Prospects for Conducting Business in Guatemala
Part 1
By Kim Anderson, [TC]²
In 2005, Guatemala became the third country after El Salvador and Honduras to approve legislation implementing the Central American Free Trade Agreement (CAFTA). The geographical location of Guatemala allows for relatively quick turnaround on apparel products—but is Guatemala equipped with the necessary tools to accommodate the voracious U.S. appetite for clothing products? A two part series will take a closer look inside Guatemala’s textile and apparel industries and evaluate the opportunities, weaknesses and potential threats of doing business in Guatemala.
Guatemala
https://www.cia.gov/library/publications/the-world-factbook/geos/gt.html
Guatemala is known for its coffee, sugarcane, and bananas. Although relatively small, it also has a growing and increasingly important textile and clothing component to its economy. In 2004, Guatemala exported $1.96 million worth of clothing to the U.S. In fact, Guatemala has more companies dedicated to the production of textiles and clothing than any other Central American country and the U.S. is its leading customer—in 2004 the U.S. imported 94.1% of Guatemala’s clothing exports.
Labor Force
Guatemala has a readily available labor force, 70% of the population is less than 30 years old and the literacy rate is 65%. Due to the country’s rough terrain, a large portion of the population live in the capital, Guatemala City, or the surrounding areas. The manufacturers in Guatemala City employ 39% of all textile and clothing workers in the country. Eighty-seven percent of the textile and clothing firms are based in and around Guatemala City.
The textile, clothing and related accessory and services industries employ 146,772 people, which represents about 73.5% of the people employed in a manufacturing industry. Of the 146,772 people, 77.2% are employed in clothing factories and 12.6% in textile plants. Under Guatemalan labor legislation the standard working week is 44 hours for day shifts and 36 hours for night shifts. By law the average minimum wage is $4.27 per day. According to the US International Trade Commission published in 2003, the average hourly wage was $1.49. The average monthly wage for a sewing operator is $200. Maternity leave is 84 days.
Weather
Guatemala is susceptible to serious natural disasters. There are numerous volcanoes in the mountains, with occasional violent earthquakes. The Caribbean coast is often threatened with hurricanes and tropical storms.
Transportation
Guatemala has the most modern infrastructure in Central America, although it is still poor by the standards of developed countries.
There are three main ports, Puerto Quetzal on the Pacific coast; Puerto Barrios on the Atlantic Ocean; and Santo Tomas de Castilla on the Caribbean Sea. From the ports, maritime transportation services around the world are offered by more than 30 shipping lines. The three ports handle most of the country’s exports but they are equipped with outdated and inadequate cargo handling equipment, which means that costs are high and delays are frequent.
There are eleven airports with paved runways. Two of the airports are international airports; however, La Aurora Airport in Guatemala City handles 93% of the country’s passengers and air cargo. It is the only international airport equipped with full passenger and freight facilities, including warehousing, and it is approaching full capacity.
The cross-country road network extends to 14,300 km, of which 39% is paved. The Pan-American Highway and the Pacific and Atlantic Highway are the main routes through the country, extending from Mexico to El Salvador.
Guatemala has 21 authorized free trade zones located throughout the country; however, only 2 of the country’s clothing producers are located in these authorized zones. Other textile and apparel producers take advantage of Decree 29-89 passed in1989. The law allows a single freestanding factory to qualify as a free trade zone anywhere in the country and to obtain all the fiscal and customs benefits of a free trade zone operation.
Telecommunications
In the last 10 years many of the country’s basic services such as telecommunications and electricity have been privatized and modernized. There are now 17 operators providing international calling services and 4 mobile phone platforms. In 2002, one-fifth of the people had access to a fixed line and mobile phones.
In 2002, 33.3 out of 1000 people were using the internet, up from 5.9 per 1,000 people in 1999. Internet access is growing; however, uptake is low because of a lack of telephone lines. Low uptake rates represent a major impediment to the significant growth of e-commerce in the local market.
Investment in roads and railways, telephone and electricity services has tended to be focused on the metropolitan Guatemala City area. An Economic Action Plan was introduced to modernize the country’s air, sea ports, road and energy networks, but the plan has been slow to get underway.
