BIG CHANGES IN STORE FOR SOURCING AS AFRICA/CBI BILL, CHINA VOTES NEAR
Byline: Jim Ostroff
WASHINGTON — Importers are on the cusp of the biggest change in global sourcing since NAFTA and the creation of the World Trade Organization.
As key votes on free-trade pacts for the Caribbean and sub-Saharan Africa near a vote in Congress, and one on granting China quota-free access to the U.S. in less than five years is set for a vote later this month, the way apparel makers, textile firms and retailers make their goods will be significantly altered.
As Bob Zane, senior vice president, manufacturing and sourcing, for Liz Claiborne, said, “The world of 2005 to 2010 will be radically different than today as a result of the elimination of quotas” on apparel made in China and other nations.
Should both bills pass — considered likely with the White House and business interests putting on a full-court press — Zane foresees a major realignment of U.S. sourcing networks, as Asian makers duke it out on price, while Mexican and Caribbean producers battle for their share of imports closer to home.
Peter McGrath, J.C. Penney’s vice president and director of quality and sourcing, views the coming changes with excitement and apprehension, as they may produce big winners and losers.
“Sourcing is an art, and perhaps a half-dozen people in our industry will do well,” said McGrath, who is also president of J.C. Penney Purchasing Corp., explaining that retailers and their suppliers will have to execute manufacturing and sourcing strategies that leave even less room for mistakes than today.
A staunch foe of retailer sourcing interests, Ann Hoffman, UNITE’s top lobbyist here, asserted that the bills “will be an instant NAFTA, causing the loss of 100,000 American jobs virtually overnight.”
Such angst and hope are a function of the enormous changes the bills would cause. Provisions passed by the House last Thursday would end all quotas and duties on apparel made in the Caribbean Basin Initiative nations using U.S. yarn and fabric, and limited regional fabric. Industry executives said the provisions could fuel an apparel-making boom in the region, much like the one in Mexico that followed NAFTA’s creation in 1994. Currently, most apparel from CBI countries enters the U.S. quota-free if it uses U.S. cut-and-form fabrics.
The bill also would extend trade perks to apparel made in sub-Saharan Africa, including such countries as Mauritius, South Africa, Botswana and Namibia, as long as U.S. textiles are used. Supporters contend it will prompt a tripling of African apparel imports to about $2 billion annually. The Senate may vote on the bill this week and its prospects are considered good, given its overwhelming 3-to-1 support in the House.
By month’s end, Congress is expected to take up another bill that would make China’s normal trade status permanent, ending the annual congressional fight on whether to effectively bar Chinese goods from the U.S.
Congressional watchers agree a yes vote would virtually assure China’s admission into the World Trade Organization, created as a culmination of the Uruguay Round of GATT talks in 1995. This is critical, since a controversial provision in the Sino-U.S. WTO accession accord will end all U.S. apparel and textile import quotas for China on Jan. 1, 2005.
American mill executives fear this will permit China to dominate the U.S. market, just as it now supplies up to 80 percent of imported footwear.
With the likelihood that all three measures will become law, makers and importers are scrambling to refigure strategies to avoid becoming casualties when the landscape shifts beneath them. This will be no cakewalk, as passage or defeat of each provision will radically change the dynamics of manufacturing and importing.
The risks are worth it, contends Penney’s McGrath, since they will “rationalize” sourcing.
“The reality today,” he said, “is that consumer demand cycles churn faster than ever, and the retailer who can respond more quickly than [its competitors] is the one that wins. Period.”
Consequently, with quota and duty elimination for CBI makers, he foresees a shift in sourcing towards this “quick-response region,” largely at the expense of sources in Taiwan, Thailand and the Philippines.
McGrath also believes the Africa provision will beneficially affect sourcing costs worldwide.
“Today, I can bring cotton quilts out of China for $120 a dozen, but with the CBI and Africa in the mix, competition will tend to drive down prices, even after the quotas are gone” in 2005, he said.
Should the CBI/Africa bill be defeated, McGrath averred, “Consumers will be the losers.”
“Quota prices will escalate across the board and this will lead, ultimately, to higher retail [apparel] prices,” he added.
Claiborne’s Zane agreed with this scenario, adding that the other big loser “will be U.S. textile firms who will not+ sell as much fabric as they would to CBI producers.”
Carlos Moore, executive vice president of the American Textile Manufacturers Institute, estimated that Caribbean makers’ purchases of U.S. fabrics will double from the nearly 3 billion square-meters-equivalent last year. Moore insisted this is a conservative estimate, noting that Mexican apparel shipments here, which mainly use U.S. fabrics, soared fivefold between 1994 and last year, due largely to free-trade perks.
It hardly takes a Ouija board to predict CBI production will soar with NAFTA-like benefits, said Larry Martin, the American Apparel Manufacturers Association president. To him, it’s about economics and logistics.
