the challenge of adjustment in the textile and garments industries of the philippines

The challenge of adjustment The challenge of adjustment in the textile and garments in the textile and garments

industries of the Philippinesindustries of the Philippines

By Raymund B. HabaradasBy Raymund B. HabaradasDe La Salle University-ManilaDe La Salle University-Manila

Outline of presentationOutline of presentation State of the industryState of the industry Challenges faced by the Challenges faced by the

industry industry Prospects under the post-Prospects under the post-

quota regimequota regime Adjustment efforts Adjustment efforts

undertaken by firms – undertaken by firms – results of surveyresults of survey

Case – Leader GarmentsCase – Leader Garments ConclusionsConclusions RecommendationsRecommendations

MethodologyMethodology Secondary data Secondary data

collection and analysiscollection and analysis Survey of firmsSurvey of firms Literature reviewLiterature review Case study methodCase study method Key informants from Key informants from

industryindustry

State of the industryState of the industry

State of the industryState of the industry Textile and garments accounted for about 6% of Textile and garments accounted for about 6% of

total manufacturing value added by the end of total manufacturing value added by the end of the 1990s, down from about 13% in 1989the 1990s, down from about 13% in 1989

According to official statistics, total number of According to official statistics, total number of workers constitute about 14% of total workers constitute about 14% of total employment in the manufacturing sector, down employment in the manufacturing sector, down from as much as 30% during the late 1980sfrom as much as 30% during the late 1980s

Estimates put the total number of workers in the Estimates put the total number of workers in the industry at 400,000industry at 400,000

State of the industryState of the industry Out of the top 20 textile firms in the country, Out of the top 20 textile firms in the country,

five registered losses in 2002, and 13 five registered losses in 2002, and 13 experienced a decrease in profitability over the experienced a decrease in profitability over the previous year. previous year.

Among the top 20 garments firms, only four Among the top 20 garments firms, only four registered a loss in 2002, but ten suffered a registered a loss in 2002, but ten suffered a decrease in profits as compared to the previous decrease in profits as compared to the previous year. year.

State of the industryState of the industry Textiles and garments accounted for about 7.5 Textiles and garments accounted for about 7.5

percent of the country’s foreign exchange percent of the country’s foreign exchange earnings in 2002, down from as much as 22 earnings in 2002, down from as much as 22 percent about a decade earlier. percent about a decade earlier.

Articles of apparel and clothing accessories Articles of apparel and clothing accessories continue to rank second to electronic products continue to rank second to electronic products in terms of total value of exports of the in terms of total value of exports of the Philippines.Philippines.

0

500

1000

1500

2000

2500

3000

FOB

in U

S$ m

illio

n

Textile exports Garments exports

Total textile and garments exports Total textile and garments exports of the Philippines, 1984-2002of the Philippines, 1984-2002

Growth rate of textile exports Growth rate of textile exports of the Philippines, 1985-2002of the Philippines, 1985-2002

-30-20-10

0102030405060

Perc

ent g

row

th

Growth rate of garments exports Growth rate of garments exports of the Philippines, 1985-2002of the Philippines, 1985-2002

-10

0

10

20

30

40

50

Perc

ent g

row

th

Product code Product description

5-year total export

value (US$)

620443 Women’s/girls’ dresses, of synthetic fibres, not knitted 305,798

610520 Men’s/boys’ shirts, of man-made fibres, knitted 291,516

620433 Women’s/girls’ jackets, of synthetic fibres, not knitted 262,484

620630 Women’s/girls’ blouses and shirts, of cotton, not knitted 241,094

620343 Men’s/boys’ trousers and shorts, of synthetic fibres, not knitted 235,330

611120 Babies’ garments and clothing accessories of cotton, knitted 234,293

610510 Men’s/boys’ shirts, of cotton, knitted 225,825

620462 Women’s/girls’ trousers and shorts, of cotton, not knitted 214,321

610610 Women’s/girls’ blouses and shirts, of cotton, knitted 213,962

611020 Pullovers, cardigans and similar articles of cotton, knitted 213,018

Largest garments exports Largest garments exports of the Philippines, 1997-2001of the Philippines, 1997-2001

