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Textiles 2005

Mill executives will face challenges, surprises in the coming months.

Robert S. Reichard, Economics Editor

D on't write off the nation's still-impressive $80 billion textile industry. To be sure, the new year will confront mill executives with a host of serious challenges and maybe even a few surprises. But, by and large, this hard-pressed sector of the US economy will survive and maybe even rack up some scattered gains.The one big question mark, of course, is imports. Its still anybody's guess as to how fast incoming Chinese shipments will grow now that the global quota system has been junked. But there are a few positive signs. Washington is finally beginning to show some meaningful signs of keeping any further import penetration within bounds. Couple this with the fact that mills seem to have performed a bit better in recent months, and the future isnt quite as bleak as some of the purveyors of gloom and doom would have us believe.

linensuitApparel innovations, such as washable suits from Lands End, will help to keep the US textile industry viable.A good deal of Textile World's cautious optimism stems from the gradual shifting of mill ownership and management into stronger, more capable hands. A case in point: this past year's purchase of struggling Burlington Industries Inc. and Cone Mills Corp. by turnaround specialist Wilbur L. Ross, and the merger of them into the International Textile Group (ITG), Greensboro, N.C. This astute businessman obviously has not made these buying decisions out of charity. The acquisitions suggest he is betting big on the industry's survival. More importantly, people with his track record usually don't make mistakes.

Another upbeat sign: the continuing development and marketing of new and improved products. It's hard to ignore the spate of innovations in fibers and fabrics that have hit the market over the past year. And a lot of other introductions are scheduled in the months and quarters immediately ahead.

The growing need for quick response plus other replacement considerations also should help domestic producers. If nothing else, these factors certainly would seem to dictate that US firms keep a significant production base nearby, thus slowing any sudden massive shift toward China and other Far Eastern supply sources.

Then theres today's increasing success in cost containment. Most of the good news here comes from reduced cotton tags, growing mill productivity, and increasingly sophisticated management that is more and more attuned to operating in what has become essentially a one-world market.

And last but not least, there's today's still-improving economy. To be sure, growth in the next few quarters won't be quite as robust as in early 2004. But it's growth nevertheless with 2005's gross domestic product advance still put at a more-than-respectable 3 to 3.5 percent.

In short, the outlook for domestic textiles over the upcoming year doesn't seem all that bleak. True, any new gains should be a lot harder to come by. On the other hand, declines that do occur should, with a little luck, be held to very modest proportions.

Taking a more detailed look at the new year, here's how key individual sectors of this multifaceted industry should fare:

Demand: Equations now suggest little more than a 1- to 2-percent slippage in combined textile mill and mill product shipments. While hardly bullish and a bit under 2004 levels, it's considerably better than the 5.5-percent, 4.5-percent and 3-percent dropoffs recorded during 2001, 2002 and 2003, respectively.

One fairly bright spot should be singled out - carpets and rugs. Here, TW sees something close to a 1.5-percent advance - not much less than 2004's slightly larger 2-percent increase. Behind the better performance in this sector are continuing strong construction and home refurnishing trends.The overall textile outlook becomes a lot more iffy beyond the current year as new international trade patterns are established. But assume some new governmental moves will occur that will be aimed at leveling the international playing field; and hopefully only minor further erosion would be the result.

Global Insight, a major economic forecasting firm, would seem to concur. Its analysts currently predict a virtually flat demand pattern for basic mill products in 2006. The textile product subsector isn't expected to fare all that badly either, with the decline that year put at a manageable 1.5 percent.

Supply: Availability will be ample, or actually more than ample, all the way down the line from basic fibers to such finished goods as apparel and home furnishings. In the United States, the average textile facility currently is operating at only slightly above 71 percent of its potential - virtually unchanged from the year-ago reading. Given both projected demand and the likelihood of little significant change in capacity, this key rate shouldn't be all that much different by the coming summer and fall.

The supply glut is even more burdensome overseas. Indeed, there's now growing fear among many smaller foreign nations that they'll lose share to expanding global giants like China and India now that quotas have been jettisoned.

Domestic inventories offer still further evidence that there is more than enough to go around. True, the industry's widely monitored stock/sales ratios are down from the top-heavy levels of recent years. Nevertheless, even at current levels they still are sufficient to meet virtually all of today's just-in-time ordering on the part of users.

Prices: Given the excess supplies just alluded to, it's again going to be difficult to boost prices. The absence of any major cost pressures also should work against the posting of any significant increases (See Table 1).

