Cablegate: Jordan's Qiz Garment Factories Continue to Close Or

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RR RUEHWEB

DE RUEHAM #1177/01 1411137
ZNR UUUUU ZZH
R 211137Z MAY 09
FM AMEMBASSY AMMAN
TO RUEHC/SECSTATE WASHDC 5154
INFO RUEHBJ/AMEMBASSY BEIJING 0189
RUEHEG/AMEMBASSY CAIRO 4025
RUEHKA/AMEMBASSY DHAKA 0193
RUEHTV/AMEMBASSY TEL AVIV 1735
RUEHJM/AMCONSUL JERUSALEM 5533
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAHLC/DEPT OF HOMELAND SECURITY WASHDC

UNCLAS AMMAN 001177

SENSITIVE
SIPDIS

STATE FOR EEB/TPP/ABT, NEA/ELA, NEA/RA
STATE PASS TO USTR (SFRANCESKI)
STATE PASS TO USAID
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA
DHS FOR CBP

E.O. 12958: N/A
TAGS: ETRD ECON KTEX EAID JO
SUBJECT: Jordan's QIZ Garment Factories Continue to Close or
Downsize Due to Financial Hardships

REFS: A) AMMAN 226
B) 08 AMMAN 1736

SENSITIVE BUT UNCLASSIFIED

1. (U) Summary: Jordan's apparel sector has been hard hit by the
recession in the U.S., where most of its exports are destined, and
competition with Egypt (ref A). The Ministry of Industry and Trade
has reported that Jordanian garment exports produced in the
Qualifying Industrial Zones (QIZs) peaked in 2006 at $1.18 billion
and have since steadily declined. From January to March 2009, QIZ
apparel exports decreased 15.4% to $191.8 million, compared to
$226.8 million during the first quarter 2008. Suffering from
reduced orders, 29 garment factories in the QIZs have closed since
2007, including five in 2009. Another is under liquidation, and
seven others have downsized. At least four garment companies have
relocated or expanded operations in Egypt. Public and private
sector interlocutors have claimed that in addition to lower
production costs, the Egyptian government provides exporters a cash
subsidy of 10 cents for every dollar exported. Jordan's factory
lay-offs and lack of new investments in the apparel sector since
2007 have caused a reduction in the QIZ workforce by almost a third
to 36,724 employees as of April 30. Despite these negative
indications for Jordan's garment business, the satellite factory
initiative has continued to move forward with the recent opening of
Sterling Apparel Manufacturing's satellite operation in Madaba which
employs a 100% Jordanian workforce (ref B). End Summary.

Garment Exports to the U.S. Continue to Decline
--------------------------------------------- --

2. (U) According to the Ministry of Industry and Trade (MOIT),
Jordanian garment exports produced in the QIZs peaked in 2006 at
$1.18 billion; fell 3.5% in 2007 to $1.14 billion; and decreased
18.9% to $923 million in 2008. This trend continued during the
first quarter of 2009 with a 15.4% decrease in total QIZ garment
exports to $191.8 million, compared to $226.8 million for the same
period in 2008. Of those exports, MOIT reported that $139.3 million
was shipped to the U.S. under the QIZ agreement; $43.8 million was
shipped to the U.S. under the Free Trade Agreement; $4.9 million was
shipped to Israel; $36,301 was shipped to other Arab countries; and
$3.7 million was shipped elsewhere in the world.

3. (SBU) All Jordanian interlocutors point to the recession in the
U.S. as playing a significant role in reducing apparel orders for
Jordan. The manager of one QIZ garment factory said that a U.S.
buyer asked him to spread out the delivery of an order originally
due in November 2008 over six months until May 2009. QIZ investors
have felt increasing pressure from international buyers to reduce
prices. They are finding it difficult to maintain competitiveness
and profit margins in light of high production and labor costs in
Jordan, especially compared to countries such as Egypt where water
and energy are subsidized. The Jordan Garments, Accessories, and
Textiles Exporters' Association (JGATE) reported that at least four
companies employing over 6,900 workers in Jordan's QIZs have
expanded their investments or completely relocated to Egypt. The
Minister of Industry and Trade Amer Hadidi also told Econoffs on
April 29 that the Egyptian government provides a cash subsidy to
exporters of 10 cents for every dollar exported. His staff was
looking into whether this was allowed under the World Trade
Organization (WTO).