Most competitive garments exports Most competitive garments exports of the Philippines, 2001of the Philippines, 2001

Product code Product description

RCA figures(2001)

6209 Babies’ garment and clothing accessories, not knitted 17.7346

6105 Men’s / boys’ shirts, knitted 11.0155

6208Women’s / girls’ slips and petticoats; night dresses and pyjamas;

panties, bathrobes, etc., not knitted 6.5130

6111 Babies’ garments and clothing accessories, knitted 6.2483

6116 Gloves, mittens and mitts, knitted 5.6226

6106 Women’s / girls’ blouses and skirts, knitted 5.0793

6205 Men’s / boys’ shirts, not knitted 4.2157

6204Women’s / girls’ suits, ensembles, jackets, dresses, skirts,

trousers and shorts, not knitted 4.1045

6212Brassieres and parts; girdles, panty girdles and parts; corselettes,

corsets, braces, etc. 3.8074

6207Men’s / boys’ underpants and briefs; nightshirts and pyjamas;

bathrobes, dressing gowns, etc., not knitted 3.7254

RP’s export performance, 2004RP’s export performance, 2004 According to GTEB, textile and garments exports in According to GTEB, textile and garments exports in

2004 reached a total value of $2.692 billion compared 2004 reached a total value of $2.692 billion compared to only $2.615 billion in 2003. to only $2.615 billion in 2003.

Textile exports decreased by about 8% from $136 Textile exports decreased by about 8% from $136 million in 2003 to only $125 million in 2004. million in 2003 to only $125 million in 2004.

Apparel exports increased by 3% from $2.290 billion Apparel exports increased by 3% from $2.290 billion in 2003 to $2.371 billion in 2004. in 2003 to $2.371 billion in 2004.

Non-apparel exports increased by about 4% from Non-apparel exports increased by about 4% from $188 million in 2003 to $195 million in 2004.$188 million in 2003 to $195 million in 2004.

Major export markets of RP textile Major export markets of RP textile and garments, 2004and garments, 2004

CND3%

$0.07B

NQ12%

$0.31B

EU15%

$O.41B

US70%

$1.90B

Source: An Update on the Garments and Textile Export Industry and the Garments & Textile Export An Update on the Garments and Textile Export Industry and the Garments & Textile Export Board (GTEB) TURNING POINT, Winding Down Team Conference, March 29, 2005Board (GTEB) TURNING POINT, Winding Down Team Conference, March 29, 2005

Exports to the US, 2004Exports to the US, 2004 The Philippines registered a 20% increase in volume The Philippines registered a 20% increase in volume

and a 34.41% increase in value of its garments and a 34.41% increase in value of its garments exports in December 2004. exports in December 2004.

On a year-to-year basis, however, the Philippines On a year-to-year basis, however, the Philippines suffered a 5.88% decline in volume and a 3.67% drop suffered a 5.88% decline in volume and a 3.67% drop in total value of its exports in 2004 compared to those in total value of its exports in 2004 compared to those of the previous year. of the previous year.

The major gainers in 2004 (in terms of export value) The major gainers in 2004 (in terms of export value) are China (22.97%), Cambodia (15.27%), Macau are China (22.97%), Cambodia (15.27%), Macau (12.03%), Indonesia (11.33%), Pakistan (11.30%), (12.03%), Indonesia (11.33%), Pakistan (11.30%), India (10.66%), and Guatemala (10.49%). India (10.66%), and Guatemala (10.49%).

Challenges faced by the industryChallenges faced by the industry

Challenges faced by the industryChallenges faced by the industry High shipping costsHigh shipping costs High power ratesHigh power rates Dependence on Dependence on

imported raw materialsimported raw materials

Challenges faced by the industryChallenges faced by the industry High labor costsHigh labor costs Low labor Low labor

productivityproductivity Political and social Political and social

unrestunrest

Prospects in the Prospects in the post-quota regimepost-quota regime

RP’s export performance, RP’s export performance, 11stst quarter of 2005 quarter of 2005

Exports for the first quarter of 2005 reached a total Exports for the first quarter of 2005 reached a total value of $587.170 million (preliminary figures), a value of $587.170 million (preliminary figures), a 1.08-percent increase over the $580.888 million 1.08-percent increase over the $580.888 million registered over the same period the previous year. registered over the same period the previous year.

