Upstream Focus is Sourcing Journal’s series of conversations with suppliers, associations and sourcing professionals to get their insights on the state of sourcing, innovations in manufacturing and how to improve operations. In this Q&A, Andrea Mansilla, investment advisor for the Guatemala Textile and Apparel Industry Association (VESTEX), discusses the impact that slowing U.S. sales could have on Guatemala’s garment industry and how “friendshoring” is encouraging international investment in the nation.
Name: Andrea Mansilla
Title: Investment advisor
Company: VESTEX (Guatemala Textile and Apparel Industry Association)
What’s the No. 1 question or concern you hear from your members now that was never really a consideration before?
The potential recession in the U.S. Undoubtedly, a panorama of greater uncertainty, high inflation and contracted demand is looming. The readjustments in the U.S. market have a strong impact on our country since 72 percent of apparel exports are destined for the North American market. If retailers’ sales slow down, production orders are canceled or stop coming in.
How should factories be evaluating potential brand and retail partners differently now compared to before the pandemic?
Companies are interested in working with brands or businesses that want to develop enduring relationships. The clothing and textile industry is very volatile and susceptible to trends. Having partners and brands that seek long-term relationships allows companies in the sector to plan better and even think about expanding their operations, seeking verticalization, incorporating more technology, diversifying their production or investing in new production plants.
How can the relationship between these parties evolve?
Retailers and brands can no longer rely solely on the traditional model, in which they depended on suppliers’ investments to increase their production to remain competitive, because no matter how big a company is, it has its limits.
The region is a solution to many problems facing today’s supply chains. However, it is necessary to work in partnership, because the capacity is not found, but must be co-created with strategic suppliers who have the know-how of the industry in the context of our countries.
The partnership can be carried out through the commitment of both parties, seeking continuous improvement together, as well as sharing information, risks and successes. Another key issue is investment in training, technical support and innovation. Currently, companies see diversification and the establishment of vertical structures as a strategy to reduce supply setbacks. When there is joint work between retailers, brands and suppliers through diversification, it is also possible to reach the verticalization of the industry in closer markets and to improve the response to customers.
What should be manufacturers’ top lesson from the pandemic? How can they address this in their operations?
The pandemic showed that our region has a great opportunity for growth and market capture, especially now that retailers and brands are looking for resilience in their supply chain. The pandemic opened the possibility to think of other ways of doing business and to think of strategic alliances not only with brands, but also with companies related to the sector or vendors with know-how in other parts of the world.
Due to the regulations put in place by the government, the Guatemalan apparel and textile industry was able to continue operating by switching its exports from clothes to medical products throughout the pandemic, demonstrating its flexibility and resilience.
What is the state of apparel production capacity in Guatemala? From your perspective, what is the outlook for 2023?
Guatemala has an integrated supply chain with spinning and textile companies, more than 200 apparel companies, machinery suppliers, textile finishing services and garments such as screen printing, sublimation, embroidery, dyeing and other related services. The nation ranks among the top 10 exporters of cotton and synthetic T-shirts, shorts and pants, cotton skirts and jackets to the United States. Guatemala also excels in the production of sweaters and pullovers made of synthetic materials. Other categories, such baby clothing and women’s wool and synthetic jackets, have seen significant expansion. There have been numerous announcements of new investments and reinvestments in the country in 2021 and 2022; it is projected that Guatemala’s spinning capacity will double from an estimated 241,744 to 411,840 spindles.
One example of these success stories is the Spanish company Nextil, which will soon start operations at a new production plant that will manufacture fabrics from nylon and Lycra, which will add value through the manufacture of differentiated fabrics.
Work orders in the United States have started to decline compared to last year. The sector is still coping with the effects of excess inventory, and the industry is currently dealing with weak demand because of the impact of inflation and a more cautious consumer when it comes to discretionary spending. It is anticipated that the economy will adjust and the sector will resume its pre-pandemic growth. Investors have been upbeat, seeing this as a chance to increase market capacity and be ready to act quickly when the economy begins to recover.
How can the Guatemalan government best support the domestic apparel industry during this time?
It is crucial for the nation to improve its infrastructure, particularly its port system. Making progress in simplifying formalities and procedures is also crucial. The legislative basis for digitizing various processes is provided by Decree 5-2021, Law for the Simplification of Administrative Requirements and Procedures, which Guatemala passed in 2019. However, work on its implementation is still ongoing.
If companies aren’t already producing in Guatemala, why should they consider using it as a sourcing location?
Guatemala’s industry offers buyers a quick response, with flexibility in terms of the size of production orders and the type of garments. Guatemala has managed to develop a robust cluster of more than 250 service and accessory suppliers that allow it to produce and export garments with different finishes that meet market requirements.
Guatemala’s exports to the United States have an added value component of 54.11 percent, thanks to the highly integrated cluster and high labor productivity, which allows exporting more complex products with higher finishes. According to figures from the U.S. Office of Textiles and Apparel (OTEXA), the average price per equivalent square meter of Guatemalan products is $4.04, compared to $3.32 in the CAFTA-DR region and $2.98 worldwide, which is an indicator that apparel manufactured in Guatemala has high value added.
What makes you most optimistic?
Despite the challenging market environment, the apparel and textile industry is undergoing a global reconfiguration of the way it operates. As a result, “nearshoring” and “friendshoring” trends have gained further acceptance, which has given countries from all over the world the possibility to think about Guatemala as a potential investment destination. Friendshoring is similar to nearshoring with the distinction that it is based not only on the issue of physical proximity but also on establishing in a country with shared values or reliable countries with whom there are good diplomatic relations or a close cultural background.
Due to Guatemala’s political and economic stability as well as the growth of its sector, there are currently a number of companies wanting to expand or make new investments in the market, as well as those that are already in the installation or reinvestment stages. This is undoubtedly positive because Guatemala is strengthening its efforts to gain a greater market share in the United States and generating more jobs through the companies that have already confirmed their investments in the country.
What’s in store for VESTEX for 2023?
We will continue to promote exports of companies located in Guatemala and support companies and buyers who have identified our country as an ideal destination for their investments and placement of production programs.
For VESTEX, it is important that its partner companies have a strict compliance with national legislation, so it will continue to support them in providing the necessary information for this.
Finally, it expects to continue representing them before public and private entities, both national and foreign, to ensure market conditions.