Mexico's apparel manufacturers have been fighting a losing battle against declining exports over the past few years. Even an ambitious multi-pronged project to save Yucatan state's apparel industry, focusing on fast-turn production, new training facilities and initiatives to lure textile investment into the region, has met with dwindling government and industry support. Is this the end of the line?

It's hard to believe that only five short years ago Yucatan State was the flavour of the month for apparel manufacturers looking to set up in Mexico. The NAFTA bandwagon meant the country's export volumes had been surging dramatically every year since 1995, with Mexico overtaking China as top apparel exporter to the US by 1998. It was difficult then to imagine anything stopping the Mexican juggernaut.

Tranquil Yucatan State, located at the southern end of Mexico, seemed just the ticket. With a business-friendly governor paving the way for foreign investors, activity hummed at the industrial park just outside Merida, the capital city, where signs advertising for sewers hung from every factory gate. In early 1999, Yucatan boasted some 100 maquilas - export-oriented assembly plants - the majority in apparel.

For companies previously based in northern Mexico who had struggled to hold on to costly workers always threatening to head north, Yucatan's stable albeit untrained workforce looked more than promising. Instead of contending with expensive trucking services and the accompanying frequent pilferage, Yucatan's port in Progreso, only 30 minutes from Merida, offered a reliable and speedy two-day shipping service to Mississippi. With speed to market the mantra on everybody's lips, Yucatan beat most of the rest of the country as the closest port of entry into the US.

Most important was the quality of life in the state, amidst gently crumbling colonial architecture and Mayan villages and ruins. Merida was considered a plum posting for foreign expatriates and managers from other Mexican states, a great place to live and raise kids.

The US companies were present in force, with medium to large-scale operations for Maidenform, Oxford Industries, Oshgosh B'Gosh, Jerzees of Russell Corporation, Vanity Fair and Kellwood, each producing only for orders received from head offices. The Asians, fearful of losing their US market, had begun considering the inevitable - setting up operations in Mexico - and were restrained only by the financial crisis at home.

Hong Kong's Fang brothers, who had cut their manufacturing teeth way back in Asia with Liz Claiborne, were frontrunners in the region, with units in Central America from the early 1990s and then Yucatan. By 1999, their Yucatan operation was up to four plants, three doing knit tops for the likes of Polo/Ralph Lauren, Tommy Hilfiger and Liz Claiborne, with Marks & Spencer-trained engineers developing better woven bottom production in the fourth.

NAFTA's strict yarn forward requirements meant some of the bigger operations were planning to set up local fabric mills. Taiwan's Hong Ho announced a project which would employ 8000 workers, including a vertical knit fabric facility. The future also looked rosy for the larger locally-owned companies. Industría Textil de Yucatan (now known as GMY) would eventually have three plants churning out fleecewear and uniforms and its young president, US-educated Adolfo Peniche, voiced confidence in being able to satisfy whatever production demands his US clients might throw at him.

The biggest problem looming overhead in 1999 was the fast dwindling supply of workers in and around Merida with its modest population of about 900,000. So, newer arrivals were setting up in towns and villages, capturing workers from the surrounding countryside. For Cuban Jose Becerra who had previously run factories in Miami and then Costa Rica before being driven out by rising wages, Yucatan was unbeatable. "All we have to do is promote the place and make sure buyers know we're here," he said.

Declining exports
And then it all went pear-shaped. From 2000 onwards, Mexico's exports began declining, just as dramatically as they had risen, dropping by nearly 12 per cent between 2000 and 2002.

The trend continues today and with quota phase-out just around the corner in January 2005, Mexico's loss will surely be Asia's - particularly China's - gain. Mexico's apparel manufacturers, having spent the previous half decade racing to keep up with increasing volumes, had devoted little energy or resources towards middle or long-term strategies and were caught sorely off guard.

The Mexicans were quick to blame recession in the US and the over-valued Mexican currency. In fact, exports from the CBI and Asia had either held steady or increased during the same period while Mexico's peso had depreciated overall. A new Caribbean trade policy was pulling buyers away from Mexico while devaluated Asian currencies pulled them back to Asia. Most importantly, the problems of working with Mexico - its inflexible labour laws, sky-high taxes and utility bills, strangling bureaucracy and the other hidden costs of doing business here - could no longer be ignored.

At the US-owned plants in Yucatan, with their guaranteed orders from head office, production continues unabated albeit amidst steady grumblings of cost control from up north. US operations are in charge of all marketing, merchandising, pre-production, raw materials and trims sourcing - down to the smallest sewn label or printed polybag. Most Yucatan operations are reduced to receiving cut bundles, stitching and shipping.

