US Textiles 2007

his past year didn’t turn out all that badly. And assuming the absence of any big new
domestic or international surprises, a similar reassuring pattern would seem to be shaping up for
the next 12 months.

This optimism is based on more than just wishful thinking. True, both the textile and apparel
industries may be in for a bit more shrinkage. But by and large, all signs suggest both sectors
will survive as they become increasingly efficient and a lot more internationally oriented.

To be sure, plenty of problems remain. Specifically, the multitude of serious challenges the
industry has been facing for years — still-rising import levels, changing international ground
rules, cutthroat competition and ever-changing consumer wants — will persist. But overall, most
mills should manage to keep their heads above water. Indeed, for those who play their cards right,
some selective production and profit gains may even be attainable.

US Mills Invest For The Future

There are other factors, too, that should keep US mills viable in today’s volatile market.
One of these is continuing capital investment. Recent numbers released by the Washington-based
National Council of Textile Organizations (NCTO), for example, show plant and equipment spending by
the industry came to more than $33 billion over the past decade. If nothing else, outlays of this
magnitude can’t help but improve industry productivity – and in the process help keep labor costs
under control. But more than that, these huge expanding expenditures can also enhance mill
flexibility, speeding up the US domestic firms’ response to demand shifts; establish a firm base
for the development of new and improved fibers, fabrics and garments; and help the industry come up
with more niche products – the kind that generally carry a lot higher profit margins.

Moreover, add in such other pluses as increasingly savvy management approaches – including
more vertical integration and growing international contractual moves involving outsourcing and
joint ventures – and the future doesn’t look all that bleak. Indeed, all of the above developments
would seem to assure that US mills and clothing manufacturers will remain in the top tier of
world-class suppliers over the longer pull.

Indeed, there is already some solid evidence that all these strategies are paying off. Thus,
this past year’s combined shipments of basic textiles, textile mill products and clothing added up
to nearly $108 billion. That’s only a miniscule $1 billion or about 1 percent under the previous
year’s aggregate figure – and nowhere near the declines that many had been predicting.

Finally, a vibrant economy also has to be factored into this basically positive industry
appraisal. Our gross domestic product (GDP), for instance, is expected to show another 2.5- to
3-percent advance in 2007 – with equally rosy figures anticipated for both 2008 and 2009. This
alone would seem to assure continuing gains in domestic purchases of apparel, home furnishings and
other textile products.

Industry Outlook

Meantime, zeroing in on the new year, here’s how

Textile World Asia
editors see key elements of the industry shaping up:

Demand: While overall domestic activity should continue to edge lower, the drop
again will be quite small. Looking at textile mill shipments, first,

equations suggest only a 1- to 2-percent decline. As in 2006, virtually all of the slippage
will be centered in basic textiles – fibers, yarns and fabrics. On the other hand, more highly
fabricated textile mill products – home furnishings, rugs/carpets and industrial products, for
example – will hold pretty much near 2006 levels, although some decline can’t be ruled out in
carpets as housing construction takes a bit of a breather.

But even with some overall slippage, these domestic rug and carpet shipments should manage to
reach close to $13.5 billion. That’s not bad considering the fact that a decade ago, these
shipments were running only around the $10 billion mark.

The overall textile industry should also be helped by another tolerably good apparel buying
year next year. Thus, projected domestic clothing shipments – while not expected to grow as they
did this past year – should pretty much hold their own. But, on a somewhat more sobering note, it
should be recognized that our apparel industry, while still accounting for near $36 billion worth
of shipments, is nowhere near the $60 billion-plus levels of a decade ago.

Supply: Excess rather than shortages should pretty much remain the order of the
day as US mill operating rates remain relatively low, and overseas producers – hungry as ever for
US dollars – continue to expand their push into our domestic markets.

