FACTORS LEERY OF CBI BUSINESS
Byline: Vicki M. Young
NEW YORK — While the Trade and Development Act of 2000 spelled out in detail what mills and apparel companies can do to take advantage of the Caribbean Basin Initiative trade parity, it’s mum on the subject of financing.
As apparel and textile vendors slowly start to step up their business in the region, many in the financial community do not really see what, if anything, CBI means to them.
“From the factoring point of view, I have yet to understand how it impacts factors and banks,” observed Stanley Officina, president of Sterling Factors. “It impacts our clients who have to make sure that the merchandise meets the Caribbean Basin Initiative requirements, but the end result of all this is that the garments are still classified as a sale of product to the retailers.”
The region’s apparel industry developed around the old 807 U.S. trade regime, which was more protective of U.S. apparel makers and tightly restricted how much labor could be done on a garment in the region — in some cases, pieces could be sewn in the Caribbean as long as they were cut in the U.S. That led to a true outsourcing model, in which the region’s factories essentially never assumed ownership of any of the materials that they were working on.
Adam Winters, vice president for business development at Merchant Factors Corp., said: “Apparel manufacturers that deal with the Caribbean Basin firms purchase piece goods here in the U.S., ship it there for assembly and then have it sent back here when done for shipping to the retailers. They don’t necessarily care who the manufacturer is because they’re hiring the Caribbean factory as a third-party contractor.”
So while the extension of trade parity has created an opportunity for the region to develop a full-package garment industry, many companies operating in the Caribbean don’t have the financial wherewithal to make that happen. A further problem is that many factors are uncomfortable about extending credit to companies operating in nations where U.S. banks don’t necessarily fully understand or trust financial regulations.
One problem with manufacturing in the Caribbean, Sterling’s Officina pointed out, is that the Caribbean nations don’t have the same infrastructure that is available in many parts of Asia. “In Asia, you have companies that were established to provide finished product to American companies. In the Caribbean, the factories were established to provide labor, and they don’t have the same infrastructure to do a full-package business,” he explained.
Ethan Schwartz, vice president at CRT, an investment bank and securities firm, added that part of the problem is the continued confusion over how to deal with the rules and what forms to fill out. However, even once those issues are sorted out, Schwartz said, he wouldn’t expect a surge toward Caribbean production in the near term. “The competition from Asia seems relentless,” he concluded.
Seymour D. Schneiderman, owner and president of Symphony Fabrics, pointed out that there’s been a lot of “fanfare and flourish” about CBI. “People forget that the Caribbean companies don’t buy product because they’re contractors. Manufacturers here use the Caribbean factories to cut and sew, and it’s the apparel guy who will decide which one will manufacture the garments,” he said.
Looking ahead, Schneiderman noted: “The Caribbean has been the playground for years for many high-profile manufacturers. This is supposed to help the domestic manufacturer, but I don’t know how beneficial it really is. My customer base is now exploring possible opportunities, but in order for production to move over there, the U.S. firms still have to find a shop in the Caribbean that has expertise in producing the type of garment that needs to be made, in addition to using my fabrics that are beneficial to them.”
Factoring firms that have clients doing business with Caribbean factories point out that there are indeed some benefits for U.S. firms.
John F. Daly, president of CIT, said: “The benefits for textile companies are that [piece] goods can be shipped into areas where production costs for apparel are lower than here domestically. Now that shipping costs have gone up because of rising fuel prices, producing in the Caribbean could be beneficial. For example, South Carolina is not that far. We know that Charleston is an excellent port for getting goods in and out.”
Jerry Sandak, executive vice president at Rosenthal & Rosenthal, added: “We have many clients who are producing in the Caribbean Basin, in El Salvador, Costa Rica and Mexico. Right now, those areas still have an edge over the more distant manufacturing countries. The advantage is proximity because you can easily have a boat to bring in the finished goods or you can fly down in one day to visit the factory.”
However, even the potential benefits gained from the new trade parity law doesn’t automatically translate into financing dollars for CBI factories that are short on cash.
Sandak noted that companies such as his are wary of financing companies within foreign states. “It’s hard to take a security interest in assets that are located in another country. We just don’t have the same flexibility. We had a problem once with a client that was located south of the U.S. border. We were last in line to get our money because everybody else had a prior claim,” he said.
Daly observed, “I don’t see a lot of factors opening offices in the Caribbean Basin. One hurdle is that those nations don’t have the same procedure in perfecting collateral securities that we have here. The U.S. has a very good legal system, which is easy to understand.” He disclosed that his company is in the early stages of discussions with local banks in the Caribbean, with an eye toward building relationships where CIT may be able to provide services based on a joint arrangement.
