Honduras Holding its Own
By Kelly Stanmore and Bendict Pillionel, Special to Apparel
During the past two decades, export-driven measures, such as the 1987 Export Processing Zone Law and the 1992 Investment Law, have transformed Honduras' economic structure by providing the tools to foster economic development, providing fiscal incentives and improving the overall climate for both foreign and local investment in manufacturing. Nevertheless, intense global competition and looming concerns about the phaseout of quotas in 2005 are driving apparel manufacturers in Honduras to ramp up the intensity when it comes to providing full-package production capabilities.
Despite hurdles, such as a lack of financing, Honduras' proximity to the U.S. market, and its large port, Puerto Cortes, are attractive benefits to U.S. companies desiring quick-turn production. As such, the country's apparel companies are striving to build on these natural advantages to keep apparel manufacturing as a viable sector of the country's industrial base.
The growth of the apparel industry
While textile mills producing knitted cotton fabrics began to operate in Honduras in the 1960s, it wasn't until the enactment of the Caribbean Basin Economy Recovery Act in 1984 that Honduras began to export assembled garments on a large scale. The legislation, which would evolve in 2001 with the Caribbean Basin Trade Partnership Act (CBTPA), gave duty-free entry into the United States for some apparel categories, provided they used U.S. components. Subsequently, Honduras witnessed a manufacturing boom, as large foreign corporations and strong local groups invested heavily in the apparel industry.
Fast forward to 2002, when Honduras exported $2.4 billion in apparel, making it the world's third-largest garment exporter to the United States, behind Mexico and China. Since 1999 it has led the 24 CBI nations in exports, and in the first quarter of 2003, achieved average growth of 24.4 percent in volume and 13.1 percent in value. Production reached 359.3 million SMEs (square meters equivalent), a 22.8 percent increase compared to the first quarter of 2002.
Contributing to this growth have been privately run export processing zones (EPZs), which have been one of the region's most effective mechanisms to create mass employment and diversify the industrial base. Twenty-four industrial parks operate as EPZs or free trade zones (FTZs), and more than 500 mostly international companies spread across the territory utilize their preferential conditions. In addition to fiscal incentives, established zones allow companies to bypass government red tape and also provide amenities such as security, waste treatment and often daycare and adult education.
"A company needs only 120 days to start up operations here," says Fernando Fiallos Fasquelle, general manager of Zip San Jose. Foreign companies new to the market don't have to deal with the government when they set up in an industrial park, and the park management intercedes as mediator and lobbyist for the investor when necessary, he states.
Although agriculture remains the largest employer and tourism holds great potential, the apparel industry provides the greatest number of manufacturing jobs in Honduras, employing 1.07 million people (16 percent of the total population) either directly or indirectly as of December 2002. This includes 535,000 indirectly and 107,000 directly employed in garment facilities.
Preparing for 2005
Notwithstanding its position as an established apparel sourcing nation, Honduras faces fierce world competition as the natural result of globalization. With the impending elimination of quotas on textile and apparel products in 2005, a considerable number of challenges stand in the way of sustainable development. "2005 is critical not only for Honduras, but for the world," says Raja Rajan, general manager of Skip's de Honduras, a U.S.-based apparel manufacturer with maquila operators in Honduras. "We need to compete on a level playing field."
With the expected threat of China in mind, Honduras is actively looking for solutions to compete efficiently in a free trade environment.
Part of the effort to compete, and a natural side effect of this globalization, has been significant consolidation in Honduras' apparel supply chain during the past three years. Additionally, the largest of the remaining companies have been investing heavily in cutting, spreading, embroidery, and screen printing operations to offer full-package programs to their customers. The recent establishment of Asian-owned textile mills has also contributed to this verticalization.
As for suppliers to the apparel industry, there are 31 companies in Honduras supplying everything from threads, machines, labels and buttons, to zippers, plastic bags and elastics. Most report there is mutual sharing of experience, technology and expertise between them and their customers. These suppliers are increasingly involved in their customers' operations by assisting with such functions as streamlining companies' inventories and offering technical support and product development testing. Many foreign-based suppliers, such as ECA, Paxar, A&E, Finotex and Coats, have started manufacturing in the country, registering two-digit growth during the past few years.
