the apparel and textile industry in a development perspective · the apparel and textile industry...

The Apparel and Textile Industry in aDevelopment Perspective

José Alfredo Sánchez y Michael Bulhmann

November, 1998CEN 1601

WORKING PAPER. This work seeks to stimulate thought about: new conceptualframeworks; possible alternatives to framing problems; suggestions to put in place publicpolicies; regional, national and sectorial investment projects; and, business strategies. Itdoes not intend to prescribe models or policies. Neither does it make the authors orCLACDS responable for incorrect interpreation of its content, nor for good or badmanagement or public policy practice. The objective is to elevate the level of discussionregarding competitiveness and sustainable development in the Central American region.Under the prior stated conditions, CLACDS, and not necessarily its contributing partners,is responsible for its content. November, 1998.

TABLA DE CONTENIDO

INTRODUCTION .................................................................................................................................1

1. TRENDS IN THE WORLD MARKET ..........................................................................................2

2. THE US MARKET .......................................................................................................................5

2.1 THE US SOURCING PATTERN ......................................................................................................6

3. CENTRAL AMERICA’S EXPORT TO THE USA........................................................................9

3.1 GENERAL DEVELOPMENT IN THE EXPORTS TO THE US MARKET.....................................................93.1.1 Costa Rica .......................................................................................................................93.1.2 Guatemala .....................................................................................................................103.1.3 Honduras .......................................................................................................................113.1.4 El Salvador.....................................................................................................................113.1.5 Nicaragua.......................................................................................................................11

3.2 THE COMPOSITION OF THE APPAREL EXPORT TO THE US MARKET...............................................133.2.1 Composition of the exports by type of fabric .................................................................133.2.2 Composition of the exports by type of product ..............................................................141.1.1 ...........................................................................................................................................15

3.3 CENTRAL AMERICA’S MAIN COMPETITORS IN THE US MARKET ....................................................183.3.1 Main competitors in selected products-categories ........................................................19

4. FRAMEWORK CONDITIONS OF THE CENTRAL AMERICAN APPAREL & TEXTILEINDUSTRY.........................................................................................................................................22

4.1 MACRO-LEVEL FACTORS...........................................................................................................224.1.1 Labor costs ....................................................................................................................224.1.2 Exchange rates ..............................................................................................................234.1.3 Fiscal incentives.............................................................................................................254.1.4 Import quotas and duties ...............................................................................................274.1.5 Transportation costs ......................................................................................................29

4.2 INDUSTRY-LEVEL FACTORS .......................................................................................................304.2.1 Free trade zones............................................................................................................304.2.2 Industrial organizations..................................................................................................32

4.3 MICRO-LEVEL FACTORS............................................................................................................324.3.1 Price, lead time, lead time fulfillment and quality...........................................................324.3.2 Seven generic operation types ......................................................................................344.3.3 Efficiency levels .............................................................................................................374.3.4 General firm positioning.................................................................................................38

5. THE CENTRAL AMERICAN APPAREL AND TEXTILE CLUSTERS .....................................40

5.1 THE COSTA RICAN APPAREL AND TEXTILE CLUSTER ...................................................................405.1.1 Cluster analysis..............................................................................................................41

5.1.1.1 Factor Conditions................................................................................................................ 415.1.1.2 Firm Strategy, Structure and Rivalry................................................................................... 425.1.1.3 Demand Conditions ............................................................................................................ 435.1.1.4 Supporting and Related Industries...................................................................................... 435.1.1.5 Conclusion.......................................................................................................................... 43

5.1.2 Cluster organization .......................................................................................................43

5.2 THE SALVADORAN APPAREL AND TEXTILE CLUSTER....................................................................445.2.1 Cluster analysis..............................................................................................................45

5.2.1.1 Factor Conditions................................................................................................................ 455.2.1.2 Firm Strategy, Structure and Rivalry................................................................................... 465.2.1.3 Demand Conditions ............................................................................................................ 465.2.1.4 Supporting and Related Industries...................................................................................... 465.2.1.5 Conclusion.......................................................................................................................... 47

5.2.2 Cluster organization .......................................................................................................475.3 THE GUATEMALAN APPAREL AND TEXTILE CLUSTER ...................................................................49

5.3.1 Cluster analysis..............................................................................................................495.3.1.1 Factor Conditions................................................................................................................ 495.3.1.2 Strategy, Structure and Rivalry........................................................................................... 505.3.1.3 Demand Conditions ............................................................................................................ 515.3.1.4 Supporting and Related Industries...................................................................................... 525.3.1.5 Conclusions ........................................................................................................................ 52

5.3.2 Cluster organization .......................................................................................................525.4 THE HONDURAN APPAREL AND TEXTILE CLUSTER.......................................................................54

5.4.1 Cluster analysis..............................................................................................................555.4.1.1 Factor Conditions................................................................................................................ 555.4.1.2 Strategy, Structure and Rivalry........................................................................................... 565.4.1.3 Demand Conditions ............................................................................................................ 565.4.1.4 Supporting and Related Industries...................................................................................... 565.4.1.5 Conclusion.......................................................................................................................... 57

5.4.2 Cluster organization .......................................................................................................575.5 THE NICARAGUAN APPAREL AND TEXTILE CLUSTER ....................................................................58

5.5.1.1 Factor Conditions................................................................................................................ 585.5.1.2 Strategy, Structure and Rivalry........................................................................................... 595.5.1.3 Demand Conditions ............................................................................................................ 595.5.1.4 Supporting and Related Industries...................................................................................... 605.5.1.5 Conclusion.......................................................................................................................... 60

5.5.2 Cluster organization .......................................................................................................60

6. DEVELOPING COMPETITIVE ADVANTAGES .......................................................................62

6.1 MACRO-LEVEL FACTORS...........................................................................................................626.2 INDUSTRY LEVEL FACTORS........................................................................................................636.3 MICRO-LEVEL FACTORS............................................................................................................63

ANNEXES..........................................................................................................................................65

ANNEX 1 ...........................................................................................................................................66

1.1.1 ...........................................................................................................................................66

ANNEX 2 ...........................................................................................................................................67

BIBLIOGRAPHY ...............................................................................................................................68

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INTRODUCTION

With total exports of USD 4,695 millions to the US market in 1997, the apparel and textileindustry in Central America has become one of the most important export sectors in theregion. The industry’s exports are closing in on the traditional export products likebananas, coffee and sugar, and as such the apparel and textile industry represents thefirst real diversification of the Central American exports.

The apparel and textile industry has also become a significant employment factor in theCentral American economies. There are currently around 300,000 direct employees in thesector in the region, not including all the supporting and related industries, which haveemerged in connection to the industry. This means that the apparel and textile industry isalso an important factor in relation to the creation of a skilled labor pool, which then againattracts and develops other diversified and more complex industries.

Furthermore, the apparel and textile industry has attracted considerable foreign directinvestments to the region. More than 50% of all the apparel and textile firms in the CentralAmerican countries represent foreign direct investments with the exception of El Salvadorwhere the foreign firms represent 41%.

So far Central America has mainly been competitive due to low costs and the proximity toUS market. However, the cost levels are rising in the region as the five countries developand other regions with lower costs have emerged on the world market. Likewise theproximity to the US market is only a real advantage if it is supported by a stronginfrastructure. There is therefore a growing pressure on Central America to improve theconditions of the competitive environment if the apparel and textile industry is going to staycompetitive in the future.

The following analysis of Central America’s apparel and textile industry is divided into fourparts. The analysis starts with a broad outline of the trends in the world and US market.The second part continues with a detailed analysis of each of the five Central Americancountries’ exports to the US market. This is followed by an analysis of the businessenvironment in the region and a cluster analysis of the apparel and textile industry in eachof the five countries. Finally, some of the most important elements in the development ofcompetitive advantages are discussed.

The analysis focuses on the Central American apparel and textile exports to the USmarket since more than 90% of the total production is exported and approximately 95% ofthe total exports are destined for the USA. The analysis is not intended as an in-depthstudy of the apparel and textile industry in the region. The objective is to give a generalpicture of the conditions of the competitive environment in the region and how the trends inthe world market are forcing the Central American countries to establish a strongercompetitive position.

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1. TRENDS IN THE WORLD MARKET

The total world trade in clothing and textiles reached a level of 310.45 billion dollars in1995 equivalent to almost a 225% increase from the level in 1980. Through the periodfrom 1955 to 1995 the world trade in clothing has risen far more than the trade in textiles.Between 1980 and 1995 the annual growth rate for clothing was 9.5% compared to a 7%annual increase in the trade in textiles.

The effect of the faster growth in trade in clothing can be seen in the composition of theworld trade in textiles and clothing. In 1955 textiles were the dominant componentrepresenting 85% of the world trade in the two items. This has changed and the trade inclothing now exceeds the trade in textiles.

TABLE 1

WORLD TRADE (BILLION OF US DOLLARS)

1955 % 1980 % 1995 %Textiles 3.80 85 54.99 58 152.57 49Clothing 0.68 15 40.59 42 157.88 51Total 4.48 100 95.58 100 310.45 100Source: Werner International INC., Globalization of the American Textile Industry, 1997.

Although the world trade in clothing and textiles has risen with 7% to 9.5% annually, theworld market for apparel and textile sales is a mature industry with expected future growthrates amounting to the population growth in the leading markets. Central America’s mainmarket – the US market – is expected to have a growth rate in apparel sales for 1998amounting to 5%1. At the moment industry experts do not envision any significantincreases in the consumption. However, it is expected that a number of emerging regionslike Eastern Europe, Latin America and parts of Asia will experience more significantincreases in the demand for apparel and textiles in the medium and long term as they passthe current crises and continue to develop their economies.

As illustrated in table 2, Western Europe, Asia and North America dominate the exports oftextiles in the world market. There has been little change in the countries included in thetop ten textile exporters from 1980 to 1995. However, the ranking of the countries withinthe top ten exporting countries has undergone important changes. The only two countries,which have maintained their positions throughout the period, are Germany and Italyoccupying the first and third place in the list of the top ten textile exporters.

The most important changes have occurred in the export market shares of China, SouthKorea and Taiwan. China has gone from being the eighth largest exporter in the worldmarket with a market share of 4.6% in 1980 to becoming the second largest exporter witha market share of 9.1% in 1995. The same pattern is found when analyzing South Korea,which went from being the tenth largest exporter of textiles in the world market with amarket share of 4% in 1980 to be the fourth largest exporter in 1995. Taiwan was notamong the ten largest textile exporters in 1980. But in 1995 Taiwan entered the top ten asthe fifth largest exporter with a market share of 7.8%. 1 Werner International Inc., Sourcing USA – Trends in the Americas, September 1998.

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The rise of China, South Korea and Taiwan has been followed by a decrease in therelative importance of Japan, USA, United Kingdom and the Netherlands in the worldmarket. Most notable is the decrease of Japan’s share of the world market. The countrywent from being the second largest exporter of textiles in the world in 1980 to the positionas the ninth largest exporter in 1995. Although not as dramatically as Japan, USA andUnited Kingdom have experienced significant decreases as well. The two countries wentfrom being the fourth and seventh largest exporters to the position as the eighth and tenthlargest. Finally the Netherlands is no longer among the ten largest textile exporters – itwas the ninth largest exporter in 1980.

TABLE 2

WORLD’S LARGEST EXPORTERS OF TEXTILES AND CLOTHING – 1980 & 1995

1980Textiles Clothing

Rank Country $ Billions % Rank Country $ Billions %1 Germany 6.296 11.5% 1 Honk Kong 4.664 11.5%2 Japan 5.117 9.3% 2 Italy 4.584 11.3%3 Italy 4.158 7.6% 3 South Korea 2.949 7.3%4 USA 3.757 6.8% 4 Germany 2.882 7.1%5 Belgium 3.550 6.5% 5 Taiwan 2.430 6.0%6 France 3.432 6.2% 6 France 2.294 5.7%7 United Kingdom 3.108 5.6% 7 United Kingdom 1.878 4.6%8 China 2.540 4.6% 8 China 1.625 4.0%9 Netherlands 2.259 4.1% 9 USA 1.290 3.2%

10 South Korea 2.209 4.0% 10 Belgium 999 2.5%Top Ten Total 36.426 62.2% Top Ten Total 25.595 63.1%World Total 54.990 100.0% World Total 40.590 100.0%

1995Textiles Clothing

Rank Country $ Billions % Rank Country $ Billions %1 Germany 14.196 9.3% 1 China 24.049 15.2%2 China 13.918 9.1% 2 Italy 14.036 8.9%3 Italy 12.672 8.3% 3 Hong Kong 8.540 6.0%4 South Korea 12.313 8.1% 4 Germany 7.384 4.7%5 Taiwan 11.908 7.8% 5 USA 6.651 4.2%6 Belgium 7.758 5.1% 6 Turkey 6.119 3.9%7 France 7.468 4.9% 7 France 5.621 3.6%8 USA 7.372 4.8% 8 South Korea 4.957 3.1%9 Japan 7.178 4.7% 9 United Kingdom 4.649 2.9%

10 United Kingdom 5.163 3.4% 10 Thailand 4.620 2.9%Top Ten Total 99.946 65.5% Top Ten Total 87.626 55.5%World Total 152.570 100.0% World Total 157.880 100.0%

Source: Werner International INC., Globalization of the American Textile Industry, 1997

On the clothing side, the same three regions dominate the world export market.Comparing the top ten exporting countries in 1995 with the list from 1980, major changeshave also occurred in the export of clothing. First of all Taiwan and Belgium are no longeramong the ten largest clothing exporters. In 1980 the two countries occupied the fifth andthe ninth position among the largest exporters in the world market. Two new countries,

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Turkey and Thailand, have entered the list by 1995 occupying the sixth and tenth placerespectively.

Analyzing the ranking within the top ten countries China is by 1995 the world’s singlelargest clothing exporter with a 15.2% share of the world trade. This represents aremarkable improvement compared to China’s ranking in 1980 where it was the eighthlargest clothing supplier with a 4% market share. USA has also strengthened its positionby going from the ninth largest exporter in 1980 to the fifth largest exporter in 1995. It isinteresting to note that USA has lost terrain in textiles but has gained land in clothing. Likein textiles both Italy and Germany have maintained their positions as the second andfourth largest exporters in the period from 1980 to 1995.

Hong Kong’s, South Korea’s, the United Kingdom’s and France’s relative importance hasdiminished among the top ten clothing exporters. Hong Kong was the largest clothingexporter in 1980 covering 11.5% of the world trade. In 1995 Hong Kong’s exports droppedto 6% of the world trade leaving the country as the third largest exporter. Going from thethird place on the top ten in 1980 to the eighth place in 1995, South Korea hasexperienced an even stronger decrease in its relative importance in clothing. Like intextiles France and the United Kingdom went from being the sixth and seventh largestexporters to be the seventh and ninth largest exporters respectively.

Based on the statistics presented above four things should be pointed out. First of all it isstriking to see that Germany and Italy have maintained their rankings among the top fourcountries in both textile and clothing exports. Although both countries have lost shares inclothing and Germany also in textiles they are still among the key players in the worldmarket. The leadership can partly be accredited to technology and the investments inresearch and development throughout the supply chain. Second it is a fact that China isnow among the most dominant nations in textiles and clothing. With a continuous openingof the Chinese economy one can only expect that China’s participation in the world tradewill continue to grow stronger.

Third the relative importance of the top ten clothing exporters in the world trade hasdiminished in the period from 1980 to 1995. In 1980 the top ten exporters dominated63.1% of the world trade in clothing compared to 55.5% in 1995. Part of the explanationcan found in the global sourcing shift following the globalization and opening of new “lowcost nations” that represent attractive sourcing alternatives. This is the case with EasternEurope after the fall of the Berlin Wall in 1989, North Africa, certain parts of Asia (e.g.Vietnam and India), Mexico, Central America and the Caribbean.

The final point is related to the economics behind the sourcing shift. Due to the fact thatclothing is more labor intensive than textile production one can expect that the productionbase for clothing will continue to move from high cost countries to countries with moderateand low labor costs. The cost and efficiency pressure on the Italy, Germany, USA, Franceand the United Kingdom will continue to grow, as the world market is liberalized and newproduction bases are developed. Hence it is reasonable to expect that internationalsourcing activities will continue to grow, especially in relation to labor intensive operations.

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2. THE US MARKET

The globalization of the US sourcing activities has been intensified throughout the eightiesand nineties as a response to the strong pressure from a very competitive retail market.The principal driver behind this growth has been the cost pressure where the labor-intensive operations have been moved to countries with low labor costs.

However, the increased cost pressure has been accompanied by an increased demand forbroader assortments, smaller minimum batch sizes, higher quality, faster delivery andother additional services2. This has meant an additional pressure for higher flexibilitythroughout the supply chain.

The combination of the cost and flexibility pressure calls for the optimization of the tasksperformed by the individual firms in the production chain as well as “optimization”(coordination and integration) of the supply chain itself in order to make it flexible, shortenthe production cycles, assure faster response times and cut costs. Regarding the latter,the growing application of information technology will provide the possibility for greatercoordination between the different steps of the supply chain and the integration betweenthe supply chain and the end-markets by improving the information flows significantly.

Based on the trends from the US retail market presented above the key competitiondrivers in the market are divided into basic drivers and advanced drivers. The basic driversinclude price, quality and delivery. To be competitive any firm will have to meet a certainstandard in relation to the price, quality and delivery components defined by the market ata given point of time. But the firm competitiveness does not only depend on the basicdrivers alone. The competitiveness also depends on a firm's conduct in relation to theadvanced factors. The advanced factors refer to the flexibility of the firms. This coversamong other things the firm's ability to handle broad assortments, smaller batch sizes,frequent changes in product or lines and the compatibility of the firms production andinformation systems with the rest of the production chain.

The relative importance of the basic and advanced competition drivers depends on theactual product-market or niche of the firms. Basic drivers are dominant in the basic, lesssophisticated products (and markets) and the advanced drivers are increasingly importantin more sophisticated niches.

So far the major trends from the retail market (the end-market) and some of the principalimplications for the supply chain have been presented. On the sourcing side anotherimportant change in the demand is taking place. The market is changing from sourcing thecomponents (like fabric, apparel and accessories) individually to sourcing full-packages.

