Central America as a Sourcing Option
Alfonso Hernández
Chairman & CEO The Argus Group
CENTRAL AMERICA AS
A SOURCING OPTION
Prepared by
Alfonso Hernandez
For
GRAND VELAS RESORT, JUNE 2012
This presentation is intended to update attendants to The Cotton Forum 2012 on the advantages of
sourcing in the DR-CAFTA trade zone. It follows the format and the topics requested by Cotton, Inc.
It is not intended for any other use.
SUMMARY
A SUMMARY OF THE REGION TODAY

THE ADVANTAGES OF SOURCING IN DR-CAFTA ARE SELF EVIDENT.

THAT IS WHY THE REGION’S EXPORTS TO THE U.S. GREW 12 PERCENT IN 2011.

LAST SEMESTER APPAREL EXPORTS FROM THE REGION REMAINED FLAT,
REFLECTING MARKET CONDITIONS AND GLOBAL TRENDS.

HOWEVER, INVESTMENT IN TEXTILE INFRASTRUCTURE CONTINUES TO GROW IN
EXPECTATION OF THE MARKET’S RECOVERY.

THE SIGNATURE OF A FREE TRADE AGREEMENT WITH THE EU IS EXPECTED
WITHIN THE NEXT 18 MONTHS.
4
AGENDA
1
CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
2
TEXTILES AND APPAREL
3
WHY HERE?
CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
A SUMMARY OF THE REGION

DR-CAFTA includes six countries:
 Guatemala
 El Salvador
 Honduras
 Nicaragua
 Costa Rica
 Dominican Republic

The five Central American countries are neighbors on the mainland and the D.R. is an island
in the Caribbean; all share the same language.

A beautiful region of the world, with a very benign climate and abundant water and
vegetation:
 Total area – 178,455 square miles
 Population – 49.2 million inhabitants

Main exports are apparel, electronics, coffee, sugar, bananas, tobacco, and shellfish,.
6
CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
THE MAP OF DR-CAFTA
The five provinces of Central America gained their independence from Spain
in 1821 as the Federal Republic of Central America. Then they proceeded
to request statehood to the U.S., but were rejected by Congress. They
finally split apart in 1841.
7
CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
BRIEF COUNTRY PROFILES






Guatemala – Area 42,042 square miles; Population 14.7 million; 65% of the population is
indigenous; GNP per capita $2,740; 2.28 million Internet users.
El Salvador – Area 8,124 square miles; Population 6.2 million; Most densely populated in
this hemisphere; GNP per capita $3,380; Dollarized; 1 million Internet users.
Honduras – Area 43,433 square miles; Population 7.7 million; First to stop the imposition of
a Chavez model of government; GNP per capita $1,870; 1 million Internet users.
Nicaragua – Area 46,430 square miles; Population 5.8 million; Most fertile farmland in
Central America; GNP per capita $1,110; 660,000 Internet users.
Costa Rica – Area 19,730 square miles; Population 4.7 million; Tourism is main source of
foreign currency; GNP per capita $6,810; 2 million Internet users.
Dominican Republic – Area 18,696 square miles; Population 10.1 million; GNP per capita
$5,030; 4.6 million Internet users.
8
CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
THE INVESTMENT ENVIRONMENT

The investment environment:
 World Bank’s “Ease of Doing Business” Latin index average is 103 of 183 (Max).
 Honduras 128; Costa Rica 121;Nicaragua 118; El Salvador 112; Guatemala 97
 Moderate free-market policies.
 Private property and intellectual property rights are respected.
 Enforcing contracts and protecting investors are highly rated by the World Bank.

Massive emigration seeking better living conditions generates monthly family remittances
of approximately 12 percent of the GNP to all the countries in the region.

Leading socio-economic realities:
 Developing democracies
 High poverty levels
 Social inequalities
 Relative freedom of the press
 Freedom of religion
9
AGENDA
1
CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
2
TEXTILES AND APPAREL
3
WHY HERE?
TEXTILES AND APPAREL
There are Five Major Trends in the Central American Apparel Industry

Despite the weakness of the United States economy, demand for Central American
garments is on the upswing in selected market segments.

