Prospects for Conducting Business in Guatemala
Part 2
By Kim Anderson, [TC]²
In the last twenty years Guatemala’s textile and clothing industries have experienced major growth. Although opportunity abounds, the industries must overcome a number of formidable issues in order to become a dominant player in the international arena.
With more emphasis being placed on quick replenishment, one of Guatemala’s most competitive strengths is its close geographical location to the world’s largest consumer—the U.S. By air, Guatemala is within hours from three major U.S. cities. Flight time from Guatemala City to Miami is 2.5 hours. Los Angeles and New York take just 5 hours by air. These relatively short commutes make it possible for Guatemalan suppliers to meet with U.S. customers quickly and without an overnight stay. The transit time for air freight to Miami is one day and to New York and Los Angeles it is two days.
Guatemala has access to the Atlantic and Pacific oceans—allowing for quick and easy deliveries to North and South America, Japan and Europe. Cargoes to the U.S. take 3 days to reach Miami, 6-8 days to reach Los Angeles and 10 days to reach New York. These times are relatively short considering that transporting cargo from China and other Asian countries can take 45 days.
Guatemala is in the same time zone as the U.S., therefore suppliers can easily and quickly communicate with their customers.
After winning its independence from Spain in 1821, a variety of military and civilian governments followed as well as a 36-year guerrilla war. In 1996, the government signed a peace agreement formally ending the conflict. Today, Guatemala is undergoing changes. After taking office in January of 2004, President Oscar Berger has taken a strong anti-corruption and pro-business stance. Major initiatives have been launched to reduce and modernize the military and combat drug trafficking.
Unfortunately, even President Berger’s efforts have not totally squelched domestic and international concern regarding crime and illegal drug trafficking. Last year there were 6000 murders and 98% of them went unsolved. Guatemala is a major transit country for cocaine and heroin. Its close proximity to Mexico makes it a major staging area for drugs, money laundering and corruption.
Guatemala has the largest workforce in Central America. There are a variety of opportunities in which people can seek training in textiles and clothing. Two of the country’s ten universities offer degree courses in textiles and apparel manufacturing. The country’s largest vocational training institute, the Technical Institute of Training and Productivity, also offers technical training in textiles. VESTEX (Comision de la Industria Vestuario y Textiles, or the Apparel and Textile Industry Association) has set up a training center for textiles and apparel which provides specialty training in areas such as CAD/CAM, pattern making and marker making. VESTEX also offers seminars and training programs targeted at operators, mechanics and middle and top managers.
Although there is an abundant labor supply, Guatemala’s labor costs have risen in recent years and are now among the highest in Central America.
The ability to offer full package services is one of the greatest opportunities for Guatemalan apparel companies. Many of Guatemala’s textile and apparel companies are vertically structured. A vertical structure is beneficial for quick product replenishment and full package service. Some garment manufacturers offer a 4-6 week production and delivery cycle. However, there are challenges that need to be addressed. The country’s clothing manufacturers are dependent on imported yarn and fabric—locally produced yarn and fabrics are not available in the quality and quantity needed to meet demands.
The Caribbean Basin Trade Partnership Act (CBTPA) only benefits companies producing garments that are constructed with woven or knitted fabrics made in the U.S. and with yarns made in the U.S., or knit fabrics manufactured in the region from yarns made in the U.S. Unfortunately, the high cost of U.S. yarns and fabric make it difficult for manufacturers to compete—despite duty benefits. Many manufacturers still find it cheaper to produce goods using fabrics imported from Columbia, Brazil, Mexico or China. The need to import materials is adversely affecting a widespread move into full package production.
Another roadblock facing the implementation of full package services is having the ability to switch from producing basic garments to more fashion forward garments. Traditionally, Guatemalan exporters have focused on producing basic products. Manufacturers who have attempted to shift their focus have found they lack the design, product development and marketing skills. There is also a dearth of trained local engineers, electricians, mechanics and supervisors.
With worldwide quotas lifted between WTO members, Guatemalan textile and apparel companies will soon find it even more challenging to compete in the basic apparel markets.
Although Guatemala’s infrastructure is considered to be one of the most modern by Central American standards, it represents a significant obstacle to foreign investment and economic growth. Investment in roads and railways, telephone and electricity services has tended to be focused in Guatemala City. An Economic Action Plan was introduced to modernize the country’s air, sea port, road and energy networks but the plan has been slow to be implemented. Recent drought, hurricanes and floods have also had a negative impact on Guatemala’s infrastructure and economy.
Competition for duty-free access to the U.S. market is intensifying and duty-free benefits extend beyond the Caribbean Basin Initiative region (CBI). The U.S. is already party to free trade agreements with Israel, Canada, Mexico, Jordan, Chile, Singapore and Australia. Negotiations have recently been finalized with Morocco and Bahrain. In the first 5 months of 2005, 24 Guatemalan clothing plants closed and 4,200 jobs were lost. The closings have been attributed to growing competition from low cost suppliers such as China and India.
Guatemala has a number of strengths that could help the country become an integral player in the apparel sector. However, there are also threats that will need to be addressed before the textile and apparel industries can successfully grow into an autonomous full package supplier.
References
Leonie Barrie. Textile Outlook International, July-August, 2005. Pages 13-44.