1Lyn Fernando

REGIONAL WORKSHOP ON TRADE CAPACITY BUILDING & PRIVATE

SECTOR DEVELOPMENT

PHNOM PENH CAMBODIA 2nd. DECEMBER 2003

THE GARMENT INDUSTRY

• THE CHALLENGES IN THE GARMENT INDUSTRY FOLLOWING THE PHASE OUT OF THE QUOTA SYSTEM

• PRIVATE – PUBLIC PARTNERSHIP TO OVERCOME THE CHALLENGES

Effects of the MFA

MFA INTRODUCED IN 1974 TO REGULATE THE TRADE IN TEXTILES & CLOTHING

Asia became the world’s foremost exporter of apparel.

Many developing countries embarked on the garment industry using quota as an instrument for market access.

Buyers were compelled to move from country to country in search of quotas

SUCCESS OF ASIAN COUNTRIES• SRI LANKA – Garment exports account for

over 52% of exports. Over 1 million employed out of 6.5 Million. Only 20% knit fabrics but fair quantity of Accessories made locally

• CAMBODIA – Garment exports account for 85% of exports. All fabrics & large quantity of accessories imported.

• BANGLADESH – Garment exports represent 75% of exports. 80% Knit & 20% woven fabrics now produced locally

• PAKISTAN- Garment exports represents over 67% of total exports but similar to INDIA – Have invested large sums in modern fabric mills – Have the capacity to specialize in cotton based fabrics & garments

New Rules of Trade

The Uruguay Round starting in 1986 finally came into effect in 1995 in Geneva.

It was decided that Textile and Apparel have to be integrated into the mainstream by removal of all quotas over a 10 year phase out.

Agreement on Textiles and Clothing

ATC lays down the modality of phasing out the MFA over a period of 10 years.

Total elimination of quotas would be done in four stages

Three stages have been already completed. The fourth stage is due on Dec. 31, 2004 where

all the popular or ‘hot’ categories will be phased out.

MFA Restricted textile

Trade due to quotas

Phase-out in 4 stages WTO

Free world trade

1 January 1995

2 January 1998

3 January 2002

4 January 2005

Integration’s of atLeast 16% of theimport volume of1990 for textilesand clothing

Integration of another 17% of the 1990 Import volume

Integration of another 18%

Total integration of all textile and clothing

4-Stage Phase out of MFA

Assumptions on ATC

The movement of industry from the developed to the developing countries will continue

The greatest relocation would be from one developing country to another

The MFA guaranteed a market for a wide range of poorer countries even though they were not competitive

Assumptions on ATC (cont’d)

Without MFA there will be a concentration of the industry in countries with inherent advantages:Availability of fabric Infrastructure for Marketing and TransportLow WagesFavorable Trading TermsProximity to the Market

Marginal countries will be squeezed out

The Question is not….Whether there will be change, the Question is whether the change will be :

A Sudden Collapseor

Slow and Somewhat Predictable

11Lyn Fernando

THE US MARKET

REGIONAL TRADING BLOCKS (USA)

• NAFTA- The North American Free Trade Agreement - Result a growth in Textiles & Clothing in Mexico at the expense of Asia

• CBI - The Caribbean Basin Initiative - Result growth of Garment trade in the Caribbean at the expense of Asia

• AGOA - The African Growth and Opportunities Act - Result Movement & Relocation of Factories to Africa

1980

Continuation of MFA

Signing of NAFTA

Signing of CBI

2000

1980 Apparel Imports into USA Far East

82%

CBI5%

Others5%

Indian Sub.5%

Mexico3%

Far East 82%

Mexico 3%

2000 Apparel Imports into USA

Far East35%

Mexico16%

CBI23%

Indian Sub14%

Other12%

EUROPEAN UNION• Trade Agreements

TARIFFS

• Most tariffs on Garments to the Developed Countries are high.

• EU has a tariff of 12.5%• USA varies between 0 - 30%• With increased competition a 1%

tariff difference can loose a large order

• Tariff concessions can be obtained bilaterally or multilaterally

• Tariffs are on the basis of reciprocity

FREE TRADE AGREEMENTS• Many countries are negotiating FTA’s with the

USA.• The Tariff advantage could be relatively short

term as many others strive to obtain better market access.

