Is DTI serious about garments?

One of the things the Department of Trade and Industry (DTI) is supposed to do is help local industries so they can hire more people and reduce the country’s unemployment rate. But we haven’t heard much about DTI’s efforts in this area.

The DTI Secretary should be doing what the Tourism Secretary is doing: advocating reforms within the bureaucracy, using the clout of his being a Cabinet member to ask other Cabinet members to help entrepreneurs with problems in policies or programs in other departments. Thus Tourism Secretary Mon Jimenez got the visa problem for Indians and Chinese fixed, as well as convinced the Finance Secretary to give in a bit on the taxes for foreign airlines.

I thought about the usefulness of the DTI as I was reading its latest press release about how they are assisting Uniqlo develop our domestic market “to entice it to open up factories here.” That’s Trade Undersecretary Cristino L. Panlilio giving us the first public hint that they have not given up on the local garments industry.

To be fair to Usec Panlilio, we also found out through the reporting of Greg Rushford for the Wall Street Journal that they tried but failed to get the Americans to agree to drop tariff on our clothing exports. All Mr. Obama offered P-Noy was a vague statement that he was working “on how we can make sure that we are structuring a relationship of expanding trade and commerce.”

The problem with the current DTI approach is it follows the old route of begging for preferential treatment that we thrived on for many years. That strategy should have been no more than a tentative one while we are working to improve the basics of competitiveness for our garments industry.

So now, USec Panlilio is dreaming that Uniqlo will move some of its manufacturing to the Philippines if DTI helps it gain local market share even if doing so will trash local manufacturers. He is setting himself up for a big disappointment unless DTI tackles the basic competitiveness problem of the garments industry and this has to do with our labor laws.

Sure, Uniqlo has started to use Luen Thai, a Hong Kong manufacturer with a factory here, but DTI must still wonder why Uniqlo has most of their manufacturing done in China and other Asian countries. DTI has to do better than just hope the Japanese firm will consider putting up their factories here once their domestic market expands considerably.

It was timely that one of the speakers in the meeting last week of the Foundation for Economic Freedom was Bernadine Siy who spoke on the “Garment Industry and Job Growth Prospects.” Bern was born into the garments industry and her family has pioneered in it, rode its decline and survived to this day, albeit much smaller than they used to be. They used to own Solid Mills and they still manufacture Jag, Lee, American Eagle, DKNY and other well known brands for the local and foreign markets.

Bern told us right away that she has no illusions about how tough this garment export business is. “On one hand, we’re constantly dealing with stiff competition from other countries: rising cost of materials, a tough buyer market given the slowdown in their economies, and on the home-front, another round of increase in wages, more regulations (Dept. Order 18A most recently) and a strengthening peso.”

Bern thinks the garment industry can do a whole lot better than it is doing now, employ more workers and earn more foreign exchange for the economy. She feels frustrated that the industry is looked upon as a sunset industry when it could play a key role in reviving labor-intensive manufacturing.

She said she looks at our high unemployment rate and our high labor costs and she knows something is wrong. “For a country starved for investments, especially in businesses which can take advantage of a commodity which we have an abundance of, like lower-skilled labor, it is indeed ironic and tragic.”

Just to show how uncompetitive our policies are for the garments indusry, Bern revealed that “some Filipino companies put up factories in China, Vietnam, and even in Africa.” Many of those who remain here are struggling.

Bern gave us an idea of the economics of the global apparel trade. First of all, it is extremely price competitive. “Although quality, flexibility and reliability play a part, the bulk of the apparel trade can be won or lost literally ‘on a dime’.”

The trade, she explains, is dominated by large global corporations: manufacturers, customers – global brands, retailers, and trading houses or buying offices like Li & Fung. “They own or are supported by a network of smaller and medium players in key supply hubs all over the world. The global players are very mobile, agile, and can quickly ramp their operations up or down in a location depending on its cost competitiveness.”

An important point to consider, she said, is the transparency of pricing and costing breakdowns. “Price shopping is prevalent, as the main players have a global network to tap.”

Bern recalls that when the quotas were finally lifted in 2004, “the larger players, which were mostly foreign-owned, just packed up and moved to other countries… The players are very agile, they will move to where they can get a competitive cost structure, wherever it is. They can do it much more quickly than other industries because the capital investment is lower.”

Bern thinks it is premature to write off the garments business as many are inclined to do. Philippine garment exports peaked at $2.6 billion in 2006 and have decreased year after year since then to a level of $1.1 billion in 2009, $1.2 billion in 2010. It went up to $1.5 billion in 2011.

Garments manufacturing has 60+ years of history. It has a good industry reputation among buyers: veteran players, reliability, technical capability, manufacturing flexibility. We have good English communication skills from top to bottom. We also have a relatively better-educated workforce vs. competing countries.”

But we have high cost of labor, beyond the official minimum wage because of all attached benefits and regulations on permanency/ regularization, fixed terms, contractual arrangements, guaranteed leaves, etc. Just to illustrate, daily labor costs here are: $9.36 -$10.21 (NCR); $5.83- $8.00 (IV-A); $6.38-$7.55 (VII) and $5.21- $5.77 (V).

How do we compare? In Cambodia, it is $2.03; Vietnam $2.20-$3.14; Indonesia/Jakarta $2.93-$5.35; China/Beijing $3.99-$7.87; Thailand $6.92-$9.36; Bangladesh $1.53; Sri Lanka $2.50.

Yet, unemployment and underemployment in NCR totals 25 percent; it is 27.6 percent in Region IV-A; 19.6 percent in R-III; 25.1 percent in R-VIII; and 41.5 percent in R-V. Fighting poverty means bringing these rates down significantly.

Gerry Sicat, a former NEDA chief and a most respected economist, also made a presentation in the same meeting. He suggested the creation of a special economic zone in areas with high unemployment and underemployment where there would be a lot more flexibility in labor rules… a zone liberated from the national labor laws including minimum wage. The objective is to create massive employment. Bern agrees that garment manufacturing can benefit in such an arrangement.

It is however a radical approach and we can expect a lot of protests from militant labor groups and the left. But we need such drastic solutions to finally lick the persistent high unemployment rate. Our workers go abroad, sometimes only to accept wages lower than what our laws stipulate if they get paid at all and get abused by foreigners and separated from their families as well.

Maybe the Sicat proposal can be tested in a region or a province where poverty level is high – Samar, Masbate, even Basilan come to mind. If it works, the concept can be replicated. If not, at least we tried something new.

Bern is anxious that we do something quick because we now have a window of opportunity as Global brands are seeking alternatives to sourcing from China as a way of rebalancing their supply chain.

Bern says we have the capability and the reputation for quality products and reliable vendors, but PRICE has been the biggest constraint. If we take the right steps, we should get our fair share of this production capacity, and the numbers can be huge.

But is this government brave enough to try something new and change the status quo? The continued misery of our unemployed and underemployed is the life blood of professional labor leaders and the radical left. They will fight to keep the status quo. –Boo Chanco (The Philippine Star)