Bloomberg - Dec 23, 2011

Central America lures sportswear makers as Adidas shifts orders

By Bob Willis

Sportswear producers such as Adidas AG (ADS) are turning to Central America to complement China as a source for apparel as the region’s proximity to the U.S. allows for quick turnaround of orders during peak seasons.

With China’s garment factories producing more for its own growing middle class and wages there rising, companies have begun moving production back to countries within Central America and the Caribbean that also benefit from duty-free access to the U.S. market.

Adidas, the world’s second-biggest sporting goods maker, plans to increase fivefold to about 45 million items a year by 2015 its production in the region, said Gregg Nebel, Adidas Group’s head of social and environmental affairs for the Americas, in a telephone interview from his office in Seattle.

“The real shift for us was driven by a need to have shorter lead time,” said Nebel. “We’ve been reallocating our production volume needs back into Central America,” he said. “Some of that is being pulled back from Asia.”

U.S. apparel imports from the six nations of the Dominican Republic-Central America Free Trade Agreement, or DR-CAFTA, were up 2.6 percent in the 12 months through October, compared with a 3 percent drop from China in that same period, according to the U.S. Commerce Department’s International Trade Administration.

Imports of apparel from China last posted an annual decline in 2008, when the recession dried up global trade. China accounts for about 41 percent of U.S. clothing imports, down from 42 percent last year. DR-CAFTA accounts for about 13 percent of U.S. apparel imports, up from 12 percent in 2009.

‘Chasing’ Inventory

Carlos Arias, president of Guatemala’s textile and apparel exporters’ association, expects the region’s producers to profit from last-minute inventory replenishment, known as “chasing,” in the holiday and post-holiday season that runs to the end of January.

Quick turnarounds — goods shipped from Central America by sea can take two to three days instead of about two weeks from China — are also important at other peak shopping periods, such as the back-to-school season, apparel makers say.

“We are seeing interest in some of our customers in looking at the region as a permanent chase region,” said Arias, who is also president of Guatemala City-based Denimatrix LP, one of the region’s biggest jeans producers. “They are looking to control inventories better and react faster.”

‘Exploring the Possibility’

Nike Inc., the world’s largest sporting-goods maker, is “exploring the possibility of sourcing” from Nicaragua “with a small number of strategic partners,” Nike spokeswoman Mary Remuzzi said in a statement.

Beaverton, Oregon-based Nike already has contracted with factories in Honduras, El Salvador and the Dominican Republic, according to the company’s website.

Donald Blair, chief financial officer at Nike, said on a conference call this week that improved inventory management was enabling the company to keep a better handle on discounting. “As we start to see our supply chain smooth out, we’re going to also see that those discount levels can be managed out.”

Nike this week reported second-quarter profit that topped analysts’ estimates as sales of running shoes surged in North America. Nike shares, up 11 percent for the year, fell 1.6 percent yesterday to $94.82 in New York trading.

Managing inventory is key to controlling costs, said supply chain expert Jeff Streader, an operating partner at Marlin Equity Partners LLC in El Segundo, California. “Competitiveness is having the right product at the right time.”

Quicker Turnaround Times

The shift from China allows companies to save by keeping fewer goods in warehouses, relying instead on Latin American producers for quicker turnaround times. Free-trade agreements with Colombia and Panama signed into law in October by President Barack Obama may accelerate the process.

Retail inventory-to-sales ratios in the U.S. were at 1.32 months’ supply in October, the lowest since record-keeping began in 1980 and down from a seven-year high of 1.62 months’ supply in December 2008, at the height of the financial panic, according to Commerce Department data.

“Rather than bringing in all of the goods for holidays up front, we’re seeing more of a flow,” Streader said. “Inventory is money.”

Global retailers and the major brands are also concerned that producers in China may cut back on exports and focus increasingly on the country’s growing domestic market, said Walter Wilhelm, a Salt Lake City-based apparel and footwear consultant. The cost of production in China is also rising, he said.

China’s Rising Wages

Twenty-one regions in China, including Beijing and special economic zone Shenzhen, raised minimum wages by an average 22 percent this year, the government said in Beijing on Oct. 25. Shenzhen’s minimum monthly wage of 1,320 yuan ($208) is the highest in the country.

The minimum wage in Guatemala is about $230 a month, while in Nicaragua it’s about $134 a month for workers in special industrial zones, according to the governments’ websites.

The end of quotas on textile and garment exports from developing countries to developed nations on January 1, 2005, caused the loss of thousands of jobs in Central America, as well as in the U.S., as China gobbled up share of the U.S. market.

Aided by the launch of DR-CAFTA in 2006, some of those jobs are returning to member nations, which include the Dominican Republic, Costa Rica, Honduras, Nicaragua, Guatemala and El Salvador.

Recovering Jobs

Guatemala, which saw its apparel and textile-related employment plummet to about 80,000 in 2008 from about 120,000 in 2004, has now recovered to about 92,000 jobs, according to Arias.

In Nicaragua, 70,000 workers are employed in textile operations and another 10,000 may be hired next year, Dean García, executive director of the Nicaraguan Association of Textile and Apparel Industries, said in a telephone interview from Managua.

Central America is forecast to grow 4 percent next year, compared with an estimated 3.9 percent this year, the International Monetary Fund said in September.

Herzogenaurach, Germany-based Adidas Group, which has 14 contracted production sites in the CAFTA region, will see much of its growth in Honduras, El Salvador and Nicaragua, Nebel said. Adidas rose 1.2 percent yesterday to 50.13 euros, extending its gain for the year to 2.3 percent, in Frankfurt trading.

Apparel maker Augusta Manufacturing SA has begun a pilot program to produce sportswear in Nicaragua for Adidas and plans to hire about 1,000 workers through next year, Javier Chamorro Rubiales, executive director of the official Nicaraguan investment promotion agency, said in a telephone interview from Managua. Another Adidas supplier is set to begin production early next year and will generate about 1,000 jobs in the country by the end of 2012, Chamorro said.

“We are rebuilding the industry in a post-China environment as our customers are looking to balance their sourcing,” Arias said.

To contact the reporter on this story: Robert Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net