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The tangled state of the Philippine garments industry
By John C. Ong
First Published in Business World (10/1/2012)
The garments and apparel industry has always been among the world's largest, with most items being produced out of developing countries. In the Philippines, garments and apparel started as a cottage industry in the 1950s. Bolstered by skilled and educated workers, innate creativity and favorable legislation, the industry grew rapidly in the intervening decades until it peaked in the 1990s.
In 1995, however, the World Trade Organization began a 10-year phase-out of the Multi-Fiber Agreement, which had previously established quotas and preferential tariffs on apparel and textile items imported by the United States, Canada, and many European nations. This opened the playing field in 2005 to countries which could produce huge volumes at lower cost, eventually affecting the smaller producing countries, including the Philippines. Conditions were further exacerbated by the recent global financial crises, which led to a sharp drop in international demand for manufactured clothing.
These conditions have led to a steady decline in our garments and textile exports, as tracked by the Department of Trade and Industry (DTI). From a volume of US$1.9 billion in 2006, exports declined to US$1.2 billion by 2010, although there was a bit of a recovery in 2011 at US$1.5 billion. Attrition has also been severe – with the roster of top 10 garment exporters changing almost every year.
To experts, the decline of the industry is alarming, although not yet hopeless. There are still steps which garments-related businesses, associations and the government can take to sustain or revive the industry. Some of these steps, which came up in our discussions with the DTI's Garments and Textile Industry Development Office (GTIDO) and industry players represented by the Confederation of Garment Exporters of the Philippines (CONGEP), Garment Business Association of the Philippines (GBAP), Textile Millers Association of the Philippines (TMAP), Federation of Philippine Textile Industries (FOPTI) , and the Foreign Buyers Association of the Philippines (FOBAP), are:
Mapping the industry
One reason for the difficulty associations have when lobbying for government support is the lack of a clear industry map. Without verified facts and figures, it becomes exponentially more difficult to identify priority areas for investment, spot gaps in the industry, focus on policy reforms, and see where legislative lobbying can have the most impact.
One way to create this map is for manufacturers, exporters and other enterprises to provide information through surveys sent out by the GTIDO. Understandably, many companies are more focused on day-to-day activities rather than participating in surveys. However, if the industry is to regain its former economic prominence, it will require commitment, participation and cooperation from all players. For example, simply identifying the actual number of garments exporters is a challenge for the DTI. Current estimates are at 360 to 380 exporters, down from 700 or 800 in 2009. Preliminary data shows there are around 900 registered manufacturers, but there is no information if all are still in operation.
Managing labor costs
Many analysts have stated that one of the issues facing the garments industry is the high cost of labor in the Philippines, especially when compared with wage costs in other developing countries. However, reducing wages is a difficult option, as this would cause hardship for our craftsmen and laborers.
A possible solution may be found in the practice that has been adopted by some garments manufacturers and assemblers. This is a productivity-based arrangement that pays wages on a per-piece basis, rather than a fixed rate. Productivity incentives have already been adopted in the Calabarzon area early this year, based on mutual agreements between workers and management. A productivity-based wage system is not as simple as it sounds though. Safeguards must be built-in, and there must be constant dialogue between all stakeholders, including labor groups and officials. However, given that the Department of Labor and Employment says that there are over 500,000 people employed in the garments and textile sector in 2011, it is important to find an effective and equitable answer to the wage question.
Moving up the value chain
Another alternative to competing against countries with a lower cost of mass-producing clothes is to change the rules of engagement. Given the natural creativity, affinity for design and generations-honed craftsmanship of our artisans, it would make sense for garments enterprises to move up the value chain into higher-value products and services.
Studies show that the most valuable elements in the garments value chain lie not in the manufacturing, but in the design, branding and marketing of the products. Many fashion houses, for example, outsource the design and production of their fashion lines to external suppliers. This may be an area of opportunity for the Philippines. By upgrading the technical expertise of our workers and adding value to the manufacturing and assembly process, we can bypass competing on a mass-production level where we have a disadvantage, and instead move up to the apparel design and development level where we can put our people's talents to best use.
Gaining better access to markets
Historically, apparel and textile have been some of the most protected industries, from the initial source of the raw materials (e.g., the rule of origin principle) to most-favored nation agreements, export quotas, and many others. For the industry to recover, it needs to gain more export destinations. This is primarily an area where the government can work closely with trade groups and garment enterprises to identify areas where the most assistance is needed, including favorable legislation and trade agreements.
One example is the proposed SAVE Our Industries Act, which aims to promote industry and job creation in both the Philippines and the US. In essence, the law provides for duty-free entry into the US of Philippine-made apparel, as long as they are manufactured using US made fabrics. However, the bill is still pending in both houses of the US Congress, which is why local industry stakeholders should work together and explore ways to work for its passage.
Another area is the European Union (EU) Generalized System of Preferences Plus (GSP Plus), which provides duty-free access to EU markets for developing countries that comply with 27 international conventions in areas such as human rights and sustainable development. This may be an excellent opportunity for us, considering the Philippines is one of the countries that has qualified for the GSP Plus from 2014 onwards. Yet there seems to be very little participation or preparation from local enterprises, possibly due to a lack of information or awareness on the part of industry stakeholders. It would be a shame to waste this opportunity – under the previous GSP, the Philippines only utilized around 36.6% of the allowed incentive.
The truth is, every industry has its own issues and problems. The ones facing the garments industry, although tangled and knotty, are not by any means insurmountable. It will, however, take a concerted effort from all stakeholders – industry associations, government agencies, and especially from the garments enterprises themselves – to find lasting solutions.
John C. Ong is a Partner of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
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