Southern California transition takes hold

Bobbin, Sept, 1998 by Judi Kessler

Asian sourcing has increased as well, but it continues to represent a relatively small proportion of total offshore production for Southern California-based manufacturers. Approximately 25 percent of the firms interviewed are now sending some production to Asia and other countries (outside of Mexico), although there is no evidence of a trend toward any particular country. However, the implications are clear: Los Angeles apparel production is not only heading south, it's going global.

The findings of the study suggest that the Los Angeles-area firms sourcing in Mexico are larger than those producing exclusively in Southern California. The mean 1996 gross earnings among the former are $40 million, compared with $15 million for the latter. Those sourcing in Mexico also tend to be private label manufacturers, the larger, high-volume order firms - those with reasonable turnaround times - and companies that specialize in commodity items. Although the reasons for the dominance of the large players in Mexico requires more careful analysis, the numbers as they stand suggest production relocation is not as "footloose" as has been typically portrayed. One reason: Relocation requires resources - both financial and in terms of personnel - that smaller firms do not have. (See "How Mexico Figures into the Strategies of L.A.'s Key Players," page 31.)

In terms of production locations, although Mexico's border towns offer the proximity sought by Southern California producers (and many chose to send their production orders to this region), a growing number of firms from the greater Los Angeles area are choosing to set up production networks within Mexico's interior apparel hubs. This is due, in part, to the fact that unemployment along the 2,000-mile U.S./Mexico border region is low, upping the cost of labor.

Why Mexico?

Not surprisingly, factors related to company profit margin figure most prominently in decisions to relocate production to Mexico. (It's estimated that for Southern California producers, labor costs represent anywhere from 30 percent to 33 percent of the total cost of production.) However, the majority of manufacturers are not looking for a quick fix.

For example, NAFTA, for the most part, is perceived by manufacturers as correlating much more closely with cost savings than the 1994 Mexican peso devaluation and monetary collapse. Very few manufacturers in Southern California are willing to initiate the complex process of production relocation based merely on currency fluctuations.

Consider this rather blunt quote from a veteran industry CFO. He argues, "The peso crash is a stupid reason to relocate production. [Currency fluctuations] are always a crap game. It could happen any time, and it could recover any time. ... You'd have to be a moron to [relocate production] based on the peso crash."

In addition to cost, quality and turnaround times are very important determinants in offshore production locations. According to the study's findings, most Southern California manufacturers currently contracting in Mexico report being moderately to highly satisfied with production quality. And while the definition of good quality is often dependent upon the type of garment under production and target price range, these findings represent a cross-section of price points and SIC classifications.