Welcome 2005! This year is bringing new challenges in the international arena. Most of the Latin American economies grew last year, thanks to foreign investments and exports based on low foreign exchange. However, competing with low prices will not guarantee growth. One of the sectors experiencing this challenge is the textile industry. With the terminations of quotas the price competition is higher and companies need to change strategies. Intrix believes it is time to find new directions and we are able to assist companies with this.
Industry News
The fear of the big Chinese dragon; there are many countries that are feeling the threat of losing the desirable US apparel market. An estimation of the WTO predicts that with the elimination of the quotas, China could gain 56% of the US garment market and will come out the victor in the battle for the global $350 billion industry. Unions and lobbyists around the world are fighting to create new barriers to slow the exodus of jobs and contracts to China.
South American countries are forecasting that their textile exports will fall from 16% to 5% to the US. However, there is some optimism that termination of quotas will benefit some garment pieces with high-value added. In addition, there are new trade agreements under discussion with Peru and Colombia, which are expected to be signed this year.
Although China manufactures clothing at the lowest price worldwide, labor cost (US $0.86 per hour) this is not the only factor of their competitive advantage. The Chinese were driven to move up-market more aggressively than their rivals because of domestic competition to fill their nation's limit quota. Now, buyers not only ask for price, they think about delivery, quality and selling price after markdowns to see which is more cost effective.
There are also other aspects that have changed the industry; the retail sector works closely with suppliers, maintaining tight inventory controls and trade volume. US retailers reduce costs and pass the savings on to consumers. And not only retail has changed, trendy fashion houses have also cut the time it takes to introduce new styles from months to weeks. Therefore, competing with low cost will not guarantee continuity in the industry; the global economy is demanding more creativity and technology.
Production Costs Comparison(per unit) US$
Peru
China
Labor
1.68
0.74
Yarns
1.23
0.70
Chemicals
0.06
0.05
Energy
0.21
0.16
Others
1.32
1.29
Total
4.50
2.94
Caretas Magazine 1855
Economy in the Region
Brazilian Economy Pushed by the Foreign Markets
2004 was the year with the highest trade surplus in the history of Brazil: about US$ 34 billion (exports US$ 96 billion and imports 62 billion). The US, Brazil's major trade partner, imported about US$ 19 billion in Brazilian products (20% more than 2003). Brazil imported about US$ 11 billion from the USA. For the first time in decades, Brazil has a surplus in its external accounts. Brazil now produces more dollars than needed to honor its debts. After registering a deficit in current transactions of US$ 7.637 billion in 2002, Brazil had a surplus of US$ 4 billion in 2003, and US$ 10 billion in 2004; the highest in the history of the country. Most of this is result of the growth of the exports, and also the capital flow with foreign investments, which reached US$ 15 billion.
The private debt in March 2003 was US$ 100 billion; in October 2004 it went down to US$ 89 billion, helped by the devaluation of the dollar, but most of it due to the trade surplus. For 2005 it is expected that the private debt will go down to US$ 73 billion, 13% of the GDP.
The Bovespa registered 17% growth in 2004. The C-Bond is quoted above its "face value", which means that there is strong trust in the future of the economy. The country risk, which reached 2,000 points in 2002, went down to 400.
For 2005, the government expects another good year in the economy, pushed by exports and foreign investments.
Intrix sees good opportunities for foreign companies to invest in Brazil in this moment.
Source: Istoé Dnheiro Magazine, MDIC
International Overview
Revolution in China, China is facing a revolution in the consumer sector: Mercedes and Ferraris are now a common sight in the major Chinese cities. Luxury brands like Gucci, Armani, Louis Vuitton and Dior are present in daily Chinese life.
There are 10 million to 13 million consumers of luxury and brand products in the country. According to a study done by the US consulting company Mintel, the jewelry market, fine watches, clothes and luxury accessories reached US$ 2 billion in the last year. Imports of Swiss watches registered US$ 150 million. From Brazil the Chinese imported US$ 20 billion in Brazilian jewels, representing a growth of 20% over 2003.
China is the 4th largest market of Luis Vuitton, which will open another 13 stores in 2006. Prada is investing $40 million to reach 14 stores in 2005 (today there are seven). Giorgio Armani has a plant in the country and intends to open 20 stores in the coming years. Luxury cars are also a sector that is growing. Toyota will inaugurate a chain with 14 new stores in the country. Ford plans to sell Aston Martin and Jaguar in 2005. GM will export the Cadillac line, which will be produced in China in a few years.
In the last 25 years China has been registering growth rates of 9%, doubling its GDP. About 270 million people left the poverty levels, and 100 million graduated to middle class. According to the Chinese Academy of Social Sciences, in 2020 middle class will comprise 40% of the population, about 600 million people. The consumers of luxury products are mostly young people, executives of multinationals or businessmen. It is sophisticated in Beijing to live in condominiums in the US style, with names like Grand Hills and Riviera, drive a Ferrari and have Armani clothes. High society likes status and wealth symbols to be used on the streets. Huge logos and labels are preferred.
Intrix believes there are good opportunities for luxury products manufacturers to invest in the Chinese market.
Source: Exame Magazine, Dec.22, 2004.
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