Financial Times

Garments price war begins
As the countdown to the end of textile import quotas nears its end, with less than 150 days to go, garments exporters have already begun to feel the pinch with buyers demanding steep discounts, squeezing manufacturing profit margins.

"The price war is about to start - we can see the first signs now," declared Ashroff Omar, head of the industry's apex body, Joint Apparel Association Forum (JAAF).

Apparel exporters in Sri Lanka as well as other exporting countries were coming under pressure from buyers to reduce their prices. "Now there's a lot of pressure on price but quantities seem to be alright," Omar said.

The garments industry is bracing for an onslaught of cheap clothing from producers like China as textile quotas are phased out by January 1, 2005. The 43-year-old Multi Fibre Arrangement governing trade in textiles and clothing guaranteed poorer countries a share - in the form of quotas - in the markets of rich economies.

It will be replaced by WTO open trading rules and had raised fears that competition from China and other low cost producers could wipe out less competitive exporting countries such as Sri Lanka.

In preparing to face tough competition when quotas end, the industry has drawn up a strategy that includes consolidation among garment factories, exit strategies for the weak ones and an over all effort to upgrade skills in design, production and marketing.

It was also hoping to have a free trade deal with the US in place as quotas end, giving preferential access to the biggest market. But these hopes have been dashed by the delay in negotiating a free trade agreement this year owing to the complex and time-consuming nature of the talks.

Negotiations were originally disrupted by the crisis triggered by President Chandrika Kumaratunga's take over of three ministries last November. This delayed the US announcement to Congress of its intention to negotiate an FTA with Sri Lanka. Congressional approval is the precursor to formal talks on an FTA.

Tuly Cooray, JAAF secretary general, said the industry was "very worried" that talks on the FTA have been delayed. "That's a disaster. We had planned to get the consent of the US government to announce it in November but we missed that opportunity. Now with US elections coming up it is unlikely anything will happen this year. Progress will depend on the new administration."

He said the industry is hopeful it would be able to re-orient US thinking during talks on the Trade Investment Framework Agreement, that precedes the FTA, in October. Garment exporters said the depreciation of the rupee had helped compensate for the pressure on pricing.

"Buyers are trying to make a killing by demanding very much cheaper prices," one exporter said. "If they pay $7 today, for January they want to cut it to $6 or $5.50. The depreciation of the rupee does help provide some sort of relief but buyers are asking for a 15-20 percent price difference."

He said it was difficult for exporters to cut prices as it would mean they would have to go back to their suppliers and re-negotiate prices. "We have to become more skilled in negotiations to get better prices and be more efficient and make better use of fabric."

Cooray of JAAF said the industry had obtained aid to improve its competitiveness and to launch a productivity improvement programme. He said they expect garment factories to form "industrial alliances" in an effort to remain in business in the quota free era. This would allow weaker companies to join forces with stronger ones. "There will be a negative impact. While some firms will not be affected others will be compelled to downsize."

Back to Business