Made in Guatemala

GUATEMALA CITY — Guatemala’s textile and apparel industry expects to grow 10 percent to some $1.8 billion this year as the trade war between the U.S. and China boosts orders and it exports more fabric to neighboring countries.

Alejandro Ceballos, president of top trade lobby Vestex, made the projection at the latest Apparel Show trade fair here last month, adding, “The trade war with China is bringing new clients and brands have reduced their presence in Nicaragua and Honduras” amid political strife in those countries. Guatemala faces its own political turmoil, though, after presidential elections on June 16 generated allegations of election fraud and produced no clear winner. A recount has been ordered by the country’s Supreme Court, while a runoff election is set for Aug. 11.

Whatever happens, one thing is clear: More brands are looking at Guatemala and Central America to source their apparel, both to benefit from speed to market and zero tariffs under the CAFTA-DR free-trade agreement with the U.S.

New brands and retailers such as Lacoste, Spain’s El Corte Ingles and children’s socks maker Gold Bug visited the four-day fair this year, according to Vestex.

Meanwhile, Guatemala is exporting more polyester and yarn to neighbors to forge a more integrated supply chain and bolster the region’s U.S. shipments. This year, its textile exports are expected to grow 16 percent to about 77 million pounds while U.S. apparel shipments will jump 6 percent, according to Ceballos.

To avoid U.S. tariffs on Chinese and Asian technical textiles, a string of South Korean firms and increasingly Chinese ones are investing to boost output of polyester and synthetic yarn needed to manufacture the sportswear and performance apparel that brands are increasingly demanding from the region.

During the 25th annual event, executives announced that Honduras-based Grupo Karim, SAE A and Tejidos Imperial will invest $200 million, $70 million and $25 million, respectively, to increase output of technical textiles in Guatemala. SAE-A is said to be favoring factory investments in that country but may also invest in Honduras or El Salvador, said one insider.

But the commitments are a drop in the bucket when compared to what Central America needs to build a truly competitive technical textiles sourcing matrix. Observers say at least $10 billion is required, but noted that amount will be difficult to achieve amid a dearth of financing options and continual political and economic volatility.

“We need hundreds of millions a year,” said Federico Zimeri, a young executive running his family-owned EcoYarn, which makes upmarket towels from recycled polyester and other fabrics. “Nike wanted to make more synthetics and activewear in the region but they can’t so they had to cancel some orders.”

Amid high borrowing costs, EcoYarn will use its own capital to build a $2 million spinning facility to supply the likes of Walmart, according to Zimeri. The expansion will enable it to make 300,000 towels a month. Guatemala’s own aggregate clothing output is 10 million pounds monthly.

Other makers, such as South Korean-based Startex, are struggling to obtain financing from local banks, which require too many guarantees to issue expensive loans, executives said.

“The government and the banks do not support the industry,” said Startex’s president Seung Hee Kim, during a visit to his factory, which employs 1,000 people, on the city’s outskirts. “I have had to mortgage everything, my house, my car, even my life insurance.”

Kim claimed he recently tried to negotiate a $30 million loan with a Guatemalan lender but the institution would only approve a $10 million loan with a six-year term and asked for full guarantees.

Startex is undergoing a major expansion to boost synthetics production and revenues to roughly $50 million in three years. As part of that effort, the firm will make 4 million pounds of synthetic yarn and other technical fabrics by 2022, compared to 3 million now. Garment production for the likes of Polo Ralph Lauren and the North Face will rise to 15 million units monthly versus 7.5 million currently.

But Kim wonders how future expansion capital will be procured as some banks, including Banco Industrial — which recently won $30 million from South Korea’s export credit agency Kexim to help its country’s firms expand in Guatemala — continue to shun the industry.

“We are financing everything with our revenues, bit by bit,” Kim added. “The banks including Banco Industrial don’t lend to textiles and instead prefer to fund malls or real estate.”

One solution is to offer invoice receivables as collateral, something that some U.S. banks have been willing to consider as they see opportunities to help U.S. manufacturers outsource production in Guatemala.

But others said the winning formula to obtain capital is to partner with a U.S. or international label that wants to grow hand-in-hand with them.

“It’s easier to obtain capital if you have sourcing commitments from the brands,” said Ceballos, adding that he expects Kexim and its Chinese counterparts to begin providing more guarantees to help South Korean and Chinese manufactures boost their synthetics output in Central America.

Executives said Guatemala must still work to build scale, improve speed to market and modernize equipment, though it has come a long way. “There is more at play here than just trade,” said one executive, who leads a U.S. manufacturer’s operations in Guatemala and Honduras. “The need for really fast turnarounds to reduce inventory risks is what’s driving growth, regardless of whether the trade negotiations are there or not. If Guatemala can handle the growth and service it properly, they have a lot of potential.”