Wed, Jul 18, 2001 page21

• Textile companies turn to Africa for US access

  APPAREL Firms such as Taiwan's Nien Hsing Textile lower their costs by taking advantage of import benefits the US offers to African-based textile makers

  • BLOOMBERG
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  For Hong Kong-based James Lee, a trip to his newest clothing factory means a 15-hour flight and a three-hour drive to the tiny republic of Lesotho.

  The reason: Clothes made in Africa and exported to the US, the biggest market, aren't subject to quotas or duty placed on products manufactured in Asia, long a world center for textiles.

  "If we can save 20 percent anywhere, I will go," said Lee, managing director of Carry Wealth Holdings Ltd, which makes clothes for DKNY and Tommy Hilfiger.

  Lesotho, a nation of 1.2 million completely encircled by South Africa, is also luring the likes of Nien Hsing Textile Co (年興紡織股份有限公司) of Taiwan and China Garment Co because of the US African Growth and Opportunity Act, which offers import concessions for clothing and other products.

  They're exploring the Caribbean too, where similar inducements are available, at the expense of Asia.

  "Once one place gets too much focus and gets to slacking off, another place picks up," said Craig Chan, an economist at ING Barings Ltd in Hong Kong. "If Africa's really a cheaper place to produce goods and as efficient, than the trend will continue."

  Africa isn't likely to generate quick returns because of its poor transport links. Shipments take 40 days to reach the US, compared with less than a week from Mexico and Nicaragua.

  "These countries are very poor, and don't have enough infrastructure," said January Yen, a Taipei-based analyst at Indosuez W.I. Carr Securities Ltd.

  Yet much the same was true of China two decades ago, when its economic transformation first meant that garment companies from Hong Kong and Taiwan could do business there.

  Hong Kong and China now account for 22 percent of US apparel imports, according to the Hong Kong Trade Development Council. They lag only Mexico, with 30 percent.

  As costs rise in China, reflecting an expanding economy that is itself the result of foreign investment, Asian clothing makers are moving farther afield. After first sampling southeast Asia, they are on the move again.

  They're setting their sites on places like Lesotho, a mountainous nation where wages are a fifth lower than in Indonesia and the unemployment rate stands at 40 percent. El Salvador, in Central America, is another favored destination.

  "Lesotho has more than 10 years of apparel manufacturing experience," Lee said. "We don't have to do anything. We just took over management and keep pumping it out."

  The move is benefiting investors. Carry Wealth shares more than doubled in 12 months, compared with a 17 percent drop in the Hong Kong All Ordinaries Index.

  It's still a penny stock: at HK$1.15, or US$0.15, the shares are trading at just 3.3 times earnings, compared with an average of 20 times for stocks included in the Hong Kong All Ordinaries Index.

  Other companies want to gain the same cost advantages from Africa. Exports from Lesotho to the US have risen by 30 percent since April, when the concessions took effect, according to the Lesotho National Development Corp.

  Nien Hsing opened its first factory in Lesotho 11 years ago, when manufacturing in Taiwan began to lose competitiveness as wages rose, said Robert Yang, general manager of the company. In January, the company opened a second jeans factory where it now employs 3,500 people.

  The company plans a US$100 million denim mill that will start making the fabric in 2003, Yang said.

  "Our price is more competitive" because of the US act, Yang said. The company chose Lesotho because the country is "very far away" from Taiwan to discourage competitors from following, he said.

  Carry Wealth bought a knit factory in El Salvador in January for US$2 million. It expects the investment to pay for itself in two years, Lee said.

  In January, Carry Wealth bought 70 percent of a three-year-old knit-garment plant in Maputsoe in Lesotho for US$1 million. It paid US$1 million in May for a four-year-old jeans factory.

  The trade benefits last four years, after which the company must use local or US fabric, Lee said. The company will spend US$1.2 million to triple production at the knits-factory and expand the jeans plant by half.
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