Garments exports accounted for 90.34% of the total Garments exports accounted for 90.34% of the total amount, while textile exports accounted for the amount, while textile exports accounted for the balance.balance.

Total exports for March 2005, however, decreased by Total exports for March 2005, however, decreased by 17.26% from $202,522 million to only $167,575 17.26% from $202,522 million to only $167,575 million. million.

RP’s garments exports to the USA, RP’s garments exports to the USA, 11stst quarter of 2005 quarter of 2005

Table 23. Volume Change and Volume Share of RP exports to the US (selected items) Volume in dozen; First Quarter, 2004 and 2005 Selected Items: Category

1st Q 04 Volume

1st Q 05 Volume

1st Q 04 Volume

Share

1st Q 05 Volume

Share Cotton / MMF Woven Shirt (M&B): 340/640 292,046 309,799 2.81% 2.44% Cotton Trouser: 347/348 1,015,995 1,215,642 2.48% 2.54% MMF Knit Shirt: 638/639 631,642 515,355 3.32% 2.58% Cotton and MMF Brassiere: 349/649 529,558 467,397 4.59% 3.64% Cotton and MMF Dressing Gown: 350/650 49,818 66,154 1.94% 2.29% MMF Trouser: 647/648 467,818 427,299 3.03% 2.67% Source: EmergingTextiles.com (1998-2005), based on compiled data from the US Department of Commerce / OTEXA

RP’s garments exports to the USA, RP’s garments exports to the USA, 11stst quarter of 2005 quarter of 2005

Table 24. Percentage volume change of garments exports of selected countries to the US for selected items (First Quarter of 2005 compared to First Quarter of 2004) Selected Items: Category

China %

Bangla %

India %

Indon %

Phils %

Thai %

Viet %

Cotton Knit Shirt: 338/339 1,257.87 Na 129.44 na na na -28.26 Cotton / MMF Woven Shirt (M&B): 340/640

284.12 28.18 28.47 39.50 6.08 -17.72 29.71

Cotton Trouser: 347/348 1,521.04 75.93 na 56.46 19.65 na 11.39 Underwear: 352/652 308.07 11.12 56.16 -1.81 na 38.79 na MMF Knit Shirt: 638/639 331.19 -20.29 na -22.39 -18.41 -7.34 na Cotton and MMF Brassiere: 349/649 34.53 -45.86 64.91 5.51 -11.74 25.55 Na Cotton and MMF Dressing Gown: 350/650

36.86 80.05 -44.15 54.60 32.79 161.86 -11.67

MMF Trouser: 647/648 269.16 24.09 -16.23 9.81 -8.66 14.38 1.12 Source: EmergingTextiles.com (1998-2005), based on compiled data from the US Department of Commerce / OTEXA na- figures not available

Prospects for the PhilippinesProspects for the Philippines Net investments of new companies reached Net investments of new companies reached

P1.04 billion from 2001 up to the end of the P1.04 billion from 2001 up to the end of the first semester of 2004first semester of 2004

388 new manufacturing facilities started 388 new manufacturing facilities started operations compared to 269 factory shut-operations compared to 269 factory shut-downs. Net gain: 119 manufacturing facilitiesdowns. Net gain: 119 manufacturing facilities

44,031 new workers were hired compared to 44,031 new workers were hired compared to 42,128 layoffs. Net gain: 1,903 workers. 42,128 layoffs. Net gain: 1,903 workers.

