Thursday, July 28, 2005

China's Garment Rivals Survive Storm

Smaller Asian Countries, Now Lacking Quota Help, Keep Sales in U.S. Growing

By MURRAY HIEBERT in Washington and PATRICK BARTA in Bangkok Staff Reporters of THE WALL STREET JOURNAL July 28, 2005

When global quotas on garment exports ended on Jan. 1, China was widely expected to overrun other major Asian textile producers such as Sri Lanka, Bangladesh and Cambodia. Half a year into the new order of unfettered competition, China's sales have indeed soared -- but other exporters are also doing surprisingly well, at least for now.
China's clothing exports to the U.S. in dollar terms jumped 85.9% in the first five months of 2005 from the year-earlier period. But other key Asian garment-makers are also enjoying unexpected double-digit growth. Bangladesh's exports to the U.S. were up 25%, Sri Lanka's rose 20%, while Cambodia's sales increased 16.8%.
Until this year, these and other exporters were covered by the so-called Multifiber Agreement, an international pact dating back to the early 1970s. Under the pact, poor countries got reliable access to U.S. and European markets through quotas that limited competing garment exports from more-efficient producers, notably China.
[Take an interactive look at how the expiry of textile quotas has affected the global clothing industry. ]
Other Asian exporters have survived, in part, because Western importers still want to diversify their sources of supply, despite the attraction of China or India, another beneficiary of the end of the old quota system.
"None of the sourcing specialists would put too high [a percentage of their] business into China," says Peter McGrath, a J.C. Penney Co. executive vice president responsible for the company's overseas purchases. "We knew that would be a risky deal."
Moves by the U.S. and Europe to impose "safeguards" to limit the pace of Chinese garment export growth are one of the risks that giant U.S. retailers such as J.C. Penney, Wal-Mart Stores Inc. and Target Corp. have sought to avoid. That has prompted them to retain alternative suppliers in other countries.
As part of its 2001 accession to the World Trade Organization, China agreed that fellow WTO members could impose limits on Chinese textile imports if they were found to cause market disruption. In some product categories, such as cotton knit shirts and pants, China by June had already filled the new U.S. limits determined by the safeguards.
In addition, threats that the U.S. Congress might impose a variety of trade sanctions and increase tariffs on Chinese products have "caused some folks to diminish some of their sourcing from China that they might have been planning," says Steven Lamar of the American Apparel and Footwear Association.
Some Asian manufacturers are also benefiting by identifying niche products that China hasn't yet mastered. In the case of Sri Lanka, manufacturers such as Colombo-based MAS Holdings Ltd. are focusing on higher-end, "value-added" garments such as women's intimate apparel that require extra skill to make. "We've been able to hold on to our share of the business," says MAS Chairman Mahesh Amalean, whose customers include Victoria's Secret and Banana Republic.
Cambodia, meanwhile, has bolstered its slice of the market by adopting an unusual labor program monitored by foreign inspectors which ensures that its workers aren't exploited. Phnom Penh negotiated this labor agreement with the U.S. in 1999 to make its factories more attractive to American and European buyers whose company guidelines prohibit sourcing garments made under sweatshop conditions.
Those kinds of efforts appear to be paying off. "Improved labor standards certainly work in favor of countries like Cambodia," says Dan Henkle, vice president of social responsibility for Gap Inc.
Although predictions of mass layoffs and shuttered factories haven't come true, South and Southeast Asian countries still face formidable challenges in preserving their garment industries, which are crucial sources of employment and hard currency and have helped them get a foothold in the global economy. In Bangladesh, for example, garments represent 81.3% of the country's exports to the U.S. in dollar terms; for Cambodia the figure is 94.7%, and for Sri Lanka, 79.4%.
Many Asian garment-makers do feel the squeeze from China's low-cost factories. For instance, prices for lower-end products in Cambodia, such as T-shirts and blue jeans, have plummeted 30% since the beginning of the year, says Cham Prasidh, Cambodia's trade minister.
He says Cambodian factories will have to reduce costs and shorten delivery times if they hope to compete with China in the long run. To do so, he says, Phnom Penh is investing $10 million to streamline its customs procedures to speed delivery of its products and cut down on corruption, which adds to the cost of exports.
Mr. Prasidh visited Washington last week to press Congress to slash tariffs to zero on clothing exports to the U.S. from 14 poor countries, mostly from Asia and including Bangladesh, Cambodia, Nepal and tsunami-affected Sri Lanka. Because of higher labor costs created by Cambodia's labor agreement with the U.S., the minister contends, the country's garment industry can only compete if it has duty-free access to the American market. U.S. duties on Chinese-made clothing average about 15%.
Bangladesh has also survived the apocalyptic predictions for its textile trade. But Bangladeshi officials point out that their export surge in recent months comes off a relatively low base last year because the country's garment exports had fallen since 2000 as the quota system was phased out.
Fakrul Ashan, the commercial attache in the Bangladesh Embassy in Washington, says it isn't guaranteed that the early export pace will continue through the year because the country's factories have "abnormally low orders from July onwards." He acknowledges, however, that orders could pick up as the limits on China's exports to the U.S. kick in.
At least one major Bangladeshi garment producer, Mohammadi Group, has actually expanded this year as orders have increased from American companies, including Wal-Mart, says group head Annisul Huq. Some industry analysts believe the country's more-efficient producers could even thrive in the new trade environment by acquiring factories from less-productive manufacturers. If that consolidation occurs, says Mr. Huq, who is president of the Bangladesh Garment Manufacturers and Exporters Association, the country's textile industry could become more competitive.
Eventually, some of China's exporting rivals in Asia could also benefit from growing domestic demand in China itself. Mr. McGrath of J.C. Penney believes Chinese consumption of domestically produced garments will rise in the next three to five years, prompting "the desire to export to diminish." This, he predicts, will drive orders from U.S. buyers to other Asian countries.


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