TDA TARGETS CBI
Byline: Scott Malone
NEW YORK — The landmark trade legislation granting trade parity to the nations of the Caribbean Basin has not been met with universal applause.
While mills have come down firmly in support of its requirements that U.S.-made fabric be used in most cases, fabric printers and finishers are anxious about the recently released interim regulations allowing fabric to be finished in the region.
These opinions came out in a recent roundtable discussion conducted in Manhattan with members of the Textile Distributors Association. The group reported that, with some exception, it hasn’t seen all that much sales resulting from parity, though companies continue to hold out hope that things will pick up in the months ahead.
The printing and finishing exemption inspired much debate. Not surprisingly, those who make their livelihoods printing in the U.S. are opposed to it, as are the major textile industry lobbying groups. However, some suggested that it may be a moot point — printing plants are substantially more expensive to set up than cut-and-sew shops. Further, since most of the nations of the Caribbean Basin are islands with limited fresh water supplies, it seems to make them unsuitable for printing operations.
Five members of the TDA participated in the meeting: Joseph Gatta, president of the Danbury, Conn.-based finisher Sandlapper Fabrics; gray-mill executives Gary Niederauer, vice president at the New York offices of Greenwood Mills, and Dan Menichella, vice president of Hoboken, N.J.-based Joshua L. Baily & Co.; and converters Joseph Lee, vice president at Roseland, N.J.-based Mainzer Minton Co., and Pearl Ann Marco, principal at De Marco California Fabrics. Bruce Roberts, executive director of the TDA, also participated in the discussion, which went as follows:
WWD: The U.S. has recently extended trade parity to the nations of the Caribbean Basin. What are your thoughts on this, and do you look at this as an opportunity for your business?
Gatta: We have been actively trying to partner up with someone on this. We talked to a bunch of different mills and one of the main areas that we have been concentrating on is the knitting area. That has been one of the primary products that we have been running at the plant.
In the past, Sandlapper was probably 80 percent to 100 percent focused on the apparel market. Today, we are probably about 30 percent to 40 percent in apparel. The rest of it is other products that we had to go into.
In the Caribbean, the finishing is going to take place there. That was one of the questions that was resolved over the last couple of days that we could be able to finish, print and dye fabrics in the Caribbean as part of this program.
Roberts: That was what they handed down. However, the industry has 60 days to voice their opinion on this subject, and there are very strong opinions being voiced in opposition to this. So, I’m not sure that that issue is a dead issue. Conceivably, we may have a reexamination of it. I sincerely hope so, anyway.
Gatta: The finishing part of the industry has been impacted pretty severely. There have been so many plants closing, but I think today there are still some 60,000 people working in the dyeing, printing and finishing industry in the States. We were looking at that as somewhere we could recoup some of of the apparel business that has been lost in the past 10 to 15 years. But, hopefully, we can tie up with someone and recover some of that business.
Roberts: It’s very important that this reexamination be successful, because otherwise it’s not going to help your situation very much.
Menichella: I don’t think there is much finishing available in the Caribbean.
Lee: There are 24 countries in the CBI [Caribbean Basin Initiative], and a whole bunch of them are islands. Historically, those islands lack water, and that is the prime ingredient for dyeing, printing and finishing. So I don’t think that those island countries are ever going to be a factor. Perhaps Guatemala, Honduras and El Salvador. Those [mainland] countries might become a factor.
Niederauer: The focus of CBI is going to be garments. I don’t think there is going to be a whole lot of brick and mortar for new [textile] plants.
We see plenty of opportunities for CBI. The Caribbean for a long time has had the 807 and the 807A. They have an infrastructure there for garments. That alone will give them a jump start. So, we have to move relatively quickly turning the key. I’m sure they’re going to need more capacity, but we see it in sportswear and apparel [manufacturing].
Lee: We see CBI as just another short-term provision until the Global Agreement on Tariffs and Trade takes hold in four years. So our view is, like we have done with NAFTA, find a way to survive it, get through it, make the best of it, and prepare for the long term beyond. So, we take a much longer view of it.
Roberts: Short term, do you think that there are some opportunities that were not present a month ago?
Lee: Yes, there definitely are going to be some opportunities. A large part of our business is [fabrics for] pocketing. With the pocketing provision being all U.S. goods, it presents a problem, to make pocketing in the U.S. in large quantities at the right prices.
The market will be dictated by the price at which the garment will be made. Because if the garment can still be made cheaper doing it out of foreign material and paying the duty, then the manufacturer will take it that way.
