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Surviving The Game Of Textiles

The textile industry faces challenges in 2006; new products may help the industry thrive.

Robert S. Reichard, Economics Editor

T he nation's hard-pressed textile and apparel producers face a double-barreled headache these days: keeping track of the myriad changes buffeting the industry; and devising effective production, distribution and marketing strategies to deal with them.

As for the changes, last year's centered around the junking of the old import/ export quota system and its results - the ensuing flood of cheap Chinese imports. This year, additional adjustments will be required to deal with new 2006-08 Chinese quotas, a possible upward revaluation of the badly undervalued Chinese yuan and all the new producer-distribution-retail channels that currently are being developed and refined.

Marlon Shirley, the world's fastest amputee, wears Iceland-based Ossur's Cheetah™ Flex Foot® prosthetic sprinting foot - a featured product in the recent  Extreme Textiles: Designing for High Performance exhibit at the Cooper-Hewitt National Design Museum.

The net effect of all this is pretty clear: Some further domestic contraction will be unavoidable. But on a brighter note, these shifting ground rules would also seem to suggest new opportunities - and could give US textile and apparel producers overall a much better chance of surviving in the new global marketplace.

Another plus: The new agreement clearly will remove much of the uncertainty that has been plaguing textile markets for more than a year. Other things being equal, the new pact with Beijing also will allow for better planning and provide more reassurance that contractual commitments will be met.

Commenting on all this, a spokesman for the Washington-based National Council of Textile Organizations (NCTO) now feels these developments are basically "good news for the US textile industry."

Nor are these new attempts to level the international playing field the only signs pointing to a continuing viable domestic industry. For one, there are the growing number of innovations US mills and garment manufacturers are implementing - including an increasing emphasis on outsourcing and partnerships - steps all calculated to strengthen the US position as a viable world-class supplier of textile and apparel products.

Equally important is the ongoing drive on the part of domestic mills to hold down costs. This shows up most clearly in productivity figures where new gains - aided by more efficient equipment and improved manufacturing techniques - are already proving to be a big help in keeping labor costs under control.

True, the industry's fiber and energy outlays have been rising. But  it's important to keep in mind these latter cost increases affect both competitors and US domestic producers.

Another long-term positive: Domestic producers have taken new internal steps to improve market potential. These include more savvy market research, increasingly quicker responses to ever-changing buyer demands, the establishment of more niche products and improved customer servicing - plus the steady stream of new fiber, fabric and finished products - all designed to whet consumer appetites.

And, last but not least, today's growing economy has to be factored into the overall domestic demand equation. Most business analysts now see about a 3- to 3.5-percent gain in 2006 real gross domestic product. This should be enough to put additional cash into consumer hands and keep purchases of apparel, home furnishings and other products in a continuing uptrend.

Not A Rosy Picture, But Manageable
Weigh all these upbeat signs against the still-iffy trade picture, and 2006 doesn't look like it will turn out that badly. As stated above, overall activity is almost certain to shrink again. But barring unforeseen developments, declines should be manageable - with the overall outlook for 2006 shaping up something along these lines:

Demand: Combined textile and apparel shipments in current dollar terms are likely to slip about 3 percent this year. But there should be significant differences among the various components that make up this total.

Thus, while manufacturers' dollar sales of more highly fabricated mill products like home furnishings and rugs could hold their own or even eke out a fractional gain, the losses in basic mill activity (fibers, yarns and fabrics) could be considerable - something in the order of 5 percent.

The picture for the domestic apparel industry also is far from rosy. Given expectations of more import gains from China and a host of Third World countries, domestic dollar totals here should drop by an even larger amount - with Textile World equations suggesting a decline somewhere near 7 percent.

Supply: There should be more than enough to go around. Overseas expansions and the concomitant need for expanding these countries' sales will intensify foreign efforts to penetrate US markets. Nor is the current excessively high domestic capacity level likely to change all that much as pressures to modernize and increase productivity blunt the impact of any additional mill closures.

This excess domestic capacity is highlighted by the fact that domestic mills again will be operating at only 71 to 72 percent of their potential - despite the closings of a sizable number of textile plants over the past year. Note, too, this operating rate remains far below the 84- to 85-percent highs hit back in the late 1990s.

Nor should anyone be concerned about low inventory levels - stock/sales ratios now are running 5 to 10 percent under year-ago levels. The reason: The decline reflects little more than an effort to keep carrying costs down. In any event, it's not likely to pose any supply problems, as better communications and an emphasis on flexible manufacturing allow for quick responses to new orders.