Downstream pressure from apparel makers also will play a restraining role. Indeed, some actual apparel price erosion is likely as the ending of quotas opens up the gate to a lot more cheap clothing from abroad.

On this last score, the Washington-based National Retail Federation's International Advisory Committee recently estimated that the demise of quotas would knock anywhere from 8 to 18 percent off wholesale apparel costs over the next few years.

What does all this mean for domestic textile tags? TW' s own estimates, given the restraints of lower-priced apparel imports, call for only a fractional increase in basic textile quotas over the new year.

A pretty similar pattern is anticipated for the textile product sector, where just a 1-percent advance is projected. The best performance in the textile product area is likely in carpets and rugs, where continuing good demand should permit another 1- to 2-percent price increase - not that much different from the boost recorded over the past 12 months. On the other hand, no sizable increases are seen for other textile products.

Combined with the price restraint in basic textiles, this in turn suggests the overall 2005 textile price average (basic textiles plus textile products) should again lag behind that of the general economy, where quotas are expected to rise about 3 percent.

Costs: As suggested earlier, no major upward pressures are expected. On the fiber front, any further uptick in man-mades stemming from the energy-cost runup should be offset by easiness in cotton, where tags have been, and are likely to remain, shaky. Wool, meantime, has been relatively stable.

And the picture is much the same when it comes to labor costs. Continuing productivity gains here should be sufficient to offset relatively modest mill pay hikes. Upshot: Unit labor costs aren't expected to rise very much. In fact, with any luck, they should remain quite flat.

This lack of any significant upward pressure also is suggested by Global Insight's forecast for material and service costs. In the big textile product subsector, the forecasting firm actually sees a decline in dollar outlays for these materials and services.

Employment: As usual, this industry sector offers little to cheer about. The current still-basically-lackluster demand outlook has added negative impact coming from continuing gains in worker productivity. Together, these should result in a further decline in the number of textile workers, with 2005 job totals dropping another 4 percent or so.

But the declines, as in the past, will be uneven, with the biggest slippage seen in basic textiles. The 2005 projection, for example, calls for a 7-percent decline, on top of last year's 9-percent slide. On the other hand, textile products will fare a bit better, with little or no change seen for 2005. That would be pretty much in line with last year's performance.

But declines, whether miniscule or large, are taking their toll as they mount up over the long pull. The number of job holders this year will be 54 percent and 17 percent under decade-ago levels for the basic mill and mill product sectors, respectively.

Skip over to the apparel areas, and this employment picture is even more dismal. The new year's expected 9-percent decline coupled with the equally impressive losses of previous years will leave 2005 apparel job totals at near 260,000. That's 68 percent under levels prevailing just 10 years earlier.

Capacity: With modernization a survival must these days, the industry continues to invest in a fair amount of new, more productive plants and equipment. This, in turn, has limited any drop-off in industry production potential, despite continuing closures of older, less efficient mill facilities.

This basically small decline in capacity can be confirmed by taking a closer look at mill operating rates and mill production trends. Over this period, operating rates went up only 0.5 percent, while production remained relatively unchanged. Other things being equal, this suggests that any capacity decline was minimal.

Calling the turn on this year's capacity, however, won't be easy, especially considering all the uncertainties that lie ahead. Nevertheless, given past history and anecdotal evidence pointing to continuing capital investment, it's highly unlikely industry potential will drop all that much - at least not over the next few quarters.

Profits: Current capacity overhangs plus still-intensifying foreign competition will keep a lid on any meaningful earnings gains. On the other hand, the domestic industry still is managing to keep its head above water. Thus, mills, at least as far as overall averages are concerned, managed to end up in the black in 2004.

Based on incomplete 2004 returns, for example, Census Bureau data suggest total 2004 after-tax industry profits came to around $800 million. While that leaves a lot to be desired, it's at least better than the losses reported a few years back.

As for 2005, TW editors don't see any further improvement. But neither do they see any substantial deterioration, as basically unchanged input costs when combined with growing production and marketing efficiencies should help offset much of the impact of post-quota import competition.

Hence, these TW forecasts for the new year: After-tax profits at $600 to $700 million should be just fractionally under 2004 levels. After-tax margins per dollar of sales are put at 1.4 percent again not that much under levels reported this past year.

Foreign Trade : It's a brand-new ball game here. One thing is for sure - China, which already has captured about 20 percent of US textile and apparel markets, will again increase its share.