Prospects for the PhilippinesProspects for the Philippines RP is losing out to low-cost countries like China, but RP is losing out to low-cost countries like China, but

is able to keep its market in certain product is able to keep its market in certain product categories, particularly in the mid-range and the high-categories, particularly in the mid-range and the high-end niche marketsend niche markets

Some Philippine exporters are able to increase their Some Philippine exporters are able to increase their volume of exports but at lower pricesvolume of exports but at lower prices

Because of the safeguards against China, RP can be a Because of the safeguards against China, RP can be a “second-tier” supplier to U.S. apparel companies and “second-tier” supplier to U.S. apparel companies and retailers for niche goods or servicesretailers for niche goods or services

Philippine-based firms that have a track record of Philippine-based firms that have a track record of efficiency, flexibility, and quality are in a position to efficiency, flexibility, and quality are in a position to keep the confidence of their U.S. customers. keep the confidence of their U.S. customers.

Adjustment efforts Adjustment efforts undertaken by firmsundertaken by firms

Survey of firmsSurvey of firms Of the 1,043 registered garments and textile exporters Of the 1,043 registered garments and textile exporters

listed in the GTEB directory, only firms with main listed in the GTEB directory, only firms with main offices in Metro Manila, Cavite, Rizal, Laguna, and offices in Metro Manila, Cavite, Rizal, Laguna, and Batangas were initially considered for the survey, Batangas were initially considered for the survey, yielding a total of 809 firmsyielding a total of 809 firms

Of the 809 firms, 565 maintained garments as their Of the 809 firms, 565 maintained garments as their main product line; the 565 firms served as survey main product line; the 565 firms served as survey populationpopulation

Sample size (90% confidence level, and margin of Sample size (90% confidence level, and margin of error of 0.10): 61 firmserror of 0.10): 61 firms

Total responses: only 27 firmsTotal responses: only 27 firms

Profile of respondentsProfile of respondents Capitalization Capitalization

Ranged from P2 million to P26 million Ranged from P2 million to P26 million (based on 10 firms that revealed their (based on 10 firms that revealed their capitalization)capitalization)

Years of operationYears of operation Ranged from 2 to 34 yearsRanged from 2 to 34 years 7 have operated for more than 20 years7 have operated for more than 20 years 6 have operated for more than 10 years 6 have operated for more than 10 years

but less than 20 yearsbut less than 20 years Number of employeesNumber of employees

7 have 100 or less employees7 have 100 or less employees 7 have 101 to 200 employees7 have 101 to 200 employees 3 have more than 200 employees3 have more than 200 employees 3 did not respond3 did not respond

Profile of respondentsProfile of respondents Product linesProduct lines

Men’s and boys’ pants, shorts, vests, Men’s and boys’ pants, shorts, vests, and jacketsand jackets

Men’s wind shirtsMen’s wind shirts Ladies’ and girls’ pants, jackets, skirts, Ladies’ and girls’ pants, jackets, skirts,

and blousesand blouses Knitted t-shirts; knitted sweatshirtsKnitted t-shirts; knitted sweatshirts Polo shirtsPolo shirts Denim wearDenim wear SportswearSportswear Hospital wearHospital wear Children’s clothingChildren’s clothing Infant wearInfant wear Ladies’ lingerieLadies’ lingerie

Profile of respondentsProfile of respondents Sources of raw materialsSources of raw materials

Mostly abroad, particularly Hong Kong, China, Taiwan, Mostly abroad, particularly Hong Kong, China, Taiwan, South Korea, and JapanSouth Korea, and Japan

Other suppliers include Indonesia and PakistanOther suppliers include Indonesia and Pakistan Reasons cited for sourcing abroadReasons cited for sourcing abroad

Imported fabrics are cheaper and are of better qualityImported fabrics are cheaper and are of better quality Unavailability of fabrics and other raw materials in the Unavailability of fabrics and other raw materials in the

PhilippinesPhilippines Buyers usually nominate suppliers from abroadBuyers usually nominate suppliers from abroad One company “requires that raw materials be imported from One company “requires that raw materials be imported from

Japan”Japan” One company receives from its buyer raw materials that are One company receives from its buyer raw materials that are

already cut and ready for sewingalready cut and ready for sewing

Profile of respondentsProfile of respondents Sales volume in 2003 compared to 2002Sales volume in 2003 compared to 2002

12 firms reported an increase in volume12 firms reported an increase in volume 10 firms reported a decrease in volume10 firms reported a decrease in volume 3 firms said volume was the same3 firms said volume was the same 2 firms did not respond2 firms did not respond

