The industry is suffering from a recession and falling imports to the U.S. At the same time, sales in the roughly $20 billion local clothing industry are faltering as consumers tighten their belts amid economic uncertainty.
Textile manufacturing was down 4.4 percent as of September, hit by a 10 percent decline in fabric output, according to consultancy Cedetex, which added the bread-winning denim and knitwear sectors have been hit hard. Exports tell 2.6 percent to $3.7 billion as of October, extending losses from last year when they declined 2.7 percent to $4.6 billion, according to the U.S. Office of Textiles and Apparel. Imports, especially of cut-price Asian clothing and fabric hurting local producers, are also expected to climb this year after gaining 3 percent in 2018 and 18 percent in 2017.
As a result, the industry — which had sales of nearly $24 billion in 2016 — will shrink 50 percent in 2019, experts predicted. In 2020, however, growth could inch up as the economy is expected to see a slight recovery.
The downturn throws cold water on President Andrés Manuel López Obrador’s pledge to support apparel manufacturers through paid apprenticeships, scholarships and grants to improve workers’ fashion know-how, amid other initiatives. The plan, as part of his push to grow Mexico’s economy 4 percent annually, has failed as GDP stagnates to zero in 2019 after three consecutive quarters of negative growth.
“Sales are coming down and all my international clients are worried about the uncertainty,” said the owner of a tailored suits manufacturer in Mexico City, who requested anonymity. “Sadly, I think we are starting to see the beginning of the worst.”
The executive said upmarket retailers such as the El Palacio de Hierro department store network and Grupo Axo, a franchisor of U.S. international brands, have frozen expansion. “A lot of people are unhappy. They just don’t want to admit it,” he added.
The belief by some observers that fashion retail sales will grow at low-single digits this year are overly optimistic, the source said, adding that in some segments, such as premium fashion, they will decline 3 to 6 percent, if not more.
As sales decline, some savvy manufacturers are investing to modernize production to take on some of their Asian competition.
One such firm is sportswear maker Loma Lasatex. The 1,000-employee firm recently invested millions to add more efficient modular manufacturing machines to improve its product for U.S. labels looking to near-source in Mexico. The “re-engineering” means the Jalisco State-based firm will grow 10 to 15 percent this year versus 8 percent in 2018, said owner José Alberto Martínez.
“We are looking to take out some of our Asian rivals in finished products such as sportswear and casual apparel by improving our response times,” said Martínez, adding that with the fledgling equipment, the firm can now simultaneously make five or six models instead of just one, quickly shipping 10,000 to 20,000 short runs north of the border.
“Our products are a little more expensive than the Chinese but we can deliver 60 days faster,” boasted Martínez.
Already, Loma Lasatex’s restructuring has wooed more orders from the likes of Adidas, Puma or Iron Man while the company’s white label Carrara is also growing strongly, according to Martínez.
He said some Chinese manufacturers, irritated by the ongoing trade war with the U.S., are also considering making big investments in Mexico to sell apparel duty-free to American customers under USMCA. However, he noted some of those investments may be canceled if Washington and Beijing reach a win-win agreement.
Mexican companies should take advantage of the slowdown to rethink their business strategies and improve their product as Mexico continues to lose market share in the U.S., with annual exports hovering at $4 billion compared to nearly $8 billion a decade ago, according to Martínez.
“Every company has to study its business and find its niche but there are definitely opportunities out there,” he said.
Meanwhile, Central America’s outlook is also worsening. The industry bridging Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and the Dominican Republic with the U.S. under the CAFTA-DR trading bloc, has missed this year’s growth targets, hurt by growing political instability and concerns about President Donald Trump’s potential impeachment.
“We were expecting double-digit growth of at least 10 percent, especially after how we did last year” when the maquila industry targeting brands such as Target and Fruit of the Loom grew 12 percent in value, said Alejandro Ceballos, president of Guatemala City-based trade lobby Vestex, speaking about the whole region’s performance. “It has been a somewhat disappointing year; this is not good for our economies or job growth.”
CAFTA-DR shipments are up 7.4 percent to $8.6 billion in value and 2.4 percent in volume to 2.99 million square meter equivalents this year, according to Ceballos. However, that compares with gains of 12 percent and 9 percent on the same basis respectively in 2018, he said. In 2019, Central American spinners had also expected gains of 7 percent on a square meter basis.
On the bright side, trade in Guatemala, which makes some of the most expensive apparel in the CAFTA-DR bloc, has gained this year. Exports are matching forecasts, up 8.5 percent in value, with fabric shipments rising 15 percent as Central American neighbors buy the nation’s polyester to make apparel to ship to the U.S.
Trump woes aside, growing political instability from Mexico to Patagonia has encouraged brands to freeze manufacturing investments with roughly $100 million slated for Central America scrapped, Ceballos said.
Notably, Korea’s Sae-A, which was expected to break ground on a $200 million polyester yarn mill in Guatemala last summer, has frozen the project, he claimed. And Li & Fung is also hesitating on plans to shift 1 percent of sourcing to Central America from China amid capacity constraints and ongoing turmoil in Nicaragua and across South America, he added.
In Chile, months of deadly protests demanding an end to stinging social inequality and similarly violent uprisings in Bolivia, Ecuador and Argentina have alarmed investors and retailers who have suffered losses, forced to curtail expansion.
“Chile was our best indicator [for political stability] and now we have lost it,” Ceballos said, adding that the nation’s volatility shows that the growing social resentment sweeping the continent could have more lasting power than originally thought.
Meanwhile in Honduras, a fragile political landscape (President Juan Orlando Hernández is caught in a U.S. drug trafficking scandal while his presidential legitimacy is under question) and economic downturn have ruined plans to triple apparel exports to $7.4 billion, or 6 percent of the U.S. import market, versus roughly 3 percent now.
Those goals were inked under the Honduras 2020 development plan which also sought to create 200,000 textile maquila jobs, mainly by transitioning into more value-added synthetic sportswear, by next year.
“That has not happened,” said Freddy Carrasco, head of the labor union at textiles maker Tegra. “We have roughly the same amount of textile jobs as last year, and we have not seen any new investments and no new companies installed.”
Carrasco said some companies are leaving. Unilever shuttered a soap factory this month, dismissing 800 in a move to Guatemala, while steel concern Intrefica also opted for a shift to Guatemala in October, axing 400.
In a bid to create new jobs, President Orlando this month approved a new bill that will make maquila tax breaks indefinite instead of renewable every 15 years. The action is expected to generate 15,000 jobs and thousands more indirectly while investments are projected to hit $400 million, though some critics noted that figure could be much lower.
Peter Fleming, Honduras 2020’s president, is confident the statute will help create more jobs in one of the world’s poorest and most violent nations. He acknowledged the 2020 scheme — which envisaged 600,000 jobs — was unrealistic though he noted the textiles sector has drawn over $900 million since the 2020 scheme was envisaged five years ago.
“We can’t create 600,000 jobs because we don’t have enough companies for that,” Fleming noted. “What we can do is create 600,000 income opportunities.”
Fleming noted the government is working on a new development scheme that has yet to be named and that some of the original Honduras 2020 plan’s goals could one day be achieved.
“There is potential for these goals to be reached but not in the time frame given. Before running, you have to learn how to walk and before walking you have to learn how to crawl,” Fleming concluded.