This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MANILA 003956 
 
SIPDIS 
 
STATE FOR EAP/PMBS, EAP/EP, EB/IFD, EB/TPP/BTA/ANA 
STATE FOR EB/TPP/ABT/EHEARTNEY 
STATE PASS USTR FOR BWEISEL, DKATZ, JMURPHY, AHEYLIGER 
STATE PASS USAID AND OPIC 
STATE PASS USDA/FAS FOR SHEIKH 
TREASURY FOR OASIA FOR AJEWELL 
USDOJ FOR MCRAWFORD 
USDOC FOR 4430/ITA/MAC/DBISBEE 
USDOC FOR ITA/OTEXA/MDANDRIA 
 
E.O. 12958: N/A 
TAGS: ETRD KTEX EINV PREL ECON RP
SUBJECT: POST-QUOTA ADAPTION OF GARMENT AND TEXTILE 
INDUSTRIES 
 
REF: STATE 146213 
 
¶1.  Summary:  The Philippine garment and textile industry 
has thus far withstood the end of the MFA quota regime, 
largely thanks to U.S. safeguards imposed on Chinese goods. 
Exports during the first half of 2005 are stable, though 
production is shifting toward higher-value products and 
natural fiber materials.  To counter pressure from China, 
local producers want preferential access to U.S. markets 
before safeguards expire in 2008.  Without this access, 
industry leaders expect a sharp decline in Philippine 
textile exports and employment after safeguards are lifted. 
Econoffs met with local garments and textile industry 
stakeholders to discuss recent trends and the changing 
outlook since the abolition of textile quotas.  Responses to 
reftel requests on employment, production and exports in the 
textile and garment industry are provided after paragraph 
¶10.  End Summary. 
 
¶2.  Since the signing of the Multi Fiber Agreement in the 
late 70's, the Philippine garment and textile industry has 
grown from a cottage industry to a $3 billion sector by 
2000, becoming the country's second largest export earner, 
with seven percent of total export earnings in 2002-03.  The 
quota regime has made RP producers highly dependent upon the 
U.S. market where 78% of their textile exports went in 2004. 
The sector employs over 700,000 workers, nearly 25% of 
industrial employment. 
 
----------------- 
Post-Quota Trends 
----------------- 
 
¶3.  Since the end of the quota regime, total garments and 
textile exports of the RP slowed to 0.1 percent for the 
first half of 2005 to $1.04 billion.  A modest rise in 
textile exports to non-US trade partners offset a slight 
decline in exports to the U.S.  The Garment and Textile 
Export Board (GTEB) noted evidence of shifting production 
towards natural fibers and higher-value products. 
 
¶4.  According to GTEB statistics, during January-April 2005, 
RP exports to the US fell by 6% while garments and textile 
exports to other markets (except the U.S.) grew by 35% 
compared to the same period in 2004.  Despite the overall 
decline in exports to the U.S. market, there was a sharp 
increase in exports of silk and vegetable (S&V) apparel and 
higher value apparel products.  S&V apparel exports rose by 
105% and exports of wool apparel products rose by 38%. 
However both categories are dwarfed by the volume of cotton 
and man-made fiber products, a category that remains 
vulnerable to foreign competition.  As the total value of 
exports of S&V products rose 104%, the total volume rose by 
only 1%, confirming a dramatic shift within this small 
category toward higher-value products. 
 
Composition of Philippine Apparel Exports to the U.S. 
(Value in million US$ for January-April period) 
 
Category            2004      2005      %Change 
Wool Products         8.1      ll.3      38% 
Silk and Vegetable   12.0      24.6     104% 
Cotton apparel      434.3     451.5       4% 
Man-made Fiber      211.2     174.8     -17% 
 
---------------------------------- 
Consolidation and Decline Probable 
---------------------------------- 
 
¶5.  GTEB Executive Director Serafin Juliano told econoff at 
recent meetings that many Philippine producers were slow to 
adapt from a rule-based system to a market-based regime. 
The more successful companies include firms that produce 
branded products and firms that are able to change 
production to meet new market conditions.  Top apparel 
brands that are produced and sourced from the RP include 
GAP, Old Navy, Ann Taylor, Liz Claiborne, and Polo Ralph 
Lauren among others.  George Siy, President of the 
Confederation of Garment Exporters of the Philippines 
(CONGEP), reported that many smaller producers closed down 
in early 2005 and he predicted further consolidation as 
buyers turn to larger suppliers with greater capacity. 
According to Mr. Siy, the top 30 garment manufacturing 
companies already produce 40% of RP garment exports. 
 
¶6.  The GTEB has projected annual growth of 8-10% until 2008 
when the outlook becomes bleak.  They expect short-term 
growth to be driven by 25-35% growth in exports to non-US 
countries with no growth or decline in exports to the US. 
Mr. Juliano suggested that there could be a 50% decline in 
RP production of cotton apparel within the first year after 
safeguards expire since Philippine producers cannot compete 
with low labor costs in China.  This may be compounded if 
Thai producers enjoy preferential access through a Free 
Trade Agreement. Philippine producers will continue shifting 
production towards higher-value products while lobbying for 
their own preferential access to the US market. 
 