The full-package concept means that a client contracts one firm which can assume thetask and responsibility of sub-contracting and coordinating all the components andservices needed for a given garment according to the product specifications provided bythe client. This has a series of advantages for the clients in form of saved costs as the taskof coordinating and financing the different components is transferred to the contractor.Furthermore the resources saved can be employed in more strategically important areasfor retailers and brand name manufacturers such as design, sales and marketing.

2 Werner International Inc., Globalization of the American Textile Industry, September 1997.

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The implementation of full-packages has strong financial implications for the contractorsince it is necessary to have a certain financial capacity in order to purchase all thecomponents for the full-package. Together with the perceived risk, the lack of know-howand financial capacity are some of the main obstacles for the development of full-packagesin Central America.

2.1 The US sourcing pattern

The US import market is dominated by three sourcing blocks: 1) China, South and SouthEast Asia, 2) Latin America, and 3) Hong Kong, Korea and Taiwan3. As illustrated in graph1 the global sourcing pattern of the US apparel and clothing industry has undergonesignificant changes the last twenty years. The most radical change has occurred in thesourcing from Hong Kong, Korea and Taiwan. The import market share in the USA of thethree countries has dropped from 63% in 1980 to 17% in 1996. Meanwhile, LatinAmerica’s, China’s, South and South East Asia’s import market share rose steadily.

China’s, South and South East Asia’s market share rose from 22% in 1980 to 45% in1992. From 1992 to 1996 this region experienced a slight drop in the market share to 40%.Despite the latest development, the region still remains the leading sourcing base for theUS market.

Latin America’s market share rose from 5% to 34% in the period from 1980 to 1996. Thisleaves the Latin American continent as the second largest sourcing base for the US

3 KSA, The Americas – The Present and the Next 5 years, 1997.

Graph 1USA Sourcing Shift

0%

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80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

Year

Source: KSA, The Americas - The Present and the Next 5 Years, 1997

% S

hare

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China, S & SE Asia Latin America HK, Korea, Taiwan ROW

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market. But as illustrated in the graph, Latin America has strengthened its import marketshare throughout the nineties while China, South and South East Asia have lost marketshare.

The rest of the world has maintained a participation in the US import market between 8%and 10% throughout the period.

Three factors can be identified as the main drivers behind the sourcing shift:

! Market access (preferential status in the US market).

! Proximity to the US market.

! Labor costs.

Hong Kong’s, Korea’s and Taiwan’s loss of market share can principally be attributed tolimited access to the US market and high labor costs compared to the othercountries/sourcing blocks in question. The three countries are also subject to importquotas (quantitative restrictions) in the US market. Together with labor costs which are twoto eleven times higher than in China, Central America and Mexico this has led to astagnation of the Korean apparel export and a relocation of Korean apparel operations tocountries with greater market access and lower labor costs.

The rise of China, South and South East Asia can mainly be attributed to their low laborcosts. With the latest Asian crisis the labor costs in this sourcing block will continue to beamong the lowest in the world. But like Hong Kong, Korea and Taiwan this block is alsosubject to import quotas in the US market. This block will continue to be an importantapparel exporter to the US market but the growth will be controlled by the limited marketaccess.

The growth of Latin America as a sourcing base for the US market is mainly driven byMexico, Central America and the Caribbean. This can be explained by the regionsfavorable market access, the low labor costs and the geographic location. Starting with themarket access, Mexico has enjoyed full member status of NAFTA since 1994. This hasassured Mexico an almost unlimited access to the US market by a gradual elimination ofthe export quotas and the import duties.

Although not as significant as the Mexican case, Central America and the Caribbean alsoenjoy favorable access to the US market through the Caribbean Basin Initiative (CBI).Under the CBI the import duties are reduced to duties on the value added when thegarments/goods have been assembled in the region and contain US components4. Thisarrangement is usually referred to as “807” export. Furthermore the countries included inthe CBI enjoy a special quota (quantitative) benefit within the US quota program.Garments which have been assembled offshore from fabrics produced and cut in the USAwill enter under a Guaranteed Access Level (GAL) which is an “extension” of the generalquota system.

Second it is obvious that Latin America benefits from the proximity to the US market morethan any other region or continent. In particular Mexico and Central America have

4 It is possible to import fabric into the USA and assemble it offshore returning it to the US paying duty only onthe value added.

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privileged geographical locations, which offer great logistical advantages for exports to theUSA. These advantages manifest themselves in improved response times in the supplychain making the region a natural sourcing center for a market demanding shorter andmore flexible delivery times. Finally the low labor costs make Latin America an attractiveproduction base for labor intensive operations like the apparel industry when combinedwith the two prior drivers.

All in all it is clear that Latin America has certain advantages over the other major sourcingblocks in the US market which explains the growth of the region. Given these advantagesit is expected that Latin America, with Mexico, Central America and the Caribbean as theleading forces, will continue to strengthen its position in the US market. However, there isone factor which hasn’t been mentioned so far and that is the access to raw material. Thetwo Asian blocks have a far more developed and competitive production of textiles andfabrics than Latin America. As the market is moving toward “full packages”, thedevelopment of competitive production of textiles and fabrics in Latin America is vital forthe long-term development of the continent.

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3. CENTRAL AMERICA’S EXPORT TO THE USA

The analysis of Central America’s apparel export to the US market will fall in two parts.The first part is a general analysis of the export from the five Central American countries tothe US. The second part contains a detailed analysis of the apparel export on a productlevel in order to depict the positioning of the five Central American countries in the USmarket and among themselves as competitors.

3.1 General development in the exports to the US market

The apparel exports from Central America to the US market took off in the mid- and lateeighties. Costa Rica and Guatemala were the two dominant exporters in the region fromthe beginning of the eighties until the early and mid-nineties. As illustrated in graph 2 and 3important changes have occurred in the period from 1990 to 1997 among the five CentralAmerican countries in relation to their participation in the US import market.

3.1.1 Costa Rica

Was the leading apparel exporter of the Central American region in 1990 with total apparelexports to the USA amounting to 125.6 millions m2 equivalent to USD 381.5 millions forthis year. From 1990 to 1995 Costa Rica maintained its leading position with averagegrowth rates of 19% in terms of quantity and an average of 15% in terms of valuethroughout the five-year period. From 1995 the growth of the Costa Rican apparel exportto the US entered a downturn leaving the leading position to Honduras. Between 1995 and1996 the export quantity fell 10.5% from 297.5 millions m2 to 266.3 millions m2 and theexport value 7% from USD 756.9 millions to USD 704.1 millions. The quantity and value

Graph 2US General Imports of MFA Apparel from Central

America

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1990 1991 1992 1993 1994 1995 1996 1997

Year

Source: IDS, US General Imports of MFA Apparel, September 1998

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Nicaragua Guatemala Costa Rica El Salvador Honduras

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loss was recovered in 1997 leaving the export quantity around the 1995 level with 301.9millions m2 and the value at USD 839.8 millions. With the downturn and high growth ratesin the rest of the region, Costa Rica dropped from being the largest exporter both whenmeasured in quantity and value to becoming the third largest in quantity and the fourthlargest in value in 1997.

3.1.2 Guatemala

Was the second largest apparel exporter to the US market in the region in 1990 in terms ofquantity and value with the total apparel exports amounting to 63.8 millions m2 equivalentto USD 190.6 millions. Compared to Costa Rica, the Guatemalan exports were only half ofthe leading country in 1990. The Guatemalan apparel export to the US market has grownwith average of 21% in terms of quantity and 26% in terms of value in the period from1990 to 1997. However this covers two distinct growth periods. The first period, which isthe period of high growth, covers the years from 1990 to 1993. During these three yearsthe export quantity grew from 63.8 millions m2 to 156.69 millions m2 and the value grewfrom USD 190.6 millions to USD 545.7 millions. This equals average growth rates of 35%in quantity and 42% in value. The second period covers the years from 1993 to 1997where the export quantity rose from 156.69 million m2 to 237.9 millions m2 and the valuefrom USD 545.7 millions to USD 962.1 millions. This is the period of moderate growthwhere the average growth rates for the export quantity and value fell to 11% and 15%respectively. These moderate growth rates compared to Honduras and El Salvador haveleft Guatemala as Central America’s fourth largest exporter in quantity and the third largestin value by 1997.

Graph 3US General Imports of MFA Apparel from Central America

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1990 1991 1992 1993 1994 1995 1996 1997

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Source: IDS, US General Imports of MFA Apparel, September 1998.

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Nicaragua Guatemala Costa Rica El Salvador Honduras

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3.1.3 Honduras

Is the country which has experienced the strongest growth in the region. The country wasthe third largest exporter in the beginning of the decade and the single largest at the end ofthe decade both in terms of quantity and value. On the quantity side the exports havegrown with an average of 51% in the seven-year period and on the value side 47%. Thishas meant a growth in quantity from 40.2 millions m2 in 1990 to 726 millions m2 in 1997and in value from USD 112.8 millions to USD 1659 millions. Unlike the case of Costa Ricaand Guatemala, Honduras has been able to maintain its high growth rates throughout thedecade.

3.1.4 El Salvador

Has also experienced a strong growth in its exports to the USA. In 1990 El Salvador wasthe fourth largest exporter in the Central American region. But by 1997 it was the secondlargest in relation to both quantity and value. With average growth rates reaching 48% inquantity and 53% in value the total apparel exports went from 28 millions m2 in 1990 to433.2 millions m2 in 1997 and the value from USD 54.4 millions to 1052.1 millions.Although not as significant as Honduras, El Salvador has also maintained its high growthrate throughout the decade.

3.1.5 Nicaragua

Is the late starter in the region. The apparel export to the US market took off in 1993 and1994 after the Sandinist regime. Due to the recent establishment of the Nicaraguanapparel industry it is the smallest exporter in the region with exports of only 48 millions m2

with a total value of USD 182 millions. However, since the apparel industry is a youngsector in Nicaragua, with exports equal to the levels of El Salvador in the beginning of thedecade, it is expected that the Nicaraguan apparel export to the US will continue toexperience significant growth rates in the near future.

The effects of the slowing growth rates in Costa Rica and Guatemala compared to theother countries can be seen clearly in the development in the import market sharespresented in table 3.

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TABLE 3

APPAREL IMPORT MARKET SHARE IN THE US MARKET (1990 TO 1997)

A. Import market share measured by quantity (m2)1990 1991 1992 1993 1994 1995 1996 1997

Costa Rica 2.09% 2.55% 2.92% 3.19% 3.15% 3.21% 2.76% 2.66%El Salvador 0.47% 0.60% 0.84% 1.30% 1.92% 2.58% 2.97% 3.82%Guatemala 1.06% 1.59% 1.81% 2.08% 1.91% 1.99% 2.10% 2.09%Honduras 0.67% 1.16% 1.66% 2.02% 2.53% 3.56% 5.45% 6.40%Nicaragua* - - - - 0.10% 0.22% 0.39% 0.42%

B. Import market share measured by value (USD)1990 1991 1992 1993 1994 1995 1996 1997

Costa Rica 1.74% 1.94% 2.21% 2.31% 2.18% 2.18% 1.93% 1.96%El Salvador 0.25% 0.40% 0.62% 0.89% 1.27% 1.68% 1.98% 2.46%Guatemala 0.87% 1.46% 1.69% 1.93% 1.88% 1.97% 2.19% 2.25%Honduras 0.51% 0.87% 1.37% 1.79% 2.05% 2.65% 3.35% 3.87%Nicaragua* - - - - 0.09% 0.21% 0.39% 0.43%Note: Market shares are based on imports of MFA apparel (yarns, fabrics and other non-apparel are excluded)Source: 1) IDS, US General Imports of MFA Apparel by Region, September 1998. 2) *OTEXA,December 1998. 3) Opportunities in Free Zone Manufacturing, Nicaragua November 1998.

Costa Rica gained market share in the period from 1990 to 1993 going from 2.09% of thetotal US imports to 2.92 in 1993 in terms of quantity and from 1.74% to 2.31% in terms ofvalue. From 1993 to 1994 Costa Rica’s market share fell slightly in terms of quantity andvalue. Only the fall in quantity was recovered from 1994 to 1995. During 1996 and 1997,Costa Rica’s import market share fell to the levels at the beginning of the decade, endingat 2.66% of the US import market in terms of quantity and 1.96% in terms of value.

Guatemala’s import market share grew steadily until 1993 from 1.06% to 2.08% in terms ofquantity and from 0.87% to 1.93% in terms of value. Guatemala experienced a smalldecline from 1993 to 1994 but it was recovered in the following years leaving Guatemalawith 2.09% of the import market in terms of quantity and 2.25% in terms of value by 1997.

El Salvador has experienced continuous growth in its import market share throughout theperiod. The Salvadoran import market share has gone from a modest level of 0.47% in1990 to 3.82% in 1997 when measured in square meters. When measured by value theimport market share rose from an insignificant 0.25% in 1990 to 2.46% in 1997.

Also Honduras experienced continuous growth in its market share from 1990 to 1997. TheHonduran import market share grew more than nine times during this period whenmeasured by quantity, from 0.64% to 6.4%. When measured by value the import marketshare rose 7.59 times, from 0.51% to 3.87%.

Finally, Nicaragua’s market share is a modest 0.42% when measured by quantity and 0.43when measured by value. Again this is a direct effect of the recent establishment of theapparel industry in Nicaragua and it is expected that Nicaragua’s market will grow to moresignificant levels as the apparel sector consolidates in the country.

With the exception of Guatemala and Nicaragua, all the countries have greater marketshares in terms of quantity than in terms of value. This indicates that the unit values of the

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exports are lower for these countries than for Guatemala and Nicaragua, a fact which isconfirmed in table 4.

TABLE 4

AVERAGE UNIT VALUE OF THE APPAREL EXPORTS TO THE USA – 1997

Costa Rica El Salvador Guatemala Honduras NicaraguaUSD per m2 2.78 2.43 4.06 2.29 3.39Source: IDS, US General Imports of MFA Apparel, September 1998

Honduras has the lowest unit value of the five Central American countries with USD 2.29per m2 exported to the US market. El Salvador has the second lowest unit value with USD2.43 per m2 followed by Costa Rica with USD 2.78 per m2 exported to the USA. Nicaraguaand Guatemala have the two highest unit values per m2 in the region with USD 3.39 perm2 and USD 4.06 per m2 respectively.

The differences in the unit values mainly reflect the differences in the products exported tothe US. As shown further on, the exports from Honduras, El Salvador and Costa Rica aredominated by simple basic products like underwear with high volumes but low values.Nicaragua’s and Guatemala’s exports are dominated by more sophisticated products liketrousers and jeans with higher values.

3.2 The composition of the apparel export to the US market

When analyzing the total apparel exports in more detail interesting differences occuramong the five Central American countries. As will become evident when segmenting theapparel exports by the fabrics used in the clothes, by type of product and by the type ofoperation, the five countries are positioned differently among each other.

3.2.1 Composition of the exports by type of fabric

The apparel exports can be classified by five main types of fabrics according to the USApparel Categories. Using the US Apparel Categories the five main types of fabrics are 1)cotton and/or man-made fiber (which only refers to baby wear, playsuits and sunsuits), 2)cotton, 3) wool, 4) man-made fiber, and 5) silk blend and/or non-cotton vegetable fiber. Allapparel exports enter one of the five fabric categories mentioned above.

The positioning of the five countries in relation to the type of fabric is interesting becausethe dimension not only covers the type of fabric used in the apparel exports but also givesa first indication of the sophistication of the apparel exports. Ranking the fabrics from thecheapest to the most expensive per unit the cheapest fabrics are cotton followed by man-made fiber (MMF). Wool and then silk blends and other non-cotton vegetable fibers are themost expensive fabrics. Furthermore cotton and MMF are generally used for basicgarments where wool, silk blends and other non-cotton vegetable fibers are mainly used inmore sophisticated garments. The distribution of the apparel exports according to the typeof fabric from the five Central American countries is presented in table 5.

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TABLE 5

DISTRIBUTION OF THE TOTAL EXPORTS ACCORDING TO TYPE OF FABRIC

Percentage of the total exportCOUNTRY Cotton and/or

man-made fiberCotton Man-made

fiber (MMF)Wool Silk blends and/or

non-cottonvegetable fiber

Costa Rica* 8.32% 61.77% 28.86% 0.94% 0.10%El Salvador 1.55% 70.30% 27.01% 0.87% 0.22%Guatemala 5.48% 53.15% 34.32% 6.21% 0.81%Honduras 2.78% 68.93% 28.04% 0.22% 0.07%Nicaragua* - 88.73% 11.27% - -Source: 1) IDS, Country Reports, November 1998. 2) *OTEXA, Major Shippers Report, December1998.

The basic fabrics, cotton and MMF, are the dominant fabrics in the Central Americanapparel exports representing between 98% and 100% of the fabrics used in the apparelexports with the exception of Guatemala. Only a small percentage of the total exports fromthe region is made of wool, silk blends or non-cotton vegetable fibers. Cotton is the singlemost used type of fabric in garments exported, indicating a high concentration in theproduction and export of basic garments in the region.

Guatemala is the only country showing real diversification in relation to the type of fabricsused in its exports. A significant 7% of the Guatemalan apparel exports is covered byproducts of wool, silk blends and other non-cotton vegetable fibers. This shows the firstevidence of a diversification of the Guatemalan exports to the US market. Furthermore itindicates that Guatemala has the most diversified product base in the region.

3.2.2 Composition of the exports by type of product

The five main apparel products exported from each of the five countries are presented intable 6. As shown in the table there is a significant concentration of the apparel exports tothe US market in all of the five cases.

Costa Rica, Honduras and Nicaragua have the highest concentration of their exports in theregion. The categories underwear (e.g. boxer shorts and panties), knit shirts (e.g. T-shirtsand polo shorts), trousers & shorts (e.g. jeans and khakis) and woven shirts (e.g. dressshirts) cover 79.21%, 84.79% and 91% of the total exports of each of the three countries.

In the Salvadoran case the concentration is more moderate, although still high. The fivemain product categories cover a total of 67.26% of El Salvador’s apparel export to the US.Like in the Honduran and Nicaraguan case, underwear, knit shirts, woven shirts andtrousers & shorts dominate the Salvadoran exports. Trousers & shorts, underwear andwoven shirts are also among the main products in Costa Rica, but baby wear, nightwearpajamas are also included.