Prices: The aforementioned supply/demand imbalance will keep pressure on selling prices. And while some increases will get through, they're likely to be very selective and modest - and on average probably will fall far short of the overall inflation rate.

Our all-inclusive textile mill product price index tells the story - with the projected 2006 advance put at only around 1.5 percent (See Table 1). It's also worth noting competition has been in keeping with this bellwether, which shows fluctuations within a very narrow range for more than a decade.

Downstream pressures from manufacturers and retailers - in addition to low-priced imports - are likely behind this basically flat pricing pattern.

More to the point: These buyers of textile products, faced with apparel tags that actually have declined over the past year, are now questioning and fighting virtually all price-boosting attempts. And with competition as keen as it is, they have usually been able to stop - or, at the very least, blunt - most of these upward mill price moves.

Costs: The outlook isn't all that bad here either. A combination of relatively small pay hikes and rising productivity should put a ceiling on any unit labor cost increases - with averages holding steady or rising only fractionally.

True, fiber costs are running somewhat above those of a year ago. But here, too, the outlook is cautiously optimistic. Slowly easing energy tags, along with growing capacity, will limit any further increases in man-made fibers.

The cotton situation also seems to be under control. Based on the latest estimates, the US crop could turn out to be the second-highest on record - with ending stocks for the 2004-05 crop year expected to hit 6.1 million bales.

That's up significantly from this past year's 5.5 million-bale figure. Add in good overseas supplies, and cotton prices should continue to fluctuate in a relatively narrow band - with the yearly average running fairly close to 2005 levels.

Profits: The fact that the industry managed to eke out a small gain over the past year - at least as far as overall averages are concerned - would seem to bode well for 2006. With any luck, aggregate mill net profits should again approach the billion dollar mark - though it should be noted this will only be about half the levels prevailing in the late 1990s.

Margins also will fare tolerably well. Indeed, after-tax profits should come close to 3 cents per dollar of sales - not much under the peaks of the past decade. The same is true for after-tax profits per dollar of stockholders' equity, where a 10-percent return on the dollar is suggested for the upcoming year.

These encouraging estimates are further confirmed by the latest projections provided to TW by economic consulting firm Global Insight. Analysts here see margins holding fairly steady for basic textile mills - and perhaps doing even better than those in the more highly fabricated mill product sector.

Labor: As suggested above, the cost factor is no worry - as productivity gains offset only small increases in hourly wage costs (estimated at only about 2 to 3 percent for 2006). In the meantime, the number of employees will continue to shrink because of a combination of falling activity and rising worker productivity.

The total textile mill workforce, for example, is expected to drop to around 373,000 workers this year. That's down about 7 percent from 2005 levels. And when compared to a decade ago, the fall becomes really precipitous - something in the order of 47 percent.

Declines, however, will be uneven. Compare the upcoming year to 2005, and the biggest worker slippage (9 to 10 percent) is seen for basic mills. The more highly fabricated textile product sector, however, should fare somewhat better, with only about a 4-percent decline seen for the next 12 months.

Trade: Despite the Dominican Republic-Central American Free Trade Agreement, the new trade pact with China and other agreements, another big increase in this country's already huge textile/apparel trade deficit seems inevitable. As of now, TW puts the red-ink figure for 2006 at the sky-high $85 billion level - about 5 percent above this past year and double the level prevailing as recently as 1997.

Soaring garment imports are the major reason for these negative numbers. Incoming textile and apparel shipments on a square-meter-equivalents (SMEs) basis rose by close to 10 percent in 2005 - with an almost as large 8- to 10-percent jump anticipated for the next 12 months.

Textile and apparel exports, on the other hand, haven't been performing all that badly. Indeed, they actually have been increasing. But because the dollar figures are smaller here, the offset to rising imports has been only marginal - not nearly enough to keep the deficit from rising.

A Longer Look Ahead
Industry shrinkage is likely to continue beyond the current new year. But hopefully, with some Chinese restraints in place, the ensuing declines for the most part should be relatively small and manageable.

Global Insight analysts see activity declines in real or physical terms for the basic textile mill sector averaging out in the 3.5- to 4.5-percent range over 2007-09. As for the textile product area, the slippage should be somewhat smaller - about 1.5 to 3.5 percent over the same three-year period.

Going out even further to 2010 and 2011, these declines are expected to be even more modest - around 2 percent annually for basic textiles and perhaps even flattening out in the textile mill product sector.

