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Fruit of the Loom Shifts Production to Honduras; U.S. Manufacturing Suffers

Major U.S. apparel producer Fruit of the Loom announced that it intends to fire more than 600 workers as a consequence of shuttering a manufacturing facility in Jamestown, Kentucky. Especially since the factory’s capacity will be shifted to textile units in the Honduras, the move raises grave questions about the future of apparel manufacturing in the U.S.

Tony Pelaski, COO and executive vice president of Fruit of the Loom, attributed the decision to transition manufacturing out of the U.S. to the economic pressure generated by the increasingly competitive global industry. He said, “This decision is in no way a reflection on the dedication and efforts of the employees in our Jamestown facility, but is a result of a competitive global business environment.”

The U.S manufacturing industry has struggled to bring production back to its own shores, despite a snowballing emphasis on home-grown products that proudly display a “Made in America.” A  dearth of skilled labor in the U.S. has made it tough for companies to re-shore their manufacturing back to American soil. The reduced supply of labor has hit the apparel industry particularly hard, inducing a sharp increase in wage inflation for cut-and-sew workers, who have seen their compensation spike 13.3% between 2007 and 2012.

More than a matter of patriotic sentiment, the rush to move manufacturing back to the U.S. is propelled by a desire to seek alternatives to increasingly expensive destinations like China and cheap but troubled countries like Bangladesh. Wal-Mart has been a leader in boosting American manufacturing, committing to buying more than $50 billion worth of U.S. goods over the next decade. It has also fronted an assemblage of more than 500 U.S. companies that intend to repatriate a considerable chunk of manufacturing work they have outsourced overseas.

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The U.S. government recently spoke directly to the problem. On Thursday, Michael Froman, Ambassador for the Office of the United States Trade Representative, testified before the House Committee on Ways and Means regarding the Obama administration’s trade agenda for 2014.One central purpose of U.S. ambitions regarding trade, according to Froman’s testimony, is support for the nation’s manufacturing interests. “U.S. manufacturing plays a key role in our economy today and in the future. As American manufacturers increase our capacity to produce more advanced and value-added goods, consumers around the world continue to place a high value of products Made in America. In 2012, the United States exported nearly $1.4 trillion in manufactured goods, which accounted for 87 percent of all U.S. goods exports and 61 percent of U.S. total exports. In 2014, the Administration aims to build on the strength of our manufacturing sector.”

A promising sign regarding the possibility U.S. manufacturing is on the mend is a recent survey issued by the Boston Consulting Group; U.S. companies are planning to relocate much of the manufacturing they outsource to China back to their own shores. The study interviewed 200 executives at of large manufacturing companies headquartered in the U.S. and discovered that 21 percent of them had already committed to returning manufacturing work done in China back to the U.S. or were planning to do so in the near future. Another 33 percent revealed that they were open to the prospect. The Boston Consulting Group conducted the same survey last year, interviewing the same respondents, and registered 10 percent and 27 percent respectively.

By a wide margin, the most common reason cited for “reshoring” plans is the rapidly rising costs of doing business in China, largely driven by escalating labor costs. Once a prime destination for those apparel companies looking for big production capacity and small costs, China’s swelling middle class is forcing it to reinvent itself in the global marketplace. While the average hourly earnings in the U.S. has increased approximately 1.6% each year, China  has experienced breakneck growth of 15 percent to 20 percent per year.

The wave of reshoring could generate as many as 1.2 million new jobs in the U.S. And there are other economic factors that indicate China’s manufacturing sector is headed for trouble. HSBC’s purchasing managers’ index inched up 50.2 in September from 50.1 in August. While that upward trend evidences an expansion of China’s manufacturing, it is a much more modest rate of growth than expected by industry analysts.

A spokesperson for HSBC said, “The rate of growth (in the manufacturing sector) slowed to a fractional pace. Furthermore, growth of new work was unchanged from the previous month and only slight.” Chinese export orders increased for the first time in six months but only very slightly, dampening any optimism that movement would typically engender. In fact, since new orders overall remained stagnant this likely means there was a net decrease in domestic orders.

In July 2013, an increasingly anxious Chinese government attempted to stimulate a languid economy with a basket of tax cuts for small businesses, investment in infrastructural development like railroads and various subsidies for exporters. Problematically, none of these measures seemed to have catalyzed any growth, though some experts believe they may have contributed to the stabilization of tempestuous economic performance.

Qu Hongbin, an HSBC economist, said, “Manufacturers’ restocking process continued but remained relatively slow. We expect continuous policy efforts to sustain the recovery.” Regarding the future of Chinese manufacturing, it is difficult to issue predictions on the basis of available statistics since the full effect of reshoring won’t reveal itself for several years. Hal Sirkin, analyst at BCG, said, “These are leading indicators,” he said. “If you are going to have a plant up and running in 2015, you have to start planning in 2011, or 2012 at the latest.”

Still, the Fruit of the Loom decision highlights the daunting challenges a revitalization of U.S.-based manufacturing face. The closing of the Jamestown facility is scheduled to commence June 8 and will be fullIy completed by December 31. In compliance with the Workers Adjustment and Restraining Notification Act, all affected employees must receive a sixty-day notice.