Nicaragua remains competitive when it comes to fast-fashion orders and quick stock re-fills

Nicaragua remains competitive when it comes to fast-fashion orders and quick stock re-fills

Nicaragua is seeking $160m to build a synthetic textiles manufacturing base to help double exports to $2bn in five years and offset TPL losses, government officials have told just-style.

The Central American nation is currently negotiating with three to four foreign textile firms to encourage them to bankroll its embryonic high-tech textiles base. One such firm includes a Peruvian supplier, which is carrying out due diligence to install a synthetics factory billed as one of the largest to arrive in the country since 2010.

"They want to build a factory, starting with a cotton and synthetics dyeing and finishing facility," said Carlos Zuniga, vice general manager at duty-free Corporacion Zona Franca.

Zuniga said the investment plans come on top of other recent expenditures by Pride Denim, which is re-starting a wovens plant. New Holland Apparel and Tecshoes also plan to double sportswear and footwear production by 2020, as reported on just-style last week.

300m square metres

Zunica said Nicaragua exports 400m square metre equivalents (SME) of knitwear and woven apparel. However, it imports roughly 30% of the materials needed to make such garments. This means that to meet its requirements and possibly those of Central America (which also has a 40% textiles gap), it has to install at least 300m SME of production capacity.

"We need roughly $160m," Zuniga said, adding that Nicaragua expects such investments, if they arrive, to have a multiplying effect, bringing more maquilas and other clothing makers to the nation.

"Investors will see there are new investments in the types of fabric they use for their garments,' Zuniga enthused. "And when they think about where to go in the region, they will choose Nicaragua."

If such multiplying effects materialise, the industry could gradually ramp up exports to $2bn by 2020, up from $1.3bn this year when they will decline 5%, mainly due to the US's removal of the Tariff Preference Level (TPL) provision.

Nicaragua will continue to sell the lion's share of future garments to the US, yet Zuniga noted the country is also hoping to lift sales to new markets in South America, Canada, Korea and Europe.

Canada, Korea deals

Already, there are talks to strike a free-trade deal with Canada and South Korea in the next two years and in late 2016 respectively.

Nicaragua is also working to ramp up exports to the EU by using flexible rules of origin enabling it to use yarn from anywhere in the world. Zuniga conceded, however, that sales to the continent as part of the Central America-EU free-trade accord, have been slow to take off, totalling just $50m currently.

Nicaragua also intends to lift shipments to Peru, Colombia, Brazil and Chile as part of its recent admission into the Latin-American Integration Association (ALADI) trade promotion block. Exports to Mexico could also rev up as it works to hedge Central America's recent homogenisation of several disjointed trade deals with the 'northern giant' expected to bring greater sourcing flexibility and market access.

Duty-free benefits

In that effort, the Zona Franca tax benefits will be maintained for many years to come, Zuniga said, adding that the nation is also rushing to cut its sky-high energy prices.

Zona Franca benefits include full income tax exemptions renewable every ten years, with the same provisions extending to equipment, raw-material imports and buildings. Each Zona Franca or duty-free complex, also offers other benefits including higher tax breaks and access to lower power costs through renewable energy infrastructure.

Firms interested in building Nicaragua's much-needed textiles production base will get a first-mover advantage with high ROIs, he said. "We are giving them [investors] the most important thing," Zuniga said. "There is no-one producing high-tech textiles here and that is an opportunity."

High energy prices

The executive conceded energy prices - the highest in the region - are a stumbling block in winning investors' hearts. But even then, because of ultra-low labour costs (30-40% lower than the regional average), Nicaragua is still more competitive than main rival Honduras or against Guatemala or El Salvador.

According to Zuniga, Nicaragua is "transforming" its energy matrix to generate 80% of energy from renewables in 2020, though some experts say that's a tall order.

He noted electricity tariffs hover at $21 cents per kilowatt compared with as low as $16 cents per kilowatt for other Central American countries. However, "for maquilas, electricity costs are not that essential, labour ones are," he added.

Labour stability has also increased as Managua has managed to ink four-year collective wage agreements with the private sector and trades unions. Social expenses (vacation or social security) are also lower than in Honduras. Meanwhile, GDP is expected to gain 4.5% this year, outpacing the regional average.

5,000 jobs lost

The TPL, however, has been a wrench in an otherwise fast-growing manufacturing chain.

"We lost 5,000 jobs," conceded Javier Chamorro, executive director of export and investments lobby Pro Nicaragua, "though we haven't seen any companies shut down."

Chamorro said most losses stem from downsizing trouser and jeans producers that now have to import twill and denim fabric from the US or Mexico instead of Pakistan and China.

The end of the TPL regime (which some say could trigger 15,000 job losses) means Nicaraguan mills now have to buy key materials like synthetics, spandex, twill, denim, wovens and cotton from inside the more limited DR-CAFTA free-trade block with the US.

Following last December's expiration, the country failed to coax US Congress to renew the benefit, which ushered an era of huge progress as US woven and knitwear producers moved to the country to boost exports for firms such as Wal-Mart and Under Armour.

Chamorro said the TPL accounted for 25% of textile exports, which in turn comprise 30% of all Nicaraguan exports, so the loss has been significant.

Still, he noted companies are reshuffling their businesses and moving into other competitive manufacturing segments such as shirts, T-shirts and other knits, in addition to sports and outerwear. Because of its low-labour costs and market proximity, Nicaragua remains competitive, he claimed, beating Asian rivals when it comes to fast-fashion orders and quick stock re-fills.

Competitive niches

"We expect companies to migrate to more competitive niches like polo shirts or outerwear," he said, adding that he expects exports will recover in 2016.

Meanwhile, the government is working to retain investment through programmes to boost worker productivity and know-how through technical training. As part of that effort, it hopes to install a Technical Training Institute next year.

"If you increase labour productivity, one person can do more pieces simultaneously so the cost-per-piece falls," Chamorro said, adding that the industry meets international productivity standards at a 65-75% rate. He conceded Nicaragua's productivity is lower than Mexico's but similar to Central America and Vietnam, though the latter has cheaper labour.

Speaking of the Asian giant - which has quickly stolen much of Central America's US market share - Nicaragua hopes the US will negotiate a yarn-forward rule to admit the country into the game-changing Trans-Pacific Partnership (TPP).

TPP hope

"We hope for a yarn-forward rule," Chamorro said. "CAFTA's spirit was to strengthen the US's partnerships with its traditional Central American allies so signing an agreement that offsets these benefits would go against that logic."

In the case of a non-yarn forward rule, "the whole industry will have to change its business model to focus on more niche products like fast fashion for quick delivery to the US," Chamorro said. "We need many types of high-tech textiles...more capacity to develop design and printed fabrics."

Chamorro said views that Central America needs $10bn to build this crucial manufacturing base were not off the mark.

However, even with a tougher Vietnam, Nicaragua and Central America would still have a place in the global market. "The global industry can't solely depend on one country or region, have all their eggs in one basket," Chamorro mused. "If you have an earthquake in Vietnam, its whole industry could disappear. They would lose a lot of market share."