This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 MANILA 003956
SIPDIS
STATE FOR EAP/PMBS, EAP/EP, EB/IFD, EB/TPP/BTA/ANA
STATE FOR EB/TPP/ABT/EHEARTNEY
STATE PASS USTR FOR BWEISEL, DKATZ, JMURPHY, AHEYLIGER
STATE PASS USAID AND OPIC
STATE PASS USDA/FAS FOR SHEIKH
TREASURY FOR OASIA FOR AJEWELL
USDOJ FOR MCRAWFORD
USDOC FOR 4430/ITA/MAC/DBISBEE
USDOC FOR ITA/OTEXA/MDANDRIA
E.O. 12958: N/A
TAGS: ETRD KTEX EINV PREL ECON RP
SUBJECT: POST-QUOTA ADAPTION OF GARMENT AND TEXTILE
INDUSTRIES
REF: STATE 146213
1. Summary: The Philippine garment and textile industry
has thus far withstood the end of the MFA quota regime,
largely thanks to U.S. safeguards imposed on Chinese goods.
Exports during the first half of 2005 are stable, though
production is shifting toward higher-value products and
natural fiber materials. To counter pressure from China,
local producers want preferential access to U.S. markets
before safeguards expire in 2008. Without this access,
industry leaders expect a sharp decline in Philippine
textile exports and employment after safeguards are lifted.
Econoffs met with local garments and textile industry
stakeholders to discuss recent trends and the changing
outlook since the abolition of textile quotas. Responses to
reftel requests on employment, production and exports in the
textile and garment industry are provided after paragraph
10. End Summary.
2. Since the signing of the Multi Fiber Agreement in the
late 70's, the Philippine garment and textile industry has
grown from a cottage industry to a $3 billion sector by
2000, becoming the country's second largest export earner,
with seven percent of total export earnings in 2002-03. The
quota regime has made RP producers highly dependent upon the
U.S. market where 78% of their textile exports went in 2004.
The sector employs over 700,000 workers, nearly 25% of
industrial employment.
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Post-Quota Trends
-----------------
3. Since the end of the quota regime, total garments and
textile exports of the RP slowed to 0.1 percent for the
first half of 2005 to $1.04 billion. A modest rise in
textile exports to non-US trade partners offset a slight
decline in exports to the U.S. The Garment and Textile
Export Board (GTEB) noted evidence of shifting production
towards natural fibers and higher-value products.
4. According to GTEB statistics, during January-April 2005,
RP exports to the US fell by 6% while garments and textile
exports to other markets (except the U.S.) grew by 35%
compared to the same period in 2004. Despite the overall
decline in exports to the U.S. market, there was a sharp
increase in exports of silk and vegetable (S) apparel and
higher value apparel products. S apparel exports rose by
105% and exports of wool apparel products rose by 38%.
However both categories are dwarfed by the volume of cotton
and man-made fiber products, a category that remains
vulnerable to foreign competition. As the total value of
exports of S products rose 104%, the total volume rose by
only 1%, confirming a dramatic shift within this small
category toward higher-value products.
Composition of Philippine Apparel Exports to the U.S.
(Value in million US$ for January-April period)
Category 2004 2005 %Change
Wool Products 8.1 ll.3 38%
Silk and Vegetable 12.0 24.6 104%
Cotton apparel 434.3 451.5 4%
Man-made Fiber 211.2 174.8 -17%
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Consolidation and Decline Probable
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5. GTEB Executive Director Serafin Juliano told econoff at
recent meetings that many Philippine producers were slow to
adapt from a rule-based system to a market-based regime.
The more successful companies include firms that produce
branded products and firms that are able to change
production to meet new market conditions. Top apparel
brands that are produced and sourced from the RP include
GAP, Old Navy, Ann Taylor, Liz Claiborne, and Polo Ralph
Lauren among others. George Siy, President of the
Confederation of Garment Exporters of the Philippines
(CONGEP), reported that many smaller producers closed down
in early 2005 and he predicted further consolidation as
buyers turn to larger suppliers with greater capacity.
According to Mr. Siy, the top 30 garment manufacturing
companies already produce 40% of RP garment exports.
6. The GTEB has projected annual growth of 8-10% until 2008
when the outlook becomes bleak. They expect short-term
growth to be driven by 25-35% growth in exports to non-US
countries with no growth or decline in exports to the US.
Mr. Juliano suggested that there could be a 50% decline in
RP production of cotton apparel within the first year after
safeguards expire since Philippine producers cannot compete
with low labor costs in China. This may be compounded if
Thai producers enjoy preferential access through a Free
Trade Agreement. Philippine producers will continue shifting
production towards higher-value products while lobbying for
their own preferential access to the US market.
