US Textiles 2006
Textile World Asia takes an economic look at the US textile industry and its prospects for the coming year.
By Robert S. Reichard, Economics Editor, Textile World
US -based textile and apparel producers face a double-barreled headache these days: Keeping track of the myriad of changes buffeting the industry; and devising effective production, distribution and marketing strategies to deal with them.
As for the changes, last year's centered on the junking of the old quota system and its results - the ensuing flood of Chinese imports. This year, additional adjustments will be required to deal with new 2006 to 2008 Chinese quotas, a possible upward revaluation of the Chinese yuan and all the new producer-distribution-retail channels that are being developed and refined.
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 a much better chance of surviving in the new global marketplace.
The recently inked US/China pact should help put a floor under further industry declines - and hopefully stop the decimation of key sectors of the US domestic market.
Another plus: The new agreement clearly will remove much of the uncertainty that has been plaguing textile markets for more than a year now. The new pact with Beijing also will allow for better planning and provide more reassurance that contractual commitments will be met.
These new attempts to level the international playing field aren't the only signs pointing to a continuing viable domestic industry in the United States. 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.
And, 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 US 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.
Overall, the outlook for 2006 is shaping up along the following lines.
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.
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 other countries, domestic dollar totals here should drop by an even larger amount - TW Asia 's equations suggest a decline somewhere near 7 percent.
Overseas expansions and the need for expanding these countries' sales will intensify foreign efforts to penetrate US markets. The current excessively high domestic capacity level is not 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 that this operating rate remains far under the 84- to 85-percent highs hit back in the late 1990s.
Nor should anyone be concerned about low inventory levels because the decline merely reflects an effort to keep carrying costs down. 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.
The supply/demand imbalance will keep pressure on selling prices. 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.
TW Asia 's all-inclusive textile mill product price index tells the story - with the projected 2006 advance put at only around 1.5 percent. It's also worth noting that competition has been in keeping with this bellwether, which shows fluctuations within a very narrow range for more than a decade. Downstream pressures from both manufacturers and retailers - in addition to low-priced imports - are most likely behind this basically flat pricing pattern.
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 a year ago. But here, too, the outlook is cautiously optimistic. Slowly easing energy prices, along with growing capacity will limit any further increases in man-made fibers.
The cotton situation also seems to be under control. Based on latest estimates, the US crop could turn out to be the second highest on record - with ending stocks for the 2004 to 2005 crop year expected to hit 6.1 million bales. That's up significantly from this past year's 5.5 million bales. 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.
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 latest projections provided to TW Asia by Global Insight, an economic consulting firm. 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.
As suggested above, the cost factor is no worry - as productivity gains offset only small increases in hourly wage costs (estimated at 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 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.
Despite the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), the new trade pact with China and other agreements, another big increase in this country's already huge textile/apparel trade deficit seems inevitable. The red-ink figure for 2006 is put 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, of course, the major reason for these negative numbers. Incoming textile and apparel shipments on a square-meter-equivalents 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.
However, textile and apparel exports haven't been performing all that badly. They actually have been moving higher. 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 year. But with some Chinese restraints in place, 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 to 2009. As for the more highly fabricated 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 a flattening out in the textile mill product sector.
Apparel activity should continue to weaken as outsourcing becomes increasingly prevalent. Declines in 2007 to 2009 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 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 US domestic and other global producers respond.
But the 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 restriction.
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. 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.
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? Many Chinese companies have been setting their sights on the market for more fashionable apparel. As such, 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 preferential treatment to manufacturers of higher-priced items in determining the nation's overall volume of exports.
The Productivity Factor
Meanwhile, US 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.
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, output per textile worker has been increasing at a 3-percent or higher annual rate.
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 and thread mills 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 above shows apparel manufacturing efficiency over this same period of time 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, yes - as mills continue to invest in new, increasingly efficient and sophisticated equipment and processing techniques.
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.
National Council of Textile Organizations 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.
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 a competitive stance can be gleaned from the US 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 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.
TW Asia factored all of the positive developments 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 in the United States. No one is suggesting any return to the activity levels of a decade ago, but much of the gloom and doom of one year ago seems to be disappearing.
US producers are again seeing a future - albeit one with a lot of changes. 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.
Download this article in Chinese.
Download accompanying 2006 economic charts.