Profitability in 2003 compared to 2002Profitability in 2003 compared to 2002 13 firms reported a profit13 firms reported a profit 6 firms claimed to have incurred a loss6 firms claimed to have incurred a loss 6 firms said they broke even6 firms said they broke even 2 firms did not respond2 firms did not respond

Upgrading efforts of firmsUpgrading efforts of firms 13 firms invested in newer and faster machines, 13 firms invested in newer and faster machines,

including some state-of-the-art machineryincluding some state-of-the-art machinery Several firms bought specialized machines to be Several firms bought specialized machines to be

able to satisfy their buyers’ specific able to satisfy their buyers’ specific requirementsrequirements

Some companies also invested in the training of Some companies also invested in the training of their workers: technical consultants, in-house their workers: technical consultants, in-house training, scholarship programs / subsidized training, scholarship programs / subsidized training offered by GTEB; hiring only of training offered by GTEB; hiring only of computer literate staff for office workcomputer literate staff for office work

Upgrading efforts of firmsUpgrading efforts of firms What triggered upgrading?What triggered upgrading?

Stiff competition – increasing productivity of other Asian Stiff competition – increasing productivity of other Asian countriescountries

Impending quota phase outImpending quota phase out Need to comply with buyers’ standardsNeed to comply with buyers’ standards

What hindered upgrading?What hindered upgrading? 10 firms did not mention any factor that hindered upgrading10 firms did not mention any factor that hindered upgrading 4 firms mentioned financial constraints4 firms mentioned financial constraints 2 firms referred to the “uncertain future”2 firms referred to the “uncertain future” 5 firms did not respond5 firms did not respond

Upgrading efforts of firmsUpgrading efforts of firms For many firms, upgrading is limited to For many firms, upgrading is limited to

process upgrading, or efforts to improve the process upgrading, or efforts to improve the efficiency of their operationsefficiency of their operations

Some are engaged in product upgrading, or Some are engaged in product upgrading, or coming up with differentiated productscoming up with differentiated products

Functional upgrading, or moving into the Functional upgrading, or moving into the higher value activities of the chain, does not higher value activities of the chain, does not seem to be a common occurrence among seem to be a common occurrence among garments exportersgarments exporters

Institutional supportInstitutional support Support from governmentSupport from government

9 firms cited training programs offered by the GTEB-PTTC9 firms cited training programs offered by the GTEB-PTTC 3 firms mentioned financial support from SBGFC and 3 firms mentioned financial support from SBGFC and

TIDCORPTIDCORP Support from industry associationSupport from industry association

1 firm mentioned endorsement made by FOBAP1 firm mentioned endorsement made by FOBAP 2 firms mentioned the seminars and conventions / trade 2 firms mentioned the seminars and conventions / trade

expositions sponsored by CONGEPexpositions sponsored by CONGEP 1 firm credited GBAP for providing info on the industry and 1 firm credited GBAP for providing info on the industry and

GTEB rules and regulationsGTEB rules and regulations 1 firm cited the ITAP, which sent invitations to its 1 firm cited the ITAP, which sent invitations to its

expositions, and PCCI, which provides updates on new expositions, and PCCI, which provides updates on new business developmentsbusiness developments

Institutional supportInstitutional support Support from buyersSupport from buyers

Technical upgrading on sewing process and quality Technical upgrading on sewing process and quality managementmanagement

Seminars on safety and productionSeminars on safety and production Information updates on latest fashion trendsInformation updates on latest fashion trends Information on new specialized equipmentInformation on new specialized equipment Advanced payments or loans from buyersAdvanced payments or loans from buyers Procurement of raw materials and delivery to Philippine Procurement of raw materials and delivery to Philippine

suppliersupplier Investment in fabric inspection machineryInvestment in fabric inspection machinery

Membership in local cluster or Membership in local cluster or export consortiumexport consortium

Only 1 firm is a member of a local cluster; received Only 1 firm is a member of a local cluster; received support in terms of transport facilitationsupport in terms of transport facilitation

Not one firm is a member of an export consortiumNot one firm is a member of an export consortium

Evaluation of institutional supportEvaluation of institutional support

Few firms have availed of the support offered Few firms have availed of the support offered by the GTEB and the different industry by the GTEB and the different industry associationsassociations

Very few firms are members of local clusters Very few firms are members of local clusters or export consortiaor export consortia

Firms seem to be undertaking upgrading Firms seem to be undertaking upgrading efforts on their own, and are likely to be efforts on their own, and are likely to be supported by their mother companies or by supported by their mother companies or by their major buyers.their major buyers.