Increasing demand from retailers.

Requirement for new product development and full-package services.

Speed to market and replenishment present higher inventory turns.

Supply chain alliances and cross-border colaboration are increasing significantly.
11
TEXTILES AND APPAREL
Coping with the Five Trends is the #1 Challenge of the Central American Apparel Industry

Apparel companies are increasing their working capital, their human resource capabilities,
their information systems, and their manufacturing speed and flexibility.

Companies are strengthening alliances in order to face these challenges.

The Central American apparel industry has been negatively impacted by the illiquidity
suffered by many institutions that finance Central American production, and by a reduced
trade flow of finished garments.

Increasing presence of textile capacity in and for Central America.
12
TEXTILES AND APPAREL
U.S. APPAREL IMPORTS FROM THE DR-CAFTA REGION
DR-CAFTA REGION
BY COUNTRY
GUATEMALA
EL SALVADOR
HONDURAS
NICARAGUA
COSTA RICA
DOMINICAN REPUBLIC
DR-CAFTA TOTAL
TOTAL U.S. IMPORTS OF APPAREL IN $MM
2010
2011
Change
1,155
1,639
1,325
1,739
2,478
2,696
1,018
1,357
168
167
627
7,084
YTD/4-20-11
YTD/4-20-12
Change
408
522
373
549
802
743
373
457
52
47
655
15%
6%
9%
33%
-1%
5%
186
184
-9%
5%
-7%
23%
-8%
-1%
7,939
12%
2,343
2,353
0%
The regional industry displayed a very strong recovery in 2011 over 2010.
The first semester of 2012 became stagnant again, regionally.
However, it sustained dollar growth for Nicaragua and El Salvador.
13
TEXTILES AND APPAREL
SHARE OF REGIONAL IMPORTS BY SOURCE COUNTRY
PERCENT SHARE OF DR-CAFTA ON A DOLLAR BASIS
BY COUNTRY
2010
% Of Total
GUATEMALA
EL SALVADOR
HONDURAS
NICARAGUA
COSTA RICA
DOMINICAN REPUBLIC
DR-CAFTA TOTAL
2011
% Of Total
YTD/4-20-11
% Of Total
YTD/4-20-12
% Of Total
16%
24%
35%
14%
2%
9%
17%
22%
34%
17%
2%
8%
17%
23%
34%
16%
2%
8%
16%
23%
32%
19%
2%
8%
100%
100%
100%
100%
Nicaragua’s share is growing faster than all the others due to labor cost and TPL’s.
Honduras is the largest regional exporter to the U.S., but shows a small decline.
El Salvador is second, but it’s share of exports is stagnant.
14
TEXTILES AND APPAREL
DR-CAFTA REGION
BY COUNTRY
GUATEMALA
TOTAL
DUTIABLE
DR-CAFTA
U.S. IMPORTS OF APPAREL IN $MM (By Group)
2010
2011
Change
YTD/4-20-11
YTD/4-20-12
Change
1,155
1,325
15%
408
373
-9%
421
428
897
2%
22%
24%
12%
21%
146
262
129
244
-12%
-7%
-8%
-10%
21%
734
Free Trade
Short Supply
Cumulation
EL SALVADOR
TOTAL
DUTIABLE
DR-CAFTA
568
52
DUTIABLE
DR-CAFTA
6%
522
549
5%
109
89
1,650
-18%
8%
7%
17%
159%
28
494
28
521
0%
5%
1,460
1,567
82
1
70
0
483
11
0
505
16
0
5%
45%
-75%
2,478
2,696
9%
802
743
-7%
216
199
2,497
-8%
10%
10%
48%
8900%
68
734
64
679
-7%
-7%
2,262
Free Trade
Short Supply
Cumulation
201
26
17
1,739
Free Trade
Short Supply
Cumulation
TOTAL
219
29
14
1,639
1,530
HONDURAS
706
128
63
114
2,241
21
0
2,457
31
9
725
9
0
665
8
6
-8%
-11%
5900%
15
TEXTILES AND APPAREL
DR-CAFTA REGION
BY COUNTRY
NICARAGUA
TOTAL
DUTIABLE
DR-CAFTA
U.S. IMPORTS OF APPAREL IN $MM (By Group)
2010
2011
Change
YTD/4-20-11
YTD/4-20-12
Change
1018
1,357