29 Factories Shut Down, Most Recently Century Tailoring
--------------------------------------------- ----------

4. (SBU) Mostly as a result of decreased business, 29 garment
factories in the QIZs have closed down since 2007, leaving 46
factories still operating in the QIZs, according to statistics
maintained by JGATE and MOIT. NOTE: This does not include four
factories which were having financial difficulties and were taken
over by other companies or changed names. END NOTE. Of the 29
factories, five - DK Garments, Golden Fingers, Ocean Star, Shamila,
and Century Tailoring - shut down in 2009. Another company,
Mediterranean Resources Apparel Industry (MRAI), is currently under
liquidation after downsizing earlier this year. Seven other garment
companies have downsized their operations in Jordan since 2007. As
a result, employee lay-offs have reduced the QIZ workforce to 36,724
(including 27,865 foreign workers and 8,859 Jordanians) as of April

30, 2009, compared to 52,058 total workers (including 36,883 foreign
workers and 15,175 Jordanian workers) as of June 30, 2007.

5. (SBU) Century Tailoring's former plant manager Adnan Ismail told
Econoff on May 3 that Century Tailoring, a joint venture between the
Jordanian Century Investment Group and the Israeli company Bagir,
also owned a factory named Medco in one of Egypt's QIZs. Since
there were not enough orders to keep both factories running, Ismail
said Century Tailoring closed down in Jordan in April 2009 because
it was cheaper to produce in Egypt. He estimated that between 60-80
foreign workers returned home with paid salaries and benefits, while
the rest were transferred to other factories with the help of the
Ministry of Labor (MOL). About 350 local workers stopped working
and agreed with MOL, the textile union, and factory management that
their April salaries would be paid on May 20 and their final
financial settlement packages would be paid on June 20, according to
JGATE.

Satellite Factories Still Employing Local Workers
--------------------------------------------- ----

6. (SBU) Despite these negative signs for the garment industry, Rob
Rothbaum, the U.S. owner of Sterling Apparel Manufacturing in
Jordan, told the Ambassador during a May 17 visit to Sterling's
satellite factory in Madaba that Jordan still has a competitive
edge. In addition to the duty-free access provided by the
U.S.-Jordan Free Trade Agreement (FTA) and the QIZ agreement, he
believes Jordan offers superior infrastructure over Egypt, ensuring
deliveries arrive on time. When Sterling faced a 50% reduction in
orders due to the recession, the company decided to change its
strategy and move into more high-value garments, which resulted in
more orders as of July. The key, Rothbaum said, is for companies to
have a Jordan-specific strategy with customers and programs that can
support longer lead times and adapt to changing conditions. He
added that compliance with international labor standards is also a
top priority for U.S. buyers when deciding where to do business.

7. (SBU) Rothbaum eventually hopes to migrate most of Sterling's
production to the satellite factory which opened on February 14.
The factory currently employs 170 Jordanian workers, with the
capacity to hire 450 locals and expand even further. He commended
the Jordanian government for its support of the satellite initiative
by contributing to workers' salaries and social security benefits,
subsidizing transport and food costs, and providing the company with
the building rent-free for five years. Such a project has enabled
his company to fulfill its initial intention of hiring a 100%
Jordanian workforce, Rothbaum noted.

Are the QIZs Dead?
------------------

8. (SBU) Comment: It is not uncommon to hear in Jordan that "the
QIZs are dead." People see the relatively nascent garment sector,
which makes up most of the businesses in the QIZs, struggling to
survive during the global recession. On top of that, many argue
that the benefits of the QIZ agreement will dissipate when the FTA
comes into full effect in January 2010. Indeed, many garment
companies will likely make the financial decision to shift to
exporting under the FTA because unlike the QIZ, the FTA does not
have the 8% Israeli content requirement which often entails higher
costs. Other manufacturers, however, have indicated that the QIZ
agreement has led them to develop strong relationships with Israeli
suppliers whom they plan to continue using even after the FTA comes
into full effect. The key message should be that as our bilateral
trade relationship evolves, so do the options for Jordanian
exporters to maintain competitiveness and conduct business with the
U.S. Post continues to monitor the labor situation in the QIZs,
including the Jordanian government's ongoing efforts to ensure
workers receive entitled salaries and benefits if factories face
financial troubles.

Visit Amman's Classified Website at:
http://www.state.sgov.gov/p/nea/amman

Beecroft

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