• The USA has indicated total duty free by 2015• The EU pursue the implementation of the

Doha Agenda but have many agreements providing duty free access

• New members States of the EU and their close proximity could also be a challenge

GLOBAL SOURCING PRINCIPLES • WORKER ISSUES – Linking Trade to Labour

rights Child Labour, Forced Labour, Health &

Safety, Freedom of Association, Disciplinary Procedures, Working hours, Wages

• FACTORY STANDARDS-Modern Factories, Latest Equipment & Technology, Proper Storage Facilities for Fabrics & Accessories

• FACTORY AUDITS• NON TARIFF BARRIERS -ENVIRONMENTAL

ISSUES, INTERLECTUAL PROPERTY & ANTI DUMPING

19Lyn Fernando

THE CHINA FACTOR

The Agreement of T&CThe 3rd Phase of integration resulted in the following categories becoming ‘quota free’ for the whole world from 01 Jan 2002 : 239 – Infant and young children’s wear 350 – Cotton Robes/Man-made fibre Robes 349/649 – Cotton Bras/Man-made fiber

Brassieres and other Foundation Garments 670 – Luggage 331/631 – Gloves & Mittens

Exports to the USA by UNITS World Vs China/SL – Jan-Aug 01/ Jan-Aug 02

-100

0

100

200

300

400

500

600

700

% G

row

th

239 350/ 650 349/ 649 670 331/ 631

World Sri Lanka China

Exports to the USA by FOBWorld Vs China/SL – Jan-Aug 01/Jan-Aug 02

-70

-60

-50

-40

-30

-20

-10

0

10%

Cha

nge

239 350/ 650 349/ 649 670 331/ 631

World Sri Lanka China

LESSONS FROM SRI LANKA

• Category 670 bags were made by a few foreign firms in Sri Lanka because of quota. In 2002 with quota free they could not compete and closed down

• Categories 350/650 & 349/649 Intimate apparel – Robes & Bras. Sri Lanka supplies the high end of the market – branded goods and exports increased

Projected Chinese ControlU.S. textile and apparel Import market

13% 20% 22%

44%

71%

0%

20%

40%

60%

80%

2002 2003 2004 2005 2006

ATMI

REGIONAL CORPORATION & PROSPECTS

• Can the Asian Countries that do not have a fabric base secure their requirements in future?

• Why should China supply fabrics when they can add value domestically?

• The SAARC countries – India & Pakistan have large cotton cultivation's & modern textile mills.

• ASEAN countries produce competitively priced textile. Can they be used regionally?

• Should countries specialize in products?

PRIVATE-PUBLIC PARTNERSHIP

• Prepare a strategy- where you want to be in 5 yrs

• 80/20 rule. 20% account for 80% of exports.• Large firms – 20% should take the lead as the

critical mass is important• Improve the Enabling Environment- Cost of Utilities, Transaction Costs, Regional

Corporation, Market Access, Image Building, Labour Laws

PRIVATE – PUBLIC PARTNERSHIP• Supply Chain Management –Sourcing 60%

or more consists of fabrics & another 10-15% on Accessories

• Benchmarking – at firm level. The FIT- an ITC tool to benchmark domestically, Internationally or with Buyers requirements

• Human Resource Development – Skills development at all levels

• Forward Integration & Marketing- A more focused approach to harness the resources of the public & private sectors in Marketing

Apparel Products Value ChainBy Lyn Fernando

Product Development

Selling & Distribution (Agents)

Outbound logistics

Manufacturing (cut, sew & finishing)FOB 10-25% of

Retail

Buyer (Retailer)

Manufacturing Quality products

Good on time Delivery Records

Raw materials /Accessories –40-70% of FOB

Availability of basic fabrics &

accessories locally

Educated & Trainable Workforce

Design

Non availability of advanced product development facilities

Lack of Advanced Manufacturing

Technology

Lack of Specialty fabrics & Accessories

-Lack of Direct contacts/ Access to Retailer.

-Long lead time

- Cost of Agents

Proximity to market, regular sailings -sea &

Air. Electronic Data Interchange for documentation

• High Cost Structure ( Labour, Utility) Wastage use of CAD/CAM

• Labor Laws, Invest in Human Resources

• Lack of Skilled Management

•Low productivity,

• Proximity to Suppliers

•High energy cost

Need to develop strong networks & lobby groups. Free Trade Agreements,

concessionary tariffs

Dependency on imported raw material, long lead times,delays

at customs, documentation, EDI

Lack of design capabilities

Sourcing

100%

Social Compliance Buyers /ETI Codes Labor Standards. Modern factories

Lack of Facilities to design,make,stock,&

supply on credit Proximity to market

FIRM LEVEL STRATEGIES• From Family Business to

Professionally Managed Business• Product Specialization and Finding

niche markets• Closer links with Buyers & Markets• Continuous Improvement &

Investment * At Factory Level * Staff Training * New Machinery & Technology

THE FUTURE

• Unpredictable- an uncertain world• How will China perform as a member of

the WTO ?• What will happen to China’s domestic

market ?• Growth potential of India & China with

huge internal markets• Post 2005 could be an opportunity not a

problem. A challenge requiring action

31Lyn Fernando

THANK YOU