Looking at US production potential first, the aggregate mill-operating rate – production as a
percentage of rated capacity – is expected to remain in the low 75-percent-plus range. That’s a far
cry from the near 90-percent peak hit back in the mid-1990s. To be sure, mill closings will
continue as companies are forced to abandon inefficient facilities. But much of this already has
been accomplished. Equally important, the pressure to remain competitive should result in new
capacity increases as mills continue to pour money into new and more efficient facilities and
processes. Bottom line: This additional investment should offset further plant shutdowns – making
it increasingly difficult, if not impossible, to raise the industry operating rate to any
significant extent.

Nor are today’s relatively low inventory levels expected to create any supply problems. The
fact is that our domestic mills have vastly improved their forecasting expertise, their logistics
and their ability to react quickly to any sudden change in demand. Implication: There’s no need to
expand inventory levels, even in the face of increasing consumer buying volatility. Upshot:
Continuing low inventory/sales ratios are nevertheless substantial enough to avoid any serious

Prices: Here, too, recent developments have turned out better than expected.
Rather than fall, as many had predicted, both basic textiles and textile mill product quotes have
continued to hold their own — and in some instances have actually managed to creep up a bit.

Carpets and rugs have been one of the positive performers. Bureau of Labor Statistics price
data here, for instance, show a solid 2-percent advance over the past 12 months. On the other hand,
this uptrend could be about to flatten out as reduced 2007 housing activity puts a crimp in this
subsector’s demand.

Greige goods have been even better price performers over the past year — with average quotes
here advancing about 3 to 4 percent, and

sees another small increase for the new year.

The picture is much the same for both finished fabrics and industrial textiles. Both these
sectors managed to rise a few percentage points in 2006 — with further fractional advances seen for
the next 12 months.

To be sure, there have been some exceptions to this basically firm price picture. Thus, both
home furnishings and apparel have not been all that buoyant as strong competition virtually rules
out any meaningful gains. The fact is that both of these sectors have been severely impacted by
low-priced imports to the point that price averages have been hard-pressed to even maintain the
previous year’s level. Indeed, if you zero in on some apparel products like men’s suits, sport
coats and outerwear, some sizeable year-to-year declines become readily apparent.

The apparel softness is actually part of a long-term trend, with prices here backing and
filling around a small 1- to 2-percent range for more than a decade now. And there’s little to
suggest any 2007 change — at least not as far as the overall apparel price average is concerned.

Costs: As noted earlier, no problems are anticipated in payroll outlays. And in
the case of the other major expenditure stream — fibers — all signs point to no major changes in
either natural or man-made constructions.

Looking at cotton first, while there will be some decline in US crops during the current
marketing year, this should be more than made up by increases in other big cotton-growing
countries, such as China, India and Pakistan. Therefore,

looks for about a 2-percent increase in the global crop — more than sufficient to satisfy
projected demand. This, in turn, points to little major change in cotton prices. Domestic tags in
2007 should remain in the recent 45 to 50 cents-per-pound range — marking the second straight year
of basically unchanged quotes.

The cost outlook for man-made fibers also is reassuring. To be sure, averages here are up
about 3 percent from a year ago. But with their key feedstock — petroleum — down significantly, and
manufacturing capacity both here and abroad more than adequate, it’s hard to see any meaningful
upward drift.

Meantime, some further comment on labor costs would also seem to be in order. Here again,
there are moderating factors: expectations of another moderate pay hike in 2007; and continuing
productivity gains, which should offset the wage increase. Put another way: Unit labor costs will
in all likelihood remain unchanged.

