With clothing sales off sharply this past Christmas and a new U.S. administration, the textile and apparel industry faces what looks to be a challenging year.
Textile and apparel imports in the first 10 months of 2008 amounted to $82.1 billion, down 2.6 percent from the same 2007 period, reported the Office of Textiles and Apparel in the International Trade Administration.
'From the political perspective, there is uncertainty. From the economic perspective, there is more than uncertainty, there is fear,' said Bob Zane, chairman of the United States Association of Importers of Textiles and Apparel. 'There is just nothing good you can wrap your arms around at this point, as far as our industry is concerned.'
Retailers had an 'an extraordinarily difficult holiday season,' said Michael P. Niemira, chief economist for the International Council of Shopping Centers, whose year end survey of 36 retail chains found comparable store sales in 2008 up a scant 1.1 percent over 2007, but down in each of the last three months of the year. If Wal-Mart's figures were removed, retailers had a 0.9 percent decline in sales in 2008.
Things were bleaker for companies primarily selling clothing. Apparel chain stores saw comparable store sales fall 7.1 percent in 2008, and they were 10.7 percent lower in December 2008 compared to December 2007. Department stores saw sales fall last year 6.4 percent, 6.8 percent in December, while luxury chains performed even more poorly, down 7.5 percent for the year, off a whopping 17.4 percent in December.
And, of course, textile products used in furniture and home furnishing have seen their volumes fall because of the housing crisis.
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|'We just don't see any end and traditionally you can see some light at the end of these things.'|
Volumes from China and other major exporters of garments are down sharply, said Mike Berger, vice president of national and international accounts for DHL, mostly because of reduced demand from customers, and to a lesser degree because of tight credit.
'The trends that we see from a budgeting and procurement standpoint are somewhat troubling,' Berger said. 'We just don't see any end and traditionally you can see some light at the end of these things. When you speak to the big retailers or any of the analysts, frankly no one is willing to give you an outlook as to when the corner will be turned.'
Berger said business seems to be down pretty much all around the world 'with the exception of some of the emerging markets – we are still seeing pretty decent growth in emerging markets.'
The softness in retail sales was reflected in the transportation industry, where volumes at the major retail ports in 2008 were off 7.1 percent from 2007 to 15.3 million TEUs.
Larry Ravinett, senior vice president of logistics at National Retail Systems, which does warehousing, trucking and logistics work for some of the nation's largest chain and department stores, noted at Christmas 'in the past we could not keep pace – this year we were trotting, not running.'
Zane predicted a continuation of the current turmoil and said it will be reflected throughout the supply chain.
'People are not buying and if people are not buying then there is no point in making product. If you are not making the product, then the capacity for making product is too great. The product that you do make has to be less expensive, has to be made available under quicker turn situations and therefore inventory must be better controlled,' he said.
There has been a dramatic reduction in the number of factories around the world producing textile and apparel products for the United States.
Panjiva, a New York-based firm that provides information about suppliers and manufacturers globally, found that the number of textile companies actively serving the U.S. market dropped more than 70 percent in just three months, from 22,099 in July to 6,262 in October.
And 40 percent of those remaining factories still active in October had suffered a year-over-year drop of 75 percent or more in volume, Panjiva said. It defines an active supplier as one that has shipped to the United States in the prior three months.
'What we have seen is pretty staggering,' said Josh Green, Panjiva chief executive officer, who added the phenomena seems to be happening globally, not just in a limited number of countries. 'This is not to say that these companies have closed, but it is indicative of the dramatic drop-off in the orders that are being placed by American buyers.
'What's going to happen to these companies which are no longer serving their American customers? I think the answer depends on the company. Suppliers that have a diversified customer base – in their home market, customers in Europe and Japan – those companies will make it through, though they may be hanging on by a thread. Companies that are solely or heavily dependent on American customers are likely going to fail unless the U.S. market turns around rapidly – and my guess is that is unlikely,' Green said.