What is a global What is a global value chain?value chain?

Simple value chainSimple value chain

Design and product development

Manufacturing

Marketing and sales

Disposal and recycling

The apparel The apparel value chainvalue chain

Case – Leader GarmentsCase – Leader Garments

Leader GarmentsLeader Garments Part of Makalot Industrial CompanyPart of Makalot Industrial Company Main products: ladies’ blouses, sleepwear, Main products: ladies’ blouses, sleepwear,

pants, shorts, and jogging pantspants, shorts, and jogging pants Capitalization: P100M to P160MCapitalization: P100M to P160M Has been operating for 14 yearsHas been operating for 14 years 1200 employees, 93% of which are female1200 employees, 93% of which are female In 2003, sales volume increased compared to In 2003, sales volume increased compared to

previous year; generated profitprevious year; generated profit

Leader GarmentsLeader Garments Buyers are all based in the United StatesBuyers are all based in the United States Major buyers include Wal-Mart, J.C. Penny, Major buyers include Wal-Mart, J.C. Penny,

Mervin’s Department Store, Target Department Mervin’s Department Store, Target Department Store, and Kohl’s Department StoreStore, and Kohl’s Department Store

Biggest client is Gap, Inc.Biggest client is Gap, Inc.

Buyer’s Head Office

United States

Buyer’s Trading Office

Hong Kong

Makalot IndustrialTaiwan

Leader GarmentsPhilippines

Raw Materials Suppliers

Hong Kong, China, Korea, Indonesia, Japan

In-house Subcontractor

Philippines

Other Subcontractor

Philippines

Other Subcontractor

Philippines

Other Subcontractor

Philippines

Order

Order / Pay FOB

P.O. / Pay CMTQ

Deliver

Consign

Assign

DistributeDistributeDistribute

Case study hypothesesCase study hypotheses Hypothesis 1: Hypothesis 1: In quasi-hierarchical chains (i.e., In quasi-hierarchical chains (i.e.,

captive value chains), developing country captive value chains), developing country producers experience fast product and process producers experience fast product and process upgrading but make little progress in functional upgrading but make little progress in functional upgradingupgrading

Hypothesis 2: Hypothesis 2: Network-based chains (i.e., Network-based chains (i.e., modular or relational value chains) support an modular or relational value chains) support an open-ended upgrading path but local producers in open-ended upgrading path but local producers in developing countries rarely find themselves in developing countries rarely find themselves in such chainssuch chains

Theoretical frameworkTheoretical framework

Value chain governanceValue chain governance

MarketsMarkets Modular value chainsModular value chains Relational value chainsRelational value chains Captive value chainsCaptive value chains HierarchyHierarchy

Paths for upgradingPaths for upgrading

Process upgradingProcess upgrading Product upgradingProduct upgrading Functional upgradingFunctional upgrading Chain upgradingChain upgrading

Arm’s Length Market

Relations

Network-based Value Chains

Quasi-hierarchical Value Chains

Hierarchies

CHAIN

FUNCTION

PROCESS

PRODUCT

HIERARCHY

CAPTIVE

RELATIONAL

MODULAR

MARKET

Integrated Firm

LeadFirm

Captive Suppliers

Component & Material Suppliers

LeadFirm

Relational Supplier

Component & Material Suppliers

LeadFirm

Turn-key Supplier

PriceSuppliers Customers

MATERIALS END-USEValue Chain

1

3

POSSIBLE UPGRADING

TRAJECTORIES

PROCESS

PRODUCT

FUNCTION

CHAIN

PROCESS

PRODUCT

FUNCTION

CHAIN

4

GEOGRAPHICAL SCALE / CONTEXT OF GLOBAL VALUE CHAINS

Figure 1. Conceptual Framework

ChainFunctionProcessProduct



Price

Determinants of value chain Determinants of value chain governancegovernance

DeterminantsDeterminants IndicatorsIndicators

Complexity of Complexity of transactionstransactions

Degree of dependenceDegree of dependenceLength of trading relationshipLength of trading relationshipOrdering procedureOrdering procedure