The Asians, all contracting operations working for a variety of competing customers, have felt the pinch more. TPL quotas for non-NAFTA fabrics issued on a first-come, first-serve basis run out earlier each year forcing them to source within NAFTA or pay duty. Hong Ho halted hiring at 1500 employees and its fledgling circular knit operation was abandoned: NAFTA yarn had proved more expensive than anticipated and they were unable to identify satisfactory and consistent dyeing and finishing contractors.

Those who felt the crunch the most were the smaller, locally-owned operations. These lacked not only the industry-specific and general business skills necessary to deal directly with buyers, but more critically, the all important cash flow to finance raw materials purchases. In 2000, when there were some 32000-plus people working in the state's apparel sector, over 9000 workers came from this group. By the end of 2002, their numbers had dipped below 3000.

State government steps in
That's when the state government stepped in. Worried about losing their largest industrial employer and concerned about developing a solid industrial base with international benchmarks and exposure, the Secretariat of Industrial and Commercial Development (SEDEINCO) called on David Birnbaum of Third Horizon Ltd, a formerly Hong Kong-based apparel industry consultancy and sourcing specialist.

Birnbaum had been working in Merida since the late 1990s setting up operations with Asian investment. He signed on Spanish-speaking Josephine Bow, a long-time collaborator and former Women's Wear Daily correspondent for Asia as in-country project manager for the duration of the nine-month contract. Then the project's official start was delayed - and its original resources drained - in the wake of Hurricane Isidore which devastated the state in September 2002.

Birnbaum drew up an ambitious multi-pronged strategy to save the state's apparel industry which was released in a final report in August 2003 when the project finally got underway. The strategy focused primarily on Yucatan's main advantage - its proximity to market. He argued that the only way to secure a guaranteed toehold in the US market in the post-January 2005 era was to offer a 30-day turn, from fabric production to apparel delivery in the customer's US distribution centre.

Acknowledging the necessity for cutting edge engineers on the factory floor that such a plan would require, Birnbaum proposed the establishment of an internationally accredited apparel industry polytechnic along the lines of Hong Kong's highly successful Institute of Textiles & Clothing (ITC) to serve the entire Latin American region. In addition to apparel production modules, other degrees for merchandising and a special MBA program for small and medium business owners would be offered. Professor Gail Taylor of the ITC drafted a preliminary budget and agreed to serve as advisor during the planning stages of the polytechnic.

It was also crucially important to secure new textile investment into the region. Mexican mills are notoriously unreliable, with uncompetitive prices and a reluctance to develop new product lines. As major US textile mills were already throwing in the towel on their new Mexican operations, Birnbaum proposed strategic alliances between Asian mill groups and major US buyers who would guarantee steady and quick payback to the Asians.

Birnbaum apologised that his strategy was long-term and could not help the struggling smaller, locally-owned companies. "Right now, we have no real industry," he said. "If we can raise the levels of professionalism through the polytechnic, those graduates should go out to work in New York, Asia and Europe. When this group returns and sets up their own factories, then we will have built an industry."

Throughout the early months of the project, Birnbaum embarked on a steady grind of speaking engagements at apparel conferences and major company meetings, promoting the Yucatan strategy. Initial reactions to the report were generally positive as to the strategy, mixed with a healthy dose of scepticism as to its achievability.

In-depth interviews
Back in Merida, Bow's first task was to conduct in-depth interviews with every apparel company in the state. Part of the information would go into an internet database listing apparel manufacturers, reliable export-oriented Mexican mills and other related service suppliers; the rest would be confidential, assisting Birnbaum in carrying out the project strategy. She soon ran into what would come to characterise the Yucatan project's primary difficulty - the disparate nature of the various factory types and their perception of a lack of common ground.

"I'd done hundreds of apparel factory interviews in Asia, but had to completely adjust here," recalled Bow. "In factory after factory, there were no sample rooms or fabric swatches for me to work from. The local general managers knew nothing about where the raw materials came from or what the FOB or retail prices for the styles were. Nobody ever talked to the buyers. I could only ask questions about volumes, turnaround time, sewing minutes, efficiencies and employee turnover levels, this last item being, by and large, their most important operational problem."

If the US-owned operations were closed shops with no decision-making executives stationed locally, the Asians were even tougher to bring on board. Monty, a Hong Kong-parented operation and Yucatan's largest with over 4,500 employees producing woven bottoms for Gap, refused to be interviewed.

