As U.S. Demand Shrinks, Mexico’s Garment Makers Alter Strategies

After years of unbridled expansion under the North American Free Trade Agreement, Mexico’s garment industry is being forced to retool itself due to falling exports to the slowing U.S. market, tougher regional competition and weak domestic demand.

More than 95% of Mexico’s garment exports make their way to its two NAFTA partners, the U.S. and Canada. But dampened demand north of the border has translated almost overnight into a drop in orders, overstocked warehouses and factory layoffs as such retailers as Montgomery Ward and J.C. Penney close or scale back operations and U.S. apparel makers put the brakes on production at home and abroad.

As a result, Mexican apparel exports are expected to plummet 12% this year.

The sector also is reeling from recent U.S. trade legislation granting Central American and Caribbean nations the same tax breaks that fueled Mexico’s apparel boom--with the added lure of labor that is cheaper than in Mexico.

Call them lessons of globalization--and Mexico is taking heed. Mexico will undoubtedly remain a critical player in the global garment trade, and U.S. investment will continue to flow south. However, the garment industry here has begun to diversify its trading partners, revive a domestic market overrun with illegal imports and improve quality and productivity.

“This is forcing us to turn our eyes to other markets,” said Jose Mendez, whose Confecciones Imperial and other factories in which he is a partner employ 1,200 in the garment hub of Tehuacan in central Mexico. “We want to compete with developed countries based on quality service and fast response. Mexico has to change.”

Apparel is not the only export-oriented sector that has slowed with cooling U.S. consumer demand. But the economic slowdown has taken a particularly sharp toll on the industry precisely because it has grown so rapidly in the seven years since NAFTA was enacted.

Garment exports have grown fivefold, and Mexico has become the top U.S. clothing supplier, edging out Asian competitors. Employment has more than doubled to 725,000. And factories have broken ranks with traditional border-belt maquiladoras, spreading across the countryside and transforming the economies of small rural towns as far south as the poor state of Yucatan.

Although the most recent Mexican government data show a slight increase this year in apparel and textile jobs at maquiladoras--the U.S.-owned companies that operate south of the border--the growth rate has slowed dramatically. The national garment industry trade group, Camara Nacional de la Industria del Vestido, estimates that as many as 30,000 jobs may have been lost so far this year--many of them among Mexican-owned subcontractors--although that number has been difficult to verify. Of nearly 14,000 garment companies operating in Mexico as of last June, only about 7% were U.S.-owned. Family-owned Mexican businesses make up the majority of the rest.

And the bruising is likely to continue: Mexico’s national export bank, Bancomext, predicted last month that overall exports will grow only 7% in 2001, a 50% drop from last year, with the apparel and textile sectors taking the biggest hit.

“We’re worried,” said Raul Garcia, general director of the national garment industry trade group. “For a sector like ours that grew so much with such a boom to have such a dependence on the North American market--this was a mistake.”

Cashing in on Global Pacts

Now, however, the industry has vowed to attack its problems at home and abroad. In the last few months, a number of garment companies have begun hunting for new markets, hoping to cash in on Mexico’s more than two dozen trade pacts around the globe. Mendez, for example, made contact with potential Canadian customers for his company’s casual wear, dress slacks and uniforms on a recent trip north and is researching European opportunities.

Efforts also are underway to reclaim a 100-million-strong domestic consumer market that has been almost entirely lost to competition from illegal imports. President Vicente Fox--an avid free-trader who aims to increase the number of Mexico’s global partners while developing higher-wage jobs at home--has pledged his help in that battle. In an effort to rout corruption that has allowed substandard and contraband apparel to flood the nation, he has replaced 43 of the top 47 customs officials.

Other sectors--such as the automotive and electronics industries--outperform apparel in the value of exports and number and quality of jobs. The maquiladoras in those sectors have fared worse in the slowdown: According to Mexican government figures for January, those sectors lost about 3,600 jobs from the previous month.

But apparel stands apart in the pace of its growth under NAFTA, which rapidly transformed thousands of once-independent Mexican garment companies into maquiladora subcontractors.

But the near-total dependence on Mexico’s northern neighbor has its price. In a meeting with Fox earlier this year, the garment trade group laid out the casualties: In addition to layoffs caused by canceled U.S. orders, planned 2001 investments valued at $500 million have been put on hold.

