WORSE TIMES AHEAD, KTA TOLD
Byline: Scott Malone
NEW YORK — If the members of the Knitted Textile Association came to their annual financial forecast event last week hoping for good news, they were in for a disappointment.
A panel of three speakers told them Wednesday morning at Manhattan’s Arno Ristorante to expect a tough year in 2001. That’s pretty bad news, speakers pointed out, given that the industry had a hard time even during prolonged economic prosperity in the U.S.
However, they said it’s not yet time to give up the ship and offered executives some strategies for braving the hard times they predicted are on the way.
“There is not much out there to suggest the industry’s financial results are going to improve in 2001,” said Kay Norwood, analyst with Wachovia Securities. “I don’t think 2001 is going to be a good year for the industry, and this is an industry that even in the best of times doesn’t have profitability to write home about.”
Norwood was filling a spot on the podium originally slated for well-known Prudential Securities textile analyst Jack Pickler, who recently left the firm.
Norwood said she saw a few reasons for executives to be wary about 2001 economic conditions. “Whether we have a recession remains to be seen, but you certainly have concerns about the broad economy,” she said.
Investors have clearly been wary of the textile industry, she said. Wachovia’s index of all publicly traded textile stocks is off 78 percent over the past two years, she noted.
One thing to worry about, she continued, is slowing consumer spending. Pointing out that spending has outpaced income for several quarters and that recent drops in the stock market are likely to make “whatever is the reverse of the wealth effect” a major influence on consumer psyches this year. She forecasted further slowing in spending.
“Consumer demand is probably going to be spooked,” she said, “at least in the first half.”
A possible positive economic development for the sector is a potential decline in oil prices this year, which could help ease some of the pressures that have pushed prices of synthetic fibers upward over the past 18 months.
However, she pointed out: “You have to realize that the fiber makers didn’t get the increases they needed last year,” adding that could make fiber companies unlikely to back down on prices this year.
She also suggested that the recent actions of the Federal Reserve Bank — its surprise between-meetings announcement that it would drop central-bank interest rates by half-a-percentage point — “should make you pause.”
The Fed’s cutting of rates between meetings, which is rare, and by half a point, instead of its typical quarter of a point, may be a sign that its concern about an economic slowdown is high, Norwood said.
If Norwood’s opinions were bleak, those of the next speaker, PricewaterhouseCoopers chief retail economist Carl Steidtman, were dismal.
Steidtman responded to a quip from Hampton Print Works president Michael Garson, who, before introducing the speakers, said he hoped their economic forecasts would be “better than the weather forecast” during a snowy and cold January day.
“Don’t count on it,” Steidtman returned, as his fellow panelists murmured in concurrence. His message was clear: “We are in a recession.”
As evidence of his belief, Steidtman pointed to the significant drop in the stock markets over the past few months and last year’s inversion of the bond market — a label applied to periods when short-term yields exceed long-term yields.
Further, he pointed out that the National Association of Purchasing Managers index closed out the year at the lowest levels it’s seen since 1991, when the economy was in a protracted recession.
The index, according to the NAPM, was at 43.7 in December, indicating that while the nation’s Gross Domestic Product is continuing to expand, the manufacturing economy is declining.
Steidtman also described the just-ended holiday retail season as “clearly the worst Christmas since 1991,” adding that his company’s research shows that 70 percent of retailers came in below their planned sales levels for December.
Admitting that other economists have forecasted 2.5 to 3 percent growth for the U.S. economy this year, Steidtman said he doesn’t believe that much growth is possible. What he did predict was “a big increase in bankruptcies.”
“That’s actually the good news,” he said. “It does eliminate a lot of excess competition, competition that really wasn’t profitable.”
Steidtman said he believed there were three main causes of what he is calling a recession.
One is the Fed’s move in late 1999 to loosen the money supply in anticipation of consumer panic around the millennium bug, followed by its steps early last year to tighten the supply after the bug failed to bite. That, he said, resulted in money being pulled back from the capital markets.
Secondly, Steidtman said he believed that the nation’s progressive tax system has been an “excessive drain on the economy” over the recent period of prosperity.
Finally, he pointed out that rising energy prices across the country have reduced consumer spending on merchandise. He went so far as to suggest that the recent troubles in the technology sector are at least partly the result of many technology companies being based in California, where energy costs have risen dramatically.
Despite his dire assessment of the nation’s current economic situation, Steidtman said he believed the tough times would be short-lived.
