GUATEMALA CITY — Apparel manufacturers in Guatemala, preparing for an onslaught of Asian competition when quotas are lifted next year, are seeking to boost factory capacities, adopt more service-intensive business models and develop the textile manufacturing output that many industry executives say will be key to the region’s success.
The biggest step taken by manufacturers is their embrace of a full-service production model, in which factories propose designs to U.S. retailers and brand marketers, handle the purchasing of fabrics and trims, manufacture garments and deliver them to distribution centers, buyers said. This marks a major evolution from Central America’s old contract model, in which U.S. customers handled areas such as fabric buying, pattern making and even plant oversight.
“The old way, they had to be fed with a spoon,” said Marc Compagnon, chief merchandising officer at the Colby International division of Li & Fung Ltd., the Hong Kong-based $5.47 billion sourcing powerhouse, in an interview here last week. “The local people are starting to learn how to do business with retailers, rather than manufacturers.”
Local manufacturing executives said the ability to modernize will be crucial if they are to hold off a surge of Asian exports starting Jan. 1, when the 147 members of the World Trade Organization drop quotas on textiles and apparel. The system has regulated the international apparel trade for more than three decades. Limiting exports from manufacturing nations such as China and India is intended to guarantee some market share to smaller nations such as Guatemala.
For the year ended in February, Guatemala exported $1.76 billion worth of textiles and apparel to the U.S., a 3.7 percent gain, making it the U.S.’s 17th-ranked supplier, according to the U.S. Commerce Department. China, the U.S.’s leading supplier, shipped $11.76 billion worth of goods, a 24.3 percent increase that gives it a 15.2 percent share.
Marcio Cuevas, who was sworn in as Guatemala’s minister of economy in January as part of the new administration of President Oscar Berger, said apparel exports made a significant contribution to the nation’s estimated $24 billion gross domestic product. He was unable to quantify the amount.
“It is a very significant sector that helps the economy in Guatemala,” Cuevas said in an interview at his office last week. “It’s significant not only for the money, but also for the jobs that the industry generates.”
Apparel, textile and trim companies employ about 140,000 people in Guatemala. One of the local industry’s largest employers — and an example of the changes in Guatemala’s industry — is Koramsa, a pants maker based in the capital city.
During a tour of his company’s sprawling, walled compound, where the majority of its 14,800 employees work, executive vice president Carlos Arias said Koramsa in August would complete an 18-month expansion that will boost production by 40 percent to 700,000 pairs of pants a week and require 1,000 additional workers.
To increase the demand that justifies expansion, which included the purchase of two additional locations, the company also is changing its business model to focus on offering quick responses to in-season orders. Cargo ships typically take about 11 days to make the trip from Hong Kong to Los Angeles, while a vessel leaving Guatemala makes the trip to Miami in two to three days, said Brian Moore, director of apparel sales at Maersk Sealand Inc., an ocean carrier.
“We are doing a lot of chase business,” the buying model in which retailers place test orders of goods and then look to reorder after getting a sense of how well the merchandise will perform, Arias said. “That is becoming a very important part of our business.”
Koramsa also is restructuring to try to work around the most common cause of delays in apparel production: “people making up their minds,” Arias said.
The time between an initial conversation with a customer and the date of delivery may be from seven to 12 months, though much of that time is spent determining what styles and quantities to buy, he said. Actual production time may range from 120 days for first-time orders to 45 days for “chase” situations, in which the factory is expecting reorders and has materials in stock.
Kirkir Balei, vice president of corporate sourcing and group manufacturing with New York-based Liz Claiborne Inc., said importers need to be able to delay order commitments as long as possible to improve the odds that the goods will sell at full price.
“We have to make decision dates closer and closer to the in-store dates,” Balei said. “That’s when the real cash register rings.”
To give customers more flexibility, Koramsa has developed a planning model in which decisions can be made one at a time, Arias said. For customers such as Levi Strauss & Co. and Gap Inc., which buy jeans from Koramsa, buyers need to commit to a quantity and style of fabric first, so that it can be ordered, while holding off on making a final decision about design details — such as the rise of the jeans or the flare of the legs — until later. Arias estimated his company has cut its production times by several weeks in recent years.
John C. Peden, director of Polar Industrial SA, a local T-shirt maker that produces its own yarns and fabrics, estimated that since his company was founded in 1997, it has cut its typical production times by about five weeks, to an average delivery time of eight to nine weeks on new orders.
To improve its response times, Koramsa is holding materials such as fabric and trim in inventory. The company has a warehouse capable of storing about $15 million in fabric that it buys for customers, and is working with its 57 suppliers to develop a program for them to keep inventory in Koramsa’s headquarters that is then billed only when it begins to be used in production. At its cutting center in the El Naranjo neighborhood, Koramsa has built a 60,000-square-foot warehouse, where it plans to rent space to its vendors.
One supplier that’s already bought into the idea is label producer Shore to Shore, which is constructing its own 35,000-square-foot location adjacent to the El Naranjo property.