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TABLE 6

THE MAIN PRODUCTS EXPORTED TO THE US MARKET (QUANTITIES, SEPTEMBER 1998)

Country Product & US ApparelCategory1

Share ofcountry export

Import marketshare

SupplierNo.

Unitvalue

Underwear (352/652) 51.01% 8.33% 5 11.77Trousers & shorts (347/348) 14.43% 3.36% 5 70.86Baby wear (239) 7.44% 5.78% 7 14.76Nightwear & pajamas (351/651) 3.47% 1.58% 19 46.80Woven shirts MB2 (340/640) 2.86% 1.23% 20 95.85

osta Rica

TOTAL 79.21% - 19 -Underwear (352/652) 38.98% 11.14% 3 11.49Knit shirts (338/339) 9.92% 5.91% 3 29.64Knit shirts MB (638) 7.77% 8.81% 4 24.31Woven shirts MB (340/640) 5.37% 3.75% 10 66.05Trousers & shorts (347/348) 5.22% 1.97% 13 40.33

El Salvador

TOTAL 67.26% - 15 -Trousers & shorts (347/348) 15.55% 3.25% 6 73.55Woven shirts WG3 (341/641) 11.10% 2.72% 10 69.40Knit shirts (338/339) 10.18% 3.35% 8 47.51Woven shirts MB (340/640) 9.74% 3.87% 9 75.74Dresses (336/636) 6.81% 4.06% 6 90.98

Guatemala

TOTAL 53.38% - 22 -Underwear (352/652) 43.59% 19.08% 1 10.11Knit shirts (338/339) 14.23% 13.35% 2 29.75Knit shirts MB (638) 11.52% 20.58% 2 18.75Trousers & shorts (347/348) 10.33% 6.16% 4 47.37Woven shirts MB (340/640) 5.12% 6.64% 6 70.65

Honduras

TOTAL 84.79% - 13 -Trousers & shorts (347/348) 44.29% 1.71% 14 70.20Woven shirts MB (340/640) 21.31% 1.52% 16 59.01Knit shirts (338/339) 12.05% > 0.01% n.a. n.a.Underwear (351/651) 10.55% 0.31 25 8.42Trousers & shorts (647) 2.80% 0.53% 24 68.43

Nicaragua

TOTAL 91.00% - 41 -1 200 cotton &/or man-made fiber, 300 cotton, 400 wool, 600 man-made fiber. 2 Women & Girls. 3 Men & Boys.Source: IDS, Country Report and US General Imports for Guatemala and other suppliers,November 1998

The case of Guatemala is distinct. Here the share of the five largest categories is only53.38% of the total exports, which is considerably lower than in the other four countries.The five main categories are trousers & shorts, woven shirts, knit shirts and dresses.

The differences in the importance of the five main categories give important evidenceabout the diversification of the exports from the five Central American countries. Using theshare of the five main categories of the total country export as a measure of the degree ofproduct diversification, Nicaragua, Honduras and Costa Rica have the least diversifiedapparel exports in the region. Only 9% of the Nicaraguan exports, 15% of the Honduranexports and 20.79% of the Costa Rican exports are covered by other categories than thefive main categories. El Salvador has a higher degree of diversification of the export basethan the prior three cases, although low when compared to Guatemala. Almost 33% of thetotal Salvadoran apparel export to the US is covered by other categories than the top five.

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The diversification of the apparel exports from Guatemala is considerably higher than theother four countries’. Approximately 47% of the Guatemalan exports to the US market arecovered by other categories than the top five. This leaves Guatemala’s exports to the USAas the most diversified in the region.

There are also important differences in the market leadership among the five countries. Asthe thirteenth largest apparel exporter to the USA, Honduras has the strongest overallmarket position of the Central American countries. But when analyzing Honduras’ marketposition in its main export categories, it is clear that Honduras is among the top leaders inthe world in each of these segments. Honduras is the single largest overall supplier ofcotton and man-made fiber underwear in the world to the US market. FurthermoreHonduras is the second largest supplier in the world of cotton and man-made fiber knitshirts. In relation to cotton trousers and shorts the country enters as the fourth largestsupplier in the world to the US market in this particular segment. Finally it is the sixthlargest supplier of woven shirts made of cotton and man-made fibers.

El Salvador is the fifteenth largest apparel supplier in the world to the US market, which isthe second strongest market position among the Central American countries. TheSalvadoran apparel exports are not as dominant in the five main categories as Honduras’.In cotton and man-made fiber underwear and knit shirts made of cotton, El Salvador is thethird largest exporter in the world. In knit shirts made of man-made fibers, the countryenters as the fourth largest supplier. The market position is less significant in relation towoven shirts and trousers & shorts where El Salvador only occupies the tenth andthirteenth place in the US market.

As the nineteenth largest apparel supplier to the US, Costa Rica’s market position is lesssignificant than the two prior competitors’. In relation to the two most important exportcategories, underwear and trousers & shorts, Costa Rica is the fifth largest exporter to theUS market. In its third most important category, baby wear, it is the seventh largestsupplier in the world. The importance as supplier drops even further in relation tonightwear and pajamas where the country only occupies the nineteenth place. FinallyCosta Rica takes the place as twentieth largest supplier in the woven shirts segment.

Guatemala is the twenty-second largest supplier in the world. Although important,Guatemala is not among the most dominant producers in any of its five main categories. Itis only the sixth largest supplier in its most important export category, trousers & shorts. Inits second most important export category, woven shirts for women and girls, Guatemala isonly the tenth largest supplier to the USA. For knit shirts, woven shirts for men and boysand dresses, Guatemala is the eighth, ninth and sixth largest supplier.

Due to the recent establishment of the Nicaraguan apparel industry and the modest exportlevel compared to the region, Nicaragua has the weakest overall position in the USmarket. Nicaragua is only the fortieth largest supplier in the world. The weak overallposition is reflected in the position in each of the country’s main export categories.Nicaragua is only the fourteenth largest supplier in its main category trousers & shorts. Inthe two subsequent categories it occupies the sixteenth place among the world suppliersand in its fifth most important category it is the twenty-fourth largest supplier.

As shown, Honduras is the export market leader of the region followed by El Salvador.But even though Guatemala and Costa Rica appear with an overall weaker positions intheir five main categories they are the regional leaders in other segments (see annex 1). In

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the region and the world, Guatemala is the leading exporter to the US market of woolcoats for women and girls. Furthermore Guatemala is the fifth largest supplier in the worldto the US market of cotton and man-made fiber skirts, the seventh largest of man-madefiber coats for woven and girls, and finally the thirteen largest supplier of man-made fibercoats for men and boys, which is enough to make Guatemala the largest Central Americansupplier in these categories. Costa Rica is the fourth largest supplier of man-made fiberbrassieres and body support garments which makes it the second largest exporter of thiscategory in the region only surpassed by Honduras.

The final dimension in relation to the market position of each of the five countries is theunit value of the products exported to the US. The unit value covers the factor inputs and itis correlated with the complexity of the products. Complexity refers to the number ofindividual operations, the fabrics, the know-how and technology required in the productionof a given garment. The exports from the five countries can then be divided into productsof low, medium and high complexity. Products of low complexity should be interpreted asbasic products requiring only few operations, knit fabrics (cotton and man-made fiber) andstandard know-how and technology in the production process. This group of productsmainly includes underwear, knit shirts (e.g. T-shirts), baby wear, nightwear and pajamas5.

Products of medium complexity are products which require more operations, woven fabrics(cotton and man-made fiber), some special know-how and technology in the productionprocess. This group includes products like woven shirts, trousers, shorts and skirts. Finallyproducts of high complexity require several operations, woven and knit fabrics (wool,cotton, man-made fiber and other), special know-how and technology and includes amongothers coats, dresses and suits. The unit price is higher in the case of products with highcomplexity than in products with low complexity.

With 69% of the total exports covered by underwear and knit shirts, Honduras is mainlypositioned in the segment of basic products with low unit values and product complexity.The same is the case of Costa Rica where 62% of the exports is covered by underwear,baby wear, nightwear and pajamas. El Salvador is also strongly positioned in the basicproducts with almost 57% of the apparel exports covered by underwear and knit shirts.

Guatemala covers some of the basic products too. However, unlike the other countriesGuatemala’s main position is in the segment with medium unit values and productcomplexity. Trousers, shorts, skirts and woven shirts cover more than 42% of Guatemala’stotal apparel exports to the US. The position in more complex product categories is furtheremphasized by the fact that more than 19% of Guatemala’s exports is covered by productswith high complexity like dresses and coats.

Nicaragua is positioned with approximately 50% of its exports in the basic products and50% in the products with medium complexity and unit price. But since Nicaragua’s apparelindustry is relatively young it is difficult to draw any definitive conclusions about its marketposition.

The position of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua is illustratedin chart 1. When combining the two dimensions, market leadership and unit value, itbecomes clear that Costa Rica, Honduras and El Salvador are competing in the same

5 This is a general classification of the overall product categories. Whether a given (specific) product is of low,medium or high complexity is defined by the individual case.

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basic product-segments. Guatemala, however, is mainly competing in more sophisticatedsegments, although still producing and exporting basic goods. Again Nicaragua’s positionin relation to the two dimensions should be seen as a reflection of the relatively young ageof the apparel sector in this country.

3.3 Central America’s main competitors in the US market

The five largest suppliers to the US market are presented in table 7 with their respectiveimport market shares measured by quantity and value. The largest competitors areMexico, Canada, China, Pakistan and Taiwan when measured by quantity. Together thefive largest exporters cover 40.82% of all the US imports. Mexico is the single largestsupplier almost covering 14% of the total amount of square meters imported in 1998.Canada is the second largest supplier with 9.2% of the total imports followed by China,Pakistan and Taiwan with 7.79% 5.78% and 4.49% of the import market.

Mexico is also the largest supplier when measuring its market share by value. The countrycovers 11.81% of the total value of the US imports. China enters as the second largestsupplier covering 9.74% of the total value of the imports. Hong Kong, which is not amongthe five largest suppliers when measured by quantity6, is the third largest overall supplierrepresenting 7.9% of the total value. Taiwan and Canada follow as the fourth and fifthlargest suppliers with 4.77% and 4.47% of the market. Pakistan is not among the fivelargest suppliers when measured by value. Actually Pakistan’s market share is only 2.39%

6 Hong Kong is the eighth largest supplier when measured by quantity.

CHART 1PERCEPTUAL MAP OF THE CENTRAL AMERICAN EXPORTS

Strong market position

Highunit value /

productcomplexity

LowUnit value /

productcomplexity

Weak market postion

El Salvador

Costa Rica

Honduras

Guatemala

Nicaragua

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of the total value imported leaving, it as the sixteenth largest supplier to the US in terms ofvalue.

Mexico’s leading position can be seen as a clear result of its NAFTA membership. Due tothe favorable market access Mexico’s import market share has tripled in terms of bothquantity and value since it entered NAFTA in 1994.

TABLE 7

THE FIVE LARGEST TEXTILE AND APPAREL SUPPLIERS TO THE USA, AUGUST 1998

Quantities (m2) Value (USD)Supplier No.Country Market Share Country Market Share

1 Mexico 13.56% Mexico 11.81%2 Canada 9.20% China 9.74%3 China 7.79% Hong Kong 7.90%4 Pakistan 5.78% Taiwan 4.77%5 Taiwan 4.49% Canada 4.47%TOTAL 40.82% 38.69%Note: Based on imports of all MFA fibers including apparel, yarns, fabrics and other non-apparel categories.Source: OTEXA, October 1998

The position of the Central American countries is moderate compared to the five leaders.As mentioned earlier Honduras is the thirteenth largest supplier to the USA both in termsof quantity and value with 3.28% and 3.16% of the market. El Salvador is the fifteenthlargest supplier in terms of quantity with 2.07% of the imports and seventeenth largest interms of value with 2.03%. Representing 1.28% and 1.44% of the imports in terms ofquantity and value, Costa Rica is the nineteenth and twenty-first largest supplier.Guatemala covers 1.14% of the imports quantity wise and 1.86% in terms of value makingit the twenty-second and eighteenth largest supplier to the US.

Despite the modest individual positions Central America is not an insignificant supplier tothe US market. Together Costa Rica, El Salvador, Guatemala, Honduras and Nicaraguacover 7.98% of the total quantity and 8.85% of the total value imported. This is enough tomake Central America the third largest supplier in the USA.

Apart from Mexico the strongest Latin American competition comes from the DominicanRepublic. The Dominican Republic is the eleventh largest supplier to the USA in terms ofquantity with an import market share of 3.6% and the seventh largest supplier in terms ofvalue with 4.03% of the total imports.

3.3.1 Main competitors in selected products-categories

To elaborate further on the competition in the US import market table 8 presents CentralAmerica’s five main competitors in relation to nine of the region’s most important apparelexport products. Mexico’s dominant position is once more confirmed. Barring woven shirtsfor men and boys, Mexico is among the five largest suppliers in each of the categoriespresented. The Mexican domination is in basic products as well as in the products ofmedium and high complexity.

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The Dominican Republic is the most significant Caribbean competitor. It is among CentralAmerica’s top five competitors in the three basic products. Furthermore the DominicanRepublic is a strong competitor in relation to trousers and wool coats. Competing inunderwear, Jamaica is the only other Caribbean competitor present in the selectedproducts.

East Asia, with China, Hong Kong, Korea and Taiwan, also competes directly in CentralAmerica’s main product segments. Hong Kong is the strongest East Asian competitor inthe selected products. Surprisingly, mainland China is only listed as being among the topfive competitors in one of categories presented below, namely woven shirts for men andboys. However, this should not be interpreted as China has a weak position in general as itis among the ten largest suppliers of numerous other categories.

TABLE 8

THE FIVE MAIN COMPETITORS IN SELECTED PRODUCTS IN THE US MARKET (1998)

A. Basic products – Products of low complexityUnderwear (352/652)1 Cotton knit shirts (338/339) MMF1 knit shirts (638)Country Supplier No. Country Supplier No. Country Supplier No.

Dominican Rep. 2 Mexico 1 Mexico 1Mexico 4 Dominican Rep. 4 Dominican Rep. 3Bangladesh 6 Turkey 5 Korea 5Jamaica 7 Pakistan 6 Indonesia 6Hong Kong 8 Hong Kong 7 Philippines 7

B. Products of medium complexityTrousers & shorts (347/348) Woven shirts MB2 (340/640) Skirts (342/642)

Country Supplier No. Country Supplier No. Country Supplier No.Mexico 1 Bangladesh 1 India 1Dominican Rep. 2 Hong Kong 2 Mexico 2Hong Kong 3 Korea 3 Taiwan 3Turkey 6 China 4 Hong Kong 4Philippines 7 India 5 Philippines 6

C. Products of high complexityDresses (336/636) Wool coats WG3 (435) MMF coats WG (635)

Country Supplier No. Country Supplier No. Country Supplier No.Mexico 1 Dominican Rep. 2 Canada 1Philippines 2 Mexico 3 Hong Kong 2India 3 Philippines 4 Mexico 3Indonesia 4 Italy 5 Taiwan 4Pakistan 5 Ukraine 7 Sri Lanka 51 300 cotton, 400 wool, 600 man-made fiber (MMF). 2 Men & Boys. 3 Women & Girls.Source: IDS, U.S. General Imports – Quota/Trade Tables, December 15, 1998

It is interesting to see that countries from the Indian subcontinent are among the leadingcompetitors in six of the selected products. India, Bangladesh, Pakistan and Sri Lanka areamong the six largest suppliers in the categories of underwear, cotton knit shirts, wovenshirts for men and boys, skirts, dresses and man-made fiber coats. Bangladesh and Indiaeven hold the position as the largest suppliers to the US market in woven shirts for menand boys and in skirts.

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South East Asia, covering Indonesia and Philippines, is a strong competitor in thecategories presented above. Being among the seven largest suppliers of the fivecategories man-made fiber knit shirts, trousers and shorts, skirts, wool coats and dressesto the US market, the Philippines represents the strongest competition to Central Americaof the two South East Asian countries. Indonesia is a competitor in knit shirts made ofman-made fibers and dresses.

Surprisingly, three countries from the European continent are among Central America’smain competitors in the US market in three of the selected products. First of all, Turkey isa competing supplier of cotton knit shirts and trousers and shorts. It is accompanied byUkraine and Italy, which supply wool coats to the US market.

Finally, Canada enters as the leading competitor of man-made fiber coats for women andgirls. Canada is only represented in this category, although the country is among theworld’s five largest textile and apparel suppliers to the US market.

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4. FRAMEWORK CONDITIONS OF THE CENTRAL AMERICANAPPAREL & TEXTILE INDUSTRY

In the following some of the most important elements of the Central American businessenvironment will be analyzed. Concentrating only on selected macro, meso and microlevel factors the analysis does not pretend to be a complete study of all the aspects of theCentral American business environment. The objective is to draw a general picture of theframework conditions for the apparel and textile industry in Central America by highlightingsome of the most important elements behind the evolution of each of the five countries'exports.

4.1 Macro-level factors

The macro-level factors refer to the elements, which influence the competitiveness of theindustry on a national (country) level. The six factors included in the analysis are wages,exchange rates, fiscal incentives, quotas and tariffs, general infrastructure andtransportation costs.

4.1.1 Labor costs

It is difficult to find precise and consistent data about the labor costs in Central America.The estimates developed by different regional and international experts differ from oneanother as they use different bases for the calculations. In the following the minimumwages established by law including all fringes will be used to illustrate the differencesbetween the five countries in the region. Although the real labor costs are higher than theminimum wages (due to the incentive systems applied in the apparel and textile firms andcompetition in the labor market) they give a general idea about the cost level in the region.

TABLE 9

LABOR COSTS

Country Minimum Wage by Law(USD/hour)

Additional Benefits Total(USD/hour)

Costa Rica 0.74 0.69 1.00 – 1.30El Salvador 0.69 0.16 0.85Guatemala 0.34 0.24 0.58Honduras 0.34 0.14 0.48Nicaragua 0.29 0.10 0.39Source: 1) Cámara de Textiles de Costa Rica, January 1999. 2) Bühlmann, Análisis de ElementosCríticos para la Competitividad y Desarrollo del Sector Vestuario y Textil en Guatemala, IDCGuatemala, November 1997.