33%
373
457
23%
202
816
221
1,136
9%
39%
40%
55%
367%
25%
71
302
90
367
27%
22%
Free Trade
Short Supply
Cumulation
TPL's
COSTA RICA
TOTAL
DUTIABLE
DR-CAFTA
336
11
18
451
145
0
25
197
2%
-100%
25%
41%
167
-1%
52
47
-10%
7
161
2
165
-71%
2%
3%
0%
0%
1
51
1
46
0%
-10%
-9%
0%
-29%
156
0
5
DOMINICAN REP.TOTAL
160
0
5
627
57
570
Free Trade
Short Supply
Cumulation
142
0
20
140
168
Free Trade
Short Supply
Cumulation
DUTIABLE
DR-CAFTA
471
17
84
564
655
48
607
531
33
6
5%
-15%
6%
560
40
7
50
0
1
5%
21%
19%
45
0
1
186
15
171
184
16
168
158
11
3
-1%
4%
-2%
158
10
1
0%
-9%
-68%
16
TEXTILES AND APPAREL
TOTAL U.S. APPAREL IMPORTS FROM DR-CAFTA IN DOLLARS BY GROUP
DR-CAFTA REGION
U.S. IMPORTS OF APPAREL IN $MM (By Group)
TOTAL
2010
2011
Change
YTD/4-20-11
YTD/4-20-12
Change
TOTAL
7,084
7,939
12%
2,343
2,352
0%
DUTIABLE
1,011
987
-2%
329
327
-1%
DR-CAFTA
Free Trade
Short Supply
Cumulation
TPL's
6,073
6,952
2,014
2,025
1%
5,292
249
82
451
5,921
298
169
564
14%
12%
20%
106%
25%
1,776
60
39
140
1,718
60
50
197
-3%
0%
28%
41%
Growth in 2011 was fueled by imports under free trade.
Nicaragua’s growth was led by Cumulation and TPL’s.
The dollar imports went flat in the 1st semester of 2012.
17
TEXTILES AND APPAREL
DR-CAFTA REGION
BY COUNTRY
GUATEMALA
TOTAL
Cotton Apparel
MMF Apparel
Wool, Silk & Other
TOTAL U.S. IMPORTS OF APPAREL IN MM OF MT² EQUIVALENTS
2010
2011
312
209
100
4
Change
783
551
230
2
-5%
-7%
2%
59%
255
185
69
1
248
164
84
1
-3%
-11%
21%
-4%
1,183
812
371
0
-7%
-11%
3%
-24%
380
273
107
0
312
202
109
0
-18%
-26%
2%
1481%
410
261
149
0
13%
12%
16%
461%
132
82
50
0
135
83
53
0
3%
1%
5%
-70%
67
54
12
1
-23%
-20%
-35%
29%
22
17
5
0
19
16
3
0
-12%
-9%
-25%
22%
-6%
-11%
0%
9%
66
33
31
2
64
30
33
1
-3%
-9%
6%
-31%
-3%
969
874
-10%
820
HONDURAS
TOTAL
Cotton Apparel
MMF Apparel
Wool, Silk & Other
1,272
NICARAGUA
TOTAL
Cotton Apparel
MMF Apparel
Wool, Silk & Other
362
COSTA RICA
TOTAL
Cotton Apparel
MMF Apparel
Wool, Silk & Other
86
DOMINICAN REP. TOTAL
Cotton Apparel
MMF Apparel
Wool, Silk & Other
236
7
223
107
108
8
TOTAL
3,090
2,999
226
1
912
359
1
234
129
0
67
19
1
120
109
Change
7%
-6%
31%
41%
EL SALVADOR
TOTAL
Cotton Apparel
MMF Apparel
Wool, Silk & Other
593
YTD/4-20-11 YTD/4-20-12
114
95
70
53
43
41
1
1
333
197
132
5
-17%
-25%
-3%
-22%
18
TEXTILES AND APPAREL
TOTAL U.S. APPAREL IMPORTS FROM DR-CAFTA IN MT² BY FIBER
DR-CAFTA REGION
TOTAL
U.S. IMPORTS OF APPAREL IN MM OF MT² EQUIVALENTS BY FIBER CONTENT
2010
2011
Change
YTD/4-20-11
YTD/4-20-12
Change
TOTAL
3,090
2,999
-3%
969
874
-10%
Cotton Apparel
MMF Apparel
Wool, Silk & Other
2,135
942
13
1,981
1,002
16
-7%
6%
23%
660
304
5
546
324
4
-17%
7%
-20%
68%
31%
1%
100%
62%
37%
0%
100%
MIX OF FIBER CONTENT
Cotton
MMF
Wool, Silk & Other
TOTAL
69%
30%
0%
100%
66%
33%
1%
100%
Dollar imports grew, but square meter equivalents declined.
Thus, the increase in prices of fabrics became evident.
The decline was driven by a reduction of cotton’s share.
This shows the impact of the high prices of cotton the previous year.
19
AGENDA
1
CENTRAL AMERICA AND THE DOMINICAN REPUBLIC
2
TEXTILES AND APPAREL
3
WHY HERE?
WHY HERE?
THE OBVIOUS ADVANTAGES

