The Textile Industry Is Looking ThreadbareWalecia Konrad
Until 1987, Burlington Industries Inc. in Greensboro, N. C., was a strong company. The maker of sheets and other home furnishings was investing $200 million a year in its factories. Then came a leveraged buyout engineered by Morgan Stanley & Co. Now, struggling under $1.9 billion in debt, Burlington is teetering on the brink. In late August, most bondholders rejected its bid to buy back on the cheap some of the junk bonds issued to finance the buyout. Burlington has warned that without relief, its banks may pull its loans, which might force a bankruptcy filing.
It's becoming the story of the textile business. During the 1980s, eight of the top 10 mills changed hands, and dozens of smaller ones were gobbled up. Many of the deals are now going sour. In August, William F. Farley finally gave up on his three-year-old, $2.5 billion takeover of West Point-Pepperell Inc., relinquishing all but 5% of his ownership and leaving it to lenders to restructure the company's junk-laden debt. JPS Textile Group Inc., formed by the Wall Street LBO firm Odyssey Partners to take private the apparel and industrial fabrics divisions of J. P. Stevens & Co. in 1988, emerged from bankruptcy in April.
High debt is hurting textiles just as the industry is finally showing a pulse. In the past five months, textiles has been one of the first U. S. industries to start coming out of recession, adding 12,000 jobs--after employment had fallen by 32,000 to a postwar low of 660,000 during the recession. Exports are booming, although from a small base. And the growth of imports has slowed in recent years, though the American Textile Manufacturers Institute estimates they will jump two points this year, to 42% of the U. S. market. Sniffing recovery, Wall Street has bid up the shares of the remaining public textile companies--the 16% that haven't gone private. For instance, Springs Industries Inc. has nearly doubled to 34 since late last year.
A few companies will surely prosper from a spurt in sales. But, says Josie Esquivel, an analyst with Shearson Lehmann Brothers: "Nobody's seeing a major pickup." And for the long-term, too many big companies are choking on debt, which has jumped to 58% of capital from 39% five years ago, says the Commerce Dept. That helped drop the industry's aftertax profit margin to 0.8% in 1990, its lowest since 1939. Debt aside, operating margins have narrowed yearly since 1987 to a slim 5.6% last year.
TIME BOMB. The upshot: Few companies can afford to invest the 6% of sales per year in capital improvements experts think is needed for modernization--and perhaps survival. Farley slashed West Point's capital investment to $7.1 million in the first quarter, just 2% of sales. Loan covenants cap Burlington's capital spending at $50 million a year until 1994--"little more than hay and baling wire," says a former executive.
Worse, imports may be a ticking time bomb. "Textiles have become the sacrificial lamb in American trade policy," gripes Roger Milliken, the 74-year-old chairman of Milliken & Co., the biggest U. S. textile maker. After 1993, the Bush Administration plans to phase out quotas and reduce the average 20% tariffs that make textiles one of the most protected U. S. industries, just as a new free-trade agreement with Mexico is expected to start allowing in cheap fabric from south of the border. Esquivel argues that only "low-cost U. S. producers with strong brand names or specialty niches will survive."
The seeds of today's troubles were planted long before the wheeling and dealing of the 1980s. The main problem is cheap labor competition in making fabric for apparel. Chinese textile workers average 37~ an hour total compensation, vs. a U. S. laborer's $10.02. Imports now hold about 59% of U. S. apparel sales--both material and finished clothing--vs. 19% for less labor-intensive industrial and home furnishing fabrics used in seat covers, bedsheets, and such.
Not surprisingly, U. S. apparel makers are snapping up less expensive, foreign-made fabrics to use in clothes sewn here. Many clothing manufacturers also have set up cheap-labor cut-and-sew operations overseas that ship finished goods back to the States. Manufacturers and retailers such as Liz Claiborne Inc. and Wal-Mart Stores Inc. have even begun to buy directly from overseas textile and apparel makers. The Limited Inc. has its own Asian manufacturing division, Mast Industries, a leader in low-cost apparel production.
