officer of Natori Co., acknowledged the challenges. “All of our [licensed] bras with Dana-co are made in China and our partners there are very strong,” she said. “But I’ve definitely heard that some factories have been closing down. They want higher quantities, but it’s not like I can take this business elsewhere. Some companies, though, are talking with factories in Vietnam and Indonesia because it’s less expensive.

“Things may be bad but I see this as an opportunity,” Natori said. “I think new things will emerge with new ideas at retail and different ways to manufacture. It’s not business as usual for sure, but I think this is the beginning of an evolution of change. I think the companies that will survive will evaluate and adapt to the changing environment.”

Bob Nolan, president of the Jockey North America wholesale and licensing operations at Jockey International, said there is a need for “a balanced view on strategy.”

The impulse to “jump into something for a one- or two-year gain” should be resisted, he said. “We’ve never taken a direction to chase the low-cost producer. We spread out our manufacturing opportunities throughout the globe. We have sourcing in South America and Asia, and we’ve always manufactured in the Western Hemisphere and have two factories in Costa Rica and Honduras, so this gives us the flexibility of controlling our destiny. When certain items are selling, we can turn things around quickly and meet consumer demand.”

Peter Gabbe, chief operating officer of Carole Hochman Design Group Inc., said, “The changes in relationships or working models have been more subtle than overshadowing. It begins with the fact that we are working with a stable sourcing base. This helps to reduce the volatility. However, with that said, we do recognize that factories are more sensitive to pricing pressures as their costs have risen. In some cases, price quotes are subject to time limits not previously at issue. With rising prices for raw materials, freight and labor in many countries, specifically China, factories are loath to make open-ended commitments.”

But despite the mounting pressure, Gabbe said “strong relationships are becoming stronger with increased emphasis on protecting good partnerships.”

“Collaboration on ways to control overhead have become more prevalent,” he said. “There is an increased emphasis on economy, with larger lots and cleaner transactions to minimize staffing. Even China wants to limit the number of bodies.”

Marcia Leeds, ceo of Richard Leeds International, said the company has a more than 20-year history with its Asian factories, adding, “these are trying times, the worst we’ve seen. But we started to prepare for difficult times such as this over a year ago. All of our factories are vertical, so this has enabled us to shorten lead time and keep the prices more in line. We have partnered with our factories in every aspect of our business, from fabric prices to all prices in the supply chain like hangers and boxes. It is difficult but not totally impossible to work through this if we all stay calm.”

Walter Costello, sales director at Macra Lace, which supplies lingerie companies, said large companies are beginning to rethink the Asian equation.

“There’s been talk among a lot of our customers who have totally moved production to Asia about coming back to the Western Hemisphere, specifically the Caribbean, because of shipping expenses, communications problems and longer lead times,” he said.

Regarding advantages for merchants, a retail executive who did not want to be identified, said, “Since most retailers have no investment in factories, they are free to source private label globally. If a country develops a significant cost disadvantage, the retailer can move production to another country. However, retailers generally don’t make those moves quickly. It takes time to develop a strong and reliable relationship with a new vendor. Plus, a retailer can only manage so many supply relationships.”