Actually, this encouraging unit-labor-cost trend has been going on for years now. Compare
2003 with 2006, for example, and you find average textile industry productivity rising by slightly
more than 3 percent per year, while annual labor rates have edged up slightly less than this 3
percent. Implication: steady to maybe even fractionally lower unit labor costs over the past three

: Put such factors as these relatively stable costs, slightly higher industry
prices, and only a small drop in production into the computer hopper, and you end up with a really
not-all-that-bad earnings level. Indeed, both after-tax profits and after-tax profits per dollar of
sales both managed to eke out small gains last year. On the net profit front, for example, the
domestic industry total came to nearly $1.72 billion — considerably above the previous year’s $1.5
billion figure and the highest level since 1998. More significantly, those latest numbers are a lot
better than the near-zero-to-actually-negative figure that was reported as recently as 2000 and

It’s also interesting to point out that this past year’s profit performance wasn’t all that
different from earnings reported by most other industries. More to the point: The 10-percent
increase in textile mill after-tax profit in 2006 compares quite favorably to the all-US-industry
8-percent increase.

Employment: There seems to be no way to stem the inexorable decline in the nation’s
textile and apparel workforces. In part, this can be traced back to the continuing productivity
gains. Employment totals would continue to shrink even if the industry were able to maintain a
steady production volume.

But that’s an unrealistic “even if,” as domestic mill activity — plagued by ever-rising
imports — continues to shrink every year. Not surprisingly then, 2007 worker totals will continue
to show significant slippage. Hence, these projected worker attrition rates for the new year: 5
percent in the already hard-hit basic mill area, 6 percent in apparel, and perhaps 1 percent in the
somewhat firmer fabricated textile product sphere. However, even with this erosion, the domestic
textile/apparel complex should still play a significant role in overall US industrial activity.
Indeed, according to NCTO, this overall sector — including some supporting industries — is still
providing jobs for close to a million domestic workers. Equally significantly, our mills and
factories are also managing to contribute an important $60 billion to the nation’s GDP.

: Incoming shipments from abroad have turned out to be somewhat less disastrous
than many had predicted. True, imports of textile and apparel products were up again last year. But
the gain was fairly subdued — something in the order of 3 percent on a square meter equivalents
(SME) basis — and well under the nearly 11-percent advance of the previous year.

Also noteworthy here, Chinese increases seem to be slowing down a bit — with preliminary
estimates for 2006 putting that Far Eastern nation’s gain at around 9 percent, far under the close
to 44-percent jump recorded just one year earlier. Unfortunately, some of this deceleration was
offset by larger gains from other Asian nations.

As for 2007,

equations suggest another relatively small advance in overall incoming shipments — probably
something again in the order of 3 to 4 percent. And while the biggest chunk of these shipments —
about 40 percent — will still be from China, substantial volume is also seen for other Southeast
Asian nations, the Association of Southeast Asian Nations (ASEAN) bloc and our nearby neighbors
such as Mexico, Canada and Caribbean Basin (CBI) nations. Again, while the increase is better than
some earlier years, this still points to an import total of more than 54 billion SMEs — nearly
twice the volume of incoming shipments reported as recently as 1999.

On a somewhat rosier note, US textile exports should also continue to move higher. They
should offer both a modest offset to the import surge, and help maintain the US position as the
third-largest exporter of textile products in the world. But even with an export counterweight, the
US textile and apparel trade deficit would continue to grow.
TWA’s best estimate here: About an $83 billion red-ink figure for 2007 — that’s
close to 60-percent above the trade shortfall prevailing back in 1999.

More Thoughts On China

Pinpointing future developments with China will remain quite iffy given the number of
questions that remain unanswered. The biggest of these, of course, is how Beijing’s currency, the
yuan, will fare vis-à-vis the US dollar. With the yuan already up close to 6-percent over the past
18 months, some further upward moves are indeed likely. But just how significant they’ll be is
still anybody’s guess.

One thing is for sure: Virtually no one denies some further adjustments are necessary to slow
down Chinese exports. Other things being equal, further upward revaluation would make Chinese
products more costly in terms of the dollar. They could also help narrow the trade imbalance in
still another way — by making US exports to China a little more affordable to their producers. In
any event, it’s becoming increasingly clear that the status quo is no longer an option. And that
goes for Europe as well, where a similar trade deficit with Beijing has become unsustainable.

