Honduras is now the third largest apparel exporter to the US after Mexico and China reports Jozef De Coster. The Honduran maquila industry is currently moving towards ‘full package’ production, investing in more sophisticated manufacturing centres that focus on flexible supply chain management, high productivity and good quality.

The rise of the Honduran apparel industry over the last decade has been a real success story. The tiny central American country (6.7 million inhabitants) is now the number three exporter to the US after NAFTA member Mexico and clothing export giant China, and ahead of Bangladesh and Hong Kong.

In 2002, Mexico exported 2.14 billion square metre equivalents (SME) of apparel to the US, China 1.14 billion SME and Honduras 990 million SME. No mean feat since US buyers are permanently benchmarking Honduran manufacturers against other potential suppliers.

San Pedro Sula is the centre of the Honduran garment industry.

The textile and apparel industry is of critical importance to the Honduras economy. According to the Honduran Apparel Manufacturers Association (AHM), it is the largest employer in Honduras, in 2002 providing jobs for 26.2 per cent of the country’s workers. Between 1990 and 2000, employment in the sector rose from 17,500 to 125,608 jobs. In 2002, the Honduran maquila* industry produced 118 million dozen garments (all categories), with a dollar value worth US$2.43 billion.

US trade agreements
US trade agreements such as CBI (Caribbean Basin Initiative, 1985-86), CBTPA (Caribbean Basin Trade Partnership Act, 2000), and enhanced CBPTA (2002) are, for a large part, responsible for the growth of the Honduran apparel industry.

They enable the country to enjoy NAFTA-parity for its apparel products (mainly maquila output), which are allowed to enter US ports duty-free. In 1990, textile and apparel exports represented 27 per cent of total Honduran exports to the US. By 2001, this had increased to 70 per cent. The US is the main customer of the Honduran maquilas, absorbing more than 90 per cent of their output.

The twin competitive advantages of proximity and free access to the US mean that Honduras can compete successfully even with China. At the Third Central American and Caribbean Forum of the Free Zones in February 2003, Mary O’Rourke, managing director of the New York-based strategic consulting network Jassin-O’Rourke Group, provided some figures. For Honduran woven cotton twill trousers, the landed cost in 2002 (US$9.71) was lower than that of China at US$10.66 (Chinese exporters still have huge quota costs to pay). As for knit cotton polos, in 2002 Honduras’ landed cost was US$7.52 compared with US$8.60 for China.

President Ricardo Maduro of the Republic of Honduras attended the Maquila Forum.

Why has Honduras become the biggest maquila apparel exporter to the US of all 14 countries which benefit of CBI?

Henry Fransen Jr, director of the Honduran Apparel Industry Association (AHM), says: “Over the past ten years more than 250 apparel companies have set up operations in Honduras. Investments are secure here, and there are a lot of qualified bilingual (Spanish and English) professionals available. Legislation in the country promotes investment, as do the best port facilities in Central America, at Puerto Cortés. Highly productive labour is widely available, and the labour rates are very competitive. The minimum wage stands at US$0.82/hr including benefits.”

Unfortunately, violent crime in the cities continues to deter potential foreign investors. Also, the relatively strong position of labour unions in Honduras (20 per cent of industrial workers are unionised, the highest percentage in Central America) is not necessarily interpreted as a great investment incentive.

An analysis of established apparel companies in Honduras shows that 40 per cent of the investment is from the US and 31 per cent from Honduran nationals. Another 15 per cent of the investment is from the Koreans, 4 per cent from Hong Kong, and 2 per cent from the Taiwanese. An additional 8 per cent spread among a number of countries.

Up to full-package
Proponents of the maquila sector assert it is a valuable source of export revenue and job creation for Honduras. Critics say it offers nothing but dead-end jobs, and traps Honduras into providing cheap labour for low value-added assembly operations. Because the vast majority of inputs are imported, critics argue that the maquilas do not stimulate growth in the rest of the economy.

However, as Honduras is stepping up its efforts to become a full-package supplier, the discussion for or against maquilas becomes irrelevant. The maquiladoras are currently in a transition from assembly sites based on cheap labour to more sophisticated manufacturing centres whose competitiveness derives also from non-price factors such as flexible supply chain management, high productivity and good quality.

AHM enjoys the full support of the government in promoting full-package. At the Forum for the Free Zones, Ricardo Maduro, the president of the Republic and several of his ministers, were present to show their support.

Henry Fransen Jr, director of the Honduran Apparel Industry Association (left) and Dave Gardner, director of SPESA.

According to Stephen Lamar, vice-president of the American Apparel & Footwear Association (AAFA) and one of the speakers at the Forum, in Honduras and other CBI-countries the so-called cut-part model (807A and 807) is rapidly being replaced by the full-package model. According to US import statistics, the share of full-package in Honduran apparel imports in 2002 amounted to around 50 per cent.

