By Jordan K. Speer, Apparel
Nike's "swoosh" and its associated motto, "Just Do It," could easily have been appropriated by the Full Package Summit, which was held July 14-16 in San Salvador, El Salvador, and energized by an attendance of more than 500 U.S. and Central American apparel industry players who came together to discuss the measures necessary to transform the Western Hemisphere into a full-package sourcing region.
Don't wait. Do it now. This was the oft-repeated mantra of the event. Don't wait for the passage of CAFTA to begin forming alliances with other members in the apparel supply chain. Don't wait for orders from retailers to start organizing full-package operations. Don't wait for everybody else to do it. Don't wait to see what happens with China in 2005. In short, the message was clear: If you build it, they will come.
The $64,000 Question
According to John Short, CEO of LF Brands, that question is: "Will you be here in 2005?"
Jan. 1, 2005 - It's the magic date when quotas will lift and China will have greater access to the U.S. market, and it's also a major concern for the Central American apparel industry, worried that retailers and brand manufacturers will shift an even greater percentage of their sourcing to China at that time.
Why the concern? As David Birnbaum of Third Horizon Limited puts it: "China fills the model of our industry best." With true full-package services, it is often the easiest and best choice for U.S.-based companies, despite the distance.
Likewise, Short poses the question: "Why do my team and I travel 28 hours to Asia, when it's four hours to El Salvador?" Because of the price-value and high quality of the product, product development capabilities and value-added services, he explains.
Giving an example of an Indonesia-based factory, Busana, where LF Brands does business, Short details the range of value-added services offered by that contractor, including a design team that keeps abreast of the latest trends, the latest in technology, electronic lab dipping and a proactive approach in which Busana brings ideas and designs to LF's business. "They showed us what is good for our business."
It's what Short calls full full package, and it's what Central America must develop, according to speakers at the summit. "There are a lot of people betting that this industry in this region cannot compete," Short says. "You have to change your mindset if we're going to survive after 2005."
Likewise, John Windham, senior vice president of strategic sourcing at Kellwood, states that "elimination of quota will have a very negative impact on the region." He notes that implementation of "safeguards" will not counter the exodus of sourcing out of other regions into China. He offers the case of the Jan. 1, 2003, implementation of the U.S.-Vietnam bilateral trade agreement - which eliminated quotas for Vietnam apparel exports to the United States - as an example of what can be expected in 2005 across the board.
In 2001, Vietnam's apparel and textile exports to the United States rang in at $50 million; in 2002, they hit $950 million. The estimate for just the first half of 2003? $1.75 billion.
From another perspective, Jeff Rives, president of Rives Apparel International, remarks: "Full-package production is going to be a factor in this region whether we - contractors - like it or not."
In other words, the question is not whether the region will rise to the occasion, but which companies within the region will make the cut. With global apparel manufacturing over-capacity at an all-time high - according to Birnbaum, the disappearance of 50 percent of garment producers would not be noticed - only those companies that refashion themselves to meet the demands of the industry will be part of that elite group. (Birnbaum predicts that eventually, just 50 companies will be producing for the $200 billion global apparel market.)
Finally, Mary O'Rourke, co-founder and managing director of The Jassin-O'Rourke Group, stresses that change must be made with an eye on time constraints: "What isn't in place over the next six to eight months isn't going to matter. Long before then, decisions will be made."
Tearing Up the Old Model
Becoming a full full-package provider is not an easy task. Full-package production requires an entirely different mindset and a new business model. As Kim Krummell, apparel category manager of Timberland, puts it: "You have to overcome the CMT mentality."
What's required? "In the future, the factory must become the design partner of the manufacturer," says Birnbaum. Additionally, the factory must sell its services and value-added support to merchants and designers in the United States. Most Asian companies, he notes, already have offices in New York City, where they can work directly with their U.S. customers.
Quick-turn manufacturing also is an essential element in the full-package model that Central America must master.
Get this. A 1 percent loss at markdown equals 4 percent to 5 percent at FOB, according to Birnbaum. That's a significant statistic, and compelling evidence of the need to be able to quickly respond to market trends.
