Romanian makers underestimate Chinese threat
By just-style.com | 20 December 2004
The Romanian clothing industry has several reasons to rejoice. It's the biggest Eastern European clothing exporter to the EU, the local supply chain is improving and domestic consumption is on the rise. Surprisingly though, the majority of Romanian manufacturers don't seem afraid of the Chinese threat reports Jozef De Coster.
On the eve of the 2005 'Big Bang' when quotas between WTO members are lifted, the Romanian clothing industry presents a mixed picture.
On the one hand, it has several reasons to rejoice. Since 1998, Romania has been the biggest Eastern European clothing exporter to the EU and looks set to continue in this position. The local textile and accessories supply chain is improving. And domestic consumption of clothing is increasing and is expected to speed up from 2007 onwards, when Romania should enter the EU.
On the other hand, however, the Romanian clothing industry still suffers from serious weaknesses: over-dependency on CMT, outdated machinery, and lack of a commercial strategy that takes into account the 'China factor.'
Since 1998, when Romania grabbed the title of Eastern Europe's biggest clothing exporter to the EU from Poland, its clothing exports to the EU have doubled.
According to Euratex statistics, those exports stood at €1.85 billion in 1998; five years later, they reached €3.66 billion. But recently their speed of growth has become quite modest: less than 2 per cent in 2003.
Romania's most obvious comparative advantages continue to be its geographic proximity to the EU and its low labour cost.
Transport time from Romanian clothing factories to customers in EU countries varies from just 24 hours to 3 days. Average delivery time is shrinking as ever more Romanian manufacturers source threads, buttons, zips, etc locally.
"Investments in new garment production capacities are stalling, but we observe a lot of investment activity in the Romanian accessory sector," Andrei Pena, director of the leading Romanian textile magazine Dialog Textile, says.
Recent British investors in the Romanian textile supply sector include Coats (sewing thread), Labelon (labels) and Mainetti (hangers). Cotton Mill Romania, a subsidiary of Cotton Mill UK, intends to invest around £0.5 million in a thread production facility in Romania in early 2005.
A number of German suppliers have also strengthened their presence in Romania, such as Kufner (interlinings), Schaefer (buttons), Hackenberg (tapes), Korte (woven and printed labels), G+O Friedrich (fabrics), Textil Gruppe Hof (interlinings) and WKS (washing and dyeing).
To the disappointment of Romania's 275,000 clothing factory workers, salaries in the sector remain low. According to the National Statistics Institute, Romanian overall gross monthly salaries rose by 2.2 per cent in October 2004 to 8.39 million Lei (€209), while the net average salary reached 6.07 million Lei (€151). In most garment factories, however, wages are much lower.
Paying his employees the equivalent of €160 per month net and of €200 gross, the children's wear manufacturer Cardati Grup in the west Romanian town of Timisoara is an exception.
Eng. Tiberiu Ciurceu, the company's founder and general manager, explains why he pays so much. "I don't want to step into the so-called 'Lohn' system (1)," he says, "because in two years this system will shift away from Romania to cheaper countries. I prefer relying on the design capabilities of my wife and the skills of highly qualified employees to produce my own collections."
Most Romanian garment factory workers have to be satisfied with a net salary (bonuses for meals included) of around €100 a month.
The economist Malio Dour, commercial director of the knitwear company Privex '93, argues that in spite of the fervent expectations of Romanian workers, the macro-economic situation of the country doesn't permit big salary increases.
"Nominal salary increases amounted to around 10 per cent in 2004 and could reach 17 per cent in 2005. It simply can't be more," Malio Dour says.
Real income rises for factory workers depend on the government's success in taming inflation, which has fallen from 46 per cent in 2000 to 12 per cent in 2004.
The German consultant Wolfgang Weis (Weis Consulting Associates GmbH) in autumn 2004 organised an enquiry into the standard minute prices (transport costs not included) which are practised in 35 important clothing production countries. He found that Romania is still favourably positioned.
Romanian CMT companies boast a minute price of €0.08 only, compared with €0.15 for Poland and €0.12 for Hungary. The Balkan countries Bosnia-Herzegowina (€0.07) and Serbia-Montenegro (€0.06), which are geographically closer to the EU markets than Romania, are not yet considered as a threat by Romanian manufacturers because of their continuing ethnic and political problems.
