California Apparel News

The world order of apparel and textile manufacturing will shift drastically on Jan. 1, 2005, when quotas on these goods are eliminated for World Trade Organization members.

Already, Chinese factories are gearing up to expand their apparel production capacity and take advantage of the U.S. trade barrier tumbling.

Other Asian countries expected to step in and profit from the freetrade climate include India, Pakistan and, eventually, Vietnam (if it is admitted to the WTO next year).

Still, Central America, including the Dominican Republic, remains the No. 1 apparel supplier to the United States, accounting for 19 percent of all U.S. apparel imports as of April.

Currently, China is in second place with 13 percent of all U.S. garment imports. Mexico, with a little more than 10 percent, has dropped to third place.

With these changes in the importing world, 2005 will be a challenging year. In preparation, the California Apparel News has talked to several experts about what apparel and textile importers should expect next year.

Richard Wortman

Attorney Richard Wortman is the go-to man who helps apparel companies deal with the panoply of problems that arise when manufacturing overseas and importing goods from abroad.

Wortman has spent a fair share of time getting goods through U.S. Customs when officials have decided containers warrant a thorough inspection. With more than 15 years at Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP in Los Angeles, he has a few opinions about 2005.

What is going to change in 2005?

I think 2005 is going to be a very troublesome year because there is going to be a lot of uncertainty in the market. I think that for people who are already in the market, it is going to be a year in which pricing is going to be difficult on imported merchandise because we don’t know [whether prices are going to go up or down]. There are possibilities of different types of non-tariff barriers, such as safeguard measures. There will be a window period when China will be open three to six months, and then safeguards may or may not be imposed. That may limit quantities after goods are already pre-sold by an importer.

The second thing is, and I think it is more difficult to plan a business around, is the potential for anti-dumping duties. We know that the Commerce Department has begun creating a group to deal with the onslaught of dumping cases. We also have clients who have asked us to go into their factories to structure their books and records to survive an anti-dumping case and to structure their pricing to make sure they can look good at the end. These could be U.S. clients or offshore clients who [have purchased] substantial quantities from specific factories in China. They may own the factories, or they may have a financial interest in the factory.

What should an apparel company do if it placed an order and these safeguard measures went into effect? Would that mean the company would not get its goods? The safeguards themselves are quantitative restrictions. It will all depend on when the safeguards are issued. But I think it will be no different than the way we currently analyze quotas. There is X percentage available, and on a weekly basis so many percentages are available, and we make predictions.

Who will survive?

I think ultimately the large companies will prosper. The question is: Who will get them the goods to market? For years, who had the quota often dictated who could sell the goods. So some of the traditional sources of goods are actually going to dry up now. You don’t need these individual vendors whose only asset was they owned the quota. They had a certain regular supply. Now, everyone is going to be on an equal playing field, but the playing field is going to be like quicksand.

Do you think customs inspections will become more stringent or less stringent next year?

I think the early part of 2005 may see a lightening of the number of inspections because customs won’t have to be out there to see whether Chinese goods are mysteriously coming from a third country. But I do believe once these barriers start to become erected, whether it is safeguards or antidumping duties, the level of inspection will likely come to the level [it is at] now because people may have incentive to start transshipping goods.

Is there anything anyone can do to prepare for 2005?

I have counseled my clients to treat 2005 like they have treated the last 20 years. If goods were subject to quotas in prior years, there is a high probability there will be some kind of barrier or an economic issue that is going to take place between 2005 and 2008. So what I have suggested is that the day of reckoning is not really 2005 but it may be 2008, assuming we don’t enact other legislation in between. One cannot believe that China is a free game on day one of 2005.

There is also the possibility that the Chinese will limit their own exports, the same way they did years ago with silk quotas, in order to show to the world that they can control their market and don’t need any safeguards.

What kinds of documents should importers have to alleviate problems with U.S. Customs inspectors?

What you need to import and what you may want to ask the vendor for are two different things. What documents you need for the inspector to construct a customs entry is what you would need [for] a commercial invoice: a packing list. While you don’t need a country-of-origin certificate, customs has the right to ask for it. And they have been recently, particularly for goods they think are suspect. It is not clear yet whether you will need a multi-country declaration, which tells you it was cut in country A and assembled in country B and shipped from C and the fabric is from E. It is not clear whether that requirement will survive 2005.

What about cutting tickets? Should an importer have those?

