Latin American Makers Scramble to Stem Losses as Brands Scrap Orders

Date: Tuesday, May 12, 2020
Source: Sourcing Journal

Latin America’s textile and apparel makers are struggling to cut losses as U.S. and European fashion brands cancel or postpone orders as the coronavirus pandemic slows retail around the world.

“We are in a critical situation,” said Eric Levy, vice president of Mexico-based Cavalier Fashion Group, which makes suits for Tommy Hilfiger and its own private label Cavalier. “We have enough cash to survive two more months. That’s it.”

Levy supplies Mexico’s top department store chains, including Liverpool, El Palacio de Hierro and Sears de Mexico, among others. All of those chains, he said, have scrapped or asked for more time to receive orders, cancelling payments and throwing the firm into a cash squeeze.

“I pay my maquiladores [Spanish slang for sewing shops] within a week but Liverpool pays at 90 days. I have lost $2.5 million in revenues for part of March and all of April,” Levy said.

Mexican banks are quickly curtailing lending to fend off a deep recession. When they do offer credit, they do so at prohibitive interest rates, according to Levy. Adding salt to the wound, Mexico’s government continues to drag its feet to launch a stimulus program for the sector. It has demanded manufacturers shutter output but continue to pay workers while idle. And while makers can delay social security payments, they must repay them at a 2.5 percent interest rate once the crisis subsides, double the normal bank interest rates.

“There is no help at all from the government. It’s ridiculous,” Levy said. “They have not exempted taxes or allowed us to reduce salaries or fire people. I don’t see how anyone meeting the law can last.” Levy said his 420 operators continue to earn their salaries while at home.

Mexico’s top industry lobby Canaive sounded similar alarms, just as the pandemic has claimed 2,500 lives in the country, according to the World Health Organization, raising the specter that the government will extend lockdowns until May 30 when they were set to end April 30.

In a statement, Canaive said the apparel industry is staring at the abyss, operating at 20 percent capacity versus 80 percent before physical isolation measures began on March 30. It urged the government to immediately launch an aid package that includes support for ailing enterprises, work to substitute low-cost imported fabric for domestic alternatives and institute other actions to combat contraband and piracy. The body also asked for tax payment deferrals while “the health emergency” continues.

“We need to urgently get back to work as the industry is not in a position to pay one more month of salaries,” the organization added.

Suppliers are also suffering in Central America where hundreds of apparel makers serving the likes of Under Armour, Nike or Lululemon have closed shop, leaving production half staffed (mainly because of a shift to make personal protective wear) or virtually shut such as in Dominican Republic, Nicaragua or Honduras.

“There have been many cancellations,” said apparel lobby group Vestex’s president Alejandro Ceballos. “In Guatemala, we have lost $400 million of orders of $1.6 billion in total annually. A very hard blow that will probably get harder.”

Several U.S. trademarks have postponed payment or refused it altogether. In one instance, an unnamed American label “disappeared, leaving three unpaid containers each worth $100,000 parked at a Guatemalan port,” Ceballos said.

“Some brands have offered to pay for fabric but not finished apparel while some have cancelled orders no matter what state they were in the production cycle,” according to Ceballos. “Others are asking for as much as 90 days instead of the usual 30 days to pay.”

Most garment makers have given up on collecting payment for lost orders and will simply record the losses.

Bucking the trend, however, are a string of undisclosed factories that sew for Walmart and Amazon, which have not shelved orders because home-bound consumers have stepped up online purchases, Ceballos said.

In Colombia, Grupo Crystal, which makes garments for companies including Chico’s, Zumba and Michael Kors, has received cancellations but is allowing clients to defer payments, said Jaime Sierra, who leads the company’s manufacturing plants in the city of Medellin.

“We have two or three months of clothing on hold that probably won’t be sold,” Sierra said, estimating that the firm, which also runs its own brands GEF and Punto Blanco, may not collect payment for that merchandise. Still, he said Crystal has enough cash to survive a prolonged downturn. It has also recently started making masks and other protective apparel for doctors battling the virus in Colombia and abroad, offsetting losses elsewhere, according to Sierra.

Fernando Pimentel, president of Brazilian export apparel lobby Abit, added clothing manufacturers in Latin America’s largest economy have halted exports to the U.S. and Europe to make medical gear for overwhelmed doctors and hospitals.

“We need a lot of medical equipment to attend our needs so we stopped exporting in March,” said Pimentel, reversing prior views that the epidemic was fueling sourcing opportunities for Brazil as American labels were starting to shift contracts away from China.

Meanwhile, Brazil is quickly becoming a hotspot for the deadly respiratory disease, with deaths topping 7,900 out of more than 114,000 cases. Retailers have been hit hard by strict lockdowns that are expected to last for two months, observers said.

Amid the chaos, designer Lenny Niemeyer, who makes bikinis and other beachwear for international department stores such as Bergdorf Goodman in New York, El Corte Inglesin Spain and Le Bon Marche in Paris, is engaged in a price war with distributors.

“All our customers have postponed orders but especially those in the U.S., England, Europe and Japan,” said commercial director Luis Lima. “We are offering 10 percent to 30 percent discounts for orders they have cancelled and asking our suppliers to give us the same. It’s all a big mess but we will survive.”

So far, the Rio de Janeiro-based fashion brand has lost up to $700,000 in international orders, nearly 50 percent of the $1.5 million it exports annually, and expects similar losses until the situation has normalized.

Next door in Paraguay, the once high-flying export industry is also reeling as Brazilian customers, notably department store Riachuelo, have slashed orders, said Diego Daud, president of Paraguay’s textiles association AICP. He forecast foreign shipments will decline more than 30 percent to just over $100 million this year, as other customers in Uruguay, Chile and Bolivia also curtail orders.

Manufacturers and fashion labels in Paraguay, whose industry has grown rapidly amid rock-bottom wages, are also engaged in tough negotiations to avoid losses, Daud said, though he declined to name any of the firms involved. And in common with Brazil, clothing makers are fast becoming suppliers of gowns, masks and other medical gear, allowing them to offset export losses and continue to pay salaries in the industry, which employs 200,000.

“It’s a very difficult scenario,” Daud said, adding that exporters are not the only ones writhing from the pandemic. “The [local] retail sector is completely stopped. We have had 60 days of zero sales.”

 

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