Ability to codify Ability to codify transactionstransactions

Price determinationPrice determinationCredit extendedCredit extendedContractual relationshipContractual relationshipInspectionInspection

Capabilities in the Capabilities in the supply basesupply base

Technical assistanceTechnical assistanceCommunicationCommunicationOutsourcing payment termsOutsourcing payment terms

Hybrid value chain: Hybrid value chain: modular and captivemodular and captive

Manufacturers, subcontractors,

and service providers

Leader’s buyers:Gap, Wal-Mart, JC

Penney, etc.

Leader Garments and

Makalot Industries

Captive Modular

Leader’s upgrading practicesLeader’s upgrading practices Process upgradingProcess upgrading

206 units of new computerized machines 206 units of new computerized machines were delivered in 2004 for sewing and were delivered in 2004 for sewing and cuttingcutting

10% improvement in efficiency and quality 10% improvement in efficiency and quality of work and productsof work and products

Taiwan office approves and purchases the Taiwan office approves and purchases the machines upon approval of Leader’s machines upon approval of Leader’s General Manager in the PhilippinesGeneral Manager in the Philippines

Older machines are lent to the other Older machines are lent to the other subcontractors of Leader at no cost to themsubcontractors of Leader at no cost to them

Leader’s upgrading practicesLeader’s upgrading practices Process upgradingProcess upgrading

Use of online software to get information on Use of online software to get information on the order of its buyers; now orders go the order of its buyers; now orders go directly to the in-house manufacturerdirectly to the in-house manufacturer

Purchase of the Enterprise Resource Purchase of the Enterprise Resource Planning (ERP) from Oracle in 2002Planning (ERP) from Oracle in 2002

In-plant seminars for line managers and In-plant seminars for line managers and managerial staff, using trainers from managerial staff, using trainers from Meralco FoundationMeralco Foundation

Individual sewers are trained internally by Individual sewers are trained internally by the managerial staffthe managerial staff

Leader’s upgrading practicesLeader’s upgrading practices Product and functional upgradingProduct and functional upgrading

Higher value-added functions of product Higher value-added functions of product design / development and marketing are design / development and marketing are performed in Taiwanperformed in Taiwan

Minimal design activities performed in the Minimal design activities performed in the PhilippinesPhilippines

Philippine operations are mainly concerned Philippine operations are mainly concerned with counterchecking of patterns and with counterchecking of patterns and measurements of samples presentedmeasurements of samples presented

Lower value-added functions such as Lower value-added functions such as embroidery, washing, and packaging are embroidery, washing, and packaging are outsourced to local companies.outsourced to local companies.

Leader’s upgrading practicesLeader’s upgrading practices Chain upgradingChain upgrading

Plans to establish a distribution function to Plans to establish a distribution function to provide warehousing and direct delivery provide warehousing and direct delivery services to its buyersservices to its buyers

Makalot plans to establish offices either in Makalot plans to establish offices either in Los Angeles or New York, and deliver Los Angeles or New York, and deliver products at the buyers’ doorstepsproducts at the buyers’ doorsteps

Will enable Leader to quote orders with the Will enable Leader to quote orders with the distribution service already accounted fordistribution service already accounted for

Makalot has financial means to integrate Makalot has financial means to integrate distribution services into its operationdistribution services into its operation

ConclusionsConclusions

ConclusionsConclusions Upgrading is driven largely by the strategic intent of Upgrading is driven largely by the strategic intent of

individual firms, but is influenced by the firm’s position individual firms, but is influenced by the firm’s position in the value chainin the value chain