Nevertheless, the ability of Honduras' apparel industry to provide full-package programs on a large scale will depend on a set of interrelated factors, such as a sound and reliable financial sector that can provide access to competitive financial resources for piece goods sourcing and other needs. Indeed, despite the increase in investment in equipment and skills, there is still a general lack of cutting capacity and expertise, and pattern making and product development services are also relatively rare in the region. Capital investment is also needed for infrastructure, such as ports, roads and airports.
While overall the financial sector is not up to snuff by many standards, the private banks are contributing positively by bringing about changes and making the system more efficient and transparent. To this end, the Central Bank was recently granted a loan of $9.9 million, aimed at reforming and strengthening the system.
Nevertheless, current high interest rates create little incentive to borrow, and only a few private local banks such as Banco Ficohsa and Banco del Pais have a good understanding of the potential of full-package production. Moreover, foreign banks seem reluctant to invest in Honduras. Of the 22 banks in the market, only two, CitiBank and Lloyds, have operations in the country, and only those few companies with excellent banking relationship are able to receive adequate financing for full-package operations.
As such, other solutions are being looked into as alternatives. For example, apparel manufacturers are forming strategic alliances with textile companies, in which the latter finances the fabrics. This type of relationship is gaining in popularity.
Yet, according to the Honduras Apparel Manufacturers Association (AHM), the factor most integral to the success of the apparel industry in Honduras - and the entire region - is the final signature on the Central American Free Trade Agreement (CAFTA). Under negotiation, CAFTA is expected to further integrate Honduras, Costa Rica, El Salvador, Guatemala and Nicaragua with the United States into a single free-trade area next year.
It is expected that the agreement, should it pass, would overturn rules that penalize companies that export garments assembled with locally made yarn and fabrics. As one local businessman put it: "We're hoping to promote not only free trade but fair trade."
Solid foundations keys to continued growth
It has been said that the three keys to success in real estate are location, location, location. That's often true when it comes to the apparel industry as well. Honduras' proximity to the United States - two hours by plane from Miami and two to three days shipping time to Gulf ports - is a key advantage for U.S. companies seeking quick response and short cycle times. The country also has four international airports and the largest shipping port in the region, Puerto Corts.
This strategically located port is one of Central America's main gateways to the U.S. market. The port handles 98 percent of all Honduran exports and 53 percent of the traffic from neighboring countries El Salvador, Nicaragua and Guatemala.
"Puerto Corts benefits from the most advanced port security program in Central America, but we are still committed to expanding and improving our facilities," says Port Authority general manager Fernando Enrique Alvarez. The port has until early 2004 to be certified as a "secure port" by the International Maritime Organization, and is also working to become an official U.S. customs port, which will save apparel exporters several days in turnaround time by allowing shipments to be cleared by U.S. customs before leaving Honduran shores.
From another perspective, Honduran manufacturers are also attuned to environmental and social issues, as evidenced by the growing number of companies abiding by the 12 principles of the Worldwide Responsible Apparel Production program (WRAP), sponsored by the American Apparel & Footwear Association (AAFA). Monitoring and auditing processes are commonplace in Honduras, as most companies are already producing for major apparel brand names. Overall, the industry is highly committed to responsible business practice.
Foreign investment: still flowing
While Honduran entrepreneurs are worried about the influence of China after 2005, it's a promising sign that foreign investment continues to flow in from Asia, especially from Korean and Taiwanese companies. For example, in October 2002, global giant Woong Chun invested $30 million when it opened a much-needed textile plant in the country. General manager Willy Wang says the company is trying to attract spinning mills, and is even offering companies incentives such as free land in its industrial park.
Many foreign investors are optimistic about the health of the market in Honduras. American label producer Finotex opened operations here less than a year ago, competing with already-established Paxar. "We're investing a lot in technology here because we have high hopes for the country," says Finotex general manager Carlos Caballero. "In the next two to three years, Honduras could very well be our headquarters for Central and South America," he notes.
From another perspective, Raja Rajan, president of Skip, says flexibility at its Honduran operations is a huge advantage for the company. "We have the ability to change styles in mid-stream if necessary," Rajan pointed out. "Being in a smaller country means we also have incredible access to government when we need it."