“This is not going to be a long recession,” he predicted.
He cited three factors — the absence of inflation, the health of the banking system and the current low unemployment rate — as reasons for that belief. He said that by December, the economy will be picking up again.
“The good news is Christmas 2001 will be better than 2000,” Steidtman predicted. “By the end of the year, we’re expecting recovery.”
For her part, Norwood said that while the U.S. economy’s problems may prove to be short-lived, the industry’s challenges are only going to get more difficult.
“As difficult as things have been, there are worse things out there,” she said, referring to the coming phaseout of quotas among World Trade Organization-member nations in 2005.
“The import issues that we have had up to this point are not going to go away,” she said. “The real question in 2005 is not ‘Do imports go up?’ or ‘Does China take market share?’ but rather, ‘Who does China take it from?’ If the industry under a protected environment is struggling, what on earth is going to happen in 2005?”
China’s entry into the WTO is seen as inevitable, following the U.S. granting of permanent normal trading relations to that country last year.
Norwood said that by taking advantage of the NAFTA trading bloc and last year’s granting of parity to apparel made in the Caribbean Basin of U.S. fabric, U.S. mills can prepare themselves to be competitive in 2005. That could mean that China would take market share from other Asian nations, rather than from Western Hemisphere producers, she contended.
She suggested a few strategies that mills should pursue. They included:
Eliminating diversification. Instead, she said, mills would do best to focus on their core products and seek to produce large volumes of a few types of fabric. That is the only way to gain the economies of scale to deal with the retail giants that control the apparel industry, she said.
Companies should also focus on improving their return on assets, she said. Noting that this can be accomplished either by growing profits or getting rid of equipment. “This industry has too much capacity, and it needs to get rid of some of it, ” she said.
She pointed to Galey & Lord’s recent moves to shut a yarn plant, choosing to buy yarn from another supplier, and close an outdated denim plant, in favor of using a new Mexican joint venture, as bold steps to improve return on assets.
Developing proprietary products that cannot be copied is another key move for domestic mills, she said. She pointed to Burlington Industries’ nanotechnology venture as an example of innovations that are likely to bring substantial profits.
One strategy, about which Norwood said she’s not yet sure, is full-package garment production. While a number of mills are making efforts in that area, she said: “It remains to be seen whether getting into the garment manufacturing business is a viable model. So far, it has been mixed.”
The third speaker, Seymour Melman, professor of industrial engineering at Columbia University, pointed to another innovation that should give the knit industry hope: seamless technology.
He noted that a traditional focus of manufacturing managers is cutting labor costs, which has been the prime driver behind the migration of apparel and textile manufacturing jobs out of the U.S. Melman said even on the domestic front, from the mid-Eighties to 1996, U.S. manufacturing executives managed to cut their labor costs from 15 cents to 8.7 cents for each dollar of merchandise shipped.
However, he contended, there’s little fat left to trim.
“That idea is clearly of diminishing importance,” he said. “For many firms and for many industries, the idea of [wage reduction] as a way of improving financial prospects of firms is already gone.”
The good news, he told the group of knitters, is “there is a clear prospect for the development of equipment that will confer a new structure of cost on this part and all parts of the textile industry.”
Seamless knitting machines, such as those made by Santoni, are being used by innerwear and activewear makers to produce circular-knitted garments almost entirely by machine, with little finishing required. The increased automation that the seamless machines allow, “makes possible a transformation of your industry,” Melman argued.
“The output per unit of capital investment starts to dominate the scene, rather than the wage per hour of a production worker,” he said.
That’s because fewer workers are required to produce the same number of garments. The workers who are needed, however, have to be skilled in keeping the machines running, since downtime is a critical issue in capital-based businesses.
Most modern mills, both on the weaving and knitting side, strive to run their looms 24 hours a day, seven days a week, when demand is sufficient.
However, he pointed out a few reasons that U.S. executives should be careful not to fall behind this trend. First, he noted, the textile industry trails behind the overall U.S. economy in capital investment — textile companies spend half as much on equipment per worker as the average U.S. manufacturing enterprise, he said.
Further, with the supply of seamless knitting machines lagging behind demand — he noted that Santoni is said to have a 2,000-machine back order at the moment — and all the seamless knitting machines being developed and produced in Europe and Asia, the U.S. industry is at a disadvantage.
Norwood had a grimmer assessment of things: “If you’re not in a cost-reduction kind of mode, you’re in big trouble these days.”