Table 9 shows there are considerable differences in the minimum wages among the fivecountries. Given that Costa Rica is the highest-ranking Central American country inrelation to social and democratic development it is no surprise that it has the highest laborcosts in the region. Having the highest level of labor costs is regarded as one of the mainreasons for the country’s loss of import market share in the USA. Part of the production of

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the most labor intensive and price sensitive garments has been placed in other countrieswith lower labor costs. It is becoming too expensive to produce the basic, highly laborintensive products in Costa Rica.

El Salvador has the second highest labor cost level in the region followed by Guatemala,which has the third highest level of labor costs. Along with a number of other lessfavorable factors this can explain the two countries more modest growth in the importmarket shares compared to Honduras.

Honduras has the lowest level of labor costs in the region apart from Nicaragua. Althoughimportant, this is only one of a series of positive factors which have made Honduras thedominant apparel and textile supplier in Central America.

Finally, Nicaragua has the lowest labor costs in the region. There is no doubt that thismakes the country an attractive sourcing base in the region and it is therefore expectedthat it will continue to capture shares of the US import market, especially in the basic, laborintensive segments.

Following the differences in the labor costs it is expected that the basic, high pricesensitive production will continue to be located in the countries with the lowest labor costs,as is the current case with underwear and knit shirts in Honduras. This is subsequentlyintensifying the pressure on the other countries in the region with higher labor costs toimprove the efficiency levels and diversify the production by entering new segments withmore complex and less price sensitive products.

4.1.2 Exchange rates

The exchange rates are subject for much discussion in the five Central Americancountries. On one side the importing sectors along with different interest groups, whichargue for the protection of earnings and savings in local currencies, lobby for stablenominal exchange rates. On the other side the exporting sectors lobby for devaluation inorder to enhance the price competitiveness in the export markets.

As the exporting sectors are regarded as vital catalysts in the development of the CentralAmerican countries (at least in the short and medium term) by numerous regional andinternational experts, the argumentation tends to favor devaluation. However, twoobservations are important to make for the following analysis. First of all, the exchangerates are not a source of the development of sustainable competitive advantages. Theexchange rate should be regarded as an external macroeconomic instrument whichinfluences the framework conditions for the export sector in each of the five countries. Butreal competitive advantages can only be created internally in the industries and firms.

Following the first observation, the exchange rate should neither be used as an indirectexport subsidy nor should it be managed in a way which has a (significant) negative effecton the export sector’s price competitiveness in the foreign markets. Hence the exchangerate should have a neutral effect by leaving the real exchange rate stable.

The real exchange rate is the nominal exchange rate adjusted by the differential betweenthe national and international inflation rates (see annex 2). With an average nationalinflation rate higher than the average world market inflation the real exchange rate can

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only stay stable if the nominal exchange rate is devaluated. If the nominal exchange rate isnot devaluated the national producers will experience an increased price and costpressure7 since the local factor prices are rising faster than the prices in the foreignmarkets. In other words, the national producers will have to fully cover the higher inflationby introducing efficiency improvements in order to cut prices and costs so they can stayprice competitive in the export markets (foreign currencies). The equation therebyexpresses the degree of additional pressure, caused by the national inflation andexchange rate policy, for price and cost reductions in local currency needed in order tostay competitive in the foreign currencies.

The real exchange rate index for Costa Rica, El Salvador, Guatemala and Nicaragua ispresented in graph 4. Since more than 90% of the Central American apparel and textileproduction is exported to the US market, the inflation rate in the USA has been used as anexpression for the world inflation.

Two groups emerge when examining the real exchange rates. The first group consists ofEl Salvador and Guatemala which have had a significant fall in the real exchange rateindex due to a combination of high national inflation rates and relatively stable nominalexchange rates during the nineties. Both countries have had the policy to maintain theexchange rates relatively stable only permitting a minor annual devaluation. However,none of the two countries have had the control over the inflation needed to assure aneutral effect on the real exchange rate, which has led to what can be characterized as asystematic overvaluation of the Guatemalan Quetzal and the Salvadoran Colon.

The effect of overvaluation can be seen directly on the factor costs like labor costs sincethey are measured in US dollars. This means that overvaluation has led to a “devaluation”of the Guatemalan and Salvadoran apparel and textile industries’ capacity to compete in

7 In a competitive environment there is a constant pressure on prices and costs. Here the increased pressurerefers to the additional pressure caused by local inflation and exchange rate policy in addition to the “normal”competitive market pressure.

Graph 4: Real Exchange Rate Index (1990 = 100)

60

80

100

120

140

1990 1991 1992 1993 1994 1995 1996 1997

Year

Source: Own calculations based on inform ation from Bloom berg/IMF

Index

Costa Rica El Salvador Guatem ala Honduras Nicaragua

25

the world market. In the Guatemalan case the import tariffs were reduced throughout thenineties. This has created sufficient ground for some real adjustments of the exchangerate. But based on the current situation, El Salvador and Guatemala have the leastfavorable conditions in relation to exchange rates in the region.

The second group includes Costa Rica and Honduras. Although Honduras hasexperienced an increase in the real exchange rate index during 1993 and 1994, bothcountries have had relatively stable and neutral real exchange rates in the beginning andend of the ten-year period. Costa Rica has had the most stable real exchange rate of thetwo (and the whole region) with the index around 100, thus keeping the effects on theexporting sectors neutral. This can be seen as the result of an early adjustment of theCosta Rican Colon, which was subject to a substantial devaluation in the beginning of theeighties, and the policy to maintain a continuous and consistent devaluation of thecurrency.

Honduras has experienced more fluctuations. The real exchange rate index went from astable and neutral level around 100 in 1991 and 1992 to almost 120 in 1994 due to adevaluation of the Honduran Lempira, which more than offset the inflation differentialbetween Honduras and the USA. With accelerating inflation the index fell to 106 in 1995.This level was maintained in 1996 and 1997 with only minor variations. The strongdevaluation of the Lempira makes the Honduran exports more price competitive in theexport markets. However, Honduras has not created a sustainable competitive advantagewith the devaluation.

Nicaragua does not fit into either of the two prior groups. As the only country in CentralAmerica, Nicaragua has had a continuous increase in the real exchange rate index since1993, ending at 127 in 1997. This means, ceteris paribus, that the competitiveness of theNicaraguan exports has been artificially enhanced in this period. But it is difficult to drawany conclusions about the development in Nicaragua since the economy has been subjectto many distortions, which give little credibility to the statistics available.

4.1.3 Fiscal incentives

Substantial fiscal incentives are given to the apparel and textile industry and to the exportprocessing industries in general in all of the five Central American countries. These fiscalincentives can be obtained by any export-processing firm through two main regimes, whichare the general Export Promotion laws and the Free Trade Zone laws. In each of the fivecases the two types of regimes offer similar fiscal incentives. But the two regimes differfrom one another in relation to application and the time extension of the incentives given.Under the Export Promotion laws any firm fulfilling the requirements of the laws isapplicable to the regime regardless of its physical location. But under the Free TradeZones laws only the firms located within a free trade zone can obtain the incentives.Regarding the time extension of the fiscal incentives, the exoneration periods are generallylonger under the Free Trade Zone laws.

Given the similarities between the two regimes and that the exoneration periods aregenerally longer under the Free Trade Zone Law, only the fiscal incentives given by thefree trade zone regime will be presented.

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In general the fiscal incentives given in the Free Trade Zone Laws are applicable to firms iftheir activities are dedicated to the production or assembly of goods destined forexportation or re-exportation. This leaves out all production and sales to the local markets.As illustrated in the table the main incentives given by the Free Trade Zone Laws in eachof the five countries are similar. All the countries offer tax and duty free imports ofmaterials and equipment used in the production (such as machines, other equipment,tools, raw materials, components, semi-processed products and packaging) andexoneration from the payment of income tax and value added tax (VAT).

There are only marginal differences among the countries in relation to import taxes andtariffs. The same is the case with other taxes. But there are significant differences amongthe countries related to the exoneration periods given for income tax payments. InHonduras the firms are exonerated for 20 years. This is the longest period for income taxexoneration in the region. El Salvador and Nicaragua give a 15-year exoneration period.Guatemala and Costa Rica have the shortest period of income tax exoneration.Guatemala gives 12 years and Costa Rica only gives 10 years.

TABLE 10

ABSTRACT OF THE MAIN FISCAL INCENTIVES UNDER THE FREE TRADE ZONE LAWS

Country Import taxes and tariffs Income tax(impuesto sobre la

renta)

Others

Costa Rica Exoneration from importtaxes on materials andequipment used in theproduction.

Total exoneration for 10years.

• Exoneration from tax onfuel and lubricants

• Exoneration from allexport taxes

• Exoneration fromconsumption tax ongoods and services

• Exoneration from VATEl Salvador Exoneration from import

taxes on materials andequipment used in theproduction

Total exoneration for15 years.

• Exoneration from VAT

Guatemala Exoneration from importtaxes on materials andequipment used in theproduction.


• Exoneration from realestate tax

• Exoneration from fuel tax• Exoneration from VAT

Honduras Exoneration from importtaxes on materials andequipment used in theproduction.


• Total exoneration fromthe municipality tax for10 years

• Exoneration from VATNicaragua Exoneration from import

taxes on materials andequipment used in theproduction.


• Exoneration from VAT

Source: Bühlmann, Análisis de Elementos Críticos para la Competitividad y Desarrollo del SectorVestuario y Textil en Guatemala, IDC Guatemala, November 1997.

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With the 20-year exoneration period Honduras has an advantage over the other fourcountries. The longer period of exoneration combined with the fact that Honduras has themost competitive free trade zones in relation to infrastructure and services makeinvestments in Honduras more attractive than in the other countries (ceteris paribus). Thishas undoubtedly played a role in the strong growth of the Honduran apparel and textileexports. The combination of a relative long exoneration period and competitive free tradezones is also thought to have had a positive effect on the Salvadoran case. Furthermore ElSalvador has just implemented some modifications to the original Free Trade Zone Lawallowing for a broader spectrum of supporting and related industries to benefit from thefiscal incentives8.

Like El Salvador, Nicaragua also gives a relatively long exoneration period compared to itsneighbors. However, the free trade zones in Nicaragua do not offer the same level ofinfrastructure and services as Honduras and El Salvador. Furthermore there is currently ashortage of available space in the Nicaragua free trade zones.

Guatemala is the least competitive country in relation to fiscal incentives. This is furtheremphasized by lack of competitive free trade zones offering infrastructure and serviceslevels as found in El Salvador and Honduras. In the case of Guatemala, the lack ofcompetitive free trade zones and less attractive fiscal incentives partly explain the slowergrowth of the apparel and textile exports.

Finally, the fact that Costa Rica offers the shortest exoneration period for the income taxpayments has not supported the country in the competition for new investments in theapparel and textile industry, but the main reason for the stagnation of the Costa Ricanimport market share is still thought to be the high cost level.

4.1.4 Import quotas and duties

The import quotas are quantitative restrictions of the imports of certain productsestablished by the USA, and they are regarded as a protective measure against importswhich can damage the USA’s own industry. The quotas limit the export opportunities forthe products and countries subject to them. Therefore, countries working under quotarestrictions have a clear disadvantage.

8 Asamblea Legislativa de El Salvador, Decreto No. 464, Ley de Zonas Francas y de Comercialización,September 23 1998.

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TABLE 11

CATEGORIES WITH IMPORT QUOTAS IN THE USA (JUNE 1998)

Costa Rica El Salvador Guatemala Honduras NicaraguaCotton

340 Woven shirts MB1

342 Skirts347 Trousers & shorts MB348 Trousers & shorts WG2

340 Woven shirts MB342 Skirts

340 Woven shirts347 Trousers & shorts MB348 Trousers & shorts WG351 Nightwear & pajamas

- -

Wool443 Suits MB447 Trousers & shorts MB

- 443 Suits MB448 Trousers & shorts WG

- -

Man-Made Fiber640 Woven shirts MB642 Skirts

640 Woven shirts MB642 Skirts

640 Woven shirts MB651 Nightwear & pajamas

- -

Note: 1 Men and Boys. 2 Women and Girls.Source: IDS, June 1998.

According to the agreements regarding clothing and textiles under the World TradeOrganization (WTO) the last quotas should be eliminated in year 2005 in case they havenot expired automatically before9. This means that all Central American countries will bequota free by 2005.

So far Honduras and Nicaragua are already quota free. Honduras’ last quotas expired inlate 1997 and early 1998. Nicaragua has never been subject to quotas due to the recentestablishment of the Nicaraguan apparel and textile industry. The Salvadoran exports arestill subject to quotas in the USA in four categories including cotton and man-made fiberwoven shirts and skirts. This is only half the number of categories subjected to quotas inthe cases of Costa and Guatemala. Both Costa Rica and Guatemala have eight categorieswhich are subject to import quotas in the USA, including cotton, wool and man-made fiberproducts.

Not having any quantitative import restrictions is a clear advantage for Honduras andNicaragua. There are no quantitative limitations for a further strengthening of the twocountries’ market position in the USA. Furthermore Honduras and Nicaragua standstronger than the countries still subject to quotas regarding the attraction of newinvestments. New investors, local and foreign, can establish operations in Honduras andNicaragua and export to the US market without having any external defined quantitativerestrictions on the volume. This has played and continues to play an important role for thedevelopment of Honduras’ market position together with the other factors mentionedabove. The favorable access to the US market is also a positive element for thedevelopment of the Nicaraguan apparel and textile exports.

In the case of El Salvador, the quota limitations are partly accountable for the fact that thecountry has experienced slower growth in the exports to the USA than Honduras. On theother hand, having only four categories also forms part of the explanation why ElSalvador’s export has grown stronger than Costa Rica’s and Guatemala’s. Some of thereasons for Costa Rica’s loss of market share and Guatemala’s slow growth compared toregional leaders is to be found in the fact that the two countries have the highest numberof categories with quotas in the US market. The high number of quotas will continue to be

9 This applies to the Central American countries and all other WTO member states.

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a disadvantage as Costa Rica’s and Guatemala’s possibilities for developing strongmarket shares in these categories are limited.

TABLE 12

EXAMPLES OF IMPORT DUTIES IN THE USA

Category Duties for Central America1 Duties for Mexico338 Cotton knit shirts MB2 5% - 20.5% 0 – 3.3%340 Cotton woven shirts MB 2.9% - 20.5% 0 – 3.3%348 Cotton trousers & shortsWG3

2.9% - 17.3% 0 – 3%

352 Cotton underwear 6.3% - 19.2% 0 – 2%652 Man-made fiber underwear 10.9% - 19.2% 0 – 2.8%1 The tariff range applies to all countries which do not qualify for special duty rates and the exact tariff isdetermined by the products’ HTS codes. 2 Men and Boys. 3 Women and Girls.Source: IDS, 1998 Correlation Report, 1998.

Turning to the import duties, the Central American countries do not differ. They are allsubject to the same import duties. As illustrated, the import duties vary from product toproduct. The duties generally lay within a range from 2.9% to 20.5% with the mostsensitive products having the highest import duties.

Comparing Central America’s import duties with Mexico’s import duties it is evident thatthe region has a disadvantage. With the NAFTA membership the import duties on Mexicanproducts have been reduced to a level where the highest import duties for selectedcategories are equal to or lower than Central America’s minimum import duties. Thismakes the total import prices for Mexican products more competitive and, as impliedearlier, this is one of the main reasons for the strong growth in Mexico’s import marketshare in the USA. The strong competition from Mexico, due to its more favorable marketaccess, has put a considerable pressure on all the Central American countries to minimizecosts, implement efficiency improvements and innovate throughout the value chain inorder to stay competitive.

4.1.5 Transportation costs

The sea-freight costs for exports from the five countries to the main ports in the USA arepresented in table 13. The actual transportation costs have changed since November1997, but the mutual positioning between the countries has more or less remained thesame.

Nicaragua has the highest sea-freight costs in the region regarding all three destinations.This is a reflection of the combination of a very poor port infrastructure and general lowexport volume from the country. The port situation in Nicaragua is so weak that a greatpart of the Nicaraguan exports is shipped from ports in Costa Rica. Furthermore one of thedeterminants of the sea-freight costs is the general export volume. Having a general lowexport volume means that the costs are higher, ceteris paribus, and that the shippingfrequency is lower.

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TABLE 13

SEA-FREIGHT COSTS (USD NOVEMBER 1997)

Country To Miami To New York To Los AngelesCosta Rica 1,195 2,845 2,590El Salvador 1,610 3,260 2,565Guatemala 1,112 2,762 2,570Honduras 1,208 2,858 2,935Nicaragua 2,180 3,500 3,500Note: The costs are calculated for a 40’ container with clothes going from port to port.Source: Bühlmann, Análisis de Elementes Críticos para para la Competitividad y Desarrollo delSector Vestuario y Textil en Guatemala, IDC Guatemala, November 1997.

Only El Salvador has direct access to the Pacific Ocean. This is reflected in thetransportation costs, which are among the most competitive for exports going to LosAngeles. For exports leaving to Miami and Los Angeles from the Atlantic coast the sea-freight costs are less competitive.

The situation is similar in relation to Honduras. Honduras only has direct access to theAtlantic Ocean. The sea-freight costs for exports leaving Honduras to Miami and New Yorkare among the most competitive. On the other hand the sea-freight costs for goods goingto Los Angeles are among the highest.

Finally, the sea-freight costs for all three destinations are among the lowest in Costa Ricaand Guatemala. This can be explained by several factors, among others the fact that thetwo countries have access to both the Pacific and Atlantic Ocean. Furthermore the generalexport volumes from the two countries are among the largest in Central America.

4.2 Industry-level factors

The industry-level factors refer to elements, which influence the overall competitiveness onthe industry level. The following will include the free trade zones and the industrialorganizations.

4.2.1 Free trade zones

The free trade zones are fiscal areas where the firms operate under a special set of laws(the Free Trade Zones Laws described above) giving them certain fiscal advantages.Apart from the fiscal advantages the free trade zones generally provide the basicinfrastructure like water, electricity and telecommunication and a range of complementaryservices such as banks, basic health care, custom house, training facilities, legalcounseling, construction of production facilities and contracting of employees to make it aseasy as possible for investors to initiate their operations.

The Honduran free trade zones located in the San Pedro Sula valley are perceived as themost competitive in the region. They have superior standards in relation to both theinfrastructure and the range of services offered to the users. The Honduran free trade

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zones offer something very close to a “plug and play” concept where investors just need toplug in their sewing machines upon arrival to be in business.