Neither are the neighbouring countries: Ukraine (with a minute price of €0.08, but suffering from an image problem) or Bulgaria (at €0.07, but trucks need to cross one more border to reach the EU).
Wolfgang Weis points out that Romania is no match for China (standard minute price of €0.03). Chinese garment manufacturers mostly have a modern, well equipped machine park and their employees work much faster (up to 50 per cent) than Romanians.
The Chinese threat
Surprisingly, the majority of Romanian manufacturers don't seem afraid of the Chinese threat. Some simply argue that Chinese quality is "bad quality" (and suggest that you verify this yourself at the cheap stalls on the Niro market at the outskirts of Bucharest).
Others refer to the basic Chinese handicaps of "mass production only" and long transport times. Also, big Romanian clothing companies such as Braiconf (men's shirts and ladies' blouses) and Pasmatex (women's wear, especially business wear) boast a degree of flexibility that sets them apart from their Chinese competitors.
A UK company that is well situated to judge the pros and cons of Romania as a production location is the ladies' clothing manufacturer Alison Hayes, which is headquartered in London.
In 1994, Alison Hayes Romania was established to make ladies' garments in a plant in Urziceni (near Bucharest). According to Andreas Santis, director of Alison Hayes UK, the company's goal was to take advantage of Romania's relative proximity to the UK market and of its legacy in the textile industry.
In 1997, all of Alyson Hayes' UK production was moved to Romania. In 2000, the British company acquired a second plant, in Buzau. This facility, one of the most modern in the country, was inaugurated in 2003 by Ion Iliescu, the president of Romania.
Also in 2003, Alison Hayes Britannica, the group's logistics and warehousing company, based in Buzau, took over all activities from the company's warehouse in London (raw material sourcing, quality control, finished goods handling).
Another Romanian subsidiary, Alison Hayes Moda, started producing prototypes from designers' sketches. By the end of 2004, Alison Hayes was employing 1,200 people in Romania (not including the employees of 14 subcontractors with whom the British firm works) and had a total investment in the country of €12 million.
On 25 November 2004, during the third Congress for the Textile & Clothing Industry of South East Europe, in Bucharest, Andreas Santis announced a new investment of some €3 million in Romania that will create 1,000 more jobs and increase the group's monthly production capacity in Romania from 500,000 to 700,000 pieces.
The planned investment proves that Romania is the favourite production location of Alison Hayes (which, being of Cypriot origin had 5 factories in Cyprus before escalating labour costs forced the company to seek after another manufacturing base).
Andreas Santis stresses, however, that Romania should do more to reduce bureaucracy, change legislation and fight corruption.
Rapid growth is a thing of the past
Although the turnover of the Romanian clothing industry (knitwear and hosiery excluded), increased by 26.1 per cent (in Lei) during the 1st semester of 2004, Vasile Mirciu, director general adjunct and textile specialist at the Ministry of Economy and Trade, believes that rapid growth is a thing of the past.
He expects that, in volume terms, Romanian clothing production in 2007 will only be 7 per cent higher than 2003. He points out that Romanian clothing exporters are still very dependent on 'Lohn' (OPT). During the first semester of 2004, 'Lohn' imports of textile products represented 90.5 per cent of total Romanian textile imports (US$2 billion out of a total of US$2.2 bn).
Productivity in the Romanian clothing industry is still at a low level. Many sewing and other machines are outdated. According to director Andrei Pena of Dialog-Textil, most of the 250 CAD/CAM systems in the country have been bought second hand.
Other negative factors are the apparent failure to modernise the Romanian manmade fibre industry, the collapse of the once strong flax and hemp sector, and the slow restructuring process in the apparel industry, which still counts 190 companies with more than 500 workers (several of which employ a few thousand workers).
On the other hand, Vasile Mirciu rightly stresses that Romania has a long tradition as a clothing exporter to the EU market and that the domestic market with its 22 million consumers offers growing sales possibilities.
This is as true for the big companies which recently developed brand names as for the flexible SMEs (4,853 out of a total of 5,043 clothing companies).
From 2001 to 2004, annual GDP growth hovered around 5 per cent. The purchasing power of the growing middle class is attracting a lot of foreign retailers to Romania where they compete with existing players such as Steilmann, Stefanel, Benetton, YSL and Pierre Cardin).
(1) The Outward Processing Trade system (OPT) is mostly called the 'Lohn' system in Romania.
By Jozef De Coster.
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Romanian makers underestimate Chinese threat