'Put yourself in the position of someone who buys from these factories. In the midst of all this economic uncertainty, it makes sense that you want to hold off and minimize your buys until there is more certainty with where the economy is headed. The problem is, when everybody has that line of thinking at the same time, you have the situation where there has been this massive drop off,' he said. 'At some point the economy is going to bottom out and people are going to need to order product, and there are going to be fewer factories to fill those orders. There is probably going to be a time when people rush back in and want capacity in these factories and it is not going to be there for them. It's like musical chairs.'
For the moment, concerns about the economy have eclipsed policy issues for many in the garment and textile industry. For example, the end of safeguard quotas against China in December elicited little comment, and a year's worth of monitoring of clothing imports from Vietnam has not resulted in the U.S. Commerce Department instigating an antidumping investigation, despite some industry fears a year ago.
USA-ITA is urging the Obama administration to implement further reforms.
Calling the end of quotas on textile and apparel imports a 'transformative moment in U.S. trade policy,' Laura E. Jones, executive director of USA-ITA, wants Obama to go further and eliminate import duties on clothing and 'reform a hodgepodge of origin rules and special exceptions.
'Now that the quotas are extinct, it's time to eliminate the high tariffs on clothing that hit hardest on America's poorest families,' she said.
U.S. textile manufacturers, however, are seeking more protection. In December, Cass Johnson, president of the National Council of Textile Organizations, warned of 'a dangerous moment for our industry and our workers,' saying the Chinese government is pouring money into its textile sector in a bid to grab market share. 'The new administration needs to send a message that U.S. textile jobs are not available for China's picking,' he said.
NCTO said preliminary Commerce Department import figures show that Chinese apparel exports took a record 54 percent of the U.S. apparel import market in November and Chinese exports in key quota categories were surging by as much as 132 percent at the end of quotas on Jan. 1.
It said exports rose in 2008 as the Chinese government increased textile subsidies and devalued its currency.
There is uncertainty about what direction the Obama administration will go. A key appointment for the textile and apparel industry is the Commerce secretary, but Obama's first choice, Gov. Bill Richardson, withdrew from consideration because of an investigation into whether New Mexico gave lucrative contracts to a political donor.
Obama's choice for U.S. Trade Representative, former Dallas Mayor Ron Kirk, won praise from the current USTR Ambassador Susan C. Schwab, who said Kirk 'understands the importance of trade.' U.S. Chamber of Commerce President Thomas J. Donohue said Kirk had 'demonstrated a keen understanding of the benefits of trade as an engine for growth and jobs.'
But on the 'office of the president-elect' Web site, the new administration vows to fix the North American Free Trade Agreement 'so that it works for American workers,' saying NAFTA 'oversold to the American people.' And Obama said he would 'use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement (CAFTA) that fail to live up to those important benchmarks.'
Peter Friedmann, a Washington attorney who is counsel to the Coalition of New England Companies for Trade, noted, 'Most people in international trade recall that as a candidate Bill Clinton opposed NAFTA; as president he pushed NAFTA through. The history is that Republican or Democrat, once someone is in the White House they see trade is critical to the vitality of the country.
'The real question is whether going forward there will be any new trade agreements negotiated, and whether the U.S. will be a force for trade expansion in the Doha round. Those things are very much up in the air,' he said. 'But I would say there is less concern about eliminating current trade agreements which relate to textiles and apparel, such as the end of quotas on Chinese apparel, such as the Andean Pact, CBI, NAFTA, CAFTA – those will remain in place.
'At the same time the demand by the U.S. consumer, and thus by companies serving the U.S. consumer for more sourcing options is rather diminished right now,' he said. 'Total import volume of textiles and apparels are not expected to go up dramatically in the near future. There is less pressure for trade expansion now than there would be in a booming economy with strong consumer demand.'
'Transport does not drive sourcing decisions,' Zane said. 'Everyone knows it is faster to get goods from Guatemala than Hong Kong. But that will not result in a shift of production, because there are too many other factors involved – price, quality, turn time. Transport only has an influence if all other factors are equal.'