Marco: I’m concerned about the printing. I’m all for CBI, I think it offers a lot of opportunities. I’m concerned because a major part of our business is printing. So, what’s going to happen to all the converters like ourselves if they start printing down there? We’re going to be out of business. We aren’t going to be able to compete with them.
Roberts: The government gives the industry 60 days to express opinions on the most recent rulings. In Washington, we had a meeting of a group called the American Textile Alliance. There were seven or eight trade associations represented and this subject certainly came up for discussion. There was unanimity of opinion that this was not a good thing for the domestic industry and that we were going to do everything in our power to circumvent that rule.
Gatta: I concur with Pearl [Ann Marco] on that. We were looking for some relief. I don’t know how much they’re going to spend on nuts and bolts in those countries. We looked at putting a plant in Honduras. It was [going to cost] $12 million to $20 million to put up a finishing plant there. I think people would be reluctant to spend that kind of money. Hopefully, they’re going to use our facilities here domestically.
WWD: What are you doing now to take advantage of parity?
Menichella: From a gray standpoint, we don’t care where it’s printed or finished, as long as it’s American fabric. If it’s printed and finished in the U.S. or printed and finished in the Caribbean, it makes no never-mind to us. To the converter, it’s a problem.
Marco: You have to face this realistically, as a mill. You may not have the $20 million or maybe you don’t want to invest it, but there are plenty of Asian companies that are going to invest down there as they have elsewhere.
WWD: A lot of the garment factories in the Caribbean right now are owned by Asian interests. They are aware of CBI parity. They’ve been making the rounds of the domestic mills and trying to establish relationships. We hear that domestic mill executives are not coming to the plate in the way the potential Asian customers hoped that they would. Is there anything you are doing to do to make sure that you get to know these garment makers?
Lee: We have a Mexican company with two salespeople down there. Myself and another executive travel to build up the market. In the Dominican Republic, we have a warehouse and two salesmen. In Central America, we have a salesman and are putting in a warehouse.
We work at a factory level, because with a large part of our business being pocketing, and a large amount of our business in packages, it becomes a situation where a lot of the pocketing fabric is going to be bought at the factory level.
Roberts: To the question concerning Asian mills taking interest in buying domestic goods. I’ve heard that, too, and I understand that there is some genuine activity. Have you heard any of this?
Niederauer: I haven’t seen any movement or heard anything about Asian countries trying to source gray fabrics.
Menichella: We have not seen any direct approaches. We did have a run several months ago where, for some strange reason, we sold to several importers, people who currently operate businesses by sourcing from overseas. We thought it was because we have great personalities, but perhaps there was something more sinister in their plan.
Lee: I’ve taken back 90,000 yards of pocketing that was made overseas in Asia and I have to replace it with American fabric. Hopefully, they won’t all come in those numbers. But, those are things that we have to do to be flexible as a converter to service the manufacturer.
Niederauer: From a gray standpoint, we are twice removed, at least, from the garment manufacturer. We have to work with our customers, who have to work with their customers, who tell them where to have it cut and sewn. So, it’s an interesting dynamic there, and sometimes you have to do some back-door work. But, mainly, we have to concentrate on our customer who is going to be dying and finishing the fabric from the mill, the converter or vertical mill.
Lee: In Central America, there are many Korean [garment] factories that we call on, and many of them are working on programs with American fabrics. Also, a lot of them have sales offices here in the city, so we do call on them, and do keep in touch with them. There are programs that we know of.
Menichella: Those Korean companies that you were talking about, are most of those contractors or are they providing the whole package?
Lee: They’re contractors, some of them do supply full package from specified fabrics or they will bring the fabrics to the customer and help them source the fabric.
Menichella: But the specifying for [shell] fabric would happen not at the factory level but at the marketer?
Menichella: So your situation, in the pocketing area, would be different from [Marco’s], in the shell-fabric area?
Lee: Yes. Absolutely, I don’t see any point for her to be calling on factories.
Menichella: From a gray level, you don’t get involved with either one of those issues. We market product to converters. Where it goes from there, we have very little knowledge of that.
Lee: But it might be well to promote what American fabrics can be still made in this country. You want to promote what we can [do] well.
WWD: That’s one of the concerns that people have about this. If you want to source a garment down there, and you can prove the fabric you need is not readily available in commercial quantities, then you can get an exclusion.
Roberts: That’s a very important issue and it’s something that all of us should be aware of.
When NAFTA kicked in, there were 400 fabrics — according to importers — that were unavailable in the U.S. When they examined the list and got into it, they ended up with eight. We need to be careful that doesn’t happen again. Because this short supply list is going to be with us very soon. Any one of us has the right to complain about that short supply list, and try to identify fabrics and the availability of same.