Well, you have to make it clear to your vendors that they have a responsibility to keep these records. And I think the records they need to keep need to document the transaction from the inception to the end. So the importers themselves will have the purchase order to the factory or the agent. But what is important is whoever ordered the fabric should have a purchase order. There should be proof of payment for the fabric. There should be transportation documentation showing that the fabric went from China to Hong Kong, where it was cut or vice versa. Then you want to have the cutting tickets and assembly tickets because customs wants original records.

Which is better: LDP or FOB?

FOB means “freight on board” and means nothing more than when the goods are placed on board the ship, the duty to pay rises because the title to the goods transfers once the maker of the garment gets [the goods] on the ship and provides a bill of lading, which says the goods were laden on board. Once it does, the risk of loss shifts to the U.S. party, who takes ownership, and you are responsible to pay. And that is usually what kicks off payment under the terms of a letter of credit.

“Landed duty paid” or DDP, “delivered duty paid,” means payment for the goods and title doesn’t transfer until the goods clear U.S. Customs. Now, buying goods on LDP basis has been a large part of the apparel industry for many, many years. There are many reasons to do it, which are legitimate. This way someone else takes the financial risk until the goods hit the warehouse in the U.S.

However, in the last couple of years, there have been some scandals where goods came on vessels and then were purportedly sent in bond to the Mexican border to be exported to Mexico, and those goods mysteriously reappeared in Los Angeles and other places. Not only was quota not entered, but also no duty was paid. So customs has a deep-seated prejudice against purchasing LDP because they feel that almost puts an insulation between the buyer and what is really happening in the manufacturing.... Customs is saying that LDP is bad, but I disagree. I have said there are many legitimate business reasons to import LDP. But LDP buyers have to be alert to what is going on behind the transaction. They can’t bury their head in the sand.

LDP sounds less risky because an importer doesn’t have to take control of the goods until they arrive in its warehouse.

The risk is whether the goods will be released by customs. [LDP] ameliorates some economic risk to a new importer, but it doesn’t really. It may take away the first economic risk of paying for goods you never see....When you source the goods LDP, there is a profit built into whoever is landing the goods LDP. There is an economic cost that is going to be slightly higher.

Will this change at all next year? Will LDP become less risky?

I don’t think so. I think LDP is a financing tool like everything else. Many of our clients, especially retail chains [that are] strapped financially, can’t put out letters of credit on day one but can put out a purchase order, which doesn’t cost them anything. That may be 90 days of not paying for the goods or not tying up their credit. Until the economy is in the boom-boom times of the ’90s, LDP is here to stay.

What is the average time goods take to clear customs on a normal basis?

Apparel for the most part enters the country and still requires paper while other products are paperless. The broker enters the information in the computer, and customs sends [the broker] electronic approval, and nobody sees a piece of paper or prints a piece of paper.

As a practical matter, goods can be released virtually immediately if there is no inspection, which is in a day or two, and put on a truck. If customs chooses to inspect [goods], it is longer. They may inspect [goods] because there may be some criteria in customs computers that say [to flag] all shipments from vendors A, B and C, from country X, or every third shipment from country X. Or the team can say we have a problem with importer A, B or C—inspect those goods. Or inspectors may randomly stop a container.

Currently, there is only one inspection station in Los Angeles. That inspection station under the best of times can take five days. When they were at the height of inspections, it was taking two weeks or more. Once inspection takes place, customs has the authority to detain the goods. That notice will [state] that there are 30 days before they exclude it. You have 30 days to respond to customs’ request. We start from zero to two weeks for the inspection. The detention period is 30 days.

Robert Krieger

For more than 20 years, Robert Krieger has been in the freight-forwarding business, moving apparel around the world and into the United States. As president of Norman Krieger Inc., a Los Angeles customs broker and international freight forwarder founded by his father in 1965, Krieger has traveled extensively to China and other major apparelproducing countries to get a handle on the world of importing and exporting. He shares his view on the new world order.

What changes will be in store for importers for the rest of 2004 and in 2005?

It appears, at this point, there will still be visas required on goods exported from China to the U.S. in 2004. If your production leaves China in 2004 and requires a visa in 2004, upon its arrival into the United States in January or later, it will still require a visa. A visa is basically a Chinese export license. China transmits to the U.S. every visa issued so there are no forgeries. You need electronic transmission of the document and the actual visa to enter the goods. For the beginning of the year, if those visas are not in place and those goods were exported to the United States prior to Dec. 31, 2004, entry of the goods will be denied.

What about quotas for the rest of 2004?

