Why it’s a Good Time to Take Another Look at Sourcing in Central America (Yes, Again)
Date: Thursday, August 15, 2019
Source: Sourcing Journal
Whenever the apparel supply chain is staring down some sort of upheaval—whether it’s the Tranche 4 tariffs, fires in Bangladesh or China wage hikes—many decide that it’s a good time to take another look at sourcing in Central America.
Gail Strickler, president for global trade at Brookfield Associates, has been involved in Central America sourcing in a variety of roles since the mid-1990s, including previously serving as the assistant U.S. trade representative for textiles and apparel. And as someone who’s seen the ups and downs—and the challenges and the limitations—associated with this region, Strickler told Sourcing Journal that right now is indeed a very good time to do business there.
For one thing, the CAFTA-DR agreement facilitates free trade between the United States and El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic, and these nearshoring opportunities translate into reduced transportation costs thanks to a region that’s no more than five days away.
Factories in this area also have smaller minimum order quantities, Strickler said, while businesses are investing in state-of-the-art technology for their facilities. Add in the new large-scale polyester producer that opened last year in Honduras, and all of this combines for increased capacity and thereby speed to market, she noted.
While there has been some wage pressure, Strickler said there hasn’t been a dramatic increase in prices thanks to increasing productivity.
“Part of that is people feel confident the orders are coming and the trade benefits will continue,” she said.
Although the region doesn’t yet have the technology or capacity to manufacture at the same scale as its Asian counterparts, it’s established some proficiencies in its own niche way, said Michael McDonald, president of SPESA, an industry association for suppliers to the sewn products industry.
“Maquiladoras are already prominent in Central American countries, and 90 percent of maquiladora production is in textiles,” he noted. “The majority of factories are not prepared to produce at the same rate as China, but with investment in advanced manufacturing tools they will likely begin to keep pace.”
Lucia Palacio, promotion director for VESTEX, the Guatemala Apparel and Textile Association, cited the region’s skills in knit tops and bottoms, with specialization in blends and special finishes such as dying, washing, screen-printing and sublimation.
McDonald also described Central America as being much more stable than it has been in the past, “with less conflict and better governing.”
“The development and expansion of several free trade zones in Central America has also created an incubator of sorts that puts startups and new entrepreneurs alongside major brands and manufacturers,” he said, with benefits including faster response shipping and easier financing compared with mass manufacturing in Asia.
The region is certainly seeing an increase in activity. U.S. apparel imports from CAFTA-DR countries increased 7 percent in January through June of this year versus the prior-year period, according to data from the U.S. Office of Textiles and Apparel (OTEXA).
McDonald said that Adidas and Nike have begun shifting footwear production to the area in an effort to decrease factory-to-supply time, a decision he said was less likely driven by tariffs than a desire to benefit from closer-to-home production.
“Even companies who have prioritized U.S. manufacturing are looking to Central America,” McDonald said, citing the direct-to-consumer apparel brand Ministry of Supply. When developing its customized 3D-knit women’s dresses, Ministry of Supply worked with Shima Seiki to manufacture them in the U.S and have them delivered within 10 days, he said. For the men’s shirts, however, U.S. manufacturing was prohibitive, so they instead partnered with a manufacturer in Central America to still achieve the same delivery time.
“Small businesses seem more likely to move, as they cannot afford the uptick in costs associated with shipping and tariffs,” McDonald noted “Many companies that sell products through retailers like Amazon are heavily considering shifting production to countries such as India, Vietnam and the Central American region.”
“CAFTA-DR countries will never be Asia—in prices, labor and the application of technology—but in the long run this region has to keep up with the apparel business,” said VESTEX’s Palacio, who touted Guatemala’s small size as allowing companies to be nimbler and more flexible with their updates and innovation.
McDonald agreed that the region still holds its own set of unique challenges, including the different dynamics between countries. “Guatemala has been one of the strongest manufacturing countries in the region but has taken a significant hit over the last several years due to minimum wage increases—now having one of the highest in the region,” he said, noting that Guatemala lost nearly 30,000 jobs in the textile sector from 2006 through 2018, in large part because of these wage increases.
However, recent law changes now permit part-time workers there, which he said is expected to be a significant boon for the industry.
For her part, Strickler wondered if whether further business development in the region—or perhaps more voiced support of CAFTA-DR by the Trump administration—could even become a solution for stemming some of the United States’ illegal immigration issues.
“Here you’re having this huge issue of illegal immigration primarily from…several of the countries that are the strongest in terms of the opportunities that [the U.S. and Central American governments and the private sector] could create in the textile and apparel sector,” she said. “So maybe there’s a chance for the threats of the China tariffs and the push for reducing illegal immigration to look at the opportunities to really create long-lasting jobs and long-lasting strategy in Central America that becomes more of a win/win situation.”