TABLE 14

PERCEPTION OF THE FREE TRADE ZONES IN CENTRAL AMERICA

The Most Competitive HondurasCompetitive Costa Rica

El SalvadorThe Least Competitive Guatemala

NicaraguaSource: Own field investigation November 1996, 1997 and 1998.

The Costa Ricans and Salvadorans also have competitive free trade zones, although theyare not perceived as competitive as the Hondurans’. They offer high infrastructure andservice levels making it easy for the investors to establish operations in these free tradezones as well. A common characteristic of the Honduran and Salvadoran free trade zonesis their aggressive marketing with an almost permanent participation in the most importantinternational trade shows.

The Guatemalan and Nicaraguan free trade zones are perceived as the least competitivein Central America. In relation to Nicaragua the infrastructure and service levels do notreach the levels of the three prior countries yet. Furthermore there is a lack of capacity inthe Nicaraguan free trade zones. The existing zones are full, and new investments are notbeing made quick enough. Government officials in Nicaragua explain the slow investmentswith 1) a lack of knowledge about the free trade zones as business, 2) the private sectorbeing risk aversive due to historical facts and 3) the lack of appropriate financing of theprojects.

There were five free trade zones registered in Guatemala in 1998 but only one operating.The standard of the infrastructure and services is poor compared to the leaders in theregion. It is difficult to point out the reasons why the free trade zones haven’t beendeveloped further so far. However, one reason, which has been stated by a group ofinvestors, is the high prices of land if a free trade zone has to be located relatively close tothe main production center around the capital area. The high prices of land make it difficultto get an acceptable return on investment as the prices per square meter have to be withina reasonable range of the average price in the region in order to be competitive.Alternatively a free trade zone could be established outside the capital area but hereinvestors meet other problems such as the availability of labor.

The high standards of the free trade zones in Honduras and El Salvador have played animportant role for the attraction of new investors to the apparel and textile industry in thesecountries. The free trade zones in Costa Rica have played and important role as well, butthey seem to have attracted a more diversified industry with e.g. asembly of electricalconsumer goods.

The lack of free trade zones with high infrastructure and service standards in Guatemalaand Nicaragua is clearly a disadvantage in the competition for new investors. Combinedinitiatives are currently being developed between the private and public sector in

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Guatemala in order to promote the development of competitive free trade zones in thecountry.

4.2.2 Industrial organizations

Each of the Central American countries, with the exception of Nicaragua, has apparel andtextile associations. These industrial organizations formed by the apparel and textileindustry members in the Central American countries support the firms in two broad areas.The first area is political representation where the organizations function as lobbyistspromoting the members’ interest in the local governments and in public and privateinstitutions in general. Secondly, the industry associations assume a number of strategictasks ranging from export and investment promotion and “trouble shooting” for themembers to the facilitation of special training, generation of information and developmentplanning.

There are only few differences between the associations in the region. However, theGuatemalan association VESTEX, which is working under the association for non-traditional exporters AGEXPRONT, appears to be the strongest in Central America interms of institutional capacity, political representation, services offered to its members andthe involvement of local business leaders. As an example VESTEX organizes the leadinginternational trade show (The Apparel Sourcing Show) for the apparel and textile industryin Central America and the Caribbean. During the last three years, the association hasbeen working with industry members and international experts to develop and position thetrade show further.

Having said this, it is important to stress that the Costa Rican association Cámara deTextiles de Costa Rica, the Salvadoran association ASIC and the Honduran associationAsociación Hondureña de Maquiladores are strong organizations too in terms ofrepresentation of their members’ interests and services provided.

Finally, efforts are currently being made by industry leaders in Nicaragua to establish anassociation for the local apparel and textile industry. As the industry will continue to growso will the need for a strong association which can represent the firms’ interests locally aswell as internationally.

4.3 Micro-level factors

The micro-level factors refer to the factors which define the firms’ competitiveness. Thisincludes an analysis of the critical success factors (price, quality, lead time and lead timefulfillment) and a general assessment of the operation types and efficiency levels.

4.3.1 Price, lead time, lead time fulfillment and quality

The price and lead time estimates are based on a market analysis conducted in November199710. A firm from the USA in charge off the sourcing activities in Central America for awell know brand name in the US market was asked about the general price (cost) and leadtime levels in the region. The estimates of the price per production minute represent the

10 The market analysis was conducted jointly by IDC from Guatemala and SECO Sector Consulting fromGermany for GTZ/ASIGUA and VESTEX in Guatemala.

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contractor’s target price for each of the five countries and the lead time estimatesrepresent the average real lead times for the four categories in each of the countries11. Asgeneral indicators the estimates give an aggregate picture of the firm level performance.

The ranking of the five countries according to the prices per production minute for apparelof clothes follow the ranking according to the minimum wages in each of the five countries.Nicaragua has the lowest price per production minute followed by Honduras, Guatemala,El Salvador and Costa Rica in increasing order. The price per production minute in CostaRica is almost twice as high as the price per production minute in Nicaragua. Following theestimates, Costa Rica is 5.5 cents more expensive than Nicaragua. El Salvador is 3.5cents. Lying within a 1.5-cent range the differences in the price per production minutebetween Nicaragua, Honduras and Guatemala are less dramatic.

The final price of e.g. a dozen woven shirts depends on the price per production minuteand the total time consumed to produce that dozen. This means that the firms cancompensate for minor differences in the price per production minute by improving theefficiency in the production process.

TABLE 15

PRICE AND LEAD TIME ESTIMATES FOR APPAREL

Country Price perproduction

minute

Lead timeDresses

(336/636)

Lead timeKnit shirts(338/339)

Lead timeWoven shirts

(340/640)

Lead timeTrousers(347/348)

Costa Rica USD 0.12 10 weeks 12 weeks 14 weeks 12 weeksEl Salvador USD 0.10 14 weeks 12 weeks 10 weeks 14 weeksGuatemala USD 0.08 8 weeks 14 weeks 12 weeks 12 weeksHonduras USD 0.07 12 weeks 8 weeks 8 weeks 12 weeksNicaragua USD 0.065 16 weeks 14 weeks 16 weeks 16 weeksNote: The price per production minute covers direct costs plus a percentage to cover fixed costs and margins.Source: Bühlmann, Análisis de Elementos Críticos para la Competitividad y Desarrollo del SectorVestuario y Textil en Guatemala, IDC Guatemala, November 1997.

According to the contractor, the target lead time is 8 weeks in Central America. The targetis only met in a few cases. Turning to the lead times for the four products presented intable 15 the Guatemalan firms appear to provide the shortest lead times in dresses with 8weeks followed by the Costa Ricans’ 10, the Hondurans’ 12, the Salvadorans’ 14 andNicaraguans’ 16 weeks. For knit shirts the Honduran firms take the regional lead with 8weeks followed by the Costa Rican and Salvadoran both with 12 weeks. The Guatemalanand Nicaraguan firms have the longest lead times in this category reaching 14 weeks.

In woven shirts the Honduran firms take the lead once again meeting the 8-week target.The Salvadoran firms follow with 10, the Guatemalan with 12, the Costa Rican with 14 andNicaraguan with 16 weeks. In trousers the Costa Rican, Guatemalan and Honduran firmstake the regional lead jointly with 12 weeks. The Salvadoran firms follow with 14 weekslead time and the Nicaraguan firms enter with 16 weeks.

11 It should be stressed that they are general estimates and they should only be used as such. For exact andstatistical representative data a new and broader survey should be conducted.

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In a broader survey conducted among seven major international contractors in the regionthe perception was that there are no significant differences in the lead times between ElSalvador, Guatemala and Honduras12. However, they were of the opinion that the leadtimes in Costa Rica were slightly longer than in the prior three cases. The lead times inNicaragua were generally perceived as the longest in the region.

In the same survey the seven contractors were asked to rank the countries according tothe fulfillment of the agreed lead times. The Costa Rican and Guatemalan firms wereperceived as the least troublesome in relation to the lead time fulfillment. The Salvadoranfirms follow as the second best in the region. Finally the Honduran and Nicaraguan firmsare perceived to be the third and fourth best.

TABLE 16

PERCEPTION OF LEAD TIME FULFILLMENT AND THE QUALITY LEVEL

Country Lead time fulfillment Quality levelCosta Rica A AEl Salvador B BGuatemala A AHonduras C CNicaragua D DNote: A = the best, B = the second best, C = the third best, D = the fourth bestSource: Bühlmann, Análisis de Elementos Críticos para la Competitividad y Desarrollo del SectorVestuario y Textil en Guatemala, IDC Guatemala, November 1997.

The perceptions of the general quality levels are identical to the lead time fulfillment. TheCosta Rican and Guatemalan apparel firms are perceived to provide the best quality levelsin the region, again followed by the Salvadorans. The Honduran and Nicaraguan firms areperceived to have the third and fourth best quality levels in the region.

The perceptions of the lead time fulfillment and the quality levels only reflect the generallevels in the five countries. There are individual firms in El Salvador, Honduras andNicaragua which by far exceed the general ranking presented above.

4.3.2 Seven generic operation types

The apparel business can be divided into seven generic operation types depending on theservice/product offered by the firms. Each of the seven generic operation types requires adifferent set of core skills. This is presented in table 17.

The 807 operation is the simplest of the seven business types. In this type of operation theapparel firm only provides the sewing capacity. The client ships the cut fabrics ready to beassembled by the apparel firm.

12 Bühlmann, Análisis de Elementos Críticos para la Competitividad y Desarrollo del Sector Vestuario y Textilen Guatemala, IDC Guatemala, November 1997.

35

In CM and CMT operations the apparel firms provide a few additional services to thesewing capacity. The apparel firm offers the cutting of the fabrics, which requires specialmachines and skills, and the procurement of trimmings for the garments.

RTU business is the full-package concept. Here the firms provide a full range of servicesto the client including the procurement of fabrics and trimmings/accessories, cutting andsewing. This kind of business is more complex than the prior examples and it requiressubstantial procurement, sub-contracting and coordination skills to be successful.Furthermore it requires a certain financial capacity to be able to purchase the fabrics,trimmings and other services for the full-package.

TABLE 17

SEVEN GENERIC OPERATION TYPES

Type of operation Main services / know-how807 • Sewing (finishing and packaging)CM(cut and make)

• Cutting• Sewing (finishing and packaging)

CMT(cut, make and trim)

• Procurement of trimmings• Cutting• Sewing (finishing and packaging)

RTU(ready to use)

• Procurement of trimmings and fabrics• Cutting• Sewing (finishing and packaging)

RTS(ready to sell)

• Product development – basic designs• Procurement of trimmings and fabrics• Cutting• Sewing (finishing and packaging)

Collection • Product development – product line• Procurement of trimmings and fabrics• Cutting• Sewing (finishing and packaging)

Label • Brand name and image management• Product development – product line• Procurement of trimmings and fabrics• Cutting• Sewing (finishing and packaging)

Source: SECO Sector Consulting, Germany/Guatemala.

There is a significant conceptual shift in the business when crossing from 807, CM, CMTand RTU to RTS. In contrast to the prior four operation types, RTS includes an element ofdesign and development. This means a shift from selling the “simple” sewing capacity(with a set of additional services) to selling finished garments and this entails a significantshift in business. Although the development of basic designs is in focus, the productioncapacity still remains critical in RTS operations.

In Collection the product development becomes more important. The core of the businessis the development and design of a complete product line. There is still a production

36

element in this type of operation but the key parameter is the design, development andmarketing of an entire line of garments.

Moving to Label business, another conceptual change in the business takes place. In RTSand Collection the major change was the introduction of designs (independent product andline development). In Label business the core is the development and management of alabel. Like in RTS and Collection the design is still important but the success depends onthe ability to create and market a label.

There is an element of evolution enclosed in the seven generic operation types. Theindividual operation types can be se seen as consecutive development stages of a firm,cluster or industry where it starts with the simple 807, CM or CMT business and then, asthe know-how and market knowledge develops, moves on towards more complexoperations in the RTU, RTS, Collection and finally Label business.

Moving from 807 operations towards Label business means an increase in the valueadded. In 807 business the value added is limited to the assembly of the garments. Asadditional services are provided in the production process in each of the other operationtypes more value is added to the garments produced.

On the other hand the financial risk increases when moving from 807 towards Label. In807, CM and CMT the financial risk is relatively limited compared to RTU because theclients provide the critical components for the garments. But in RTU it is the full-packagesupplier that has to purchase all the components. If something goes wrong the full-package supplier will still have to pay for the fabrics, accessories etc. In RTS andCollection the suppliers invest in designs and they thereby risk the development costs. Thesame is the case with the development of Label business where substantial investmentswill have to be made in both the designs and the development and positioning of the labelitself.

Finally there is a shift in competitors when moving along the specter from 807 to Label. In807, CM, CMT and RTU operations the main competition in the world market comes fromChina, South and South East Asia, the Indian subcontinent, Latin America, the Caribbean,Eastern Europe, Northern Africa and the Eastern Mediterranean countries, all generallyproviding cheap production facilities. In the RTS, Collection and Label business the maincompetition in the world market comes from Western Europe and North America which areparticular strong in relation to design, quality, labels and brand names.

The general positioning of the apparel firms in each of the five countries in relation to thefive generic operation type is presented in table 18. Costa Rica and Guatemala cover thewidest range of operations in the region. The firms in the two countries are positioned in807, CM, CMT operations and in the RTU business (full-package operations) as well.Guatemala currently has the most developed full-package operations in the region.

The Salvadoran and Honduran firms are mainly positioned in 807, CM and CMToperations. Nicaraguan firms have principally developed the 807 and CM business. Thefact that only the least complex operations have been developed in Nicaragua can beexplained by the industry’s recent establishment in the country.

Only very few firms in the region have actually developed RTS, Collection and Labelbusiness and the ones that have are principally located in Costa Rica, El Salvador and

37

Guatemala. In contrast to the firms positioned in the 807, CM, CMT and RTU, the firms inRTS, Collection and Label in Central America are generally focused on the local andCentral American market.

TABLE 18

GENERIC OPERATION TYPES COVERED BY THE CENTRAL AMERICAN COUNTRIES

Country 807 CM CMT RTU RTS Collection LabelCosta RicaEl SalvadorGuatemalaHondurasNicaraguaSource: Bühlmann, Análisis de Elementos Críticos para la Competitividad y Desarrollo del SectorVestuario y Textil en Guatemala, IDC Guatemala, November 1997.

4.3.3 Efficiency levels

In the following, an assessment of the general efficiency levels in the Central Americanapparel firms will be presented13. It has to be stressed that the assessment is anevaluation of the general efficiency level and it is used to illustrate the average positioningof the firms in the region. The parameters used in the evaluation are the physicalinstallations, machines and equipment, production methods and organization,administration and management, control and quality systems.

In order to evaluate the general efficiency level it is necessary to distinguish between fourgroups of firms differentiated by size, origin, operation type and market orientation:

! Local owned, small and medium sized apparel manufacturers mainly supplying807, CM and CMT operations for the local and the export market.

! Local owned, large apparel manufacturers supplying 807, CM, CMT and someRTU operations for the export market.

! Foreign owned (and in general large) apparel manufacturers supplying 807, CM,CMT and some RTU operations for the export market.

! Local clothing manufacturers mainly running RTS and Collection operations for thelocal and regional market.

The local owned small and medium sized apparel manufacturers operate on estimatedefficiency levels around 40% to 55%. The low efficiency levels are caused by poorstandards within most of the parameters used in the evaluation. Given the relatively lowfactor costs in the region it is still possible to operate with the poor efficiency levels and becompetitive and profitable. However, as the competition intensifies the pressure forefficiency improvements rises.

13 Very little documentation is available on the general efficiency levels in Central America. The assessment isbased on the expert testimony from the international garment and textile consultant Dietmar Stiel (SECOSector Consulting Germany/Guatemala) and the efficiency study Resultados de la Investigación sobre elEstado de la Producción en las Empresas de Confección en Guatemala, GTZ/ASIGUA, September 1997.

38

The foreign and local owned, large apparel manufacturers operate on estimated efficiencylevels between 55% and 70%. In many cases the foreign and local, large manufacturersbring know-how and expertise from abroad for key positions in the firms, thus improvingtheir general management capability and capacity by knowledge transfer. Combined withfrequent investments in new technology and physical installations this explains thedifference between the local small and medium sized manufacturers’ efficiency levels.Although the two groups operate at higher general efficiency levels there is still acontinuous pressure for improvements due to the intensified competition.

Finally, the local clothing manufacturers producing garments for the local and regionalmarket operate with estimated efficiency levels around 35% and 50%. The firms in thisgroup are usually small and medium sized manufacturers with relatively poor standards inrelation to the organization of the production process, the machines and equipment usedand the management systems.

4.3.4 General firm positioning

The Central American firms’ positioning in relation to both efficiency and type of operationis illustrated in chart 2. The chart combines the seven generic operation types and theefficiency levels.

Chart 2The Positioning of the Central American

Apparel and Clothing Manufacturers

80%

70%

60%

50%

40%

30%

807 CM CMT RTU RTS Collection Label

Foreign owned and localowned, large apparel

manufacturers

Local owned small& medium sized apparel

manufacturers Local clothingmanufacturers

TYPE OFOPERATION

EFFICIENCY

Source: 1) SECO Sector Consulting Germany/Guatemala. 2) Bühlmann, Análisis de ElementosCríticos para la Competitividad y Desarrollo del Sector Vestuario y Textil en Guatemala, IDCGuatemala, November 1997.

39

According to the model there are basically two directions that the Central Americanapparel and clothing firms will have to take to develop their competitiveness. First of allthey will have to improve their efficiency levels. This is emphasized by the fact that thebasic products like underwear and knit shirts are among the five countries’ five mostimportant export categories. In the basic products the key competition drivers are priceand volume whereby efficiency becomes a central parameter. Improving efficiencyincludes among other things minimizing costs and increasing the production output byupgrading the machines and production systems.

Given the increasing demand for full-packages, the apparel industry will have to develophorizontally and strengthen the RTU operations. For the apparel manufacturers thisinvolves upgrading the production standards, improving the basic product know-how andsourcing capacity and capability.

For the garment manufacturers strengthening their RTS and Collection business involvesupgrading their pattern making know-how, improving their product know-how, improvingthe product development, developing different product lines and enlarging their markets.