This is something Central America is well positioned to do. As Kevin Burke, president of the American Apparel & Footwear Association (AAFA), observes, the region should build on its natural competitive advantage - its proximity to the U.S. market. "There is an incredible demand for suppliers that can achieve speed to market."
The ability to quickly turn production also could be a bargaining chip in price negotiations.
"Is it all about price?" O'Rourke questions, rhetorically. "You bet," she says. The key is how one defines price. "Fabrics don't have to match Asian costs," she points out. It's important to understand the true costs of sourcing, she explains, noting that most importers have re-evaluated how they analyze costs, taking into account lead times, financing and so forth. "Value will compensate for slightly higher costs."
From another perspective, Krummell emphasizes that factories must be reliable and accountable. Relating that Timberland was forced to move sourcing from Central America to Asia because of late deliveries of fall 2002 merchandise, she stresses: "One day late is late. . Don't promise what you can't deliver." While she acknowledges that "working with a brand is not easy - we are high maintenance," she also stresses that her company "give[s] you all the information you need, so you know what we expect."
In sum, full-package production requires complete business reorganization. "[It] no longer means buying raw materials as directed and producing from patterns and specifications provided by the customers," says Windham.
The Chicken and the Egg
Which comes first: full-package sourcing or CAFTA? While many speakers at the summit stressed the necessity of building a full-package region with haste, which they say would of its own accord bring business, others expressed concern about moving forward without secure knowledge about the provisions of a future CAFTA.
It's a tough situation that raises issues up and down the supply chain. The question of fabric supply is a particularly tricky one, given the shortage of mills in the region. Having to source fabric from Asia, or even the United States, cuts into Central America's "proximity" advantage, and thus shortened lead times, to the U.S. market. Local fabric supply on a large scale would be a major factor in tipping the full-package scales to the region's favor, say experts.
Rives contends that the biggest challenges to full-package production are not in developing product, or in achieving on-time delivery and high quality. Instead, he ranks the three top challenges as: No. 1: abundant availability of piece goods that qualify for duty- and quota-free treatment; No. 2: abundant availability of piece goods; and No. 3? You got it. Abundant availability of piece goods.
There's another challenge, related to fabric availability. "We have no idea how much production availability there is in the [Central American] textile industry," says Alfonso Hernandez, chaiman and CEO, of Argus International. For no clear reason, the textile industry in Central America guards that information as if it were a trade secret, he notes, incredulously. This prevents the region from making accurate assessments of its true production capabilities and how much additional fabric manufacturing capacity it would need to meet expected demand.
In similar protective measures, notes Hernandez, there are no pure-play finishers or converters in the region, because most companies are family owned, and each wants to handle its own finishing and converting operations. This approach is not only expensive, but it means that much of the finishing/converting capacity is underutilized. Also, there is not a major player who could serve new mills, were they to be created.
Additionally, most of the local fabric production is commodity based. "We need fashion-oriented fabric," says Hernandez.
On the other hand, building a fabric mill is an enormous investment - oft-quoted figures are $100 million to $200 million - and taking such a risk is not necessarily prudent while the details of CAFTA remain murky and its passage is not a guarantee.
As Burke states: "The single-most important factor to enable the Central American region to compete is CAFTA."
There is another major concern with establishing a regional fabric industry in Central America. It would be the first time in history that a textile industry would be created that did not have a domestic market large enough to support it, but would be built exclusively for the export market, asserts Hernandez.
Aside from the fabric issue, there are other major hurdles to full-package production, including the availability of financial support and capital for the procurement of piece goods, says Rives. "Banks do not recognize piece goods or finished garments as collateral," he remarks.
Challenges aside, speakers overwhelmingly focused on the need to move forward and explore alternate solutions to make full-package production in the region a reality. In this vein, Birnbaum, who is bullish on Central America's potential, suggests linking factories together as a unit to benefit from the combined collateral and thus greater financing opportunities.
"The people of Central America can't wait for Congress to pass legislation," he concludes.