It is widely believed that a lot of quotas from China and other countries will close earlier than normal. If any importer has a question about that, they can contact their broker or go online [to www.customs.ustreas.gov/xp/cgov/import/textiles_and_quotas ] and look at the utilization of that particular category. There will not be swing or borrowing of quota this year for next year for most countries.

What are some of the most common mistakes apparel importers make?

Currently under the quota system, if you do not have a visa, you don’t get your merchandise. And if the visa is not for the correct quota category, you don’t get the merchandise. So those issues are oftentimes a problem.

How should importers ensure they have the correct documents to import goods?

You take that item you want to import to a customs broker or an attorney who is familiar with the classification, and have them classify that item and give you the quota category. Most items are straightforward, and some are tricky. Tricky categories include crop tops, shirts vs. jackets, unisex items and blended items.

What other common mistakes do apparel importers make?

Not getting the paperwork on time is a big problem. In order for the goods to clear customs, the broker has to make the entry with customs. We like to pre-file our quota entries, which means we like to have our documents before the vessel arrives at the port. But many importers, particularly first-time importers, are using letters of credit. And if those letters of credit aren’t carefully written, worded and executed by professional people who understand the process, the documents may arrive late and delay the clearance process.

How is this different from the 24-hour rule, which was put into effect after the Sept. 11 terrorist attacks?

Each exporting country has rules and regulations in relationship to documentation. And many countries require export clearances through customs in their own countries. Generally, you are going to send some of the documents before the vessel departs. However, many letters of credit require a clean on-board bill of lading, and that doesn’t occur until after the ship has departed.

The 24-hour rule has to do with notifying customs that a shipment is arriving and being placed on a ship. The shipping company, or a freight forwarder or broker, notifies U.S. Customs via the Automated Manifest System. That electronic notification occurs so that the shipper gets permission from customs to put the goods on board the ship.

Do you think it will take less time for goods to clear customs in Los Angeles and Long Beach, Calif., in 2005, when quotas are eliminated for apparel and textiles?

There are a few things happening in the ports of Long Beach and Los Angeles. They are increasing the number of Central Examination Sites [where goods are more extensively examined] from one to two sites. That should allow a flow of merchandise if there are delays at a Central Examination Site. We should be able to pull merchandise and send it to the second site. Customs has not responded to trade inquiries about whether we will be able to clear apparel on a paperless basis like we do [with] other goods. Everything else we clear we file electronically, and we usually get a release back from customs in a couple of hours. For example, computers clear virtually instantaneously.

Does it benefit an apparel company to be C-TPAT (Customs-Trade Partnership Against Terrorism)–certified, which requires a company to know who its suppliers are all along the supply chain?

Many large importers are C-TPAT–certified, but they haven’t received much benefit, as far as I can tell. But I do think that will happen very soon. When a C-TPAT–certified company is designated for an examination, customs has promised an accelerated process examination.

With apparel, C-TPAT is more complicated than with other commodities. If you have a shoe importer importing $100 million of shoes, there is a good chance he is importing most of his shoes from China and from only three to five factories. But an apparel importer who is importing $100 million of apparel is not only importing from China, but he has more than three to five factories in China. He may have factories in Vietnam and other places. The C-TPAT member who is importing shoes has to secure his supply chain at only three to five suppliers. Apparel importers may have 100 suppliers. It is indeed difficult to manage that many suppliers in so many countries. One of the things apparel companies will do next year is more business with fewer factories.

What does a company have to do to become a C-TPAT member?

Companies have to develop plans internally. Customs will not tell them what they have to do internally. They have to develop their own plans, and then customs will partner with them to review their processes and procedures.

How long does it take to become C-TPAT–certified?

It took us nearly one year from the time we applied.

It takes different companies different periods of time. But it will require major resources, such as money, time and personnel. You have to visit your suppliers or hire someone to visit your suppliers if you are going to say your supply chain is secure. And you have to manage that on an ongoing basis.

With more people shipping goods from Asia next year, will shipping rates increase or decrease in 2005? What effect will the new mega-ships have on shipping rates?

Ocean shipping rates are like a pendulum. The pendulum swings slowly. You can somewhat predict when it will reach one end and swing back. But it is hard to predict how fast the swings will occur. The biggest question is: How will business fare in the United States next year? Will imports continue to grow? Will the economy slow down? Will the dollar weaken? It appears that the pendulum has swung to the far end of high prices with ocean freight and is about to turn back.

With the new mega-ships coming on board in the next few months, the supply of ocean space will start outstripping the demand some time later this year. Again, if the large steamship companies start delivering these ships and the demand doesn’t increase too much, then by the late fall or the early part of 2005, the ocean freight rates may start to drop.

