Speed to market: China threatens Central America's biggest industry, textiles, but the isthmus has a secret weapon—it's much closer to the world's No. 1 customer, the United States

Latin Trade, Dec, 2004 by Andres F. Velazquez

As the fabric rolls off the machines in a Salvadoran textile shop, it's pretty clear who the customer is: The tell-tale black-and-white stripes are bound to be sewn up into team jerseys for legendary Italian football club Juventus, to be sold all over the world and used by the team's own players. Until now, Partex, which also makes clothing for top global brands like Nike, Adidas and Reebok, has seen significant growth since coming to El Salvador 11 years ago. Nevertheless, 2005 could be the year things change.

Quotas on some textile industry products started coming off two years ago, but in 2005 countries like China will have no restrictions at all on selling its products to the world's biggest buyer, the United States. According to the U.S. International Textile Association, since China joined the World Trade Organization (WTO) in 2001, exports of textiles and clothes from the Asian behemoth to the United States have doubled to US$11.60 billion, while sales from Central America have remained nearly flat.

The China phenomenon is a serious threat to Central America, and everyone in the region knows it, particularly in textile producers like Honduras, El Salvador and Guatemala, the three biggest textile exporters in the region, in that order. Honduras now has 6% of the U.S. clothing market--it's the No. 3 clothes exporter to the United States, after China and Mexico--selling products worth $2.50 billion a year, according to the Asociacion Hondurena de Maquiladores (AHM), the country's manufacturing association. El Salvador exports $1.70 billion in manufactured goods, 57% of the country's sales abroad, according to El Salvador's Economy Ministry.

The countries of Central America are fully aware of what's coming and have been preparing for several years, industry executives say. Despite the arrival of a competitor like China, sure to increase the competition for U.S. export sales, the region has an advantage: It's very close to the world's biggest market. "We are focusing on the subject of speed to market; that is an advantage that Asia will never have," says Juan Carlos Zighelboim, president of Partex.

The fact that Central America is close to the United States is key to the clothing business--especially considering the United States' high purchasing power, and where seasonal and fashion changes play such a big role in the market. While China can delay up to six months to deliver an order, Central American producers can be ready in as little as four to eight weeks. According to Zighelboim, U.S. clothing imports total $62 billion annually, of which an estimated 40%-$25 billion--is affected by changes in the seasons or fashion trends.

Discounts. For example, while Central American producers are between 10% and 20% more expensive than Chinese factories, half of Asian products are out of the market because they are behind on fashion and have to discount from 30% to 50%. Accordingly, Central American clothing makers are inarguably the most important providers for U.S. customers, says Zighelboim. "We are going to focus on our products that best penetrate that segment and stop focusing on what has to go to Asia, like the production of T-shirts," he says.

For instance, once a soccer team wins a major game, its jerseys tend to become quickly fashionable, so putting products on the street fast is very important. The last time Brazil's national team won the Copa America soccer championship in Latin America, its jerseys were in huge demand. The same happened with the Portuguese team as it worked its way through the semifinals at the last European Cup. (It finished second, after Greece.)

Spanish textile company Inditex, which makes clothing for the Spanish retail chain Zara and manufactures most of its products in Spain, Portugal and Turkey, is a good example of this strategy at the global level. Norman Garcia, the Honduran minister of industry and trade, says Inditex is the third-largest clothing chain in the world and competes in large part on its ability to react to fashion trends. "They deliver clothing two times a week to all their stores," he says. "It's clear that logistics is the key."

According to Jesus Canahuati, president of the Honduran manufacturer's association AHM and one of the textile industry's key executives--his brother is Mario Canahuati, Honduran ambassador to the United States--China is a potential problem, one that is making the business more efficient and forcing it to increase both the range of products it sells and the raw materials it consumes. That is, the pressure is forcing companies in Honduras to invest in creating textile mills and complementary businesses--such as cardboard, thread, labels and stamped fabrics, among others--in order to integrate the chain of production. "That way we can be a one-stop shop for the client," says Canahuati, whose company Elcatex sells to retail giants like Wal-Mart, Kmart, Target, Gap and Sears. China will impact most the business of clothing assembly, he says, which is the 30% of Honduras textile production that is not integrated and depends on fabric from other countries.