As indicated, it is vital for the Central American apparel and garment manufacturers todevelop both vertically and horizontally in the model. It is not possible (or desirable) tocompete in low labor costs alone in the long run. The labor costs will rise in CentralAmerica as the countries continue to develop. Meanwhile new low cost nations will emergein the world market. It is therefore essential that the industry change from competing incomparative advantages to creating real competitive advantages.

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5. THE CENTRAL AMERICAN APPAREL AND TEXTILECLUSTERS

In the following a short analysis of the apparel and textile clusters will be presented. Noattempt is made to present complete cluster analysis. Building on recent studies made onthe subject and field research, the analysis concentrates on highlights to illustrate the keyissues from each of the clusters. This is combined with an analysis of the clusterorganization in the five countries.

5.1 The Costa Rican apparel and textile cluster

TABLE 19

BASIC STATISTICS – COSTA RICA (NOVEMBER 1998)

No. ApparelManufacturers

No. TextileManufacturers

No.Employees

Total Exports(millions)

Value Added(millions)

Origin of theFirms

99 5 35,699 USD 839.8(1997)

USD 236.5(1997)

Local 15-20%USA 70-75%CA 5-10%Other 5%

Note: The net foreign exchange income is interpreted as the value added.Source: 1) Cámara de Textiles, Costa Rica. 2) PROCOMER, Costa Rica

Apart from the Nicaraguan cluster, the Costa Rican cluster has the smallest number ofapparel manufacturers in the region with 99 firms registered as active apparel exportersand five exporting textile manufacturers. The majority of the firms are located around thecapital San José. The cluster employs almost 36,000 people leaving the average firm sizein the neighborhood of 350 employees. Only 15% to 20% of the firms represent localinvestments. The US investments dominate the cluster, representing 70% to 75% of thetotal investments in the sector14. Central American investments cover 5% to 10% and therest of the world 5%. The sector’s exports to the US market amounted to almost USD 840millions in 1997 generating a value added of USD 236.5 millions equal to 28% of the totalexports.

The apparel and textile exports represent 16% of the export of Costa Rica’s principalexport goods and services15, making it one of the most important export sectors in thecountry. In comparison, tourism represents 15%, banana exports 11% and coffee 8% ofthe principal export goods and services. The apparel and textile industry has maintainedits economic importance throughout the years. According to industry representatives thesector hasn’t had the political priority it should although it is among the most importantexport sectors in Costa Rica.

Furthermore, industry representatives point out that although the production and exportlevels have been maintained throughout the nineties the number of employees and firmshas fallen in the same period (in 1993 the apparel and textile sector employed 58,000

14 Cámara de Textiles en Costa Rica, November 1998.15 PROCOMER, Participación de los principales productos de exportación de bienes y servicios, 1997.

41

people in 176 firms16). This is seen as a result of efficiency improvements, automatizationof the production process and the fact that the market has forced the firms to consolidateand become bigger in order to stay competitive.

According to the Textile Association there are almost 330 garment manufacturersproducing for the local market apart from the 99 apparel manufacturers that export. Thereis little information available about these firms. However, they are mainly thought to besmall and medium sized firms with artisan characteristics.

5.1.1 Cluster analysis

5.1.1.1 Factor Conditions

Starting with the factor conditions, the basic factors are poor to medium good. CostaRica’s geographic location close to the US market and the access to both oceansrepresent (latent) logistical advantages. Furthermore the labor costs are still relatively low.However the labor costs in Costa Rica are not among the lowest anymore and theycontinue to rise as the demand for skilled labor grows faster than the supply. Until recentlythere has been a sufficient supply of labor for the industry. But with the increased demandfor labor as a result of the emerging technology cluster, the competition for the skilled laborhas risen.

16 CATECO, La Industria Textil y de Confección en Costa Rica, 1994.

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The advanced factors are classified as poor. This is basically based on insufficientinfrastructure to support the development of Costa Rica’s latent logistical advantages. Thecurrent state of both ports and roads does not support exports from the Pacific and theAtlantic enough. Although Costa Rica has the highest levels of education in CentralAmerica there is still a lack of vocational training. Finally, there is a general lack ofknowledge resources such as institutes, universities, research and development centersspecialized in the needs of the apparel and textile industry.

5.1.1.2 Firm Strategy, Structure and Rivalry

The firm strategy, structure and rivalry are classified as poor. This is mainly based on thestrong representation of the basic products in the Costa Rican exports. These aresegments where low price and high volume are the key competition drivers and CostaRica doesn’t seem to have the low costs or the adequate efficiency levels to compete inthese products. Given the weak position in the basic product there is too little

Chart 3The Competitive Environment in the Costa Rican Apparel and Textile

Cluster

- small local demand- unsophisticated localdemand+ demanding export clients- dependence on few largeforeign clientsPOOR

Basic factors:+ geographic location+ access to two oceans+ close to main market+/- low but rising labor costs+/- available labor force

POOR-MEDIUM

Advanced factors:- poor ports situation- poor road situation+/-improvedtelecommunications+ highest general educationallevel in CA- lack of vocational training- general lack of knowledgeresources

POOR

+/- Some development of full packages- low general efficiency levels- positioning in low cost/price products- low product and market diversification- garment manufacturers’ artisan character- insufficient investment in technology

POOR

Firm Strategy,Structure and

Rivalry

DemandConditions

FactorConditions

- lack of competitive local suppliers of materials and services+/- distribution of imported materials+ critical mass of experts in international trade (conflicts)- lack of local consultants specialized in the industry- lack of local technical assistance+ competitive free trade zones+ growing technology cluster

POOR-MEDIUM

Related andSupportingIndustries

Source: 1) Sánchez, El Cluster de Textiles en Centroamérica, INCAE 1995. 2) Field research conducted inNovember 1998.

43

diversification of products and markets. However some full-package business has beendeveloped. Finally, the apparel and textile sectors are making insufficient investments intechnology.

5.1.1.3 Demand Conditions

The demand conditions are evaluated as poor. Although Costa Rica has the mostdeveloped local market it is still small and the consumers are unsophisticated. The exportclients are demanding and since some of them are market leaders it is safe to assume thattheir needs anticipate the needs of the world market. On the other hand the Costa Ricanapparel and textile sector depends of a small number of large US clients. This makes theindustry vulnerable to fluctuations in the key clients’ conduct and the conduct of the USmarket.

5.1.1.4 Supporting and Related Industries

Due to the lack of sufficient local supply of materials and services for the apparel andtextile industry, the conditions of the supporting and related industries have been classifiedas poor to medium. There is a general lack of specialized services for the industry wherethe lack of technical assistance is especially critical. But as the only Central Americancountry Costa Rica has developed a critical mass of experts specialized in internationaltrade conflicts and other trade related issues. Costa Rica was the first nation in the regionto prepare and win a case against quota calls in the USA. Furthermore the industry issupported by competitive free trade zones. Finally the emerging technology cluster inCosta Rica can have a positive effects on the Costa Rican industries in general asadvanced local expertise in the areas will be available to the firms.

5.1.1.5 Conclusion

The competitive environment around the Costa Rican apparel and textile industry is weak.The advantages are mainly found in relation to the basic factors, where the most importantare the proximity to the US market and the labor costs - although the labor costs are thehighest in the region. Furthermore, the basic low price products dominate the exports.Neither the labor costs nor the industry structure support this positioning. The generalinfrastructure is not developed enough to create real logistical advantages.

Finally, the supporting and related industries are relatively developed. But more thanrepresenting current competitive advantages they represent latent competitiveadvantages. The emerging technology cluster could prove to have positive spillover effectson the apparel and textile industry.

5.1.2 Cluster organization

The apparel and textile industry is not included in the ongoing competitiveness program inCosta Rica. This means that no collective efforts are being made to improve the industry’scompetitiveness. Some of the problems in the apparel and textile sector like infrastructureand vocational training are common problems and they are included in the agendas for theindustries that are a part of the Costa Rican competitiveness program. But currently nojoint initiatives have been developed to deal with the industry specific problems.

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The fact that no collective initiatives have been developed despite the obvious loss ofcompetitiveness can be seen as a result of a general lack of leadership in the privatesector, industry organizations and public sector. Nobody has taken the lead to mobilize theindustry, its sub-sectors and the decision makers from the public sector in order to developan integrated plan for the industry’s future. Only sporadic efforts are being made and thereis an urgent need for a strategic planning process integrating all the cluster’s sub-sectors.

5.2 The Salvadoran apparel and textile cluster

TABLE 20

BASIC STATISTICS – EL SALVADOR (NOVEMBER 1998)

No. Apparel &Garment

Manufacturers


No.Employees


Investments(millions)

Origin of theFirms

209 9 73,505 USD 1,052.1(1997)

USD 350Local 58.9%USA 17.0%Korea 7.2%Mixed 12.0%Other 4.9%

Note: The investments include apparel, garment and textile producers working under the laws “Ley de reactivaciónde las exportaciones” and “Ley de zonas francas industriales y de comercialización”.Source: The Salvadoran Ministry of Economy.

The apparel and textile industry is concentrated in a radius of 20-30 kilometers around thecapital San Salvador. There are 209 apparel and garment manufacturers and nine textileproducers in El Salvador employing almost 74,000 people leaving the average firm sizeclose to 350 employees. In contrast to the rest of the Central American region the localfirms are in majority in El Salvador with 58.9% of the total number of firms in the sector.Firms from the USA, Korea and the rest of the world represent 17%, 7.2% and 4.9%respectively. Interestingly, 12% of the firms are working under mixed capital (jointventures) from local and foreign investors. The firms represent investments of USD 350millions. The total exports to the USA reached USD 1,052.1 millions by 1997.

The apparel and textile industry is very important in the Salvadoran economy representing40% of the total value of the exports, 2% of the GDP and 15% of the total employment ofthe country17 in 1996. The apparel and textile exports have become more important thanthe coffee exports.

17 Monitor Company, Construyendo las Ventajas Competitivas de la Confección en El Salvador, October 1997.

45



The conditions of the basic factors are medium. On the positive side is the proximity to theUS market, which represents some logistical advantages for the export to the USA, but ElSalvador only has ports in the Pacific. There is still a sufficient labor pool available for theindustry; however there is a lack of skilled labor in the sector. Furthermore the labor costsare not the lowest in the region, although they are still within a reasonable range of theaverage labor costs. It is clear, though, that the Salvadoran apparel and textile industrycannot continue to compete in low labor costs alone as the level is now.

The conditions of the advanced factors are low. In general the infrastructure includingtelecommunication, ports, roads and electrical power does not have adequate standards tosupport and exploit the geographical location as a logistical advantage yet. The currentdeficiencies in relation to the infrastructure mean higher indirect costs for the industry.Finally, there is not sufficient support from institutions offering specialized education andtraining for the industry and securing a continuous supply of professionals to the firms.

Chart 4: The Competitive Environment in the Salvadoran Apparel and Textile Cluster

- small local demand- unsiphisticated localdemand+ demanding exportclients- dependence on fewlarge foreign clientsPOOR

Basic factors:+ proximity to US market+/- relatively low labor costs+ available labor force- lack of skilled labor

MEDIUM

Advanced factors:- poor supply of electrical power- poor port and road infrastructure- insufficient telecommunications- lack of mechanics & designers- lack of support from educationalinstitutions

POOR

- insufficient & slow investments in modern technology- low general efficiency levels especially in SMEs- concentration in low price/cost products- low product and market diversification- underdeveloped full-package business+ existence of local world class champions+ most developed garment manufacturing in CA+/- Strong competition among garment suppliers in the local market POOR-MEDIUM


Rivalry

DemandConditions

FactorConditions

- dependence on import of machines and accessories+ YKK produces zippers in El Salvador+/- growing local supply of competitive fabrics/textiles- local textiles generally lack price competitiveness- low cooperation between textile and apparel manufacturers- lack of adequate credit lines for the industry+ competitive free trade zones+/- limited institutional capacity in the industrial organizations

POOR


Source: 1) Monitor Company, Construyendo las Ventajas Competitivas de la Confección en El Salvador – Resumen Ejecutivo,October 1997. 2) Sánchez, El Cluster de Textiles en Centroamérica, INCAE 1995. 3) Field research November 1998.

46

Especially education of mechanics and designers is needed, but there is also a generalneed in relation to the middle management and operative personnel.

5.2.1.2 Firm Strategy, Structure and Rivalry

The general conditions in relation to the firm strategy, structure and rivalry are poor tomedium. The general efficiency levels are low, especially in the local small and mediumsized enterprises. Given the current cost levels, the efficiency needs improvements on abroad scale. This is followed by slow adoption of and insufficient investments in modernproduction technology. Modern production technology refers to both the machines used inthe production and the latest information technology.

On the product and market dimension there is a lack of diversification; this is reflected in ahigh concentration of the exports in the basic low price products. Competing in basicproducts is going to be increasingly difficult, especially for the small and medium sizedenterprises, as one of the key factors in these segments are volume and scale.

Only few apparel and textile manufacturers have developed permanent full-packagebusiness in El Salvador. According to members of the industry one of the main limitationsto the development of full-packages is the lack of trust. As the stakes are higher in full-package deals it is very important that each of the partners comply with their part of thedeal. The firms therefore prefer to develop full-package operations with family and friendsamong whom there exists a pre-established trust. As the demand moves towards full-packages more firms will have to enter the business.

Turning to the positive elements, El Salvador has a number of local world class championslike Hilasal in the industry. These champions are innovative local firms which are able tocompete in the most demanding markets. They are not only competitive due to low laborcosts but also due to innovation, corporate excellence and sustainable competitiveadvantages. Furthermore, the Salvadoran garment manufacturers are among the mostdeveloped and competitive in the region. This can be seen as a result of the fiercecompetition among the garment suppliers in the local market.


The demand conditions are poor. The local market is small with unsophisticatedconsumers. The fashion follows the world market and due to the climate there are noseasonal changes. The export clients are demanding in relation to price but they aremainly located in the basic products.


The conditions of the supporting and related industries are poor. The apparel and textileindustry depends on imports of machinery and accessories. Although YKK (YKK is aleading brand of zippers) produces zippers for the regional market in El Salvador, the localproduction of other accessories is small.

There is a growing production of competitive textiles in El Salvador, especially in relation toknits. However, according to the apparel manufacturers the local textiles are not pricecompetitive compared to the imported fabrics from e.g. Asia. On the other hand, the textile

47

manufacturers argue that the volumes the apparel firms demand are small, and the price isset according to this. Setting the argument aside, the fact is that locally produced knitfabrics are used frequently in full-packages (two industry members stated that they useknit fabrics produced in El Salvador on a permanent basis). It is important for thedevelopment of full-packages in El Salvador that cooperation between the apparel andtextile manufacturers improve in order to create a competitive and integrated localsourcing base.

The conditions are poor in relation to the support from the financial sector. There is a lackof financial products supporting the operations of the apparel and textile industry. Theaccess to external local financing is limited, the financial services offered are not designedto meet the industry’s special needs and the costs are high.

The standards of the free trade zones in El Salvador are good. They are competitive interms of both infrastructure and services. With the last modification of the free trade zonelaw they play an important role as incubators of new apparel and textile manufacturers andtheir supporting and related industries.

Finally, the sector is supported by a number of industry organizations focusing on a fewkey areas. The industry organizations have limited resources and capacity to take on thevariety of problems facing the industry.

5.2.1.5 Conclusion

The competitive environment is weak and the general conditions limit the apparel andtextile industry’s overall competitiveness. The basic factors still represent the predominantadvantages, with the low labor costs and the proximity as the central elements. Despitethe general weak conditions a number of local champions have emerged in apparel,garment and textile manufacturing with competitive strategies.


The apparel and textile industry is included in the National Competitiveness Program in ElSalvador coordinated by the Ministry of Economy. Out of a larger group working for theprogram, a team of three people working full time is assigned to coordinate the effortsbeing made in relation to the apparel and textile industry. The industry was invited toparticipate in the initiative from the beginning.

The program contracted an international consultant firm to conduct the studies anddevelop the strategic plans. The external consultant made an in-depth study of theindustry, its competitiveness and problems followed by a series of recommendations, anaction plan and a pilot project. Now the analytical and planning phase is over and theprogram faces the challenge of implementing the recommendations and the pilot project(the pilot project is focused on the development of full-packages). A number of issues haveproved particular challenging.

The competitiveness program has found it difficult to go from analysis to action. They feelthat the analysis has all the necessary elements, but it has proven difficult to obtainconcrete results. One of the reasons pointed out by members of the program is that theyhaven’t found the answer to what are the right ways to implement the recommendations

48

and the pilot project, given the special Salvadoran context, history and culture. Anotherindustry representative used the expression that the recommendations haven’t been“tropicalized”. Furthermore, the same person was of the opinion that the ice between thedifferent sub-sectors in the cluster hasn’t been broken, thus limiting the possibilities for asuccessful implementation.

One of the main factors causing the problems is related to the private sector involvement.The private sector hasn’t been involved enough in the process leaving a sense of“alienation” in relation to the result of the studies - the studies, results and process havenot been adopted by the private sector. Furthermore the private sector participation is notbroad enough in terms of the number of firms and sub-sectors active in the project. Duringthe investigation it was indicated that the participation is mainly dominated by a group ofsmall and medium sized apparel and garment manufacturers with only a sporadicparticipation of a few textile manufacturers. This means that some of the most importantindustry leaders are not involved in the program.

The lack of private sector involvement in the program is related to the way the projectstarted. In contrast the to e.g. Guatemala, the program started as a public sector initiativecoordinated and financed via the Ministry of Economy. It can therefore be characterizedas a top-down initiative driven by the public sector for the private sector. The motivation inthe private sector to participate has been generally low since the project wasn’t rooted in acommon felt need and a shared vision within the industry. In addition the program isfinanced via the Ministry of Economy whereby the private sector is not a directstakeholder. This also means that the private sector has no real commitment in theprogram.

Additionally, two important lessons have been learned about the motivation of the industryto participate and of the members actually participating in the program. First it is importantto create results in the short term. The participants loose their motivation if no short-termresults are made and it is difficult to motivate others to participate if no results can beshown. Secondly, it is important to focus on and show the mutual benefits in order to keepthe different sub-sectors involved in the program.

Finally, during the initial stages the competitiveness program had little focus on theprocess behind the project. The focus is now changing from the studies to themanagement of the processes behind the changes and the institutionalization of theefforts. This means that the process and methodology have to be formalized and theresponsibility transferred to the private sector. The program is currently working to improvethe situation using the experience and expertise from other clusters in Latin America.