Even with Uncle Sam showing some willingness to impose a few limits on any big new surge, it's hard to see how another double-digit increase in incoming shipments can be avoided. At this early stage of the game, TW sees the imports of textiles and apparel on a square meters equivalent (sme) basis rising about 11 percent.

Add this onto increases of recent years, and 2005's import total again on a sme basis will be pretty much double what it was as recently as 1998.

Export gains in this kind of global climate also will be somewhat harder to come by. Combined with the expected big increase in imports, this means another huge jump in the already-impressive textile/apparel deficit. TW' s red-ink estimate for the new year is put at close to $75 billion. That compares to $70.5 billion last year and the much smaller $36 billion figure of just a decade ago.

More Thoughts On Trade

The above projections, however, could prove somewhat more iffy than in recent years. Clearly, at this early date, trying to call all the specific US and Chinese moves in the current quota-free world isn't easy. Some sort of accommodation with our Far Eastern competitor has to, and almost certainly will, be reached, but the exact terms of that accommodation and what it will mean for specific components of the US textile and apparel industries is still very much anybody's guess.The importance of China's impact can best be appreciated by recognizing that the Chinese share of worldwide exports has been soaring. That share, according to the World Bank, will amount to 10.6 percent of all textiles and 47.1 percent of all clothing by the end of the year (See Table 2).

Look at Chinese exports earmarked for the United States, and the situation is equally disquieting. Commerce Department figures find US imports from China now top $27 billion - a 50-percent jump over 1999 imports. Not surprisingly, some feel Chinese factories already make about 20 percent of all clothing and textiles sold in the United States. Several US mill executives now feel the figure could more than triple, eventually leading to the capture of as much as 70 percent of the US market. If correct, that would be enough to precipitate the closing of half of today's surviving US mills.

Not everybody is ready to agree with this gloomy assessment. Many domestic fashion executives, for instance, feel the 70-percent figure is an exaggeration. They point out there are some restraints to putting so many of a buyer's eggs in one basket. That's especially true where quick response and replacement considerations dictate that domestic firms hedge their bets and keep a sizable portion based here in the Western Hemisphere.

It might also be pointed out that not every gain for China means a loss for some domestic producer. Some analysts suggest that while the Chinese share will surely jump, some of that growth could be at the expense of other textile- and apparel-producing countries rather than US industry.

And it makes sense  - poor countries at the bottom of the economic ladder, such as Bangladesh and Cambodia, can hardly be expected to match China, with its endless supply of workers available to feed vast numbers of factories operating with high efficiency and low costs.

In any event, there's a growing feeling that only the really big players such as China, India, Pakistan and Brazil, will continue to sport big gains. Indeed, without rules restricting how much fabric and how many garments the United States can buy from individual countries, US firms probably will end up purchasing most of what they want from five or six nations - not the 50-plus that are now part of their supply network.

Summing up, odds not only suggest US textile and apparel import gains over the quarters and years immediately ahead, but also some really big shifts in country-by-country sourcing.

Equally important are questions on the specific steps that might be taken by both the United States and China. Here in the United States, an interagency government task force already is looking into a petition to consider new quotas. And many more such petitions are anticipated in the near future.

Normally, such petitions for safeguards or limits to exports are filed after the damage is done and can be measured. But the domestic industry has been so battered over the years that it filed these petitions based on the threat of damage, saying it is the only way to save what is left of its manufacturing base.

Commenting on this, Allen E. Gant, chairman, National Council of Textile Organizations (NCTO), Washington, noted, "[O]ur industry is looking for our government to approve these petitions and prevent China from taking over virtually the entire US textile and apparel market, at the expense of US jobs."

Possible Chinese Response

There has been some movement to engage the Chinese in new actions, especially in the area of an upward revaluation of the nation's currency, the yuan. The current undervaluation, which some put as high as 30 to 40 percent, makes Chinese imports unduly cheap, thereby encouraging US imports and exacerbating our balance of trade deficit.

Economists as well as textile industry leaders worry about this. They say the United States' insatiable demand for imports and its addiction to borrowing from abroad creates a dangerous imbalance in the world economy.

Following up on this, policy makers in the United States, Europe and Japan, backed by the International Monetary Fund, are pressing China to allow the yuan to rise in value, which would help create a gentle decline in the dollar's value. China, for its part, does see some reasons to let the yuan rise, mainly to thwart domestic inflation. On the other hand, it refuses to be pinned down on timing.