Mark Bienstock, executive vice president at DCD Capital, said: “If you want to do a credit check before selling to companies in the Caribbean, it is a simple equation if the companies provide information to the factor. However, they have to be forthcoming with the information and it has to be verifiable. The problem is that we have sophisticated laws regarding financial reporting and that’s not necessarily so in other countries. Many factors got excited when business started booming with Mexico and Costa Rica, but there are still some issues that need to be resolved. The quality of the postal system is one, and the free flow of information is another. Everything has to work well before factors get to a certain comfort level.
“We’re still in the infancy stages regarding the Caribbean,” he continued.
According to Merchant Factors’ Winters, the Caribbean companies that really need financing are the ones that are interested in entering the full-package business because of the need to lay out money to purchase trim, buy fabric and pay labor costs. However, checking their credit-worthiness isn’t so easy.
“In Europe, we can check out anybody in 35 different countries. The more industrialized the nation, the more stable the monetary policy. It is difficult, near impossible, to check companies in the Caribbean Basin. A lot of these factories are cut-and-sew and they have neither the requisite financial sophistication nor credit reporting that’s necessary to do an adequate check on them,” Winters explained.
One factoring firm that has had financial dealings with Caribbean Basin companies is Republic Capital Corp. Rafael Martinez, president, said that it is somewhat easier for him to check out the viability of companies outside U.S. borders because of family members and their contacts who live in the region.
Martinez said his company will on occassion accept Caribbean garment manufacturers as clients, but only when those manufacturers are shipping to creditworthy companies in the U.S.
Republic Capital has worked with firms in Mexico, Venezuela, Brazil, Guatemala and the Dominican Republic, which remains one of the largest producers of apparel in the region for U.S. firms, he said.
Martinez said he believes the willingness of U.S. manufacturers to shift their production to the area will prove to be a greater stumbling block to the growth of the Caribbean, as an apparel-sourcing region, than will financial considerations.
“Production is something you don’t play around with,” he said. “Manufacturers tend to stick with the factories they are already dealing with, and it’s generally not until a factory says it can’t fill an order that the manufacturer will look elsewhere. Then the concern isn’t so much the creditworthiness of the factory, but whether it can handle the work. Some countries are good for some things, other countries are better for other things.
“The other issue manufacturers have to consider is the infrastructure of some of the Caribbean nations. You don’t want to set up production, and then find out later that, poof, everything’s gone because of political instability,” he said.
Like other factors, Scott MacMillan, senior vice president at Capital Factors, believes that legal issues remain a critical problem for Caribbean Basin firms and their ability to get funding. “Because we won’t have any lien rights, there’s nothing to prevent someone else from going to a customer that we had approved and saying that it has to be paid first,” he explained.
MacMillan doesn’t expect major growth in Caribbean Basin production just yet, because most of the apparel sent to the region for assembly is “simple stuff.” He added that even the lower costs of labor in the Caribbean as compared to the U.S. isn’t necessarily a benefit.
“A company can source in Bangladesh where the wage rates are even lower, and although you have to add in the cost of shipping, it is oftentimes still cheaper to have the garments produced in Asia than in the Caribbean,” MacMillan pointed out.
Others are waiting for the movement toward Caribbean Basin production to begin as well.
Saul Langer, senior vice president at the factoring arm of Israel Discount Bank, observed, “I haven’t seen any of my clients move toward Caribbean Basin production. If anything, it’s incidental and not a significant part of their business. Most likely, if they’re working with Asian factories back then, they still are now.”
Jeffrey Kapelman, secretary and treasurer at Hilldun Corp., which specializes in funding high-end designers, said: “We have not historically done a lot with Caribbean manufacturing because the majority of our clients do the bulk of their business in Asia. We see a good amount of manufacturing in India, Pakistan and Nepal. I have a feeling that the Caribbean is more convenient for big companies doing manufacturing for mass merchandisers or retailers that have a multimillion-dollar private label business.”
DCD Capital’s Bienstock said that his firm hasn’t seen much activity in the Caribbean Basin either because the firm’s clients import directly from Bangladesh and India. “I still believe that the cost factor is the overriding issue here. Many retailers have decided to eliminate the middle man, whether the manufacturer or the importer in the U.S., by going directly to an overseas mill. Right now, there’s no real need for them to be in the Caribbean Basin. Price is the predominant theme, and whether the Caribbean Basin countries can compete with countries such as China and Pakistan remains to be seen. I don’t see on the labor side how they effectively can. Many of these Asian countries have greater capabilities than those in the Caribbean Basin.”