The Future Looks Brighter for California Apparel Industry in 2004

The worst may be over for the California apparel industry, but there are still some hurdles ahead for 2004. That’s what members of the California Fashion Association, which held its annual meeting on Jan. 22 at the California Club in downtown Los Angeles, learned.

These hurdles include increased scrutiny of apparel imports by U.S. Customs officials, a shortage of quotas for apparel and textile imports, workers’ compensation rate hikes, and state legislation requiring many employers to provide health care for workers starting in 2006.

Other challenges include a fluctuating dollar, which has dipped in value against the euro by more than 25 percent in the last year, and a new world trade order starting in 2005, when quotas evaporate for World Trade Organization members.

“The recession is over, and there is no excuse for this industry not to move on and achieve what we want to achieve,” said Lonnie Kane, CFA president and president of womenswear manufacturer Karen Kane Inc. in Vernon, Calif. “If we are going to finance inventory, this is the year to do it with low interest rates. We saw a very good Holiday season with better goods. The department stores I deal with are optimistic.”

However, Kane noted that the California Health Insurance Act of 2003, also known as SB2, could add thousands of dollars to an apparel company’s annual costs. The law, which goes into effect Jan. 1, 2006, requires employers with 200 or more workers to either pay 80 percent of a health insurance premium’s cost for workers and their dependents or pay into a state fund that will provide coverage to workers. Business owners with 50 to 199 employees will be required to do the same by 2007.

“SB2 will be a challenge in the next two years,” Kane said, noting it could cost as much as $6,000 to $7,000 per worker to provide health-care coverage. “I think this needs to be looked at.”

Also, state politicians’ efforts to curtail rising workers’ compensation rates have come up short. “People who didn’t get big increases last year will see 20 percent to 25 percent increases this year,” Kane said.

One big world

Looking at the global angle, Thomas G. Travis, a trade expert, attorney and managing partner with Miami trade law and consultancy firm Sandler, Travis & Rosenberg, talked about how to survive in the post-2005 world, when many apparel and textile quotas will end.

Also Johannes Worsoe, senior vice president of Union Bank of California, informed members about how fluctuating currency rates will affect business this year.

On the trade front, everyone is expecting an onslaught of Chinese apparel imports when quotas end in 2005. But Travis said that may not be the case.

With 2004 being an election year, President George W. Bush is likely to impose safeguards on some apparel categories—much like the safeguards imposed this year on knit fabric, brassieres and dressing gowns—if he is petitioned to do so.

“This is a political issue today,” Travis said. “We have a huge number of job losses [due to apparel production going overseas]. Bush has to do something about it or look like he is doing something. So can you source in China with unfettered access? The answer is no.”

Travis urged everyone to diversify their sourcing options and take advantage of the various free-trade agreements and preferential trade pacts established with other countries around the world. He cited several large apparel companies that have looked beyond China and made a handsome profit.

One example is Gap Inc., the San Francisco company that stocks its own private-label merchandise in more than 4,250 stores worldwide.

In 1996, Gap increased its bottoms production out of Cambodia because there were no quotas for goods coming from that Southeast Asian country at the time. Soon after, the 90 percent tariff rate imposed on pants entering the United States from Cambodia was reduced to about 17 percent. When trade from Cambodia exploded, a bilateral textile agreement between Cambodia and the United States went into effect Jan. 1, 1999, setting quotas on apparel goods. But because Gap was an early customer in Cambodia, it dominated a good chunk of that quota.

“I urge you to take a look at these strategic trade factors,” Travis said. “They make a difference.”

In the near future, Travis said, there may be a number of free-trade agreements or trade preferences negotiated with Middle Eastern countries such as Egypt and Turkey. Normal trade relation status, which lowers tariffs, is pending for Laos. Cambodia is scheduled to become a member of the World Trade Organization this year.

Moving dollar target

While Travis tackled trade concerns, Worsoe focused on currency fluctuations and how they affect a company’s bottom line.

With the weak dollar, U.S. exports are now often cheaper than they were before. But a weak dollar makes goods imported to the United States more expensive unless a foreign currency, such as the Chinese yuan, is pegged to the dollar. “China has gotten a free ride with the drop in the dollar,” Worsoe observed.

He predicted the dollar would remain weak compared with the euro, the European currency, through at least 2004.

However, business executives can manage their risk by transacting their overseas business in the currency of the country they are dealing with, although this poses a risk if the dollar starts to regain its value.

Worsoe suggested company owners obtain a currency forward and options contract to lock in a foreign currency rate.

For example, if a company is importing goods from Singapore, it might opt to pay for the order in Singapore dollars. If the invoice is due in three months, a company could enter into a forward contract with a bank by purchasing Singapore dollars for delivery in 90 days. The protection in this deal is that the forward contract fixes the rate a company pays for Singapore dollars, offsetting the risk of the American dollar losing value against the Singapore dollar.

“The concept of a risk management program is deciding when do you enter into a forward contract,” Worsoe said.

Worsoe noted he expects the euro, now trading at around $1.25, to climb later this year to $1.30 or higher.

He expects the Federal Reserve Bank’s short-term interest rates to remain low, between 1 percent and 2 percent this year. By the end of 2005, the rates could rise to between 3.25 percent and 3.5 percent.