LOOKING AT THE LAG ON CBI
Byline: Scott Malone
CORAL GABLES, Fla. — During the almost six months since the law granting trade parity to apparel made in the Caribbean Basin took effect, there’s been a lot of talk in the textile industry about its potential to boost demand for U.S. fabrics.
Yet by most accounts, so far, that potential hasn’t turned into significant sales growth.
Mill executives have expressed little surprise at this, pointing out that many retailers and apparel marketers have long-term sourcing contracts with factories elsewhere in the world. It’s a matter of time, they reason.
While that is part of the explanation, it’s by no means the whole story.
Apparel importers and Caribbean manufacturers attending last week’s CBI Sourcing Summit, sponsored by the Cotton Board, Cotton Inc. and the Cotton Council International, offered several other reasons. The recent slowdown in the U.S. economy has played a role, they said, as has the lack of financing available in the region.
But another major cause is the mills themselves, apparel executives contended. The CBI region’s prominence as an apparel supply source for U.S. is unquestioned. In 2000, it supplied 22.8 percent of the clothing imported into the U.S.
Yet representatives of several major importers, including J.C. Penney Co., said that while their CBI sourcing is growing rapidly, it’s not substantially driving up their use of U.S. fabrics.
“The region continues to have a significant growth for Penney company. It is not as a result of the legislation,” said Peter McGrath, president of purchasing at the Plano, Tex.-based chain.
The main reason for that, he explained, is that even with the duty-free status given to garments made in the CBI region of U.S. fabrics, it’s still been cheaper to import fabric from elsewhere in the world and pay the duty.
“There is a litany of challenges to the U.S. mills. Price is the first thing they need to work on, to be more competitive,” he said. “They also need to be more flexible on the size of runs.”
Fernando Anibal Capellan Peralta, president of Grupo M — a major Dominican Republic apparel producer — got a positive reaction when he told the crowd, “We need the fabric people to do the same as the Orient. We need 1,000 yards per color, we need more speed on sample yardage. You guys need to figure out how you’re going to do it.”
Lisandro Sagastume, a Miami-based principal at Kurt Salmon Associates, said on cotton garments, the duty break lowers prices by 6 to 12 percent. On synthetic-fiber garments, which the event’s organizers predictably tried to soft-pedal, the duty savings can be substantially higher. However, that duty savings is sometimes more than offset by the higher prices U.S. mills charge.
Thomas Haugen, executive director of Hong Kong-based Li & Fund (Trading) Ltd., a $3 billion garment contractor with 9 percent of its production in the Caribbean, said the duty breaks aren’t always enough to make U.S. cotton fabrics economical.
“What we’ve found is with the new duty-free treatment, we’re not always getting the best deal” by using U.S. fabrics, he said.
He sketched out two pricing analyses in which it was cheaper for his company to ship fabric from Asia into the Caribbean and pay the duty than to use domestic fabric.
For a cotton turtleneck, he said, it would cost $5.66 to make the garment in the CBI region of U.S. fabric, but would cost $4.55 to use Asian fabric.
However, he said by using open-end U.S. yarn and knitting the fabric in the Caribbean — allowed by the Trade and Development Act of 2000 — it brings the price down to $3.80.
“In the cotton knit area, the win seems to be to do the knitting in the CBI,” he said.
But even knitting in the region doesn’t avoid the U.S. price environment, some Caribbean manufacturers pointed out.
Roberto Enrique Quan, president of Guatemala-based Grupo Texpasa, said that his company, a vertical producer of knitted garments, had idled its spinning equipment and started to buy U.S. yarn to take advantage of the duty break.
However, its efforts to build the business were stymied by a recent runup in the price of open-end cotton yarn, he said.
“The price of yarn was 90 cents in January and since then has risen to $1.15,” he said.
That forced his company to turn to its new customers and explain that it was going to have to raise prices, he continued, which prompted most of them to turn back to their former Asian suppliers.
While Quan said his yarn suppliers have again lowered their prices, he said the fluctuation has made it all the more difficult to win customers away from Asian suppliers — many of whom are already sewing garments in the Caribbean of Far Eastern fabric.
Importers at the event said that they did not believe that U.S. mills were trying hard enough to sell fabric to the many Asian-owned sewing facilities in the region.
Asked what he believed mills need to do to benefit from CBI parity, Li & Fung’s Haugen said, “They need to go to Asia” to build a relationship with the owners of plants in the CBI region, which are doing full packages.
While many in the domestic textile industry have been skeptical about how willing Asian-owned companies, which tend to be vertical, would be to buy U.S. fabric, Haugen said sometimes the economics work.
“Our clients would kill for a quarter,” he said. “So, if we can make this duty-free work, that’s an advantage.”
Don Baum, vice president of manufacturing for New York-based Liz Claiborne Inc., said his company is also trying to encourage U.S. mills to take a more active role in the area.
“Unfortunately, the U.S. is many times insular,” he said. “But there are some mills who are moving forward.”
His focus has been on trying to get U.S. knitters to work with Caribbean producers to offer full-package garment production. He said that knitters have been lagging behind weavers in developing this business.
“The world is getting smaller, and we have to be able to compete without special trade benefits; 2005 is very soon,” he said, referring to the coming phaseout of quotas among all World Trade Organization member nations.
While some present at the meeting expressed frustration with the way U.S. mills have approached the new trade environment, many said they want to see the domestic textile industry adapt because of the speed advantage inherent in local production.
“If we need to be faster, we can afford to pay a little more,” said Penney’s McGrath, adding that because of the speed advantage, his company gave a fabric program for shirts to Dan River Inc. that it had previously been sourcing in the Orient.
Jim Martin, president of apparel fabrics at the Danville, Va.-based mill said domestic fabric producers need to focus on fashion.
“We need to use the cost base that is available in the CBI to promote labor-intensive fashion merchandise,” he said. “A fashion product in particular will allow us to replenish, test and replenish with a quicker turn…by that quicker turn, cost actually comes down.”