Foreign Investment:
Foreign investment grew in the 1980’s and early 1990’s. The investment was boosted by the 807 production sharing program which offered improved access to the U.S. market. Also in 1989, Guatemala passed laws which eliminated duties and taxes on raw materials, intermediate products, machinery, packaging and labels coming into the country, as long as they were used for the production or assembly of merchandise to be exported out of the Central American region.
There are no impediments to the purchase of local companies by foreign investors. Foreign owned enterprises operate in Guatemala with the same legal status as Guatemalan firms. According to recent statistics 73% of the 222 registered clothing companies are foreign owned or backed by foreign capital.
The largest proportion of foreign direct investment comes from South Korea. In 2004, 145 companies were financed by South Korean-based investors—representing 65% of Guatemala’s total apparel factories. Thirteen clothing factories were owned by U.S. investors—representing 6% of the total. Only one of the 222 clothing producers was Chinese owned.
Textiles
In 2004 the textile industry consisted of 44 mills employing 18,500 workers. There were 26 spinning mills, 31 knitting mills, 23 weaving mills and 38 dyeing facilities. However, most companies are involved with more than one of these processes.
The textile industry in Guatemala includes both cotton and synthetic yarns and sewing thread. The country also produces 100% cotton and cotton/synthetic knit and woven fabrics. The main products are:
• Cotton thread and yarn
• Woven cotton fabrics, including oxford, denim, twill and poplin
• Synthetic and polyester/cotton blended fabrics
• 100% cotton knits including fleece, jersey, pique, rib and terry made from OE and RS yarns
Guatemala is the largest producer of flat woven fabric in Central America, representing about 55% of the region’s entire output. It is also a significant producer of circular knits and printed fabrics.
The privately owned Liztex is one of the largest textile companies. Liztex is vertically integrated and has the capability to spin yarn, weave and knit fabric as well as finish. It has 2,500 employees. Forty percent of the products are sold to local manufacturers and 60% is exported to either the U.S. or Mexico. Customers include JCPenney, Levi Strauss and Wal-Mart.
Textisur is a large textile manufacturer that specializes in warp knitted fabric. The fabric is used for performance wear. Customers include OshKosh, Gap, Nike, Reebok and Mast Industries. It also has a screen printing and fabric dyeing facility.
One of the largest exporters of 100% cotton and cotton blended knit fabrics in Central America is Grupo Texpasa. The company, founded in 1992, spins cotton, cotton/polyester and cotton/nylon yarn and produces a range of knit constructions including jerseys, fleeces, ribs and piques. It also has cutting rooms and sewing plants which can produce polo shirts, sweatshirts, shorts, trousers and skirts.
Clothing
The clothing industry has grown considerably—between 1995 and 2004 employment rose from 54,000 to 113,272. The industry consists of 222 manufacturers, with a total of 83,593 sewing machines. The clothing production is concentrated in a few major areas: cotton knit shirts; cotton trousers and shorts; and synthetic trousers, shorts, shirts and blouses.
Some of the main U.S. companies that source garments from Guatemala include Abercrombie & Fitch, Calvin Klein, Donna Karan, Gap, Old Navy, Guess?, JCPenney, Kids ‘R’ Us, Kmart, Levi Strauss, Limited Too, Nautica, Jones Apparel, Liz Claiborne, Pierre Cardin, Tommy Hilfiger, Wal-Mart and Warner Bros.
One quarter of the country’s manufacturers offer “full package” services—the greatest number in the Central American region.
The largest clothing manufacturer in Guatemala is Koramsa, a full service provider of denim garments. The company has grown in size from 250 workers in 1988 to 14,300 in 2004 and now employs 13% of Guatemala’s total clothing workforce. It operates 4 sewing factories with 136 sewing lines and has 2 laundries with a specialty wash plant.
Koramsa has a joint venture with a U.S. garment processing company. Together, the companies produce 700,000 pairs of jeans and other denim garments a week. In 2003, Koramsa opened a $6 million facility incorporating a development center, sample room, cutting facility, and fabric warehousing facility. The company also has a print shop, which prints leather labels for jeans as well as care and content labels and size and price tickets and has the ability to do laser engraving.