1.
2.

1.
2.

1.
2.
3.

1.
2.
EASE OF TRAVEL
- Several flights daily from many major U.S. cities to every country in DR-CAFTA.
- Several flights daily between cities in Central America.
EASY TRANSPORTATION OF GOODS
- Efficient movement of inventories by truck between countries – customs integration.
- Several boats weekly from three Central American ports on the Atlantic, and three on
the Pacific, to the U.S.
TIME SAVINGS
- Flight duration varies between 2 to 4 hours from the Southern U.S.
- Time zone differences either nonexistent, or 1 to 2 hours at most.
- Bimodal transit time for LDP is 8 hours by truck factory-to-port, and 3 days port-to-port.
INVENTORY TURNS
- Fabric inventory on site allows for 19 day cycle time from order to distribution center.
- Can do inventory replenishment with competitive logistics due to market proximity.
21
WHY HERE?
CONCLUSIONS OF THE O’ROURKE GROUP PARTNERS STUDY
Nicaragua and Haiti are more cost competitive than key
Asian sourcing options for most products.
Comparable labor costs to China.
Greater labor productivity than Bangladesh, Vietnam.
Rising labor and energy costs in China, Vietnam and
Bangladesh.
Both LDP and Net cost advantage to Asia for many
products.
COMPARATIVE FULLY LOADED LABOR COST PER HOUR
China Coast
China Inland
Vietnam
Bangladesh
Mexico
Honduras
Guatemala
El Salvador
Nicaragua
Haiti
Avg. Cost/Hour
1.41
1.06
0.58
0.45
2.06
1.68
1.54
1.45
1.05
0.86
Efficiency
70
60
55
50
85
75
70
75
65
50
22
WHY HERE?
THE NOT SO OBVIOUS ADVANTAGES

1.
2.
3.

1.

1.
2.
3.

1.
2.
3.
COMFORT ZONE
This is a region under the cultural end economic spheres of influence of the U.S.
The management of the entire supply chain is fluent in English.
The currency exchange and tax treatments are beneficial to trade.
RESPONSIVE SUPPLY CHAIN
The local supply chain is vertical in several market segments, and growing aggressively.
FLEXIBILITY
Short supply
Cumulation
Nicaragua has TPL’s
GROWING TRADE LINKS
There is a yarn-forward free trade agreement with Mexico.
The adoption of free trade with the EU is expected within 18 months.
There are agreements being explored with other Latin countries.
23