Belay Seyoum
U.S.A.
International Business Review，Issue 16 ,2007
Belay Seyoum
Nova Southeastern University, 3301 College Avenue, Ft. Lauderdale, FL 33314, USA
Received 2 December 2005; received in revised form 17 April 2006, 11 October 2006, 23 November 2006; accepted13 December 2006
The overall environment facing the US TC industry will be one of rapidly changing market conditions and technological innovation. With the phase out of quotas and growing number of trade agreements, the US TC industry is being exposed to intense competition in export and domestic markets. This is likely to lead domestic industries/labor to demand intervention by national governments to mitigate the adverse impact of trade liberalization (Standbury & Vertinksy, 2004).
In spite of the substantial job losses, the US TC industry remains technologically advanced partly due to increased productivity resulting from advances in technology and design capabilities. Textile production is capital intensive and modern technology is essential to meet the increasing for high-quality products. Over the last few years, US textiles and apparel firms have substantially increased their investment to maintain modern manufacturing facilities as well as improve production and marketing capabilities in order to maximize their inherent advantages to market proximity. In apparel, low skill production jobs have moved to low-cost locations offshore while the more skilled ones have been retained. To successfully adapt to the new environment, US TC industries need to capitalize on their sources of competitive advantage. They need to develop a more flexible operational arrangement, meet high standards in product innovation and generally develop a more change-seeking business culture (Kilduff, 2005).
An important survival tool for US TC firms is to expand their potential market by offering new product designs and product categories. Manufacturers must try to bring a steady stream of products to market that are in line with the taste, preferences of the consumer. They can also expand their market potential by offering new product categories. Two of the fastest growing apparel segments in the US, for example, have been the women’s plus and men’s big and tall segments (Driscoll, 2004). Plus-size apparel marketing was estimated at $47 billion in 2005 accounting for 20% of total apparel market. It is important to identify the firm’s target customers and assess whether the firm is successfully addressing their needs.
US TC firms should target a narrow segment of the market that provides the best opportunity for success. In textiles, the focus should be on a few specialized segments such as carpets, nonwovens and technical textiles. Similarly, apparel producers should increase their focus on core products, reduce vertical integration to shed overhead costs, and establish alliances with other firms to consolidate resources and increase market share.
Finally, in view of rising incomes and high growth rates in many developing countries such as China, Brazil, and India, there are potential export market opportunities for US textile and apparel products. US export interests may be served by seeking improved access to the retail distribution systems of developing countries. US textile firms should also be able to use Mexico to export to the European Union and other countries, taking advantage of the Mexico-EU trade agreement. Since the conclusion of NAFTA, a number of Asian and European firms have produced certain products in Mexico in order to export to the US market.
This paper suggests a demand pull model as a basis for developing a network structure in the clothing industry. In a demand pull model, consumer demand is the driver of sales unlike the supply push model whereby the manufacturer pushes goods to the retailer regardless of consumer demand.
Retail companies have become powerful due to their sufficient capital and marketing expertise to build loyalty among consumers. They are the lead firm in view of their central role in the organizational network. The lead clothing retailer integrates industrial capabilities such as sourcing of textiles, design, product branding and its relations with consumers enables it to keep abreast of fashion consumption trends.
The lead firm conveys its requirements to these changing trends (changes in style, material requirements) to its suppliers or subcontractors (Table 7). It also provides assistance with the purchasing of capital equipment and technology necessary to produce apparel in accordance with market demand. The fragmented webs of suppliers and subcontractors are bound together through information technology, online data sharing, joint product development, and collaborative forecasting, planning and replenishment activities. Retailers will hold less inventory as shipments become smaller and more frequent since point of sale data is directly transmitted to the manufacturer/supplier who will produce and ship garments as it is needed. This model shows the role of the retailer as an intermediary integrating the functions of design, textile sourcing, branding and as facilitator of apparel production through a web of suppliers/subcontractors. Such restructuring through technological improvements and information technology is one means of succeeding in an increasingly competitive environment. The horizontally structured, mass production methods no longer ensure future competitiveness.
The lion’s share of the benefits from quota elimination is expected to accrue to China. Its low labor cost, high productivity, range and flexibility of services as well as efficient supplier networks will make China the supplier of choice. About 87% of apparel executives that participated in a cotton sourcing summit in Miami in February 2004, agreed that China will soon account for 50–90% of all apparel sold in the US market (National Labor Committee, 2004). This means rationalization of production and a massive consolidation of vendors. Other winners are likely to include India and Pakistan in narrow segments of the TC industry. The elimination of quotas is also likely to lead to lower prices for consumers in view of the absence of quota costs which is often a significant part of the cost of TC sold in the US market. Well-known brands may still hold market value since they are not subject to retail price deflation. It is important for TC firms to evaluate their internal capabilities such as sourcing, manufacturing, logistics, transportation etc. in order to develop an action plan for the post-quota world.
Exporters from Latin America, Africa and the Caribbean are likely to lose market share to China since they largely compete on price (not quality) and lack the capability to produce high value added products. Even with the introduction of safeguards on a range of products that are of export interest to these countries, their US market share has declined since the phase out of quotas. With the complete removal of quotas in 2008, it is difficult for these countries to compete on price. Since the US government lifted quotas in 2002 on 29 categories, for example, China’s market share (in these categories) jumped from just 9% (2002) to 65% (2003) while prices paid by US retailers (for apparel from China) dropped by 48% (National Labor Committee, 2004). In cotton dressing gowns (quotas removed) China’s share in 2003 jumped from 25% to 39% while that of Caribbean countries fell from 13% to a mere 3%. In the first 12 months after the phase out of quotas, China’s market share in apparel rose by 59% in value while that of many Central and South American countries showed a sharp decline.
What are the implications for TC firms in countries that are vulnerable to competition from China? First, they should capitalize on their proximity to the US market. Their ability to offer lower transport cost, lower lead times as well as duty free entry to the US market may attract the fashion-oriented segment of the US industry. This will depend on access to good local transport infrastructure to get goods to market as well as advanced telecommunications systems to link suppliers and customers. Local firms and governments need to collaborate in creating a climate which is conducive to business and to develop infrastructure to attract and retain TC industries that are so vital in generating exports and employment.
Secondly, low wages do not necessarily provide a comparative advantage with respect to China. Firms should develop new capabilities in areas in which China does not have a comparative advantage (yarn, and silk non-apparel). This requires, inter alia, investment in modern production methods and development of competitive sources of local raw materials. Even in product areas in which China is expanding its exports, developing country suppliers that enhance their skills, technology, supply chains and marketing capabilities (through joint ventures, licensing arrangements) faster than China can still maintain their shares to the US market.
Thirdly, an important strategic consideration that limits the competitive impact of China is the need on the part of multinationals to diversify their risk portfolios. US manufacturers and retailers are likely to adopt a diversified risk adjusted sourcing strategy that balances cost, speed to market as well as political and economic stability. They may not be prepared to rely on China for critical inputs beyond a certain threshold of risk. Furthermore, Mexico, Central America and the Caribbean could be attractive options for US companies in some fashion sensitive segments of the industry where quick response or fast turnaround is important.
Finally, existing US rules of origin requirements to qualify for free access to the US market have had unintended consequences. One of the requirements is that they have to use US yarn and fabric. This has had the effect of making their exports less competitive. The US may have to modify its rules of origin to allow developing countries to import from Asia or other competitive sources without losing their preferential status.
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