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5.3 The Guatemalan apparel and textile cluster

TABLE 21

BASIC STATISTICS – GUATEMALA (NOVEMBER 1998)



No. Supporting &Related Firms

No.Employees

TotalExports

(millions)

ValueAdded

(millions)

Origin of theFirms

245 23 205 71,403 USD 962.1(1997)

USD 384Local 38%Korea 53%USA 7%Other 2%

Note: 1) Number of employees only includes apparel manufacturers. 2) The net foreign exchange income is interpreted asthe value added.Source: Oficina Ejecutiva de Cuotas, Guatemala, November 1998.

Guatemala has the highest number of apparel manufacturers in the region with 245 firmsregistered. Employing 71,403 people the average firm's size is 291 people. This is lessthan the regional average and indicates that Guatemala has a higher rate of small andmedium sized enterprises than the rest of Central America.

The country also has the highest number of textile manufacturers and supporting andrelated firms in the region. There are currently 23 textile manufacturers but the sub-sectoris dominated by few large producers. It is interesting to see the high number of supportingand related firms in Guatemala. The 205 firms supply the industry with materials andservices like accessories, labels, embroideries, yarns, threads, machines, washingservices etc.

Reaching total exports to the US market of USD 962.1 millions and a value added of USD384 millions, the apparel and textile industry is among the most important non-traditionalexport sector in the country and the sector is closing in on the traditional exports such ascoffee and sugar.

More than 60% of the firms in the Guatemalan apparel and textile industry representforeign direct investments. The local firms represent 38% of the industry. Korean firmsrepresent more than half of the firms in the sector with 53%. Firms from the USA cover 7%and companies from the rest of the world 2%.



The conditions of the basic factors are medium. Guatemala is the closest country inCentral America to the US market, and with access to both the Pacific and Atlantic Oceanthere are excellent conditions for developing strong logistical advantages. The labor costs

50

are lower than in Costa Rica and El Salvador, and Guatemala has the largest labor forcein the region. However, there is a lack of skilled labor.

Even though important improvements have been made during President Arzu’sadministration, the conditions of the advanced factors are still poor. The roads have beenimproved throughout the country. A new highway has been built on the stretch from thecapital to the Pacific Ocean.

Guatemala has ports on both the Pacific and the Atlantic side but the current state of theports is poor in relation to capacity and efficiency. Improvements of the port situation areessential for the exploitation of the logistical advantages the country’s geography offersalong with the improvements of the roads. The recently privatized telecommunicationsector has improved but it still hasn’t reached satisfactory capacity and service levels.

In relation to knowledge resources there is a general lack of support from educationalinstitutions. The industry especially needs mechanics and well-trained middlemanagement which are hard to find.

5.3.1.2 Strategy, Structure and Rivalry

The conditions regarding the strategy, structure and rivalry are poor to medium. Theapparel and textile industry has a group of proactive and innovative industry leadersdedicating time to improving the cluster’s competitiveness at all levels. The strong foreigninvestments have supported the development of the industry and brought know-how to thecountry. Furthermore there is a growing pool of local, competitive, medium sized and largegarment and apparel manufacturers.

Turning to the general efficiency, it is not high enough to stay competitive in the long run.Especially the small and medium sized firms operate at low efficiency levels. As the onlycountry in the region a beginning product diversification has been detected. TheGuatemalan apparel and textile industry is (slowly) moving away from the basic low priceproducts. Guatemala has the most developed full-package operations in Central America,but they have to be developed further. Finally, the investments in new production andinformation technology are insufficient. Few firms actually take advantage of thepossibilities that exist in the integration of production and information technology.

51


The demand conditions are poor. As in the other Central American countries the localdemand is small and unsophisticated. The Guatemalan apparel and textile industry alsodepends on a few large US clients. The foreign clients are demanding in relation to price,quality and flexibility.

Several of the large and most important foreign clients have located their regional sourcingoffices in Guatemala. It is important because the foreign clients become a part of thenational cluster due to their physical presence in the country. This is emphasized by thefact that representatives from the sourcing offices participate in many of the industry’s

Chart 5: The Competitive Environment in the Guatemalan Apparel and Textile Cluster

- small localdemand- unsophisticatedlocal demand+ several US clientshave their regionalsourcing offices inGuatemala+ demanding exportclients- dependence onfew large foreignclients

POOR

Basic factors:+ proximity to US market+ access to two oceans+/- low labor costs+ available labor force- lack of skilled labor

MEDIUM

Advanced factors:+/- improved roadinfrastructure+ ports in two oceans- poor port standards+/- improvedtelecommunications- lack of mechanics & middlemanagement- lack of support fromeducational institutionsPOOR

+ proactive & innovative industry leaders+ strong foreign investments+ pool of local, medium & large competitive firms- low general efficiency levels especially in SMEs+/- beginning product diversification+/- growing full-package business- slow investment in cutting edge production & information technologyPOOR-MEDIUM


Rivalry

DemandConditions

FactorConditions

+/- growing local production of competitive fabrics/textiles- lack of cooperation between textile and apparel manufacturers+ strong local production/supply of accessories and services- lack of technical assistance- lack competitive free trade zones- poor access to adequate financing+ the Apparel Sourcing Show+ strong industrial organizations (AGEXPRONT/VESTEX)

POOR-MEDIUM


Source: 1) Bühlmann, Diagnóstico del Sector Maquila en Guatemala – la Competitividad del Sector, IDCGuatemala, December 1996. 2) Bühlmann, Análisis de Elementos Críticos para el Desarrollo del Sector Vestuario yTextil en Guatemala, IDC Guatemala, November 1997. 3) Field research November 1998.

52

initiatives and projects. The permanent presence and interaction facilitates the informationflow from the clients to the industry.


The conditions in relation to the supporting and related industries are poor to medium.There is a growing competitive, local production of textiles in Guatemala but there is a lackof cooperation between the textile and apparel manufacturers. The apparel and textilemanufacturers have been focusing on different segments which have not been compatiblein the past. As their interests and markets increasingly coincide the cooperation will bestrengthened.

Guatemala has a strong base of supporting and related industries providing the materialsand services the apparel and textile industry needs. However there is still a lack oftechnical assistance in the local market. It is a common problem that it is often necessaryto bring technicians from the USA to repair advanced machinery.

Another weak point is the lack of competitive free trade zones. As discussed earlier,Guatemala doesn’t have free trade zones which can support the development of theindustry. The existing free trade zones cannot compete with the rest of the region when itcomes to infrastructure and services.

As in the rest of the region the industry suffers under the lack of adequate financialproducts. The access to credits is limited, the interest rates are very high and the financialproducts are not designed for the industry’s special needs.

The apparel and textile industry in Guatemala is supported by strong industrialorganizations. The association of non-traditional exporters (AGEXPRONT) and the appareland textile commission (VESTEX) have been the main promoters of the industry inGuatemala and abroad.

Finally, the Apparel Sourcing Show is an asset for the industry. The Apparel SourcingShow is the leading trade fair for the apparel and textile industry in Central America andthe Caribbean. VESTEX is currently improving the concept of the show in order tostrengthen its position as the showcase for the region’s industry.

5.3.1.5 Conclusions

The general competitive environment is also weak in Guatemala, but it is improving. Thelow labor costs and the basic factors in general still represent Guatemala’s mainadvantages. However, a number of apparel, garment and textile manufacturers have beenable to defy the general weak conditions and they have developed strong and competitiveoperations including full-packages. Furthermore, Guatemala has the most developedsupporting and related industries in the region. The sector also enjoys a strong institutionalsupport.


The apparel and textile industry is included in the national competitiveness program(PRONACOM) in Guatemala which is organized jointly between the private and public

53

sector. PRONACOM is coordinated by the Ministry of Economy. The cluster initiative forthe apparel and textile industry is coordinated by VESTEX (under AGEXPRONT) with thesupport from PRONACOM. VESTEX has six employees working full time. One of theemployees speaks Korean which is an advantage considering the high number of Koreanfactories.

The cluster initiative started in 1996 before PRONACOM existed. VESTEX and a group ofindustry leaders felt the need to initiate a process to strengthen the industry’scompetitiveness. An external consultant was therefore hired by VESTEX to start theprocess. The analytical phase was divided into three parts. First an initial cluster analysiswas conducted. The cluster analysis was complemented by a benchmarking of the criticalmacro, industry and micro level factors. An international expert was included in thebenchmarking. Based on the two studies a strategic plan with recommendations wasdeveloped. The plan included a long-term vision of the industry with intermediate goals forthe short and medium term. Throughout the analytical phase numerous presentations ofthe advances was made for VESTEX and the industry members in order to get thefeedback and insights needed for the later implementation.

At the end of the analytical phase the apparel and textile industry was included inPRONACOM and it was decided to make a congress. There were 120 participantscovering apparel, textiles, clients, supporting and related industries and the public sector.The congress served several purposes. First of all it was a way to spread the results of thestudies. Secondly, it was a means of achieving consensus about the current state of theindustry and the priorities for an agenda. By asking the participants to evaluate the resultsand the proposed agenda, the initiative changed from being a project of a small selectgroup to becoming the official agenda of the industry. Thirdly, the congress was aninvitation to all the participants to take part in the working commissions’ implementation ofthe agenda.

After the congress the implementation phase started. Due to its strong leadership in theinitial phases, VESTEX was the natural organization for coordinating the efforts. However,in order to be able to coordinate the commissions, VESTEX had to expand its staff. It wasdecided to start with only four of the areas from the agenda in order not to lose control andstart where results could be reached quickly, and then subsequently include the otherareas. Detailed plans were made for each of the areas and the commissions with privateand public sector representatives were formed. The commissions started to work in latespring, 1998.

VESTEX and the commissions are now planning a second congress to evaluate theresults of the first year and adjust the agenda for next year. It hasn’t been easy and someof the commissions are advancing faster than others. However, the motivation to continueis still high and new participants are continuously included among others a well organizedgroup of local suppliers of accessories, embroideries and other services.

Four things have been important for the success of the initiative and the motivation of theparticipants. First of all the project was started by the industry as a response to aperceived need. The project was developed from the bottom up. Secondly, the industrymembers have been stakeholders in the process since the beginning. The whole processhas been financed by the private sector through their organization VESTEX. They havetherefore felt a strong commitment to finish what they have started. Thirdly, there was anorganization (VESTEX) with the capacity to institutionalize the project and join public and

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private sector agents in the effort. Fourthly, there has been a clear management of theprocess and the work in each of the commissions.

5.4 The Honduran apparel and textile cluster

TABLE 22

BASIC STATISTICS – HONDURAS (NOVEMBER 1998)

No. ApparelManufac-

turers

No. TextileManufac-

turers

No.Supporting& Related

Firms

No.Employees


ValueAdded

(millions)

TotalInvestment(millions)

Origin of theFirms

179 5 22 95,745 USD 1,659(1997)

USD 477Local:

USD 399.6Foreign:USD 515

Local 20%USA 49%Korea 18%Mixed 4%Other 9%

Note: 1) Supporting and related firms include free trade zones. 2) Total investment cover apparel, textile and free tradezones. 3) The net foreign exchange income is interpreted as the value added.Source: Asociación Hondureña de Maquiladores, November 1998.

There are 179 apparel manufacturers and 5 textile producers in Honduras employing atotal of 95,745 people. The average firm size is approximately 535 employees, which is thelargest in the region. Furthermore, there are 22 supporting and related firms registered,including the free trade zones. Except for the textile manufacturers the majority of the firmsare located around San Pedro Sula close to the port in the Atlantic. Three of the textilemanufacturers are located in San Pedro Sula and two in the capital Tegucigalpa.

Honduras is the largest apparel and textile exporter in the region. The total exports to theUS market reached USD 1,659 millions in 1997. By 1998 the exports generated a valueadded of USD 477 millions, also the highest in the region.

The total investment in apparel, textile and free trade zones amounts to USD 914.6millions where USD 399.6 millions are local investments and USD 515 millions foreigninvestments. The foreign investments are even more dominant in Honduras than in thecase of Guatemala. Only 20% of firms in the industry are local. Companies from the USArepresent 49% of the total firms and firms from Korea 18%. Joint ventures between localand foreign investors (from China, Mexico and the USA) represent 4% of the firms and therest of the world (Hong Kong, Singapore, Canada and Grand Cayman) 9%.

The apparel and textile industry is one of the most important economic sectors inHonduras in terms of exports and employment. It has been one of the principal catalysts inthe development of the San Pedro Sula valley. Furthermore, it is one of the economicsectors which has attracted the most foreign direct investments in the country.

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The conditions of the basic factors for the Honduran apparel and textile industry aremedium to good. The labor costs are among the two lowest in the region. There is also alarge available labor force. But like in the rest of Central America there is a lack of a skilledlabor pool. Honduras also enjoys a privileged geographical location with access to theAtlantic Ocean close to Miami, which is one of the main gateways to the US market.

The conditions of the advanced factors are poor. The conditions of the roads in the SanPedro Sula valley are acceptable although not optimal. However, there is a lack of generalinfrastructure to support the rapid development. The industry has grown fast and thepressure on the infrastructure is rising. This is also manifested in relation to the ports,which lack the capacity and efficiency to support the development.

Turning to the knowledge resources the industry needs more support in the area ofvocational training. Mechanics and other technical personnel are urgently needed.Furthermore there are not enough institutions providing the right education and training tothe industry.

Chart 6: The Competitive Environment in the Honduran Apparel and Textile Cluster

- small local demand- unsophisticatedlocal demand- dependence on fewlarge foreign clients- domination of theclients from the basicsegmentsPOOR

Basic factors:+ competitive labor costs+available labor force- lack of skilled labor+ proximity to US market

MEDIUM-GOOD

Advanced factors:+/- acceptable roadinfrastructure in the SanPedro Sula valley- poor port capacity &efficiency- lack of general infrastructureto support the rapiddevelopment- high energy prices- lack of vocational training- general lack of traininginstitutionsPOOR

+ large local apparel manufacturers+ pool of aggressive local investors+ strong foreign investments+ consolidation of the industry from small to medium and large firms- low product diversification / high concentration in low price products+/- generally low efficiency levels- insufficient supply of full-packages- obsolete technology (especially in the production of textiles)POOR-MEDIUM


Rivalry

DemandConditions

FactorConditions

- insufficient development of supporting and related industries+ very competitive free trade zones+/- growing local, competitive production of textiles- lack of integration between the apparel and textile manufacturers- poor access to credit lines

POOR


Source: 1) Sánchez, El Cluster de Textiles en Centroamérica, INCAE October 1995. 2) Field research November 1998.

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The general conditions concerning the strategy, structure and rivalry are poor to medium.On the positive side there are a number of large competitive local apparel manufacturerswho run vertically integrated operations. In addition to this there are several groups ofaggressive local investors who have played a decisive role in the development of the freetrade zones and the industry in general. Furthermore the large number of foreign investorshave raised the standards of the industry by bringing know-how to the country. Finally aconsolidation of the firms in the industry has taken place. According to industryrepresentatives the firms are growing in size and there are fewer and fewer small firms.This can be seen as a response to the competition in basic products where economies ofscale is the key issue.

On the negative side there is a high concentration of production and exports in a few basiclow price products. This is combined with generally low efficiency levels and obsoletetechnology (especially in relation to the production of textiles). Finally, the full-packagebusiness hasn’t been developed sufficiently in the Honduran apparel and textile industry.


The general demand conditions in Honduras are poor. The local market is small andunsophisticated. The demand is dominated by a few clients from the basic productsegment. This high dependence makes the Honduran industry vulnerable to (sudden)changes in the basic segments and to fluctuations in the conduct of a few numbers ofclients.


The conditions concerning the supporting and related industries are poor. The supportingand related industries covering accessories, embroideries, packaging materials and otherservices are not sufficiently developed in Honduras. The free trade zones are the mostcompetitive in the region both in relation to infrastructure and services, and there is risinglocal, competitive production of fabrics. But there is a lack of cooperation between the localtextile and apparel manufacturers.

Four reasons for the lack of cooperation between the two sectors have been pointed outby local industry members. First of all, there is a conflict of interest in relation to theopening of the Honduran market. The apparel and garment manufacturers support theelimination of import duties on fabrics in order to assure cheaper materials, whereas thetextile manufacturers are interested in maintaining the import duties to protect their ownproduction. Secondly, the apparel and textile manufacturers have focused on differentmarkets. The textile manufacturers have mainly focused on the local and regional market,whereas the apparel firms have focused on the US market. Thirdly, the Honduran textilemanufacturers cannot compete with the prices from Asia after the crises. A Hondurantextile manufacturer claimed that after the crises the prices of the final fabrics from someAsian suppliers were lower than the fibers (raw material) used in the production of fabricsin Honduras. Finally, it has been pointed out that the volume the apparel manufacturerspurchase is too low to reach the efficient scale and the costs are thereby higher.

57

The apparel and textile industry has poor access to external credits from the local financialsector. The interest rates are prohibitively high and the guarantee requirements extensive.Furthermore, it is difficult to find specialized financial products adjusted to the industry’sspecial needs.

5.4.1.5 Conclusion

Like in the case of the three prior countries, the competitive environment in Honduras isweak. The strongest conditions are found in the basic factors where Honduras has someof the lowest labor costs in the region. The strong free trade zones have compensated forsome of the general weaknesses in the environment. Individual companies havedeveloped successful strategies in spite of the general environment.


Like El Salvador and Guatemala, Honduras also has a national competitiveness program.It is not running as well as in El Salvador and Guatemala due to a number of factors,among others scarce support from the Government apart from the Ministry of Economy.The apparel and textile industry hasn’t been included in the program so far. However, theindustry represented by the apparel association (Asociación Hondureña de Maquiladores)and a group of industry leaders have decided to start the process and the participants arecurrently in the phase of choosing a consulting firm to assist them.

Starting the initiative in the private sector with a group of leaders from the industry meansthat the initiative is on the right track. But based on interviews made with industrymembers a few observations should be made. First of all it is recommended to use theexperience from El Salvador and Guatemala. Important knowledge and experiences areaccumulated in these countries, which the Honduran initiative can benefit from.Furthermore it is possible to learn from other cases in Latin America like Chihuahua inMexico or Chile.