Honduras does offer many advantages attractive to foreign investment. Minister of Industry Norman Garcia notes: "Our relationship with the U.S. textile and apparel companies is impeccable and very successful, due to strategic alliances and joint ventures which maintain high levels of competitiveness."
U.S. capital backs 42 percent of apparel companies in Honduras, while Asian companies account for 29 percent. The local home-grown industry holds 26 percent, thanks to continued evolution in the marketplace and strong Honduran local groups like the Canahuati, Kattan and Facuss families, who often act as commercial ambassadors to expand on government initiatives in the industry.
Honduran infrastructure still faces some potholes. The government continues to tackle energy prices, telecommunications monopolies and a questionable highway system. It's a tall order, but progress is visible. For example, a four-lane, high-speed highway connecting Puerto Corts to Pacific ports in El Salvador is under construction; once complete, it will transport apparel containers from La Union port to Puerto Corts in five hours. This inter-oceanic highway, along with another one planned for construction between Nicaragua and Honduras, will provide viable alternatives to the Panama Canal and will be attractive for investors in the region.
A better road to the Guatemalan border is also in the works, which would complete the picture in terms of major Central American roadway upgrades.
As for telecommunications, problems and monopolies in both cellular and landline systems have been frustrating for businesses. However, plans to partially privatize state-owned Honduteland to introduce a second and third license for cellular competitors by the end of 2004 should greatly improve the situation.
This would leave energy prices as the final big hurdle in the government's short-term game plan. High energy tariffs continue to be a concern for local companies, and are especially worrisome for energy-intensive textile operations. Addressing this subject, the government recently signed agreements to increase power generation in the next few years. Minister Garcia says this "will ensure that we will be able to offer energy at a very competitive price, and it will guarantee that there will be no rationing or blackouts in the next seven years." In the meantime, hydroelectric projects will support current energy demands.
Controversy over CAFTA
In the CBI (Caribbean Basin Initiative) countries, which hold 22 percent of the U.S. apparel import market (75 percent of which comes from Central America1), the rise of China is - with good cause - foremost in the minds of local textile and apparel manufacturers. If predictions prove correct, and China gets 71 percent of the U.S. apparel import market share by 2006, Central America's share is deemed to shrink severely. With $7 billion of $11 billion in Central American exports generated by the textile and apparel industries, any important market loss may prove devastating for the local economies and result in serious social and political instability in the region.
To avoid this catastrophic scenario, regional industry leaders are pushing hard for the creation of CAFTA. The extension of benefits provided by CAFTA is expected to foster the vertical integration of the local companies, to encourage the establishment of new textile mills and to allow local companies to enter full-package programs.
The nine rounds of CAFTA negotiations were officially launched last January. The final approval of the treaty and subsequent national legislative ratifications are scheduled for early 2004 and its entry into force by late 2004.
The greatest obstacles to an agreement on textiles and apparel revolve around the sensitive issue of rule of origin. Under CBTPA, assembled goods enjoy duty-free entry into the United States only if they are made of U.S. yarn and fabrics. This strict rule of origin restricts the development of full-package apparel at local maquilas and consequently dampens the benefits of such legislation. Yet until now, under pressure from the U.S. textile industry, U.S. negotiators have proposed narrow rules of origin, rejecting the use of foreign fabrics, even under quotas.
On the other side, many major players in the U.S. apparel industry support the requests of Central American manufacturers for less restrictive rules of origin that, for example, would allow Central American countries to purchase fabrics from CBTPA, AGOA (African Growth and Opportunity Act) and ATPDEA (Andean Trade Partnership and Drug Eradication Act) countries without losing the duty-free treatment. U.S. textile groups strongly oppose this move, arguing that it would only benefit Asian producers.
Challenges and concerns differ widely according to where one stands on the supply chain, but it is true that the elimination of quotas in 2005 may trigger an unprecedented wave of plant closures in the United States and, according to statements issued by the American Textile Manufacturers Institute (ATMI), may cause the biggest short-term transfer of wealth in recent economic history. An estimated $42 billion in export orders from non-U.S. countries is expected to shift to China. The estimated figure for Central America alone amounts to $6.2 billion, a net loss of 90 percent of its actual market share.