If there is any doubt that these trade imbalances need to be taken seriously, just look at
the latest numbers, which put the Chinese global trade surplus at well over $200 billion. This, as
might be expected, has pushed Beijing’s foreign exchange reserves to record levels.

A possible import brake could come from China’s gradually increasing raw material and labor
costs. On the latter score, the Chinese minimum wage in some manufacturing centers was recently
boosted by as much as 20 percent.

Reflecting on all this, some Chinese producers report shrinking profit margins. And as a
result, they are moving to ease the pressure by increasing prices by as much as 5 percent when
renewing existing contracts. Still another trend development that might slow down the Chinese
import wave: Some shifting of business on the part of US buyers to other low-wage nations like
Bangladesh and Turkey.

With China now accounting for close to one-quarter of the total US trade deficit, that
country is certain to be a big issue for trade skeptics in the new Congress.

And There’s More Ahead

With all of the above, it’s becoming increasingly clear the United States’ multi-faceted
textile and apparel complex isn’t about to disappear. On the other hand, all the recent progress
doesn’t, in itself, assure continuing success. Vigilance will still be the order of the day as more
and more challenges appear — challenges that will require the continued fine-tuning of the

For one, increased consolidation, integration and emphasis on a single global marketplace all
underscore the need for even better monitoring of company logistics. In fact, this is probably the
key reason behind the growth of global logistics firms — outfits whose sole purpose is to set up
procedures to assure the meeting and demand of production schedules at the lowest possible cost,
and the keeping of inventories as lean as possible.

As one logistics company spokesman recently put it: “The smart companies that will be the
eventual winners are those who look beyond the transactional and into the strategic. They link
themselves together with their vendors and logistics suppliers to avoid costly duplication, and
take costs out of the system while accelerating their merchandise through the chain.”

Another important “must” thesedays: The need to keep on innovating — maintaining the ability
to come up with still newer and better products. And this is far from being an easy task, for it
has to involve virtually every facet of textile/apparel activitiy — including production,
processing, logistics, market strategy, brand management and the meeting of customer needs.

If there is any doubt on the need for continuing industry innovation, just take a look at
some of the big names in textiles that have been embracing the concept. A Milliken & Company
executive typifies the thinking here: “We will continue to have a mix of both commodity and
technical. But we’re doing more research and adding more value to our products because that’s the
way the market is going.”

This kind of approach, in turn, is necessitating many more market studies. One example: the
decision on the part of some apparel firms, after intensive study, to develop sizing systems that
represent the three most common female figures. The goal: Production of the three versions of every
female size — one for each body shape.

The recent introduction of more durable bed sheets is also the result of an industry-wide
attempt to satisfy the ultimate consumer. Specifically, it reflects the results of a study showing
that product durability outweighed price when deciding among various sheet alternatives.

In short, today’s market strategy has become quite clear: Find out what John Q. Public wants;
make it; and, in the process, also come up with improved pricing and profits.

In any event, all this bodes well for the survival and even prosperity of this challenged
industry. One hint of what should be in store for textile and apparel makers over the next few
years comes from the latest longer-term projections released by Global Insight.

Looking first at the bottom line, this economic forecasting firm’s analysts — using their own
definition of profits — gross revenues less labor and material costs — agree with

that any shrinkage will be quite modest over the 2006-2009 period. Indeed, for basic mill
items, the firm projects little or no change in earnings over this three-year span.

And the picture isn’t all that bad for more highly fabricated textile mill products. Here,
their profit figures fall from the past year’s relatively high $11 billion level to a
still-respectable $9.5 billion in 2009.

Global Insight justifies these numbers on the belief that any decline in shipment volume over
this period will be relatively small — plus the fact that there will be little or no advance in
unit production costs over the period.

One top mill executive sums it all up: “We’ve got our eyes on more than just what’s happening
today. We’re in this for the long haul.” Moreover, add in what’s being planned to what’s already on
the drawing boards, and the American textile industry should not only continue to survive, but also

January/February 2007