Furthermore it is important to give the project the right focus. The focus should be onimproving the conditions for the development of sustainable competitive advantages. Thisincludes macro, industry and micro level factors wherefore both private and public sectoractions are needed. It is important to clarify the possibilities and responsibilities so theparticipants do not enter the project with false expectations. A cluster initiative will notsolve the problems, it will only facilitate the solutions and all the participants have aresponsibility.

When starting the project attention should be paid to the studies and the process at thesame time. A well-structured process facilitates the implementation. Furthermore it isimportant to create results throughout the process in order to motivate the people andcreate an atmosphere of success.

The process is long. In the case of Guatemala it has taken almost two years to go fromstudies to action. It is therefore important that the initiative is institutionalized at an earlystage in order to secure the continuity and that someone assumes the task of coordinatingthe efforts.

58

Finally, the initiative should be open to all participants willing to support the initiative. But itis important to have a small leading group with local well-respected champions, who canlead the project, unite the different interest groups in a joint effort and procure theresources needed.

5.5 The Nicaraguan apparel and textile cluster

TABLE 23

BASIC STATISTICS – NICARAGUA (NOVEMBER 1998)


No. Employees Total Exports(millions)

Value Added(millions)

Origin of theFirms

36 16,000 USD 180(1997)

USD 65(1997)

Local 39%Korea 25%USA 22%Taiwan 14%Others 4%

Note: The net foreign exchange income is interpreted as the value added.Source: Official promotion material, Opportunities in Free Zone Manufacturing, 1998.

As mentioned earlier the Nicaraguan apparel and textile industry is the youngest in theregion. The total exports to the US market reached USD 180 millions in 1997 with a valueadded of approximately USD 65 millions.

There are 36 apparel manufacturers employing approximately 16,000 people. The averagefirm size is around 440 people, which is higher than the regional average indicating thatthe majority of the firms are medium sized and large enterprises. The local firms represent35% of the total number of firms. Korean firms represent 25%, firms from the USA 22%,Taiwanese firms 14% and finally the rest of the world 4%.6.5.1 Cluster analysis


The conditions of the basic factors in Nicaragua are good. The country has the lowestlabor costs in the region and a large available labor force. However, there is a general lackof skilled labor. Nicaragua is located close to the US market and it has access to both thePacific and Atlantic Ocean which provides opportunities to develop competitiveadvantages in relation to logistics.

The conditions of the advanced factors are poor. The geographical location representsgreat opportunities for the creation of logistical advantages but with the current state of theinfrastructure it is not possible. First of all there is no port infrastructure to support it. Portsare essential for the export sector and it is a vital element in the creation of logisticaladvantages. Secondly, the standard of the roads (especially the main transit ways) is notsufficiently developed. In addition telecommunications and the power supply are notsufficiently developed. Finally, there is a lack of vocational training and educationalinstitutions that should secure a constant flow of skilled workers to the industry.

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The conditions of the strategy, structure and rivalry are poor in the Nicaraguan apparel andtextile industry. The industry is small with only 36 apparel manufacturers. Due to its youngage only little knowledge and experience have been accumulated in the industry. Theforeign firms play an important role in the development of the industry as they bringproduct and market know-how to the country. Furthermore, there are only a few localindustry leaders with an integrated vision of the industry and its possibilities.

There is little diversification of the products made and exported. As shown earlier fourproducts cover almost 90% of the exports. The full-packages haven’t been developed on apermanent basis. Finally, the general efficiency level in the industry is low.


The demand conditions are poor. The local market is small and unsophisticated, and thepurchase power of the consumers is low. The industry depends on a few foreign clients.

Chart 7The Competitive Environment in the Nicaraguan Apparel and Textile Cluster

- small localdemand- unsophisticatedlocal demand- dependence onfew large foreignclientsPOOR

Basic factors:+ lowest labor costs in CA+available labor force- lack of skilled labor+ Access to two oceans+ proximity to US market

GOOD

Advanced factors:-very poor port capacity- & efficiency- poor road infrastructure- poor electrical power- insufficienttelecommunications- insufficient trainingfacilities- lack of educationalinstitutionsPOOR

- young and small industry in Nicaragua- little knowledge and experience accumulated in the industry- few local industry leaders- low general efficiency levels- low product diversification- no permanent full-package suppliers+ foreign investors bring know-how to the industry


Rivalry

DemandConditions

FactorConditions

+/- growing local supply of imported materials and machines- underdeveloped local supporting and related industries- no local production of textiles- lack of investments in free trade zones- lack of an industrial organization representing the industry

POOR


Source: 1) Bühlmann, Análisis de Elementos Críticos para la Competitividad y Desarrollo del Sector Vestuario y Textilen Guatemala, IDC Guatemala, November 1997. 2) Field research November 1998.

60


The conditions of the supporting and related industries are poor. There is a growing supplyof imported fabrics, accessories and machines. However, the industry depends almostentirely on the imports of the materials as the local supporting and related industries areweak and undeveloped. Nicaragua has no local production of textiles.

New investments in free trade zones are needed as the existing are full. The free tradezones have been essential elements in the attraction of new investments to the sector.Expansions of the existing zones and investments in new ones are therefore urgentlyneeded.

Finally, the industry doesn’t have an organization which supports the sector and promotesits interests. Industry leaders are currently making an effort to create such an organization.

5.5.1.5 Conclusion

The competitive environment in Nicaragua is weak. The primary advantages are the lowlabor costs and the available labor force. Nicaragua’s apparel and textile industry is youngand the private and public sector face great challenges in improving the competitiveenvironment.


Nicaragua has a national competitiveness program like the rest of the Central Americancountries. The program is coordinated by the Ministry of Economy in Nicaragua. Theapparel and textile industry is included in the program and the analytical phase is expectedto start in 1999.

Industry members believe that the focus of the program should be on the long-termdevelopment of competitive advantages. But given the current state of the competitiveenvironment in Nicaragua they also feel it is necessary to find immediate solutions to someof the most important problems in the industry. If the problems can’t be solved in the shortrun alternatives will have to be found until the problems are solved.

The program for the apparel and textile industry faces two pressing problems in the start-up phase. First of all there is a lack of interest among the industry members to participate.So far only two representatives from the industry are participating. Especially the foreignfirms, representing the majority of the industry, have shown a low interest in participatingand supporting the program. The heart of the matter is that the companies in general arecomfortable doing what they are doing and they do not want to cooperate and shareinformation.

The second problem is related to the lack of an industrial organization. Currently, there isno industrial organization with the capacity to support the program. The pioneers of theprogram find it necessary to have an organization, which can support the analytical phaseand coordinate the process behind.

The experience from Guatemala shows that it is not necessary to have a large group offirms participating in the initial organization of the program. It can be done with a small

61

group of visionary leaders. The broad participation will follow when the results start toshow and the mutual benefits become clear to the industry.

However, in relation to the organization both the Salvadoran and Guatemalan case showsit is necessary to have an institution which supports the different phases as well ascoordinates the process. If no private sector organization with the capacity exists atemporary solution could be a public sector agency supported by the private sector. Themain factor is that attention is given to both the analytical part and the change process.

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6. DEVELOPING COMPETITIVE ADVANTAGES

Central America’s advantages are currently based principally on the preferential status theregion enjoys in the US market, through the Caribbean Basin Initiative (CBI), and on basicfactors like labor costs and the proximity to the USA. In a global environment where thetrade barriers are gradually eliminated and the trade between the continents flows fasterand easier for every day these are not stable advantages. Furthermore, the proximity canonly become a real competitive advantage for the region if it is supported by strong port,road and telecommunication infrastructures. Based on the analysis made, some of the keyissues for the development of competitive advantages in the Central American apparel andtextile industry will be presented in the following sections.

6.1 Macro-level factors

The three main issues on the macro-level are infrastructure, education and market access.The privileged geographical location of the countries can only be exploited if theinfrastructure is improved significantly. With improvements in the ports, roads andtelecommunication strong logistical advantages can be developed. Given the geographicallocation it will be difficult for other regions to develop the same advantage, with theexception of Mexico and the Caribbean.

More specifically, the ports need improvements in both the capacity and the efficiency ofthe services. The ports are insufficiently equipped, only medium sized vessels enter theharbors and the efficiency in relation to charging and discharging the merchandise is low,all of which results in higher transportation costs. In addition, the road networks need to beadjusted to the rising load of terrestrial transportation between the production centers andthe main gateways in order to shorten transportation times.

The current state of telecommunications doesn’t support the full application and use ofmodern information technology. The lack of adequate telecommunication limits thepossibilities of integrating information flows between the production base in CentralAmerica and the end market abroad. The integration of the information flows and sourceswould facilitate faster response times to market changes throughout the production chain.

In relation to education the labor force has very little or no education at all. There is a lackof institutions assuring a constant supply of skilled workers for the industry. This rangesfrom basic training institutions to universities. Several good institutions already exist in theregion (mostly at university level) but only very few of them have developed specializedtraining for the industry. Especially skilled middle management, mechanics and othertechnical personnel are needed.

Central America has been granted a preferential status in the USA with the CBI. But theregion is rapidly loosing terrain to Mexico after it was included in NAFTA. The import tariffsfor Central America’s exports are significantly higher than Mexico’s. Furthermore CostaRica, El Salvador and Guatemala are still subject to import quotas in the USA. This hasmeant that the region has lost exports and investments to Mexico, a situation which canonly be expected to continue if the benefits granted by the CBI are not enhanced. It is verydifficult for Central America to compete with Mexico in the long run under the presentconditions. Finally, the CBI mainly supports the 807 business. A CBI enhancement is

63

therefore also needed in order to strengthen the operations with higher value added likefull-package business.

6.2 Industry level factors

One of the main issues on the industry level is the development of supporting and relatedindustries supplying the materials (e.g. accessories and fabrics) and services (e.g.embroideries and washing facilities) used in the production. It is an important element forthe development of Central America as an integrated sourcing base. The supporting andrelated industries are an essential element in the development of full-packages. Havinglocal, strong supporting and related industries facilitates improvements in the flexibility andthe cycle times as the raw materials do not have to be shipped from abroad. Textilesrepresent the largest costs component of the finished garments. Strengthening theregional production of textiles and the cooperation between apparel and textilemanufacturers is therefore particularly important.

The free trade zones have played and will continue to play a key role in the apparel andtextile industry. First of all they are key factors for investment attraction facilitatingspecialized infrastructure and a variety of services. Secondly, they are a short-termcompensation for the general infrastructure deficiencies. Honduras has set the regionalstandard, and particularly Guatemala and Nicaragua will have to close the gap to staycompetitive in this field.

The final key factor on the industry level is the industrial organizations. It is evident thatthe industrial organizations are a vital part of the industry. Given the increased pressure onthe industry the organizations need to be strengthened in three areas. First of all they aregenerally small and insufficiently equipped in terms of personnel and office equipment.This means that their capacity is limited and they can therefore only cover a few keyfunctions, which leads to the second point. The organizations have traditionally focused onrepresenting and promoting the industry’s interest locally and abroad in a few areas ofparticular interest. But the need for additional services is rising and the organizations playan important role in relation to the national competitiveness programs as shown in theGuatemalan case. It is therefore necessary that the institutions broaden their functions.Finally, each country has various industrial organizations representing the different sub-sectors of the industry. They often have at least some common interests and the inter-institutional cooperation therefore needs to be improved.

6.3 Micro-level factors

Based on the analysis five key issues have been found on the micro level. Starting with theproducts, the production and exports are generally highly concentrated in a few low priceproducts with low value added. The main competition drivers in these segments are priceand volume, which is forcing the small and medium sized firms to reposition themselves.This implies a general diversification of the product portfolio moving towards more complexand less price sensitive segments where the competition drivers are quality and flexibility.

The efficiency levels are generally too low to be competitive in the long run with or withouta product diversification. The rising labor costs further emphasize the urgent need forefficiency improvements. Having the highest labor costs in the region the pressure isparticularly high on the Costa Rican and Salvadoran firms.

64

The third key issue is technology. The general standards of the production technology aretoo low in Central America. General upgrades are needed throughout the productionprocess including pattern making, cutting tables, manufacturing, washing services etc.The standards are also too low in relation to information technology. Only very few firms inCentral America fully exploit the possibilities of modern information technology.

The demand is moving towards full-packages. This requires a certain financial capacity,purchasing know-how and capability to manage and control sub-contracting andproduction networks. Furthermore a general upgrading of the production standards isimportant as the success of the full-package depends on the conduct of each of theindividual sub-suppliers.

The fifth and final key issue is company training. Special training courses for the firms arecrucial if the four prior factors are to be improved. Personnel from all levels of thecompanies need training in order to develop their capacity and capabilities.

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ANNEXES

66

ANNEX 1

ANNEX 1

THE MAIN PRODUCTS EXPORTED TO THE US MARKET (QUANTITIES, SEPTEMBER 1998)

Country Product & US ApparelCategory1

Share ofcountry export

Importmarketshare

SupplierNo.

Unitvalue

Underwear (352/652) 51.01% 8.33% 5 11.77Trousers & shorts (347/348) 14.43% 3.36% 5 70.86Baby wear (239) 7.44% 5.78% 7 14.76Nightwear & pajamas (351/651) 3.47% 1.58% 19 46.80Woven shirts MB2 (340/640) 2.86% 1.23% 20 95.85Knit shirts (338/339) 2.83% 1.04% 24 46.47Brassieres & body support 2.06% 6.46/ 4 37.91

Costa Rica

TOTAL 84.10% - 19 -Trousers & shorts (347/348) 15.55% 3.25% 6 73.55Woven shirts WG3 (341/641) 11.10% 2.72% 10 69.40Knit shirts (338/339) 10.18% 3.35% 8 47.51Woven shirts MB (340/640) 9.74% 3.87% 9 75.74Dresses (336/636) 6.81% 4.06% 6 90.98Coats WG (635) 5.44% 4.83% 7 124.01Underwear (352/652) 4.62% 0.69% 20 15.79Wool coats WG (435) 4.58% 16.15% 1 205.17Nightwear & pajamas(351/651)

4.47% 1.83% 16 53.90

Baby wear (239) 4.32% 3.02% 13 16.18Skirts (342/642) 3.27% 6.53% 5 61.31Coats MB (634) 2.96% 2.70% 13 108.83Trousers, shorts etc. WG(648)

2.73% 2.34% 12 69.66

Guatemala

TOTAL 82.50% - 22 -1 200 cotton &/or man-made fiber, 300 cotton, 400 wool, 600 man-made fiber. 2 Women &Girls. 3 Men & Boys.Source: IDS, Country Report and US General Imports for Guatemala and other suppliers,November 1998

67

ANNEX 2

The following equation has been used to calculate the real exchange rate:

RER is the real exchange rate, NER is the nominal exchange rate (units of local currencyfor one dollar), Pi is the world market price index, and Pd is the domestic price index.

AVERAGE NOMINAL EXCHANGE RATES

Country 90 91 92 93 94 95 96 97Costa Rica 91.579 122.432 134.506 142.172 157.067 179.729 207.689 232.597El Salvador 6.84833 8.01667 8.36083 8.70251 8.72875 8.75458 8.755 8.75625Guatemala 4.4858 5.0289 5.1706 5.6354 5.7512 5.8103 6.0495 6.0653Honduras 4.112 5.3167 5.4979 6.4716 8.4088 9.471 11.7053 13.0035Nicaragua 0.1409 4.2708 5 5.6204 6.7229 7.5456 8.4355 9.4481Source: Bloomberg / IMF 1998

CONSUMER PRICE INDEX (1990 = 100)Country 90 91 92 93 94 95 96 97Costa Rica 100 128.7 156.8 172.1 195.4 240.7 282.9 320.3El Salvador 100 114.4 127.2 150.8 166.8 183.5 201.4 210.5Guatemala 100 133.2 146.5 163.9 181.7 196.9 218.7 234.3Honduras 100 134 145.7 161.4 196.4 254.3 314.9 378.5Nicaragua 100 3045 3766 4534 4886 5421 6050 6488.6Source: Bloomberg / IMF 1998

CONSUMER PRICE INDEX, USA (1990 = 100)(WORLD MARKET PRICE INDEX)

Country 90 91 92 93 94 95 96 97USA 100 104.2 107.4 110.6 113.4 116.6 120 122.9Source: Bloomberg / IMF 1998

RER =NER * Pi

Pd=

NERPd/Pi

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BIBLIOGRAPHY

REPORTS AND PRESENTATIONS:

! ASIGUA/GTZ, Resultados de la Investigación sobre el Estado de la Producción enlas Empresas de Confección en Guatemala, September 1997.

! Bühlmann, Análisis de Elementos Críticos para la Competitividad y Desarrollo delSector Vestuario y Textil en Guatemala, IDC Guatemala, November 1997.

! Bühlmann, Diagnóstico del Sector de Maquila en Guatemala – la Competitividaddel Sector, IDC Guatemala, December 1996.

! CATECO, La Industria Textil y de Confección en Costa Rica, 1994.! KSA, The Americas – The Present and the Next 5 Years, 1997.! Monitor Company, Construyendo las Ventajas Competitivas de la Confección en El

Salvador, October 1997.! Sánchez, El Cluster de Textiles en Centroamérica, INCAE Costa Rica, 1995.! Unknown, Opportunities in Free Trade Zone Manufacturing, Nicaragua, November

1998.! Werner International Inc., Globalization of the American Textile Industry,

September 1997.! Werner International Inc., Sourcing USA – Trends in the Americas, September

1998.! Statistics:! Asociación Hondureña de Maquiladores, General Industry Statistics, Honduras,

November 1998.! Bloomberg / IMF, International Financial Statistics, August 1998.! Cámara de Textiles, General Industry Statistics, Costa Rica, November 1998.! IDS, 1998 Correlation Report, 1998.! IDS, Country Report and US General Imports for Guatemala and Other Suppliers,

November 1998.! IDS, US General Imports of MFA Apparel, September 1998.! IDS, US General Imports – Quota and Trade Tables, December 1998.! Oficina Ejecutiva de Cuotas, Export statistics, Guatemala, December 1998.! OTEXA, Major Shippers Report, December 1998.! PROCOMER, Participación de los principales productos de exportación de bienes

y servicios, Costa Rica, 1997.! The Salvadoran Ministry of Economy, Office for the Free Trade Zone

administration, November 1998.! VESTEX, General Industry Statistics, Guatemala, December 1998.

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