The CBI bill, he said, “will relieve these makers of the 10 percent duty they now pay, making their apparel competitive with a lot of Asian countries — and CBI apparel can get here in two hours by plane.” The AAMA has sought CBI parity since 1994, as member firms have either moved production there or contract from Caribbean makers.
Putting CBI production on equal footing with Mexico’s will give U.S. companies vital operating options, said William Compton, chairman and ceo of Tropical Sportswear International, Tampa.
“To stay in business in today’s climate, I must keep my inventories at low levels, and turn it fast at low prices, because that’s name of the game today for retailers,” said Compton, who becomes the AAMA chairman later this month.
“CBI parity allows me to be innovative, in that I can go from order to delivery in 30 days from the Caribbean, eliminating duties and 90 days out of the production cycle, an important competitive advantage,” against Asian goods importers, he said.
Compton also predicts that CBI parity means more jobs, not fewer, in the U.S. He noted that his firm would expand its domestic cutting, technology and marketing operations, as well as hire people who do finishing work here, such as affixing labels and hangtags. Should Congress balk at parity, Compton says the jig is up for the CBI, predicting he and other U.S. makers will shift production to Mexico and increase Asian sourcing.
Julia Hughes has no doubts that CBI parity will bring about a major shift in sourcing to the region at Asian makers’ expense. But Hughes, a vice president of the U.S. Association of Importers of Textiles and Apparel, said not every sector or company will benefit equally.
“Given the cap on the use of regional fabrics, there will be little full-package CBI production, which is the way most retailers prefer to do sourcing,” she said.
In addition, Hughes said that most new assembly in the region “will be done by existing firms, especially the large integrated ones, since it will be easiest for them to verify the U.S. origin of their yarns and fabrics.”
Moreover, she said, CBI parity mainly will spur production of apparel where its makers already are strong: underwear, knit shirts, trousers and shorts.
America’s textile makers say preferential CBI trade will change their business in two ways.
“With it, we’ll stop the erosion of our market and bring a lot of new manufacturing to our hemisphere,” said Chuck Hayes, an ATMI vice president and chairman of Guilford Mills. “But without it, you’re forcing our apparel customers to go to the Far East, which never bought a yard of my goods.”
“Our primary defense against China swamping our market must be surrounding this country with needles and sewing machines,” said Roger Chastain, president of Mount Vernon Mills, Greenville, S.C., and ATMI’s president.
Even with this firewall, he foresees industry casualties due to increased competition, stating, “We’ll see more consolidation, a reduction in U.S. apparel making, and on the textile side, as well.”
Nor is he is sanguine about selling textiles to China, despite the market-opening provisions in the WTO accord.
“China has shown it doesn’t play by the rules, and I do not expect it will keep these promises either,” Chastain added.
Textile industry officials also fret that Chinese makers will transship goods to the CBI and African countries to avoid duties, and engage in predatory pricing to gain U.S. market share. The ATMI’s Moore said the industry might launch a spate of anti-dumping cases against China to limit its apparel and textile exports here, especially in light of U.S. and private studies that forecast China is capable of tripling its share of the American market to 31 percent after quotas are eliminated.
Importer and retail industry officials dismiss such scenarios as “scare tactics” by textile makers seeking to gain CBI benefits while insulating themselves against competition once quotas go away.
Norman Fryman, the Bayer Clothing Group’s executive vice president of marketing, said, “The fear of China is just that. Sure, it will compete with us, but there always has been competition and we’ve managed it.”
Martin said he wouldn’t mind if quotas on China and other countries went away today, arguing, “quotas are a restraint on economics that makes people do things for reasons that have nothing to do with production, or economy of scale.” Enactment of the two bills, he said, will give U.S. makers operating in the CBI or at home a good shot at selling in heretofore closed markets like China’s.
Besides, said Hughes, China’s “threat” is just a bugaboo.
“First, China could be spooked by the U.S. safeguards designed to thwart import surges, and in any event, it is moving towards the higher-value, high tech industries even now.”
Penney’s McGrath averred that the China fear overlooks the likelihood that “Bangladesh, India, Pakistan and even Africa will be fierce competitors.” Besides, he said, retailers fret that any big China sourcing program could trigger “an onslaught of anti-dumping actions against China, by ATMI, for example, just like what happened in the steel industry.”
Claiborne’s Zane, meanwhile, said the arguments about China, the CBI and Africa overlook the fact that importers hedge their bets on opportunity and risk, so it is simple-minded to say the bills’ enactment will allow any trade bloc to win all the marbles.
“Sure, once quotas go away, China will wind up with a greater percentage of the U.S. requirement, but for the most part these will be commodity apparel — tops, bottoms and sweaters — where we have the luxury of longer lead times,” Zane said.
“But as our business becomes one more of commodity and fashion players, the more fashion-oriented business will shift to the CBI and Mexico, which can do the value-added work and provide the quick turns we need to be competitive in the U.S. market.