WWD: Are the mills here going out there looking to see if there are fabrics that are being used that you should be increasing your efforts on?
Niederauer: Our equipment has certain capacities and we have a pretty good idea of what that is. Variations that would differentiate us substantially from my competition, or from a foreign mill, would require substantial capital improvement. That would all depend on analysis and the size of the market. Those are things that we go through all the time and we continue to do it.
But from a standpoint of just being able to go out and say, ‘I’m going to run silk now,’ or ‘I’m going to run wool’ — which are fabrics which are not readily done here in this country — the way we’re tooled is pretty much impossible.
We could run 110-76 [cotton broadcloth], but the 110-76 that comes in from overseas is at price points where you can’t afford what I need to sell it at.
Lee: Therein lies a big problem. Because there are certain Asian staples that the U.S. gray market abandoned many years ago that are run in Asia in tremendous quantities. That makes them no longer available. While I guess they could be available, they’re not practically available.
Roberts: This country used to produce prodigious amounts of broadcloth and batiste, and Greenwood would have the capability to make those fabrics.
Niederauer: And we still do.
Roberts: Exactly, but you can’t afford to make them.
The question is whether with the tariffs that are being imposed on some of these garments and not imposed when they come from CBI, does it bring it a lot closer [to being economically possible]? If you examine those tariffs and some of the categories, they are very significant. It’s conceivable that some of them need to be reexamined. I mean, some of these tariffs are 20 percent to 24 percent.
Niederauer: That is very true. But, we know what our manufacturing cost is and we know where we need to sell those goods to be able to live. It’s up to our customer to determine whether that price point is at such a point that when you compare it to the imported gray goods, you can make a go of it.
Roberts: Are you offering them that opportunity? Are you talking to anybody about broadcloth?
Niederauer: We have spoken to a couple of people about broadcloth.
WWD: Earlier, Joseph Lee said he regards CBI parity as an interim step until 2005, and the phaseout of quotas. What are you doing to get ready for that world?
Lee: We’re not really making any preparations specifically for 2005, other than to do what we have been doing, which is to keep our import channels strong and open. Offshore sourcing is very strong, as well as our domestic production, at the levels it needs to be. Those domestic levels will have to increase in the coming years [to take advantage of CBI parity].
But what happens after that remains unknown, because the market will dictate. It will simply be at the bottom of the cost sheet for the garment. If it’s feasible to use the American products, they’ll use American products. If it’s feasible to use imported products, they’ll use imported products.
The only thing that we can hope for is that it is made close to the U.S. so, at least, we have a chance to get it done. That’s the purpose of all these programs, to build up the infrastructure of manufacturing in and around the U.S.
Roberts: Once the quotas are off, there is no controlling what’s going to be coming in from the Far East. They can flood the market. If they have a category that they want to take over and own, they can do it. So, that’s a self-evident danger.
What Joseph Lee is talking about makes sense to me. You need to position yourself, build your business, build relationships down in the CBI region. You’ve got basically four years to build some infrastructure so that you can be at least somewhat competitive.
Menichella: What I don’t understand is what happens in 2005. Mexico has duties on China. So, if some fabric comes into Mexico, it pays a duty. Does it pay another duty to go into the U.S.?
Lee: No, it comes in duty free from Mexico. So, it only pays the one duty. So, if seven-ounce twill, for instance, dyed and finished, goes into Mexico at a $1.60 a yard it pays duty as a garment, which is around 28 percent on pants. Versus, Greenwood twill. What do you sell it for?
Niederauer: Basic cotton twill? $1.80.
Lee: So, that has to be compared. It may still be cheaper. Plus the shipping, in and out and back.
Niederauer: Yeah, but you’d have to add a dollar or more for finishing.
Lee: The basic problem that exists in the American weaving business that I see is when the prices are low, we hope they go higher. It’s only with prices going up that we do very well, but everybody wants prices to go down. You can sell fabrics on lower prices if your costs go lower, and you can still make money.
Marco: Costs are going up.
Lee: On everything, at all times? They’ve never gone down?
Marco: At the present time, all of us are facing realistically that our rents skyrocketing.
Niederauer: Raw material costs are rising. Sure, we get some help from the government with cotton certificates, but our raw materials costs over the past year have skyrocketed. We haven’t been able to transfer any of that on, especially in the lighter-weight market, to our customers. We have to eat it. So with our prices going down, and costs going up, even if we were to stay level, it’s a lose-lose proposition.