The full-package model is characteristic of retailer-driven - as opposed to manufacturer-driven - supply chains. Under this agreement, Honduran manufacturers receive detailed specifications for garments from the American buyer. They are responsible for acquiring the inputs and co-ordinating all parts of the production process: the purchase of fabrics, cutting, garment assembly, laundry and finishing, packaging and distribution.

Among the main brands currently manufactured in Honduras are manufacturers’ own labels (Wrangler, Gildan Activewear) as well as retailers’ and marketers brands (Bally, Osh Kosh, Jerzees, Russell, Tommy Hilfiger, JC Penney).

Prior to CBI, leading firms in the apparel supply chain preferred sourcing from East Asia because subcontractors in countries such as South Korea, Hong Kong and Taiwan could produce orders for finished apparel according to buyers’ specifications. Since CBI, retailers and marketers have been keen to transfer business to CBI countries like Honduras, Dominican Republic, Guatemala and El Salvador. Buyers placing orders for full-package apparel in CBI countries do not have to worry about tariffs or quotas, as they do when importing from Asia.

Consequences

Ing Rudolf Boerboom, general manager of HMC, a subsidiary of Ganis, pays productive workers $50 a week.

Very clearly, value has been added at the industry level in Honduras as a result of full-package networks triggered by US retailers and marketers. In fact, only design and product development, marketing, and retail (not by accident the highest-value added activities in the chain), have remained predominantly in the United States. No Honduran manufacturer seems to have its own apparel brands in the US, although some companies have a brand presence in the domestic market.

Another effect of the move to full-package is investment in equipment to enable companies to take up new tasks (for example, computerised cutting). At the end of February 2003 two trade fairs - machinery and garment sourcing - were organised simultaneously in San Pedro Sula by SPESA (Sewn Products Equipment Suppliers of the Americas) and AHM. The machinery fair attracted a lot of potential investors. According to CAD/CAM supplier Gerber Technology, 90 such systems are already in use in Honduras and their number is rising.

How does the escalation of full-package networks affect workers in Honduras?Dramatic employment growth in the apparel industry is the most obvious impact. AHM expects that approximately 130,000 workers will be employed in 2003 (up from 107,396 in 2001) and 143,000 in 2005.

Activities associated with the deepening of the supply chain - such as fabric production, laundering and cutting - are bringing new types of jobs to Honduras. Jobs in cutting rooms and laundries entail more training and better pay than is offered to the average sewing machine operator. By the end of 2002, Honduras counted 16 companies specialising in cutting, 9 in ironing, 9 in finishing, 7 in screen print, 7 in laundry, 5 in embroidery and 3 in dyeing.

Jesus Canahuati, president of AHM, predicts further growth in the Honduran apparel industry.

Honduran apparel manufacturers complain that the labour turnover rate is high. This might discourage them from investing in the training of their workers, although AHM is fully aware of the importance of training for an industry that has to compete globally.

In 2002 the association launched an ambitious training programme, known as PROCINCO. Last year, just over 2,000 employees were trained in production methods, occupational health and safety. In 2003-2004 around 28,000 maquila workers will be trained. “No other central American country has such a program to benefit its workers and factories,” Mr Henry Fransen of AHM proudly says.

The presence in Honduras of clients with upscale labels (such as Gap and Tommy Hilfiger) has prompted an improvement in working conditions. Companies such as JC Penney have issued Codes of Conduct related not only to the final quality of the product, but also to the work process itself.

According to AHM, in 2002 the average annual salary for Honduran maquila workers was US$3,718. This compares favourably with the 2002 annual per capita income in Honduras, which was only US$850. Taking into account the premiums for piece work, some companies (such as HMC, the Honduran subsidiary of Ganis Brothers, New York) pay their workers on average around US$50 a week.

US dependence
Jesus Canahuati, president of AHM, expects that Honduran apparel exports will continue to rise, from US$2.4 billion in 2002 to US$2.7 billion in 2005 and to US$3.3 billion in 2010.

Expert Analysis

For a complete report on the trends in US textile and clothing imports, please click here.

 

But some sector observers are worried. Is Honduras not too dependent on the US market? The slowdown in the US economy in 2001 and CBTPA-implementation problems immediately had a dampening effect on the Honduran apparel export boom. According to Mario Canahuati, Honduran ambassador to the US, these factors cost Honduras approximately 15,000 jobs in the maquila industry.

Another cause of concern is the apparent over-specialisation of the Honduran apparel industry. Consultant David Birnbaum recently pointed out that in 2002 four products - T-shirts, underwear, casual pants and bras - accounted for 91 per cent of Honduras’ garment exports. Are these not the kind of products which, as of 2005, will come under heavy Chinese fire?

* The maquiladoras are in-bond factories that produce goods primarily from imported US inputs (yarns, fabrics, accessories). These goods are then re-exported for sale in the US market, with only a minimal (or zero) duty paid on the value-added in Honduras.

By Jozef De Coster.