But as noted, there are signs of change. Some high-ranking officials of that nation recently have been hinting at shifts in thinking. While no one expects any tremendous changes over the next year, the consensus is that by year-end, the yuan could edge up by about 7 percent, thereby offering at least a modicum of relief to the hard-pressed US textile and apparel industries.

Nor does this exhaust the list of possible Chinese responses. One other approach could be to reduce subsidization of that nations textile and apparel industries. Another possible move have China agree to limit exports voluntarily, similarly to what happened in the 1970s when Japan agreed to limit auto shipments.

A Closer Look At Costs

Meantime, some good news is coming from another front  - costs. Specifically, both of textiles major production inputs fibers and labor remain pretty much under control.

Looking at the fiber picture first: Cotton tags have been running lower than expected. Indeed, prices in recent days have been ranging anywhere from 20 to 25 cents per pound under year-ago levels.

Credit is in oversupply for these bargain-basement prices. Thus, US cotton production despite adverse weather from last summer's hurricanes now is estimated at a record 21.5 million bales. That's 18 percent above last year's 18.3 million-bale level. Add in impressive overseas production, and prices should be hard-put to rise much, if anything, above recent 40-cents-plus-per-pound levels.

Man-made fiber costs, given today's much higher petroleum feedstock inputs, also remain surprisingly docile. Ample supply is the reason. During the upcoming year, global man-made fiber production is expected to total 87,350 billion pounds. That's up a significant 11.5 percent from levels prevailing as recently as 2002.

True, there have been some significant increases in polyester, but these haven't been enough to push Uncle Sam's overall man-made fiber price index up by more than 0.5 percent from year-ago levels. And nothing more than a similar small advance in this key fiber price yardstick is anticipated for the new year.

Labor costs arent likely to create any serious problems either. At latest count, the average hourly rate in both basic textiles and textile product sectors was up only about 1 percent vis-is a year earlier. And even that doesn't tell the whole story. Factor in continuing productivity gains, and unit labor costs - the most meaningful yardstick of labor cost pressures - have not risen at all. Indeed, there's a good chance they may even have edged fractionally lower.

Job Shrinkage Continues

On the other hand, the aforementioned productivity gains, when superimposed on less-than-sensational demand, continue to whittle away at employment totals. At last report, the basic textile mill workforce was running more than 5 percent under a year ago, more than offsetting some fractional gains in textile mill product jobs, and the situation is even more disturbing in apparel. Go back a few years, and the extent to which the industry has lost jobs becomes more distressing still. Over the past four years, close to 350,000 workers have been trimmed from the combined textile/apparel workforce, and the dropoff is almost certain to continue. Karl Spilhaus, president, National Textile Association, Boston, sees an eventual drop of as many as 600,000 jobs if some corrective action isn't taken.

The latest official Labor Department projections aren't that encouraging either. The government agency puts average annual rates of decline over the 2002 to 2012 period at these levels: 6 percent for basic mills; less than 1 percent for textile products; and 11 percent for apparel manufacturing.

One bright spot: These declines, because they're partially due to productivity gains, will translate into production declines of somewhat less magnitude.

The Innovation Factor

The industry is going all out on the technology front, introducing a spate of new and improved products designed to whet buyer appetites and get a jump on the competition. It's a continuation of the trend started years ago with the introduction of such successful consumer-oriented lines as wrinkle-free and stretch fabrics.

Not only are the above lines still being improved upon, but they are constantly being added to by an aggressive technically oriented industry - one always on the lookout for new market opportunities.

There are, for example, new insect-repellent fabrics such as those used in Buzz Off Insect Shield insect-repellent apparel from Ex Officio, Seattle, that are permeated with repellents and designed to protect the wearer from mosquitoes and other pests. The repellents are bonded tightly to fibers and repel insects through multiple washings.

Also important are today's vastly improved outerwear products. A recent survey found three out of every four retailers and manufacturers see technology playing a stronger role in the design of their garments. Aside from basic fit, survey respondents singled out continuing improvements in such fabric characteristics as warmth, breathability, odor control, washability, water repellency and waterproofing. Just-on-the-market offerings also can be style-enticing, as well as utilitarian. Such innovations as waterproof leather and denim, for example, now allow for the introduction of brand-new high-fashion products.