Mendez, of Confecciones Imperial, said the slowdown has left operations like his scrambling to beef up their customer base: “If before we had 20 clients that kept the plant working, now we’ll need 40.”

Mendez, a subcontractor who like others cuts and sews for U.S. companies doing business here, lost work in the last few months when Greensboro, N.C.-based Burlington Industries Inc. shut a Morelos plant that manufactured men’s dress slacks. Six hundred jobs were lost, Burlington spokeswoman Dolores Sides said.

Burlington, the U.S.’ third-largest fabric maker, closed the plant as part of a restructuring announced last fall to cut 9% of its work force in the U.S. and Mexico. However, it still retains 4,000 jobs in textile plants in Yecapixtla, Morelos, and Sides said the company has no immediate plans to make more cuts in its Mexican operations.

The economic slowdown has spread to the textile sector as clothing makers’ need for fabric ebbs.

“Workdays are being shortened,” said Enrique Mercado, outgoing president of Mexico’s national textile association. “We have full warehouses. We’re not selling the merchandise.”

Danville, Va.-based Dan River has seen orders drop by about 12% compared with last year, said Jim Martin, president of the apparel fabrics division. In February, the company announced it was canceling plans to build a textile plant in the state of Hidalgo, due largely to higher equipment, electricity and water costs than the company had anticipated.

But Mexico remains a strong business location: North Carolina textile maker Cone Mills Corp. has placed some pending Mexican projects on hold but is moving others ahead, including the planned $18-million expansion of a denim plant, Chief Financial Officer Gary Smith said. And Dan River invested $10 million last year in a Jilotepec garment factory that now manufactures 8,000 sport shirts a week, with plans to ramp up to 25,000 soon.

But for more labor-intensive apparel such as dress shirts, global competition got a lot stiffer last fall when the U.S. Congress granted duty-free status to Central American and Caribbean nations.

A number of U.S. companies have begun eyeing opportunities south of Mexico more intently. Montebello-based Monterrey Canyon Inc., for example, plans to open an El Salvador facility in 2002 to manufacture its polyester garments, production manager Francisco Gonzalez said. The company has seen orders plummet since early this year, and work at its Mexican plants--which rely on subcontractors--has slowed markedly, he said.

U.S.-based garment companies have begun to ship their lower-tech, labor-intensive cutting and sewing work to countries such as Guatemala and Honduras, retaining only higher-end processes in Mexico, said John H. Christman, director of maquiladora services at the Mexico City office of Ciemex-WEFA, a Philadelphia-based research firm. “Part of the work that used to be done here isn’t being done here anymore,” he said.

The stronger Mexican economy hasn’t helped. For years, the peso devalued at a rate equal to or greater than inflation, keeping wage pressures off U.S. companies doing business there, said Dan Berry, president of Columbus, Mo.-based American Trouser Inc., which operates plants in Mexico as well as in Honduras and the Dominican Republic.

“Mexico was the best place to make apparel, but now there are better places,” he said.

Compounding matters are battles on the Mexican domestic front. Sales have barely budged in recent years, according to the national trade group, with fully 50% of garments Mexicans purchased either illegally imported or sold on the gray market.

Eyes on the European Union

The long list of pressures, however, is prompting Mexico to act.

Chief on the to-do list is diversification, and Mexico is well-poised to do so. It is the only nation that has free trade agreements with the other North American nations and the European Union, and it also has signed more than two dozen other global trade pacts.

Mexico’s national export bank is working to promote the apparel and textile industries in Europe and Central America. Although it is the top supplier of garments to the U.S., Mexico is 68th on the list of European Union suppliers.

“We’re starting from zero,” said Garcia, whose garment trade group attended a World Apparel Forum gathering in Brussels this month and will attend a denim trade fair in Germany this summer.

The industry also is hoping to move from low-wage assembly to a more vertically integrated process that ties together textile and garment operations and puts them increasingly in the hands of Mexican companies. The so-called full-package approach, in which garments bound for export are made with Mexican-made fabric, could give the industry a leg up on the growing Central American apparel trade.

“We are passing through a difficult time, but we know the formulas we must follow to move forward,” Garcia said.