OFFSHORE SURGE. The U. S. mills have tried to fight back. In the late 1980s, textile leaders began shifting to a "quick-response" system that uses high-tech equipment and flexible manufacturing to produce smaller orders faster with higher quality. Quick-response mills also electronically track inventories at stores and apparel makers' plants so they can deliver goods "just in time" and avoid overproduction. Many offshore producers use some of these techniques. But U. S. mills figure they have an edge--because, says Freddie Wood, a consultant at Atlanta-based Kurt Salmon Associates Inc., "it takes a lot less time to get goods from North Carolina than from Korea."
In niches where labor content isn't high, quick response can work. The two biggest denim-jean makers, VF and Levi Strauss, have used their size to force suppliers to improve quality and production times. Denim makers such as Thomaston Mills and Swift Textiles, a division of Canada's Dominion Textile Inc., have responded quickly to the constantly changing trends in the fickle market. And fashion innovations from the mills, such as stone- and acid-washed denim, have kept jeans demand high. A few other specialty players, such as Unifi Inc., a maker of polyester fiber, and Dixie Yarns Inc., whose specialty yarns such as Lycra spandex are doing well, are popular with investors.
Niches aside, however, few U. S. makers can compete broadly with imported textiles for apparel. In a recent survey of 80 top U. S. apparel makers by consultants Deloitte & Touche and Apparel Industry Magazine, the companies said they plan to increase foreign sourcing over the next three years. Indeed, Wood thinks that the growth of imports has slowed partly because in products such as men's shirts and women's dresses they are "approaching 70%" of the market--and can't go much higher.
QUALITY PAYS. Milliken is one of the few big U. S. mills still bucking the trend. It is insulated from Wall Street pressure because it's privately held. And its estimated $2.5 billion in sales give it market clout. The company spends lavishly on new mill technologies to make everything from car-seat covers to men's shirts. Its plants are so advanced that it won the Malcolm Baldrige National Quality Award two years ago. But analysts believe that even Milliken may have to de-emphasize its apparel business because of pressure from imports.
Other textile makers are retreating rapidly. One reason Springs Industries' stock has soared is that last year it took a $43.9 million net charge against earnings to pay for restructuring away from apparel. This year, it's pouring $120 million into capital improvements to raise home furnishings to as much as 65% of sales by 1994, from less than half in 1989. And CEO Walter Y. Elisha isn't satisfied yet. "We need more aggressive new-product development," he told shareholders in April.
How many textile makers will make it? Some high-debt companies could revive if their debt can be reduced through bankruptcy or asset sales in an improved market. Fieldcrest Cannon Inc., saddled with debt it took on to buy Cannon Mills Co. in 1986, still eked out a $1.6 million profit in the second quarter. Its share price has nearly doubled to $16 since last year. A big remaining threat is an Amalgamated Clothing & Textile Workers organizing drive. In late August, workers narrowly defeated a unionization vote, but the union accuses the company of illegal tactics and is challenging the result. The company has cut 1,100 jobs since July, heightening workers' fear of job loss.
Booming exports, tied to the lower dollar since 1986, are helping many companies. So far, exports account for only 13% of textile output. But they'll get a boost if other nations, as expected, cut textile tariffs and quotas as the U. S. does after 1993. A free-trade agreement with Mexico may help companies, but at the expense of workers. Some textile makers may build low-labor-cost plants south of the border. And many U. S. apparel makers plan to move plants there from the Far East, which means U. S. textile plants will have a better chance to sell to them. "If textile makers would get their heads out of the sand, they'd see it will increase their business," says William L. Isaac, president of the Texas Apparel Co. unit ef Salant Corp. At least one Hong Kong textile company also plans to invest in Mexico.
There probably isn't room for all the U. S. companies to survive. Apparel fabric still accounts for about 40% of U. S. textile production. And some experts predict that low-wage competitors will start making home furnishings and other products the U. S. still dominates. In short, restructuring in textiles will continue. "If you look ahead 10 years and beyond, the textile industry has to be vulnerable," says Peter Harding, a Kurt Salmon vice-president. "The only question is: How much of it will disappear--and how fast?"
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