---------------------------- 
Overcoming Hurdles to Growth 
---------------------------- 
 
¶7.  The experience of CS Garments and Litton Mills shows how 
two firms adapted to the post-quota environment.  While 
other firms continued to focus on obtaining quotas to the 
US, CS garments, a t-shirt exporter, turned to the European 
market.  Using its knowledge of the European market together 
with high quality standards, CS Garments has maintained the 
profitability of exports of Philippine made shirts every 
year for the last 15 years.  Litton Mills, the biggest among 
a handful of textile mills here in the Philippines, has also 
weathered the end of quotas.  Litton Mills primarily 
produces denim fabric for export to the US, Europe, and 
Japan.  According to Litton Mills Business Unit General 
Manager Johnson Go, only a small share of their export 
operations have been affected by the quota despite 80% of 
its customers being US-based.  He cited their size and 
market forecasting abilities as critical factors that have 
enabled them to prosper after the lifting of quotas. 
 
¶8.  In the short term, GTEB believes that Philippine 
producers will benefit from comparative advantages in 
skilled labor, product quality standards and reliable 
production capacity.  Philippine producers also maintain 
relatively strong labor standards compared with regional 
competitors.  GTEB expects an erosion of these advantages as 
other countries upgrade the training of their workers. 
Despite the current advantages in more highly skilled labor, 
the Philippines ranks low in terms of labor productivity 
especially when compared to China.  Philippine garment 
exporters are also impeded by lack of locally produced raw 
materials, high power rates and other problems affecting the 
local investment climate. 
 
---------------------- 
Government Initiatives 
---------------------- 
 
¶9.  GTEB has launched a Philippine Industry Garment 
Transformation Plan and Assistance Package to help improve 
industry competitiveness through quality improvement, and 
technology upgrades aimed at raising productivity.  However, 
CONGEP representatives reported a lukewarm response to this 
program with only a few large garment firms participating. 
GTEB also met with garment exporters in August to present 
its forecast and underscore the need for preferential access 
to US markets by 2008.  In this meeting, GTEB proposed an 
industry cost-sharing arrangement to hire a US lobbying firm 
to promote preferential access through an FTA or Qualified 
Industrial Zones (QIZs) like those established in Jordan. 
 
¶10.  Comment: Although Philippine textile and garment 
exports have withstood the end of the quota regime, 
Philippine producers remain vulnerable to increased 
competition after U.S. safeguards on Chinese products expire 
in 2008.  Philippine producers have begun slowly to shift 
toward high-value and natural fiber products; their main 
export categories of cotton and man-made fiber products will 
probably decline sharply after 2008.  Given the challenges 
involved in negotiating a US-RP FTA by 2008, Philippine 
producers will try to push for QIZs with preferential access 
to the U.S. market.  Textile and garment exporters may help 
to lobby the GRP for progress in IPR protection and other 
reform preconditions for bilateral trade negotiations.  Even 
if the Philippines gains preferential access, the garment 
and textile industries may have a difficult time maintaining 
their level of textile and garments exports. 
 
¶11.  In response to reftel queries, Embassy provides the 
following information: 
 
-- Total Philippine industrial production was $27.4 billion 
for 2004 and $7.15 billion for first quarter 2005. (See 
Table 1 below). 
 
-- Total Philippine textiles and apparel production was 
$1.22 billion for 2004 and $240 million for first quarter 
¶2005. 
 
-- Textiles and apparel's share of Philippine imports was 
2.43% in 2004.  Textiles and apparel's share of Philippine 
exports was 5.48% in 2004. 
 
-- Total Philippine manufacturing employment was 3.02 
million as of October 2004 and 2.995 million as of January 
¶2005. (Refer to table 2 below). 
 
-- Total Philippine textiles employment was 192,000 as of 
October 2004.  Total Philippine apparel employment was 
537,000 as of October 2004. 
 
                          Table 1 
            National Accounts of the Philippines 
                    At current prices 
                  In Million US Dollars a/ 
 
                                             Qtr 1 
                               2004           2005 
                               ----          ----- 
 
Gross Domestic Product        84,567         22,076 
 
Industry Sector               27,439          7,151 
 
 Manufacturing                19,897          5,079 
  Textile Manufactures b/        301             67 
  Footwear wearing apparel b/    924            174 
 
a/ Original value expressed in pesos, and converted to US$ 
equivalents using average exchange rate of 56.04 pesos/US$ 
for 2004 and 55.01 pesos/US$ for first quarter 2005. 
 
b/ Gross value added in manufacturing 
--------------------------------------------- ------------- 
Source:  Philippine National Statistical Coordination Board 
 
                         Table 2 
  Employed Persons by Major Occupation Group and Major and 
  Minor Industry Groups from Primary Occupation 
                     (In thousands) 
 
                               As of            As of 
                             Oct. 2004        Jan. 2005 
                             ---------        --------- 
 
Philippines                   31,741            31,634 
 
  Manufacturing                3,020             2,995 
   Textiles                      192               217 
   Wearing Apparel               537               517 
--------------------------------------------- -------------- 
Source:  Philippine National Statistics Office 
 
JOHNSON