Koramsa is a full service provider for Gap, encompassing Banana Republic and Old Navy; Levi Strauss; Calvin Klein Jeans; Limited Brands; OshKosh; J Crew; Tommy Hilfiger; and Eddie Bauer.
The second largest clothing manufacturer, founded in 1997 by a South Korean apparel producer, is ShinWon. In 2003, the company generated sales of $90 million and employed 2,800 people. It is vertically integrated, having the capability to knit, dye, cut, sew, print and embroider. It produces 100% cotton T-shirts and polo shirts for men, women and children. ShinWon has 4 factories and 38 sewing lines. Eighty-five percent of ShinWon’s output is exported mostly to U.S. customers include the Gap, Kmart, Wal-Mart, Reebok and Perry Ellis.
Indurasa is the largest manufacturer of intimate apparel in Guatemala. In 2003, the company employed 900 people and shipped 28-32 million items of sleepwear, underwear and swimwear to the U.S. It claims to be the only company in Guatemala with a bra cup molding machine. Its main customers are VF Corporation, Hanes, Avon, JCPenney and Reebok.
Nylotex, a company within the Guatemala-based Textil Del Sur group, produces hosiery. Recently it became the first manufacturer in Central America to offer seamless garments such as briefs and tops. It has a facility equipped with 20 Santoni machines and has the capacity to expand to 108 machines.
Services and Accessories
The services and accessories industries have grown in recent years, expanding from 75 to 276 companies between 1998-2003. Suppliers provide a range of raw materials, trims, embellishments and related services such as sample making, pattern making and cutting. The industry also includes freight forwarders, industrial laundries, 37 embroidery companies and 15 screen printing facilities. Guatemala has 2 textile laboratories that service Central America.
Export Trends
In 2004, Guatemala’s clothing exports represented 21.1% of the $9.22 billion exported by Central America to the U.S. In value terms, Guatemala is the second largest Central American supplier to the U.S. after Honduras. In volume terms, Guatemala is the third largest Central American supplier to the U.S. after Honduras and El Salvador. Knitted clothing accounts for the larger share of clothing imports. In January 2005, 65.1% of U.S. clothing imports from Guatemala were made from knit fabric and 34.9% were woven.
Traditionally, Guatemala has focused on producing products for the U.S. that other foreign suppliers had limits on due to quotas. In 2004, as much as 82% of the apparel exports from Guatemala to the U.S. consisted of cotton and synthetic trousers and knit tops.
One of the most significant decreases in U.S. imports from Guatemala between 2002 and 2004 was woven cotton shirts. This is due to the fact that apparel made from locally woven fabric is excluded from duty free treatment in the U.S. market under the Caribbean Basin Trade Partnership Act (CBTPA) preference program. In contrast apparel made in Guatemala from knit fabric produced locally qualifies for duty-free treatment under the CBTPA, provided the fabric has been knitted from U.S. yarns.
Usage of the CBTPA is relatively low in Guatemala. In February 2005 only 34% of U.S. clothing imports from Guatemala benefited from preferential access under the CBTPA, compared to 70.3% usage rate for all of the other CBERA (Caribbean Basin Economic Recovery Act) countries. Guatemala has the second lowest rate of usage of the CBTPA benefits in the region followed by Nicaragua.
The low usage rate reflects the continuing strength of South Korean apparel manufacturers. These firms tend to use yarns and fabrics imported from Asia, rather than regional materials, even though the resulting apparel is subject to full U.S. duty rates. For the year ending February 2005, 53.7% of Guatemala’s apparel exports to the U.S. were subject to full duty rates.
Although it appears that the textile and clothing industries cover all process stages, the apparel sector is highly dependent on imports for most of its yarns and fabric requirements.
In the next [TC]² Newsletter the strengths, weakness, opportunities and threats of the Guatemalan textile and apparel industries will be reviewed.
References
Central Intelligence Agency. The World Fact Book. https://www.cia.gov/library/publications/the-world-factbook/geos/gt.html
Leonie Barrie. Textile Outlook International, July-August, 2005. Pages 13-44.