Guatemalas apparel exports are likely to leap 6% to $1.6bn this year

Guatemala's apparel exports are likely to leap 6% to $1.6bn this year

Guatemala's apparel and textiles industry has boosted its value-added product portfolio and improved response times in the past five years as it scrambles to win more US sourcing business, particularly as Asian countries including Vietnam continue to steal exports to its key partner.

"They have improved a lot," said Sheyla Molina, a regional analyst with S&M consulting. "A few years ago, they were mainly sewing. Now 30 to 40% of the industry is doing full package."

Molina spoke on the fringes of the 24th Annual Apparel Show held in Guatemala City last month, which drew some 4,000 people from 17 countries. There were over 180 booths and a large Colombian and Indian delegation.

Karin de Leon, a textiles consultant with Invest in Guatemala, added: "We have added a lot of value in knit tops, synthetic and woven pants and in sportswear."

She echoed views that the country makes the most fashionable tops in Central America, where the six countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic) comprising the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) trade block with the US are rushing to independently win new US contracts, throwing once highly touted integration efforts aside.

"We are not like Honduras, which focuses on basic T-shirts," de Leon added. "Here we make fashion, special finishes with screen printing and diverse stamping."

She said Guatemalan mills are oversold, helped by rising demand from strengthening US trade and many brands' growing desire to source closer to home amid deepening manufacturing woes and rising prices in Asia.

Sourcing contracts will rise 20% this year, up from a 12% gain in 2014, De Leon predicted. In fact, business is expected to be so brisk, the industry expects exports will leap 6% to $1.6bn this year, up from a more meagre 2% gain in 2014.

Renata Morales, factory compliance director at Guatemala's top textile and apparel association Vestex, said Polo Ralph Lauren and Tommy Hilfiger will sharply boost output this year while other top clients such as Wal-Mart, Kohl's, Target and Old Navy will maintain or slightly increase production.

De Leon said response times have also increased sharply and are 30% faster than other Central American countries. "We have had to compensate higher labour and production costs with faster lead times," she said.

Still, the embattled government of Otto Perez Molina (there have been fierce calls for his resignation amid corruption charges) is moving to woo more investment by slashing energy prices by 30% and introducing lower wages in secondary cities. It is also looking for ways to maintain the country's 10-year zona franca or 'free economic zones' tax benefits for maquila exports, which expire 31 December as part of WTO phase-out requirements.

The administration is looking to pass a new law called Law of Investment and Employment that would essentially maintain the same benefit level. However, de Leon said current political turmoil could put the job in the hands of the next government (general elections take place in September).

"We hope this will be approved," she said. "We risk losing investment to other Central American countries but the parties understand this. The industry employs 45,000 directly and 100,000 indirectly. It is the main export sector in Guatemala, ahead of sugar and coffee."

Feedstock woes
But Guatemala faces a huge challenge, which sources say requires billions in investment: building its own synthetics and polyester spinning capacity crucial to more quickly assemble garments for sale to US fast-fashion labels.

In fact, much of the country's future near-sourcing opportunities hinge on this, according to observers.

"Guatemala has an amazing skill level," Molina noted. "Factory workers have small hands. They can make beautiful handcrafted products that can easily compete with India." But "we are lacking in raw materials."

Molina said Guatemala also faces big competition from Honduras, Latin America's largest supplier to the US, which has so far focused on basics but is quickly moving up the value chain. "Hondurans are very entrepreneurial. Executives are US-educated and very efficient."

Much of Guatemala's synthetic fabrics – crucial to support its growing sportswear segment – are currently imported from Central America, and increasingly Colombia.

Jaime Rojas, Central American director for high-end Colombian fabrics supplier Lafayette Sports, said Guatemalan firms are increasingly demanding premium fabrics, which he had on display at the show. "They want more specialised, high-tech knits because their US clients want better products. They want quality, even if it costs more."

US companies are becoming more interested in Guatemala and other Central American sourcing opportunities as regional stocking and re-stocking can take one to two weeks compared to two months in Asia. Still, he agreed additional investment is required to broaden the feedback base and cut import reliance.

Lacking integration, automation
Regional Integration is also pivotal at a time when other strong textiles producers such as El Salvador, Nicaragua and Honduras are still largely disconnected.

"It's really sad to see the Apparel Show promoting itself as the only Central American regional fair when these countries are hardly working together," said a sourcing manager at a major US brand.

Guatemala and Central America must also bolster their manufacturing technology at a time when only 10% to 20% of production is automated, observers said in a tech panel organised by consultancy [TC]².

They added there are no more than 35 cutting machines in 22 companies across Central America compared to roughly 500 in Mexico.

Central American companies have so far been slow to recognise the benefits of new technology investments and inventory management software, but some panellists say the rising competitive threat of the Trans-Pacific Partnership (TPP) – especially from nimble Vietnam – may encourage them to become more technology-driven.

Vietnam's visit
Speaking of Vietnam, which has stolen much of Central America and even Mexico's apparel export business to the US, the Guatemalan government ironically invited Dan Phuong Dong, president of the Vietnam Textile and Apparel Association (VITAS), to give an account of how it has achieved so much so quickly.

While many were shocked the government would invite a major competitor, Vestex's marketing director Lucia Palacios said that was far from the case. "We want to hear how Vietnam has been able to achieve so much," she said, adding: "We want to use their insights to form our own growth template which we hope the new government will support."

That feedback was unfortunately scarce. Phoung Dong's speech was full of complex graphs and illustrations but provided little detail about the secret behind the country's competitive might, which many here attributed to government subsidies, though she strongly denied that was the case.

She did say, however, that Vietnam hopes to boost overall apparel exports to $67bn by 2030 from $24bn in 2014, thanks in part to opportunities emerging from the TPP.