Questioned on his commitment to staying on in Yucatan, owner James Poon would only say that he had invested a great deal in his Mexican operations, but that bottom line decisions would determine whether or not he stayed. Interviews with the smaller, locally-owned companies were also frustrating with most simply unable to give a reliable picture of their operations and seemingly resigned to their ultimate demise.

"In fact, over and over, it's the same handful of independent companies with whom we have managed to establish an ongoing dialogue through the months," says Bow. "They've been supportive of the project from day one and we've been able to help them with leads on fabric suppliers, marketing assistance or other advice."

Database information
Finding information for the database on export-oriented Mexican mills interested in working with Yucatan factories also proved less than straightforward. "Unlike Asia where mills have well-designed, fact-filled websites and company brochures, and immediately respond to marketing queries, Mexican mills have a long tradition of marketing within closed circles and of producing only what they want to make," she explained. "Smaller Yucatan factories are poorly served and often have to settle for stock production, hardly a way to break into higher value-added, fast-turn fashion."

After the initial opening flurry of activity, the project soon began running into walls. First off, although a leading local university had accepted to house the polytechnic, anticipated state and federal funding failed to materialise. Subsequent attempts at fundraising also proved futile with local industry reluctant to pony up their share.

Birnbaum had fully expected to go to overseas buyers to ask for matching funds but without anything to show from the Mexican side, his hands were tied.

The strategy for new mill investment received an early body blow as far back as October 2003 when Russell Corporation, which had been wooed for months, announced that it was ramping up its Caribbean knit fabric operations instead, citing more favourable costs and conditions there.

Birnbaum's attempts with major buyers such as Gap, Vanity Fair and Kellwood also met with rebuffs: "right plan, wrong place" was the general common theme. In the absence of any overall project momentum, other areas of his strategy including the establishment of a state-wide credit facility for financing raw materials purchases and US customs pre-clearance facilities have also stalemated. Subsequent SEDEINCO budget cuts curtailed travel to Asia to meet with textile groups.

Putting up a game fight
With or without outside support, the independent Yucatan apparel companies are all putting up a game fight to stay in business. GMY closed down one unit and is trying to switch into full package production with one of its two major clients; it's also begun a new initiative with fashion shirts for the better domestic market. Jose Becerra, squeezed from $0.82 to $0.60 for sewing charges on the same uniform over the past five years, is trying to break back into full package production out of Yucatan and looking to shift at least part of his operations to a free trade zone in Colombia.

French-born Philippe Atlan, who shifted part of an LA-based manufacturing plant into Yucatan in the late 1990s, remains hopeful about the project's ability to get off the ground. "We were really supportive about the project, especially the polytechnic, as we were hoping to hire graduates with a real passion for the business," he says.

Adam Feldman, an American who set up in Yucatan in the late 1990s, takes heart in the fact that his major clients continue to look at Yucatan as the ideal place to produce in Latin America because of speed to market and overall good deliveries. He's currently looking at setting up a partnership with a knit fabric manufacturer in Miami to ensure reliable fabric supplies enabling him to increase volumes.

As the project enters its final months, Birnbaum is launching a renewed bid for government support with a revised strategy incorporating an initiative presented by Italian Fabio Atti, current president of the state Apparel Chamber and general manager of the La Perla factory located in the state. Under the plan, qualifying member factories would pool their surplus sewing capacities and pre-production facilities in a consortium which in turn would market and collaborate with Italian design companies for fashion production aimed at the US, European and Mexican markets.

The initiative is an attempt to identify smaller-scale targets with some chance of government funding. "Yucatan is a poor state with big problems and we just don't have the resources to finance big solutions, but we're still pushing," said SEDEINCO sub-secretary Bernardo Cisneros.

Although admittedly discouraged, Birnbaum stands by his original strategy. "The apparel industry in Mexico is in terrible shape and getting worse. We have come up with the only workable plan so far and we are waiting for the government to make up its mind. Without the plan, Yucatan will gradually lose its largest industrial employer.

Expert Analysis

Textiles and Clothing in Mexico 2003

Mexican textile and clothing exports to the USA grew rapidly following the implementation of the North American Free Trade Agreement (Nafta) in 1994. The industry achieved remarkable gains in production, employment, labour productivity, export sales and value-added. By 1996 Mexico had become the leading supplier of textiles and clothing to the US market. But the competitive advantages which the Mexican textile and clothing industry once enjoyed have been eroded over the past three years as competition from China and Caribbean Basin Initiative (CBI) countries has increased.

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