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Overcoming Hurdles to Growth
----------------------------
7. The experience of CS Garments and Litton Mills shows how
two firms adapted to the post-quota environment. While
other firms continued to focus on obtaining quotas to the
US, CS garments, a t-shirt exporter, turned to the European
market. Using its knowledge of the European market together
with high quality standards, CS Garments has maintained the
profitability of exports of Philippine made shirts every
year for the last 15 years. Litton Mills, the biggest among
a handful of textile mills here in the Philippines, has also
weathered the end of quotas. Litton Mills primarily
produces denim fabric for export to the US, Europe, and
Japan. According to Litton Mills Business Unit General
Manager Johnson Go, only a small share of their export
operations have been affected by the quota despite 80% of
its customers being US-based. He cited their size and
market forecasting abilities as critical factors that have
enabled them to prosper after the lifting of quotas.
8. In the short term, GTEB believes that Philippine
producers will benefit from comparative advantages in
skilled labor, product quality standards and reliable
production capacity. Philippine producers also maintain
relatively strong labor standards compared with regional
competitors. GTEB expects an erosion of these advantages as
other countries upgrade the training of their workers.
Despite the current advantages in more highly skilled labor,
the Philippines ranks low in terms of labor productivity
especially when compared to China. Philippine garment
exporters are also impeded by lack of locally produced raw
materials, high power rates and other problems affecting the
local investment climate.
----------------------
Government Initiatives
----------------------
9. GTEB has launched a Philippine Industry Garment
Transformation Plan and Assistance Package to help improve
industry competitiveness through quality improvement, and
technology upgrades aimed at raising productivity. However,
CONGEP representatives reported a lukewarm response to this
program with only a few large garment firms participating.
GTEB also met with garment exporters in August to present
its forecast and underscore the need for preferential access
to US markets by 2008. In this meeting, GTEB proposed an
industry cost-sharing arrangement to hire a US lobbying firm
to promote preferential access through an FTA or Qualified
Industrial Zones (QIZs) like those established in Jordan.
10. Comment: Although Philippine textile and garment
exports have withstood the end of the quota regime,
Philippine producers remain vulnerable to increased
competition after U.S. safeguards on Chinese products expire
in 2008. Philippine producers have begun slowly to shift
toward high-value and natural fiber products; their main
export categories of cotton and man-made fiber products will
probably decline sharply after 2008. Given the challenges
involved in negotiating a US-RP FTA by 2008, Philippine
producers will try to push for QIZs with preferential access
to the U.S. market. Textile and garment exporters may help
to lobby the GRP for progress in IPR protection and other
reform preconditions for bilateral trade negotiations. Even
if the Philippines gains preferential access, the garment
and textile industries may have a difficult time maintaining
their level of textile and garments exports.
11. In response to reftel queries, Embassy provides the
following information:
-- Total Philippine industrial production was $27.4 billion
for 2004 and $7.15 billion for first quarter 2005. (See
Table 1 below).
-- Total Philippine textiles and apparel production was
$1.22 billion for 2004 and $240 million for first quarter
2005.
-- Textiles and apparel's share of Philippine imports was
2.43% in 2004. Textiles and apparel's share of Philippine
exports was 5.48% in 2004.
-- Total Philippine manufacturing employment was 3.02
million as of October 2004 and 2.995 million as of January
2005. (Refer to table 2 below).
-- Total Philippine textiles employment was 192,000 as of
October 2004. Total Philippine apparel employment was
537,000 as of October 2004.
Table 1
National Accounts of the Philippines
At current prices
In Million US Dollars a/
Qtr 1
2004 2005
---- -----
Gross Domestic Product 84,567 22,076
Industry Sector 27,439 7,151
Manufacturing 19,897 5,079
Textile Manufactures b/ 301 67
Footwear wearing apparel b/ 924 174
a/ Original value expressed in pesos, and converted to US$
equivalents using average exchange rate of 56.04 pesos/US$
for 2004 and 55.01 pesos/US$ for first quarter 2005.
b/ Gross value added in manufacturing
--------------------------------------------- -------------
Source: Philippine National Statistical Coordination Board
Table 2
Employed Persons by Major Occupation Group and Major and
Minor Industry Groups from Primary Occupation
(In thousands)
As of As of
Oct. 2004 Jan. 2005
--------- ---------
Philippines 31,741 31,634
Manufacturing 3,020 2,995
Textiles 192 217
Wearing Apparel 537 517
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Source: Philippine National Statistics Office
JOHNSON