In the period immediately following the 2005 quota phase-out, half of today's garment production facilities will go to the wall. How do you prevent your business from becoming one of the casualties? Continuing his series on strategies for overcoming the challenges ahead, David Birnbaum looks at the predicament facing the Honduran apparel industry and offers creative solutions for the industry's future.

Part III - creating a country solution

If you want to succeed in business, first find out what the customer wants, then give it to him. Simple advice.

Some countries - Group I - have had to work hard to give their customer what they want. They do not have the benefit of geography, which allows for fast delivery. They are not part of the major trading blocs such as NAFTA or the EU. Nor have they been given preferential treatment through special legislation such as AGOA or CBI. Nevertheless, Group I includes most of the big winners - China, Bangladesh and Indonesia.

Some countries - Group II - have had success thrust upon them. These are the geographically, politically or strategically blessed. Just as western Europe marches to Portugal, Romania, Morocco and the Ukraine, so too does the US have its preferred suppliers, such as Mexico, Dominican Republic and more recently Burundi and Peru.

Finally there is everyone else - Group III - the countries who have neither been able to succeed on their own nor have had success thrust upon them.

One point is clear: in 2005 the rules will change and everyone must re-invent themselves if they are to survive.

How? What do you do?

Fair questions. Here are some basic steps:

  1. Define your industry: what do you produce?
  2. Measure your level of success: how does this year compare with last year and with 10 years ago? If you are not succeeding, you are failing!
  3. Determine the underlying causes. Why are you succeeding? Why are you failing?
  4. Find out what your customers want
  5. Give it to them

All very simple and obvious. Let's try it out. Let's take a country: Honduras
Honduras is Group II par excellence. It is located in Central America and is a charter member of the Caribbean Basin Initiative (CBI). Unlike other countries, the United States traditionally taxes the full FOB value of all imports regardless of the source of the raw materials. The US gives no benefit to imported garments produced from American fabrics and yarns. However, some years ago the US government made a special provision for garments produced in Central America. Where the fabric (or in the case of sweaters, yarn) is made in the US, only the added value is subject to tariff.

CBI built the Honduran garment industry. From 1989 to 2002, US garment imports increased 250 per cent. During that same period, total CBI exports to the US increased 540 per cent. However, during that period exports from Honduras increased from $87 million in 1989 to $2.4 billion in 2002 - an increase of 2753 per cent. Here is success, big time.

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However, when we look a little closer we begin to see problems.

1: Define the industry. What does the Honduran garment industry produce?

Product Market Share  
 
1989
2002
T-shirts
20.1%
47.2%
Underwear
7.3%
19.1%
Casual Pants
21.5%
12.5%
Bras
19.6%
12.5%
Total
68.5%
91.3%

Four products account for 91 per cent of Honduran garment exports. The two largest products - T-shirts and underwear - have grown from 27.4 per cent in 1989 to 66.3 per cent in 2002. Concentration of exports is not in itself a bad idea. However, concentrating on T-shirts, underwear, casual pants and cheap bras can be a serious problem. These are all basic commodities, which the least developed countries use as entry products into the international garment industry, until they can develop the skills necessary to move into more value added products. After 15 years, the Honduras should have moved on.

2: Measure your level of success. How does the Honduran industry this year compare with last year?

Based on these products, the answer is not positive. Entry level products have no bottom price - which is why they are entry level products. To compete in this area, an industry must be based on either cheap labour or very expensive capital equipment. Bangladesh can produce T-shirts at competitive prices, because it has cheap labour. Main Knitters in Montreal can produce knitted cotton underwear competitively, because they have invested $20,000 per worker in capital equipment. Honduras does not have the cheap labour, nor has it been willing to invest the capital.

 
Look at the movement of FOB prices of Honduran exports for these products. FOB prices for T-shirts and underwear - Honduras' two largest exports - are 9 per cent lower today than 15 years ago. The price of T-shirts peaked in 1992 and has been falling since.

Only the FOB price of bras has been rising. Even here, however, the future does not look good. In 2002, the quota on Brassieres (Cat. 649) was phased out. For the first time in 40 years the Chinese were free to increase sales to meet demand.

More importantly with the quota phase-out, Hong Kong factories were finally free of country-of-origin limitations. For the first time they were able to build moulding facilities in China. In 2002, Chinese FOB prices fell 41 per cent. Chinese exports as measured in units increased 639 per cent and their US market share increased from 1.9 per cent to 13.2 per cent. This is the competition that Honduras faces.

The future must bring further falling prices and reduced profit 

3: Determine the underlying causes. Why are you failing?

This begins the move to reality - an uncomfortable but very necessary part of the process. The Honduran garment industry faces structural challenges. For 15 years, the government and the industry has looked at the CBI as the solution rather than as one step towards a solution. Any CBI advantage is rapidly disappearing. Government and industry must take a critical look at their industry and make an effort to understand where they are and just how they arrived at their present position.

  • The industry is locked into entry level commodity products.
  • The industry does not yet understand the challenge.
  • The industry lacks a viable strategy for the future.
  • The industry lacks the technical skills to implement any viable strategy.

Equally important is the need to bring related industries and other groups into the discussion. Trim and material supply, banking, shipping, labour and NGOs and international financial organisations are all part of the problem and equally all are necessary to find a workable solution.
More importantly, government must understand that it has to play an active role in developing and implementing the strategy. This active role does not involve handouts, preferential treatment or other perks. The Honduran government need only carry out the tasks that only government can and should perform.