What is the average cost to ship a container of apparel from Hong Kong to Los Angeles?

A container of apparel costs about $2,600 for a 40-foot container. It was about $300 to $400 less last year, depending on what service you used, what shipper you used and how much you shipped.

What about air-freight costs?

That is really supply and demand. At times, the U.S. military has taken up a lot of the charter aircraft available, which constricts the supply of aircraft. The quota situation will impact prices of air freight later this year. If quotas start to get tight, people may panic and fly goods in for the rest of this year because quota is counted here when goods arrive.

If you have a shipment leaving Hong Kong next week and you look on customs’ Web site and the quota is 90 percent filled, then you would probably want to fly them in rather than boat them in because the quota could close from the time that boat leaves Asia to the time it arrives here.

What’s your advice for companies importing apparel next year?

I think it is time to sit down and plan your production for next year. Because of the change in quota, one would be very tempted to produce everything in China because of the quality, price and relative ease of logistics in China compared to India or Dubai or Brunei or many other places. I understand many people are doing that.

While I like China, I think that would be an unwise decision. Talk to your logistics partner about your plan, and look at China more carefully. Try to keep in tune [with] what could happen in China. What safeguard measures might be enacted? What is the possibility that anti-dumping duties might be applied against Chinese apparel?

What is the possibility that countervailing duties may be applied? Countervailing duties are additional duties on top of what you normally have due to government subsidies given to Chinese exporters.

Also, China could be hit with sanctions because of intellectual property issues, labor issues and human-rights issues. All these things have to go into planning where you are going to produce your product next year.

Bruce Berton

With 50 years in the apparel industry, Bruce Berton has seen the clothing business experience a mini-revolution. When Berton worked on the cutting floor of his father’s men’s tailored clothing business in 1954, almost everything was made in the United States. Now, almost everything is produced overseas by a wide assortment of international players.

Berton, who is the director of international business consulting for Stonefield Josephson Inc., a Santa Monica, Calif.–based accounting firm, shared his advice on how to cope with the disappearance of apparel and textile quotas in 2005.

How should apparel and textile companies be preparing for 2005?

No. 1 is the reality of whether the existing factories in China can handle much more capacity than they have. We are telling our clients, “No matter what relation you have with your factory, you better establish where your goods are going to be made, who will be making them and who will be supervising this.”

As much as 70 percent of the surge of new orders in China will be subcontracted out to other factories.

Those who have been exporting for quite a while are being watched like a hawk by the Chinese government to make sure all their goods go out at a profit margin.

No. 2 is the financial relationship importers have had with their factories. Many firms thought they were dealing with the factories directly. But really there are brokers who hold the quotas in China that have the established relationships with the banks. Therefore, since quota is going to be eliminated, there will be new revised credit relationships between the factory and either the corresponding letter-of-credit bank within China or the open-purchase-order relationships.

Are China’s factories mostly controlled by the government?

There are three types of factories in China. There are privately owned factories, but they are the smaller factories. Then there are state-owned entities, or SOEs. You may think they are private, but there is someone in the back room you never meet who may be the province chief or head of the Communist Party or the mayor of the town. That makes up 90 percent of the factories that export. Five percent are wholly owned foreign entities, which are usually Taiwanese. [Taiwan is] the largest single investor in China.

How does a U.S. apparel company determine whether a factory is state-owned or privately owned?

You have to sit down and get to know whom you are dealing with. A lot of people go to a big factory, get romanced, taken out to dinner and think they are dealing with a legitimate factory in China.

The key is to hire an infrastructure company manned by one of your people who live in Hong Kong or China or a company that has four or five employees who work exclusively on your product.

Does 2005 change anything about these factories?

The edict has come down that those firms that are exporting product must make a profit on those goods being exported rather than producing product just to put people to work. Therefore, we tell our firms they better make sure they know who has the exporting license, whether it is the actual factory or an intermediary like a broker or agent, and that the goods will comply with the new export regulations of China.

How does an apparel company make sure Chinese factories don’t copy its designs and produce knockoffs?

Even though China is implementing new regulations to be in compliance with the World Trade Organization, they are five years away or more to slowing down the pirating of all these products and ideas.

The big boys, like Ralph Lauren, produce in China and have somewhat of a handle on this. But the newer people going in there, like Juicy Couture, could see their goods pirated immediately.

We tell our clients they must hire a qualified infrastructure of people in China to be able to self enforce all the work in process as well as protect all their industrial secrets