Companies that participate in a network value chain Companies that participate in a network value chain (e.g. Leader Garments) have the ability to engage (e.g. Leader Garments) have the ability to engage different types of upgrading activities, from process different types of upgrading activities, from process upgrading to functional upgradingupgrading to functional upgrading

Companies that belong to a captive value chain (e.g. Companies that belong to a captive value chain (e.g. subsidiaries and subcontractors of Leader Garments) subsidiaries and subcontractors of Leader Garments) undertake mostly process upgrading, largely through the undertake mostly process upgrading, largely through the initiative of the lead firminitiative of the lead firm

Government support is critical, particularly in the areas Government support is critical, particularly in the areas of infrastructure, peace and order, and social securityof infrastructure, peace and order, and social security

RecommendationsRecommendations

Big Brother

Buyers

Small Brother

Small Brother

Small Brother

Private sector must drive the change

Government must serve as enabler

Recommendations for governmentRecommendations for government

Provide adequate and reliable communication Provide adequate and reliable communication and transportation infrastructure to reduce the and transportation infrastructure to reduce the cost of doing business in the countrycost of doing business in the country

Lower inter-island shipping rates by Lower inter-island shipping rates by improving port facilities to speed up cargo improving port facilities to speed up cargo handling in portshandling in ports

Minimize red tape in dealing with the Bureau Minimize red tape in dealing with the Bureau of Customs so as to speed up lead times when of Customs so as to speed up lead times when importing raw materials from abroad; facilitate importing raw materials from abroad; facilitate export-import documentationexport-import documentation


Lower power rates by encouraging more Lower power rates by encouraging more investments in the power sectorinvestments in the power sector

Provide easy access to low interest loans, Provide easy access to low interest loans, especially for working capital and capital especially for working capital and capital investmentsinvestments

Continue providing assistance, in terms of Continue providing assistance, in terms of finding new markets and providing finding new markets and providing information about developments in foreign information about developments in foreign marketsmarkets


Continue providing support for displaced Continue providing support for displaced garments workers, in terms of livelihood garments workers, in terms of livelihood assistance, job placement assistance, loan and assistance, job placement assistance, loan and loan guarantees, retraining, and loan guarantees, retraining, and entrepreneurial skills trainingentrepreneurial skills training

Strictly enforce labor laws and standards Strictly enforce labor laws and standards among garments firms so as to secure the among garments firms so as to secure the support of labor in efforts to save the industrysupport of labor in efforts to save the industry

Recommendations for garments Recommendations for garments industry leadersindustry leaders

Invest in new machineries and productivity-Invest in new machineries and productivity-enhancing technologyenhancing technology

Engage the support of Filipino designers to Engage the support of Filipino designers to help local firms constantly come up with help local firms constantly come up with creative and innovative designscreative and innovative designs

Develop the management skills of managers Develop the management skills of managers and supervisors of garments firms, especially and supervisors of garments firms, especially in the areas of financial management and in the areas of financial management and human resource managementhuman resource management


Encourage close collaboration among firms, Encourage close collaboration among firms, especially in availing of common service especially in availing of common service facilities. This could serve to reduce the capital facilities. This could serve to reduce the capital investments made by individual firms.investments made by individual firms.

Encourage the Big Brother-Small Brother Encourage the Big Brother-Small Brother (lead firm-subcontractors) arrangement so as (lead firm-subcontractors) arrangement so as to achieve significant economies of scale and to achieve significant economies of scale and so as to enhance the technological capabilities so as to enhance the technological capabilities of the subcontractors through the help of the of the subcontractors through the help of the lead firm.lead firm.


Provide support for certain lead firms to move Provide support for certain lead firms to move up the value chain by adopting the “concept to up the value chain by adopting the “concept to store approach” / full production services store approach” / full production services strategies to cater to high-end segments of the strategies to cater to high-end segments of the market.market.

Consider investments in other countries so as Consider investments in other countries so as to take advantage of proximity to raw to take advantage of proximity to raw materials and abundant cheap labor, and plow materials and abundant cheap labor, and plow back profits into the Philippines through back profits into the Philippines through investments in other viable businesses.investments in other viable businesses.

Thank you.Thank you.

the challenge of adjustment in the textile and garments industries of the philippines

Business