The washability factor, as noted above, also is getting more attention. Gains here have progressed, allowing for the introduction of washable suits such as those for men and women from Lands End Inc., Dodgeville, Wis., in blends of polyester, wool and spandex. These suits can be laundered at home and look both fresh and crisp.

The growing interest in stretch fabrics also deserves some further comment. Thanks to new advances and a shift in fashion toward slim fits, stretch is in. The addition of stretchy fibers to mens shirts, pants, suits and jeans adds something new and fresh to classic clothes in the same way wrinkle-free and stain-resistant finishes helped revive sales of men's casual pants.

Older fabrics aren't being ignored either. Denim makers now are pumping out a bewildering array of washes, pocket designs and styles all designed to boost demand.

Most of these innovations start at the beginning of the production line with improvements in the basic fibers going into the fabric. Wool is a case in point the fiber now increasingly is being engineered for washability and greater comfort.

And in cotton, biotechnology is focusing on improving fiber quality. The aim is to provide mills a better-strength cotton with a better length and premium micronaire.

Also in cotton, San Francisco-based Levi Strauss and Co.'s Dockers® brand is introducing three proprietary innovations for its pants and shirts: a never-iron cotton pant; the Thermal Adapt khaki, which helps regulate body temperature by absorbing heat; and Perspiration Guard shirts, which prevent stains from showing. Other companies are following suit with products that resist fading, wrinkling, staining and shrinkage through multiple launderings.

Finally, a few words on so-called smart fabrics that help you communicate, make you feel good, and protect you sometimes all at the same time. A few worth noting include new solar-powered jackets that allow the wearer to carry portable digital devices, microprocessor-equipped running shoes that provide intelligent cushioning, and shirts that can monitor heart rate or calculate ultraviolet exposure.

Ex Officio's Buzz Off Insect Shield insect-repellent apparel is designed to protect the wearer from pests.

Survival Strategies

As suggested by the above product innovations and improvements, the US textile industry isn't about to throw in the towel. Combine this with an impressive list of other moves already in the works and/or on the drawing board, and survival and even some scattered growth would seem assured in the years ahead.

The current strategy is perhaps best typified by Ross's ITG, which already has facilities in China, Mexico and the United States, as well as joint ventures in India and Turkey. The company plans to open up a major denim mill in Guatemala to help meet demand from its Central American customers.

"ITG's goal, said Ross, "is to be the low-cost US producer after allowing for debt service; ramp up [research and development]; generate unique value-added niche products; capitalize on brand identity; and, most important since our customers have decided to source globally ,have a matching map."

Nor is ITG alone in feeling it can succeed in a global economy. New Balance Athletic Shoes Inc., Boston, has remained and is prospering here in the United States, while most of its competitors have fled to China, India and Vietnam. In any case, some 25 percent of its shoes are assembled at five factories in the United States.

The company believes the US-overseas wage gap is overblown. All of its US plants are highly automated, with barcoded parts and computerized stitching and embroidery machines resulting in about 25 minutes of manual labor per pair of shoes versus more than four hours in a less-automated Asian plant.

This stress on better equipment is seconded by Avondale Mills Inc., Monroe, Ga., which says its plants are world-class thanks to capital investment of more than $250 million since 1997.

Another area getting a lot of attention these days is logistics - having the right product in the right place at the right time. A growing number of mills now embrace the concept of logistics and supply management as the last frontier in further achieving corporate competitiveness. With that in mind, more than a few textile mills now accept the idea of outsourcing their logistical needs to third-party logistics companies  -companies that specialize in arranging and managing some or all aspects of transportation and distribution on the client's behalf.

Also aiding and abetting these strategies is the industry decision to combine all its trade groups under one roof. "For the first time," said NCTO's Gant, "the industry has come together in a unified front guaranteeing it maximum clout when pushing issues through Congress."

Finally, it might be pointed out that partnership with our North American counterparts rather than with big Far Eastern producers still has its advantages. Indeed, when you factor in time, speed-to-market, replenishment, inventory and cost of capital, there's some logic to keeping a balanced amount of procurement nearby.

Additionally, industry executives point out there are other trade agreements in place that provide a financial incentive through lower tariffs to source from non-Asian facilities. These include the North American Free Trade Agreement, the African Growth and Opportunity Act and the Caribbean Basin Trade Partnership Act.

One top mill executive sums it all up: "We're in this for the long haul. Sure, we could see a few setbacks. But I would bet well be here a decade from now a viable firm with new products and techniques that will further define us as a world-class producer."

January 2005




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