Paula Rosenblum, a managing partner of RSR-Retail Systems Research in Miami, said she expects 'to see a shift to sourcing back to the Americas – a bit. The quality has not been there in the past. The reason is that it is the only way to reduce your inventory while hedging your bets against out-of-stocks.'
Rosenblum thinks the garment producers will be cautious about pushing producers too hard to lower costs. 'One thing that has become clear over the past five years, if you push producers to cut the costs of goods, you pay a price in ways you had not anticipated,' she said. 'The push to cut the physical cost of goods has slowed because at some point you are taking away bone and muscle.'
When producers are squeezed they may cut corners – use counterfeit zippers, do a poorer job on finishing hems and seams. That's no way to succeed in the industry, she said. 'All the data I have is that quality has trumped everything over the past five years.'
So instead, retailers may target transportation as an area for cost cutting in 2009.
Robert Sappio, a senior vice president with APL, said total inbound transpacific volumes are expected to be down about 10 percent this year, and 'wearing apparel has not been immune from that. In some cases it has been down worse than the overall market.' Exceptions include Vietnam and the Indian Subcontinent.
Sappio thinks that while carriers may try to 'manage down' air freight volumes to reduce costs, ocean shippers 'are looking for faster service and are looking at our expedited service in greater numbers. Retailers want to keep inventory levels well managed. When inventory levels are low, people require a more predictable service they can depend on to keep that inventory replenished in a timely fashion as opposed to having the luxury of sitting on goods.'
Retailers are becoming more precise in their demands on suppliers, he said. 'Retailers have to be in stock and have selection. If you are a day late they are looking for charge-downs, write-backs or will refuse an order – so delivery is all the more important.'
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|'I believe velocity will be sacrificed for cost in 2009. '|
'I believe velocity will be sacrificed for cost in 2009,' said Ravinett of NRS. Even retailers of luxury products are reducing their reliance on air transportation and doing more ocean shipping. 'The traffic departments of all the major retailers are absolutely into a major cost cutting mode.'
DHL's Berger noted that normally during the Christmas season, companies upgrade from water to air transportation for a number of 'hot' items. 'We saw very little of that this year. There was an eerie quiet. We didn't see charters, or a lot of changes in routing.'
In terms of rates 'we have not seen any horrific trends, we haven't seen anyone do something catastrophic in terms of starting a rate war,' he said.
But in a statement in mid-December, Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, said both its members and other container carriers were lowering rates in a way that was 'shortsighted and regrettable,' and said TSA lines had indicated they did not intend to leave those rates in place beyond Jan. 31.
Meanwhile NRS said it is working with retailers on programs to reduce costs in ways other than simple rate cuts. For example, Ravinett said it is working to match front and backhaul loads to get better utilization of equipment and doing more load sharing. He noted that firms are doing more commingling of domestic and international cargo to maximize use of the cubic space on trucks, and cooperating with other companies to do load sharing.
NRS formed a joint venture in 2007 with Chinese logistics company Sinotrans, and Ravinett said more retailers will seek to push distribution and value-added services to be done in China rather than the United States to reduce costs. Work such as inspection, ticketing and marking can be done at a cost of about $4 to $5 in China at a first class facility compared to $14 to $15 in the United States, he said.
With many companies importing 15 percent to 20 percent less, Ravinett predicts there will be a shakeout in the logistics industry in the first three months of 2009, with some firms filing for protection under the bankruptcy laws and other companies consolidating.
'I have people coming to our company all the time who are looking for joint ventures or asking us to buy them. There are strong carriers who are well known in the industry that are really in trouble,' he said.
There was a great deal of discussion last summer as fuel prices soared, that some textile and apparel production might return to the Americas, and Rosenblum even suggested there might be a possibility of some production returning to America – though probably more in the form of thread or fabric rather than garments, because 'consumption and production has become so imbalanced.' But she allows, 'Maybe that is wishful thinking.'
Ravinett thinks that is unlikely. 'With fuel people got panicky, and started looking at Mexico, but the sophistication of manufacturing in China is by far the most superior.'