The Spanish textiles industry is forecasting flat or declining growth in 2005 as rising imports from Asia offset gains from strengthening markets, and the strong euro continues to hurt exports.

The Spanish textiles sector has been in the doldrums since 2001, hurt by a soaring trade deficit, weak markets and the euro's rising spree against the US dollar and Asian currencies.

In 2004, output value fell 3.5 per cent to €12.8 billion. Imports leapt 7 per cent to €9.9 billion while exports rose 2.5 per cent to €6.6 billion, reflecting a €3.3 billion deficit. Production (which Spain sells 48 per cent abroad) fell 4.5 per cent to 420,000 tonnes while the industry lost 14,200 jobs or 5.5 per cent of its workforce.

This year "we expect to perform more or less the same or even fall a bit from last year," predicts Victor Fabregat, a director at industry statistics firm Centro de Informacion Textil y de La Confeccion (CITYC).

Imports will continue to rise, widening the deficit and hitting production but strengthening markets at home and Europe might provide balancing gains, he explains. Moreover, employment is expected to fall sharply as companies continue to close up shop or move to cheaper production posts abroad.

Other observers were more pessimistic.

"We are going to continue losing production [value]," says Maria Jesus Mazon, secretary general of the Federacion Espanola de Empresas de la Confeccion (FEDECOM). "Exports are falling a lot and the strong euros is going to make it worse."

Adding gloom to the industry, apparel prices have risen below the inflation rate for some years, squeezing producers' margins, Mazon adds.

Internationalisation and innovation key to survival
To bounce from the crisis, the industry must expand to new international markets, bolster innovation and streamline production, observers say.

The industry is highly conscious of the need to find new markets to fix the trade deficit, which has ballooned 50 per cent since 2001, Fabregat says.

"We must internationalise and increase our investments abroad to set up new manufacturing facilities," he says. "But we also need to innovate, and improve technology and logistics, to increase our competitiveness."

Adds a textiles official in the Galicia, north west Spain, region: "Our costs are not competitive compared to producers in China, Morocco or Eastern Europe, but if we focus on value-added products that generate commercial and logistic efficiencies, we will survive," she points out.

"We need to give new functions to yarn and fabrics to use them in growing sectors such as technology, health and construction," she adds.

Because the majority of Spanish producers are 'mom and pop' shops, one way to achieve the necessary scale to compete in the free-quota world is through consolidation, Mazon says.

The firms' high labour costs and rising investment needs make it hard for them to enter the international arena, so "merging or forming strategic partnerships is better than staying alone."

Spain chips in with R&D, publicity funds
Pressured by the industry's woes and growing unemployment rates, particularly in big outposts such as Catalonia, Valencia and Galicia, the Spanish government has pledged support with funds for Research and Development (R&D) and promotion.

It has also established an industry forum or "observatorio" to analyse the industry's problems, which many have welcomed. Spain will invest €16.5 million in 2005 to publicise the textiles industry in key markets France, Germany, Italy, UK, the US and Japan through foreign commerce institute ICEX.

It will also provide tax breaks for research initiatives and lodge protests with the World Trade Organisation if Asian producers breach fair commerce practices.

Moreover, the Consejo Intertextil Espanol (CIE), a big textiles federation, has teamed with the Association of European Textile Collectivities (ACTE) to develop programmes to help shore up the industry on a regional level.

Carmen Torres, secretary general of Madrid-based apparel Asociacion de Empresas Confeccionistas de Madrid (ASECOM), says that the government needs to invest more in the industry.

"The PP government's prior plan offered €48 million per year and we need more money if we want to sell this country's image as a modern one that has high quality standards," she notes. ASECOM represents 186 knitters in the Madrid region.

Spain should focus its entrepreneurial aims in the EU's new markets and in Russia, Torres adds.

"We have to compete with elaborate and hand-made cuts such as suits, jackets, coats and three-quarter tops that to tap into those countries' growing interest in differentiated cuts and fashion," she explains.

Spain would also benefit from muscling in the baby, bath, brides and lingerie markets where it already enjoys industrial know-how, Fabregat adds.

Unemployment keeps rising
This might be a good way to boost producers' fortunes and save jobs in an industry with a rising unemployment rate.

The industry lost 14,200 jobs or 5.5 per cent of its workforce in 2004, significantly less than a prior 20,000 forecast. However, experts are forecasting bigger losses this year as the industry continues to shift production to cheaper production posts in Eastern Europe, Africa and Asia.

Spanish textiles firm Saez Merino became the poster child of the trend when it closed three plants last year to transfer production to Morocco, axing 546 workers.

Because many companies are expected to engage in similar restructurings, the industry has urged the state to help finance "industrial and social" measures to reduce its workforce less traumatically.

"We favour relocation as a strategy to cut costs but this is not the only one we are recommending," Fabregat says.

China gains ground
China accounted for the bulk of last year's 14 per cent increase in apparel, knit and bath sales to Spain. All import categories rose while Spain only saw gains in the apparel category, which jumped 8 per cent.

Asia accounts for 32 per cent of imports (12 per cent China and the rest India and Pakistan), Europe 50 per cent and Morocco, Egypt and Turkey 18 per cent.

Asian imports grew 12 per cent last year but Spaniards have not yet hammered out a strategy to stem the tide.

While it's clear that China will boost exports in the free quota world, this increase will trump sales from other big producers such as India, Pakistan and Morocco, balancing inflow rates, Fabregat says.

Unlike countries such as Mexico, which are scrambling for ways to fight the Chinese, Spain will wait to see how the rest of Europe deals with them before taking any action.

Still, the industry's turnaround efforts will take "a few years" to work, concedes Fabregat.

2005 "won't be like crossing the big desert, but while some companies will survive, many will definitely fail," Torres says.

By Ivan Castano.