For all the aforementioned reasons, it is of utmost importance to Central American countries such as Honduras that there will be an agreement within the framework of CAFTA. With 32.9 million inhabitants and a total of US$20 billion in bilateral trade in 2002, Central America constitutes the third-largest continental economic partner of the United States. Additionally, for every dollar gained by exporting to the United States, Central Americans are spending an average of $0.81 on U.S. goods.
The apparel industry constitutes the largest hard currency earnings industry of Central America. Going forward, sound strategies, in concert with CAFTA, would likely keep the export market competitive for Central American garments. Additionally, the comparative advantages of Central America's various apparel-producing countries provide opportunities to excel further. For instance, Honduras has an edge in knits.
Although Honduras cannot compete with Asia in terms of labor costs, it has an opportunity to do so with full-package operations: "The usual mistake buyers make is that they are too focused on the cost of manufacturing and fail to look at the overall price structure after shipment," says Luis Facuss, general manager of Costuras, a manufacturer of T-shirts, polo shirts and fleece tops for Sara Lee. "If they would do so, they would be surprised by the results. Honduras is still the cheapest place in the world to produce a T-shirt, when you figure in the total cost with delivery."
Full-package: evolving to a more sustainable future
The "Full-Package Summit," which was held July 13-16 in San Salvador, El Salvador, was the first event to assemble textile, apparel and related industries in the region under the same roof. The main objective of the meeting was to encourage discussions around important themes related to the competitiveness and integration of the industry by bringing together local companies with major U.S. customers and investors (see "Full-Package Face-Off" in the October issue of Apparel and online at www.apparelmag.com for more on this event). The summit also gave U.S. textile and apparel companies a unique opportunity to meet with key players, heads of local associations and promotion agencies to establish strategic partnerships.
This is especially important, because in recent years, major U.S. apparel companies have shifted their strategic focus to areas such as improving brand management, marketing, distribution channels and logistics. This has resulted in a slow but continued shift away from manufacturing plant ownership and toward full-package sourcing. Although the majority of the production orders given to the Central American region today are still contracts for labor only, there is no doubt that most buyers are interested in exploring full-package availability in the region.
Of the 159 apparel companies in Honduras, 37.1 percent are producing under full-package programs while a slim majority (50.3 percent) of the orders remain basic assembly operations falling under the 807 program.
Even so, Honduras offers some of the most advanced and developed full-package capabilities of the region, along with Guatemala and El Salvador. However, only the larger, financially secure groups have been able to shift their production toward full-package, thanks to stable strategic alliances with U.S. partners such as Hanes, Fruit of the Loom and Sara Lee. Taiwanese-owned King Star, Korean-owned Han-Soll and Woong Chun and U.S.-owned Fivaro are also some players worth mentioning for their local investment. These companies are vertically integrated and their investments are fueled by a goal of expansion.
By contrast, although there are exceptions, the situation is more challenging for small and medium enterprises (SMEs), which are struggling to stay alive. Golden Natural Group is an interesting case in point as it constitutes a pilot project sponsored by the AHM. Having experienced the realities of globalization two years ago when its main foreign partner abruptly left the country, the company is now back on track thanks to strong local support. Its originality lies in its ownership structure, which is equally divided among its 168 employees. "Although we currently lack capital to enter full-package operations, our skilled workmanship, strong experience and unique production ideas give us confidence for the future," comments general manager Rony Linares.
High hopes for Honduras
Honduras' government is firmly committed to reforms that are backed by the private sector. In close collaboration with FIDE, the government recently launched the National Competitiveness Program (NCP) as part of an aggressive promotional campaign. "We are extremely aware of the potentials of Honduras, and are confident that this investment promotion campaign will bring considerable returns to Honduras," explains Antonio Young, FIDE vice president.
It is hoped that this image building awareness coupled with events such as the 2003 Full-Package Summit will help to stimulate growth, investment and confidence such that Honduras is able to convert its manufacturing industry to a successful full-package model.
This report on Honduras was researched and produced by Kelly Stanmore and Bendict Pillionel who are South America specialists for the textile and apparel business intelligence company, Global Business Reports. For further information on Honduras or other international markets, please contact firstname.lastname@example.org.