Apparel activity, however, should continue to weaken as outsourcing becomes increasingly prevalent. Declines in 2007-09 should be in the order of 4.5 percent - with further 3.5- to 4-percent annual domestic slippage expected through the remainder of the decade.

Despite all the above, every segment of the industry should remain profitable. Indeed, in the case of textile mill products, Global Insight analysts see margin levels remaining pretty much where they are today.

A More Detailed Look At Trade
The big question, however, is just how big a margin of error there could be in all of the above projections. Clearly, a lot will depend on how the new US/China trade pact plays out - and how our domestic and other global producers respond.

But other things being equal, the new agreement has to be regarded as a significant plus. If nothing else, it gives the US textile and apparel industries a better idea of competitive pressures and sales potentials.

In any event, the new pact puts import limits on some 34 categories of Chinese textile and apparel products. That's some 15 more than the 19 categories that were already under some sort of growth restrictions.

To be sure, US imports from China will continue to rise over the next three years. But the rate of advance should be a lot more subdued than the huge 50- to 60-percent jump in outgoing Chinese textile and apparel shipments recorded over the past year.

More to the point: All 34 categories now under control will be allowed to grow between 10 and 15 percent this year, 12.5 and 16 percent in 2007, and 15 and 17 percent in 2008.

Another plus for these recently concluded negotiations: While similar to the one reached earlier with the European Union, the new agreement limits Chinese outgoing shipments for three years - one more than under the EU pact.

In the meantime, the expected improvement in predictability is being welcomed by most US retailers. As one spokesman for the Washington-based National Retail Federation put it: "Retailers need to know when placing an order that the goods will be able to come into the United States and not be blocked because of a safeguard restriction that didn't exist six months earlier."

But this same spokesman hastens to add the Chinese now must establish a fair system for allocating quotas among Chinese manufacturers and trace exports before they leave the country to ensure reliable delivery.

Another looming question  involves the still badly undervalued Chinese yuan. This has resulted in a huge US trade deficit with China. Indeed, based on preliminary data, that deficit, including both nontextiles and textiles, now accounts for a whopping 40 percent of the total trade imbalance.

Not surprisingly, Congress remains sharply critical. Some lawmakers are now pressing for further import restrictions unless Beijing takes forceful steps to allow the value of its money to move higher in line with market forces.

Still another trade uncertainty: How fast will the new US/China agreement push Chinese manufacturers into the production of more upscale products - say, more expensive shirts rather than basic T-shirts?

In any case, many Chinese companies have been setting their sights on the market for more fashionable apparel. Therefore, they are expected to challenge European and US producers even more directly in years to come.

Also pointing in this direction is the fact that many Chinese firms are intensifying their efforts to compete on a higher level by putting more money into capital investment, designing and even the marketing of premium garments.

On the investment score, the Chinese have substantially increased spending on new textile and apparel plants and equipment. The figures are impressive - with one estimate now putting the 2004 outlay here at $3.5 billion. That's a huge 275-percent jump over levels prevailing as recently as 1998.

One result of all this has been an improving Chinese infrastructure. The country's manufacturers are now able to adjust in increasingly shorter times to meet the needs of the ever-volatile US marketplace. And aiding this along is China's increasing supply of container ships ready to transport another load of deliveries.

Chinese officials are also helping all of this along in still another way - by giving their manufacturers of higher-priced garments preferential treatment in determining the nation's overall volume of exports.

The Productivity Factor
Meanwhile, domestic mills are taking a lot of new steps to survive. This is especially true on the productivity front, where solid efficiency gains have been racked up in recent years - thereby helping to keep domestic industry costs within shooting distance of China and other low-cost global producers.

In any case, it's hard to fault these recent gains, which, in many instances, have topped those for many other US industries. Over the past few years, for example, output per textile worker has been increasing at a 3-percent or higher annual rate. And according to a recent Labor Department study, these gains have been pretty much across the board. More importantly, they've been going on for a significantly long period of time. Over the past decade and a half, fiber, yarn, thread and fabric mills have sported average annual efficiency gains of 5.2 percent and 4.4 percent, respectively.

Even the hard-pressed US apparel sector hasn't fared all that badly on the productivity front. The report just alluded to shows apparel manufacturing efficiency over this same time period increasing at about a 3.1-percent annual rate.

The big question, of course, is: Can these advances be sustained? At this point in time, the answer would have to be, probably yes - as mills continue to invest in new, increasingly efficient and sophisticated equipment and processing techniques.