Lee: I’m not just saying to squeeze your margins to the bone. I meant prices are higher on poly-cotton fabrics now than they were a year ago. You’re getting higher prices now than you were a year ago.
Niederauer: Just slightly.
Roberts: You can see what’s happening to the polyester industry. The domestic production has been impacted dramatically. They have had four price increases and their margins basically are still unpalatable. The bottom line is there are less domestic producers. Those that are still in place still have foreign partners. It’s just a lousy business.
Menichella: In the past year, our prices on a poundage basis have gone up less than 10 cents a pound. On lightweight fabrics, that’s three or four cents a yard. Our raw materials have gone up more than that. We just continue to get squeezed.
Niederauer: I’m not saying that the increase is polyester staple or filament yarn is unwarranted, but we are forced to take it or look overseas. We can’t do that to our customers, because there is my competitor willing to do it, or maybe willing to do it because they need the business. Our customer knows that, and it’s much tougher for us to raise our price to recoup that cost, than it is for our suppliers to raise their prices.
WWD: This is the perennial problem of this business, that costs continue to rise, prices continue to decline and margins continue to shrink until the company goes under. Any guess as to what could be an answer?
Lee: I would like to see the industry work more like our foreign competition, with co-ops of costs. If we can start at any one place, it’s a start. That is better than zero.
Roberts: Can you give us an example of that?
Lee: There are a lot of ways in which it can be done. For converters, if they can quote cost-in-freight to various destinations, it can give them flexibility. If there was a TDA- or a TDA-American Textile Manufacturers Institute-sponsored freight situation that they could be part of, sort of like a health-maintenance organization, that would be great.
When you buy a print out of Korea somewhere, they give it to you CIF to Panama or Costa Rica or wherever you want it.
Niederauer: There is an oversupply of domestic fabric being woven. If you look 10, 15 years ago there were three times as many mills as there are today and everyone was living. But because of the influx of imports coming in, both in garment form and package form, it has reduced the need for domestic supply.
Each company has to look at itself very, very hard and make some tough decisions: make sure that they’re sized correctly, running the fabrics that they’re best at and trying to differentiate themselves in certain markets because there is a severe oversupply in this country.
Roberts: I don’t argue with the question of oversupply in terms of weaving. What about finishing?
Gatta: We’re only at maybe 60 percent or 70 percent of capacity. We still have a large capacity that could be filled.
One of the things we were hoping for from CBI was to pick up some of this lost business that was lost on the apparel side and bring that back here. But some of the plants I’ve gone through in Honduras and Guatemala, mostly Korean [owned] facilities, had tremendous space inside the plants. It would be so easy to pick up a couple of print machines.
With one print machine, you can probably print 50,000 to 100,000 yards a day. It would be pretty easy to bring that in. The same with dyeing, to add a couple of jets.
What happens is that you can’t seem to get business-driven. You talk to a bunch of different knitters and then you try to get to an [apparel] manufacturer and it never seems to get beyond that point. To do the whole package, to drive it and make something happen, there’s been a lot of rhetoric on it. But as far as completing something, you never seem to get to that point.
We’ve been talking about it now for probably eight months. We’ve talked to a bunch of people and we can’t seem to put a closure on any of the deals.
Niederauer: The reason for that is the retailer wants to keep all the margin. When you try to do that and you’re even sharing cost information and where the margins are going to be made, it all comes down to the retailer not wanting to give up his margins. He’s really the one who’s making most of it. We’re all struggling to make five percent, four percent.
Roberts: We are now in a retailer-driven market. Fifteen or 20 years ago, it was a supplier-driven market. You’ve got this dramatic change and the chances are better than worse that we are not going to see that alter very much. We’re going to have to learn to deal with that.
WWD: Given all of this, what is your outlook on business for the next six months?
Menichella: We don’t see things being very good. We see prices staying generally where they are.
Gatta: There’s business out there. You have to find where that business is. Wal-mart, Kmart, all these chains are looking for suppliers. It’s just how do we partner up to get the product to the Wal-Marts, Kmarts and Penney’s.
That’s the biggest thing. We can’t seem to work together. You can’t seem to close a deal.
There’s business there. There’s a tremendous amount of product that they are looking for. But how do you get there?
Lee: Our business has picked up in the last couple of weeks. We are aggressively trying to position for our customers that are going to need U.S. product logistically.
We are in close communications with them, to see which ones need foreign product and which need U.S., in the CBI countries.
Niederauer: I feel that our apparel business will continue to improve over the next six months, in volume. Less in pricing. We are optimistic that CBI will give us some advantages over the imports coming in from overseas.