Most important is the need to recognise that the Honduran garment industry faces practical problems requiring practical solutions. Yes, politics must play a role. Yes, different groups will have different agendas and will offer different, often conflicting, solutions. However, the overriding need is to achieve a practical consensus.

4: Find out what your customers want.

It is very easy to find out what garment importers want. They want everything - lower prices, higher quality, faster delivery, greater flexibility, more style…you name it, they want it.

The first step is to visit the customer. Going to the local agent is of little value and may in the end be a hindrance. A high-powered group from Honduras must travel to your most important buyers' main offices.

This is not a selling trip - leave the marketing people home. This is not a public relations trip - throw out the PR people. This is a working trip. The delegation must be heavily weighted towards senior business leaders and professionals. The delegation must include at least one of each of the following: garment engineer, manager, banker, and government representative. You are travelling to meet senior management of major corporations.

You have come to ask one question - what do you want? And you must be prepared to respond. You must be willing to work out a plan to meet customers' requirements. Furthermore, you must accept that you will not be able to meet these requirements in six months or even one or two years without some modest investments. Any viable strategy will be both long term and costly

5: Give customers what they want.

If you ask a customer "What do you want?" you must expect the customer to ask for a great deal. The garment industry is a buyer's market, and if half the garment factories in the world collectively drowned tomorrow, nobody would notice the difference. However, the "I-want-everything-you-can-give-plus-much-more" response is not altogether bad. It allows for a wide range of solutions. It also provides an opportunity to tailor a strategy not just to the needs of the customer but also to the advantage of the producer.

There are myriads of solutions. The industry can trade up - drop casual pants for tailored pants; T-shirts for suits and cheap brassieres for expensive lingerie. On the other hand, the Honduran garment industry could equally succeed by doing the opposite - retaining its T-shirts, casual pants and brassieres.

In either case it is a question of giving the customers what they want.

Look at a possible strategy based on continued production of basic goods. On 1 January 2005, the world will not cease buying T-shirts or casual pants, nor will all production be concentrated in low cost areas. There exists a viable market not open to entry level and not open to the least developed countries. That market exists today and those factories supplying that market are quite successful.

Here is a list of the largest cotton T-shirt exporters to the US - men's and women's. Look at the differences between men's T-shirts and women's T-shirt exporters.

  Men's cotton T-shirts   Women's cotton T-shirts
Rank
Country
Rank
Country
1
Mexico
1
Mexico
2
Dominican Republic
2
Hong Kong
3
Hong Kong
3
China
4
Guatemala
4
Philippines
5
Bangladesh
5
Turkey
6
Honduras
19
Egypt
20
Honduras

Men's T-shirts, with the exception of Hong Kong, are dominated by the low cost makers. Women's include some very expensive people, not just Hong Kong but China and Turkey as well.

Turkey is also the largest T-shirt exporter to the EU. I talk to European retail clients about Turkey. I point out that there are many exporters who will produce a quality T-shirt much more cheaply than Turkey. My clients tell me there is more to T-shirts than FOB price. They are right. Americans buy women's T-shirts from China and Hong Kong where they pay $2.59 just for the quota, when at the same time they buy T-shirts from Honduras and pay $3.15 for the complete garment.

Why women's not men's? What do Hong Kong, China and Turkey have in common that customers will pay so much more?

Expert Analysis

The 2003 Clothesource Handbook of Apparel Sourcing
Since its introduction in 2002, The Clothesource Handbook of Apparel Sourcing has become the most widely recognised and respected manual of sourcing information in the clothing business. It is used by major multiple stores, manufacturers of all sizes, and wholesale organisations throughout the world, to find the best possible sources for their production. Find out more here.

 

Men's cotton T-shirts are almost all commodities. Women's have a much larger fashion element. Fashion is fashion only today and possibly tomorrow. Last week's fashion is on this week's markdown rack. If a buyer wants fashion, he must work in a vertical industry that is capable of producing whatever the customer needs - plain, yarn-dyed, engineered, embroidered, panel printed, etc - in the right quality in the right time and fast. For this, the customer will pay a premium

The operative word is fast. For T-shirts, fast is 7 days from raw cotton to finished garments on a ship. Turkey is within 7 days sailing from any major western European port, which is why Turkey has the customers.

Turkey, Hong Kong and China also have the US customers because at present no one, within 7 days sailing of the US, is capable of delivering the right product on time.

If Honduras wants to compete in the US T-shirt market past 2005, they would do well to follow the Turkish model.

  • A completely vertical industry with high quality knitting, dyeing and finishing.
  • Access to specialised fabric and garment facilities.
  • Garment engineers capable to of producing finished garments from knit fabric in 3 days.
  • Logistics which can move the garments to the US within 7 days.

The garment industry in Honduras will not be able to operate on this level for some years. For any strategy to succeed in the post 2005 era it must be long-term and involve some considerable investments. There is no quick fix.

In the period immediately following the 2005 quota phase-out, half of today's garment production facilities will go to the wall. Whole national industries will disappear. However, those governments who make the effort and the investment now, will not only survive they will prosper.

Part IV will look at strategies open to factories to meet current and future challenges.

By David Birnbaum.

For part I in the series 'Marginal countries and marginal factories' click here.
For part II in the series 'Marginal countries and marginal factories' click here.