To be sure, capital investment numbers are hard to come by. But judging from informal talks with both machinery makers and mill executives, the industry seems willing to spend where it sees opportunities for holding costs down and increasing - or even just maintaining - market share.

NCTO officials would seem to concur. They note US textile and apparel firms have been spending billions to improve efficiency - adding that both industries now represent some of the most highly automated and advanced manufacturing sectors in our economy.

And if still further proof of continuing capital spending is needed, take a look at the fact that overall industry capacity has declined by only a relatively small percentage despite the recent spate of mill closings - more than 30 plants have been shuttered over the last year. The only conclusion: New, more productive capacity has been coming on-stream to offset most of these closings.

Just how successful this approach has been in maintaining our competitive stance can be gleaned from the industry's latest unit labor cost figures. These key indicators of labor pressure actually have been edging fractionally lower for several years now, as efficiency gains more than outweigh small annual increases in payroll costs.

The actual numbers: Over the past three years, hourly pay rates have climbed about 4 to 5 percent, while output per man-hour during this time has jumped 8 to 10 percent. The implication: Costs per unit of output may have been falling about 1 percent each year since 2002.

New Products Proliferate
But efforts to keep labor costs under control aren't the only steps being taken to keep the still relatively impressive US textile and apparel industries afloat. Equally important is the drive for innovative fibers and fabrics - all aimed at whetting consumer appetites - and in the process keeping US companies one step ahead of the competition.

Aided by a continuing flow of new technological breakthroughs, these new products seem to have one thing in common - improved performance. Hence, the ongoing spate of products enhancing such desired characteristics as wrinkle resistance, stretch capabilities, comfort, washability, moisture management, protection from insects, breathability, stain-repellent nanotechnology, bacteria control and odor resistance.

Looking first at stretch fibers and fabrics, new variants are being developed continually for specific end-use applications. And big payoffs are expected - reflecting the fact that buyers today want their clothing to look good, feel good and perform with minimal upkeep.

Moisture management is another area getting a lot of attention. Typically associated with man-made fibers, this increasingly popular approach to comfort also is now being applied to cotton. Using technology developed by Cotton Incorporated, Cary, N.C., cotton moisture-control garments are increasingly becoming available for sportswear and other apparel products - all by reducing the fiber's absorbent quality and maintaining its wicking attributes (See " Quality Fabric Of The Month," TW, March 2005).

Cotton people are busy in other areas too. Thus, there has been a lot of work in developing finishes that not only increase tensile and tear strength, but also improve color retention after repeated washings.

Then don't forget the all-new space-age materials enhancing textiles in more than just the traditional clothing, carpet and furniture covering areas. Made of high-tech threads, they're being used increasingly in a growing number of applications in more and more industries - including construction, agriculture, protective clothing, medical, transportation and waste disposal.

Findings at the recent Extreme Textiles: Designing for High Performance exhibit at the Cooper-Hewitt National Design Museum in New York City suggest potential uses of these new materials in 150 products.

Many of these new fibers are based on engineering polymers that are taking high-tech applications to brand new levels, such as innovative thermoplastics including polybutylene therephthalate and linear polyphenylene sulfide. Both work especially well in extreme environments and in the presence of nearly any chemical.

Also worth noting are new fluor-based and aramid polymers. Despite high prices, these formulations are gaining increased acceptance because of their super-performance characteristics - including finishes that form a molecular barrier around individual fibers. This, in turn, allows any residue to be rinsed or brushed off. Applications include khakis, shirts, knit tops, workwear and outerwear.

Another interesting new wrinkle: A few manufacturers now are rolling out - or rather laying out - carpet tiles with bright colors and thick pile for the residential market. Buyers can even combine different colors and patterns, eliminating the uniformity that comes with most carpeting.

Another plus is there are more choices for individual tastes. The new tiles allow homeowners to rearrange and replace. Practicality also has to be factored into the demand equation here as the tiles easily can be replaced and dirty ones cleaned in the kitchen sink.

Ecologically correct products aren't being forgotten either. In denim, for example, there now are a growing number of eco-friendly offerings - including cotton garments produced without the aid of pesticides and chemical washes.

In any event, there's some firm evidence that these product innovations will pay off. Indeed, a recent NPD Group survey found that nearly 75 percent of consumers say they would like wrinkle-proof clothes. Almost as large numbers expressed interest in stain resistance, stain release and cooling/moisture wicking. And nearly one out of three said they'd be drawn to products offering ultraviolet protection.

Atlanta-based Oxford Industries Inc., producer of apparel under the Indigo Palms brand, is one of many companies increasing deliveries to accomodate demand.