“By having Shore to Shore next door, it will allow us to do three things: to deliver faster, to deliver cheaper and to offer fewer liabilities,” Arias said.
The paper tags inserted into the pockets of jeans to identify the style are one of the company’s longest lead-time items, which means that a last-minute decision to change the style of an order of jeans often requires buying new cards, he said.
David Slauter, vice president of global sales and marketing at Miamisburg, Ohio-based Shore to Shore, said the company already had a 5,000-square-foot warehouse in Guatemala City that served as its distribution hub for Latin America. Its printing for the region is now done at a plant in Miami, Fla. Installing $2.5 million in new printing machinery in the plant is an important move in light of the increased focus on speed among the region’s manufacturers, he said.
One of the biggest challenges local apparel manufacturers face in making the jump to full-package production is finding the money necessary to buy materials and hold them in inventory during the months of production. That’s been a particular problem to some U.S. mills trying to sell into the region to take advantage of the terms of the 2000 Caribbean Basin Trade-Promotion Agreement, which gives duty-free and quota-free treatment to garments made in the region of U.S.-made fabric.
“We’re trying to do more direct business here, and that has proven to be very difficult,” Sam Hiatt, vice president of New York-based knitter Fab Industries, said in an interview at Guatemala City’s Apparel Sourcing Show, which ended its three-day run on Friday. “The local companies have issues with credit.”
The problem is that financial reporting standards in Central America are not up to U.S. standards, U.S. buyers and local producers said.
Joshua L. Ramazzini, merchandising manager at intimate apparel maker Grupo Indurasa, said, “We got into full package, not without money, but not with a lot of money. We convinced our suppliers to get involved with this, that it was the way to go.”
He said a majority of his company’s raw materials come from Brazil, Colombia and Mexico, with about 20 percent from Asian suppliers and 5 percent from the U.S.
Ramazzini said a bigger barrier than finances to developing a full-package business model is attracting enough talented staffers. He said about 74 of his company’s 1,600 workers are in the high-skilled merchandising, design and management functions needed to support a full-package business. That full-service model requires higher-skilled and higher-paid workers, he said.
“It’s not the amount of people you need, it’s the cost of those people — what you have to pay them,” he said.
Manufacturer and government officials said the average wage for manufacturing-floor employees in the local garment industry is $200 a month. Ramazzini said he pays his three designers $2,500 a month, and since he had to recruit them from Colombia, also pays for their housing.
The minimum wage in Guatemala is 1,300 quetzales a month, which translates to $158.20 at current exchange rates, Cuevas said. Several Guatemalans said in interviews that apartments in Guatemala City rent for around $150 a month.
Arias estimated that his company has almost 3,000 workers in higher-skilled, higher-paid jobs, and said that because of low levels of education and literacy in Guatemala, he has had to recruit many from abroad and to invest heavily in training.
U.S. importers and Guatemalan executives said the key to the local industry’s future will be the development of a large textile industry. Today, as little as 10 percent of the garments made in the region use locally produced fabric, according to the estimates of several executives. That’s largely because current U.S. trade law favors the use of U.S. fabric. The proposed Central American Free Trade Agreement would allow locally made fabrics to be used in garments that would enjoy quota- and duty-free treatment.
Meanwhile, more fabric investment is starting to flow into the nation.
Jose Luis Perea Cordoba, the financial chief of Selim Guatemala SA, showed off his company’s new yarn and knit-fabric plant outside the capital city, with more than 2,000 workers. The plant, owned by Siheung, South Korea-based Selim Global Textile Group, opened in April and is targeting the local knit-garment industry. The highly automated plant occupies a compound with about 10 buildings.
Asian investors are a major force in Guatemala’s industry. They own about 65 percent of the factories in operation.
Joey Habbie, the chief of Textiles Amatitlán, said the fabric supply will be a key part of the future of Guatemala’s industry. His company produces more than 2 million yards a month of woven fabrics, including denim, corduroy and twill.
“If CAFTA comes through, we’ll be sitting on a gold mine,” he said.
GDP: $24 billion/$2,000 per capita
GDP Change: Projected +2.3 percent in 2004
Population: 12 million
Formal Employment: 4 million
Textile & Apparel Employment: 140,000
Textile & Apparel Exports to U.S.: $1.76 billion
Key Products: Cotton knit shirts and blouses, cotton and synthetic-fiber pants
Currency: $1 U.S. = 8.22 quetzales
Major Companies: Koramsa, Textiles Amatitlan, Syltex, Grupo Indurasa
Guatemala is one of five Central American countries that would be covered by the proposed Central American Free Trade Agreement, which would give NAFTA-like benefits to the region. Agriculture, not apparel manufacturing, remains the nation’s key economic driver and a large employer. However, a sharp drop-off in coffee prices in the late Nineties took a heavy tool on the agricultural sector, throwing many Guatemalans out of work. Apparel companies — many owned by South Korean investors — have been a key creator of jobs in recent years. As the nation’s industry prepares for the coming end of quotas in 2005, executives said developing the capacity to offer full-package service, as well as driving investment into textile mills, will be key.