Other Positive Developments
This growing surge of new products is part of an overall industry strategy to develop more profitable niche markets. More and more companies are moving away from traditional commodity products and instead are focusing on middle-to-higher-end offerings - primarily as a way of boosting profit margins and, in the process, also minimizing threats from China and other low-cost nations.

This increasingly viable approach requires extensive planning. And two prerequisites are always required: the ability to substantially differentiate the new offerings from products already on the market, and the ability to meet the needs of targeted consumers.

Opting for such a niche market approach also requires flexibility and quick response. Only with these two other attributes can a company move fast a decisively to take advantage of any new processes or product developments.

State and federal governments also can help when it comes to establishing these niche markets. State economic development agencies, for example, are now supporting a growing number of enterprises by offering grants and other incentives.

Add in federal aid, and tens of millions of dollars in government-funded research are being invested in product innovation and new manufacturing techniques. This past year, the US Department of Commerce is estimated to have granted some $10 million for a variety of projects funded by the Spring House, Pa.-based National Textile Center, a consortium of eight textile colleges and universities working on new products and processes.

Then there's the Cary, N.C.-based Textile/Clothing Technology Corp.'s  $3 million grant for such projects as supporting research to make manufacturing more competitive by shortening the production cycle and helping domestic producers work out production/distribution combinations with companies in other countries (See " Washington Outlook," TW, this issue).

Another endeavor worth noting is the textile and apparel tracking system to combat illegal transshipments. Developed by the Oak Ridge National Laboratory, Oak Ridge, Tenn., it's aimed at encoding information - visible only using special scanners - that can be used to determine an import's country of origin (See " Washington Outlook," TW, July/August 2005).

These combinations - in the form of both partnerships and other types of collaboration - have become virtually crucial in keeping the US domestic industry afloat. Indeed, practically every large firm has initiated or is in the process of developing complex new relationships - all designed to establish a supply chain that can strengthen its competitive position.

It also should be pointed out such collaboration doesn't rule out continuing domestic production. Springs Industries Inc., Fort Mill, S.C., emphasizes this point, citing local production that duplicates much of its product line made in other countries.

"If a customer has a spike in demand or a product starts to sell ahead of forecasting, it takes longer to get it if there's a 90-day supply chain from China," said Crandall Close Bowles, CEO, Springs.

When this occurs, Springs relies on its domestic plants, which often enable it to supply needed goods in a matter of days.

This need for quick response also is reflected in more frequent deliveries. One US apparel maker emphasized this strategy, saying it has boosted its delivery cycle from once a season to six to eight times a year. And it's paying off in terms of rising sales.

Another fashion-oriented firm has gone further - increasing deliveries to 12 times a year. Whatever the delivery performance, the goal is clear: to be more connected to retailers and overall trends - making sure a company has the appropriate merchandise in stock when orders come in.

Keeping a closer eye on import trends has also become more important than ever. The reason, as pointed out earlier: It's still far from certain how the Chinese will follow through on their recent promises.

But despite such concerns, the new pact between the United Sates and China does seem to be offering more than a modicum of protection for a wide variety of goods. In the apparel sector, products now protected by quotas include brassieres, cotton knit shirts, cotton trousers, man-made fiber trousers, men's and boys' woven shirts, men's and boys' wool trousers, silk/vegetable-fiber trousers and socks/bobby socks, as well as sweaters, swimwear and underwear.

And the quota list is equally impressive in textile home furnishings, with quotas now operative on blinds, combed-cotton yarn, cotton towels, glass-fiber fabric, knit fabric, polyester-filament fabric, special-purpose fabric, man-made-filament fabric and thread.

Summing Up
TW has factored all of the above basically positive developments - all fraught with uncertainties - into the increasingly complex textile/ apparel equation. And what has developed can be described as cautiously optimistic - suggesting that both segments of this still-impressive industry will be around for the long haul.

To be sure, no one is suggesting any return to the activity levels of a decade ago. On the other hand, much of the gloom and doom of just one short year ago finally seems to be dissipating.

Put simply, US producers are again seeing a future - albeit one with a lot of changes. Put another way: Thanks to a combination of factors - including global investment, government help, brand power, quick turnover and better service - domestic firms are increasingly confident not only of surviving, but also of continuing to prosper.

As one mill executive recently described the situation: "Our firm and probably most other large ones aren't about to disappear. But it's going to take a lot of effort, a lot of planning and maybe even a bit of luck. It won't be easy, but it's doable."

January/February 2006