Cotton Textile and Apparel Products in Philippines

December 1998

Political and Economic Highlights

• The Philippines has fared better than most Asian countries during the
regional economic and financial crisis that began in 1997. The Philippine
peso has depreciated steadily since 1997, with inflation increasing to an
annual rate of 10.3 percent as of May, 1998. Gross Domestic Product is
predicted to decline to 1.5 percent for 1998.
• Widespread popular opinion supports economic and structural reforms
begun under Presidents Aquino and Ramos and continuing under President
Joseph Estrada, elected in June, 1998.
• Traditionally, the US has been the Philippine's largest trading partner, with
bilateral trade exceeding $17.8 billion. US goods represent 20 percent of
the Philippine import market - making it the 20'h largest US market.
Approximately 41 percent of Philippine exports come to the US market.

The Philippine Textile Industry

• The Philippine textile industry traces its history to the 16th Century, reaching
its peak in volume, employment, and per capita consumption in 1979.
• The domestic industry is not globally competitive. It is totally dependent on
imported raw materials and has relatively high energy and production costs.
Electricity costs are at least double those of the region; labor costs are
double those in China, India, Pakistan, Indonesia, Sri Lanka, and
Bangladesh. Quality is low- to medium-grade and largely used for domestic
fabric and apparel consumption.
• As of 1995, there were less than 2,000 firms engaged in textile
manufacturing, with 26 percent of those firms employing more than 10
employees and accounting for 99 percent of the industry's total output by
value. Two of the largest domestic firms are integrated and produce their
own cotton yarn.
• Even the volume of textiles produced for the domestic market has been
declining due to competition from lower-cost, higher-quality producers in
China, Taiwan, and other countries in the South East Asia.
• Smuggled yarns and textiles are a significant factor in the market.

Cotton Fiber and Yarn

• Yarn manufacturers depend heavily on imported raw cotton, importing more

than 90 percent of total cotton demand, mainly from the US, Australia,
India, and Taiwan. According to 1997 statistics, the US was the principal
source of imported cotton fibers, while Taiwan ranked first for carded or
combed cotton (with US and Taiwan prices per unit relatively the same).
• Cotton yarn imports reached their peak in 1995 and have been declining
since. The Philippines imports mostly spun yarn, single carded, accounting
 for 92 percent of total yarn imports. Ninety percent of all imports come from
Pakistan, India, Hong Kong, and Taiwan. The largest importers of cotton yarn
are denim manufacturers.
• In 1996, 49 percent of total value of apparel exports was spent on imports
of textile yarns and fibers.
• The US was not a significant supplier of cotton yarn between 1991 and
1998 and accounts for less than one percent of imports by value. In 1997,
the Philippines imported only sewing thread from the US. As of June, 1998,
there were no US yarn imports.
• There is negligible demand for non-commodity yarn in the Philippines.
Buyers of non-commodity yarn are textile millers (woven fabrics) and
knitters. Although they have the capacity to produce high-quality fabrics,
there is low demand.

Fabrics

• The demand for imported textile products is highest for fabrics. Philippine
industry has been cotton-fiber dependent for many years; following trade
liberalization, it is becoming fabric-dependent, as well.
• Imports, including US-made, have generally increased during 1990s. Top
five fabrics (80-90 percent of market) in 1997 and 1998 included: circular
knit fabrics, denim, twills (dyed and others), sheetings (printed, print cloth),
and special purpose fabrics. Only 16 percent of fabrics used by garment
exporters are produced domestically. Eighty percent of locally manufactured
fabrics are consumed in the domestic market.
• Hong Kong and Taiwan dominated the import fabric market during the l990s
(84 percent). In terms of total value, the US ranked around 3rd in 1997 and
1998, up from 9th in 1996, but US imports have 10 percent or more share
only in denim, other woven fabric, special purpose fabric, and sheeting. Top
US exports from 1995 to 1998 were denim, other woven fabric, circular knit
fabric, special purpose fabric, and twills (dyed and other). Problems with US
fabrics include high prices and long lead times.

The Philippine Garment industry

• The Philippine garment industry dates to the 1950s and the emergence of
cottage-level industries that replaced homework. As the industry began
exporting during the 1970s, it experienced rapid growth, growing an
average of 30 percent between 1972 and 1980.
• Output declined during the first half of the 1980s during a foreign exchange
crisis that affected the heavily-import dependent industry negatively, but
recovered during the last half of the 1980s due to export demand. Industry
growth slowed in the first half of the 90s, along with exports. Labor costs
are high compared to Asian competitors, particularly Bangladesh, China,
and Indonesia.
• More than 80 percent of apparel manufacturers are small, consisting of
custom tailoring and dressmaking. Larger firms, employing more than 10
employees, largely manufacture ready-made clothes for the export market.
 In 1996, there were 1,274 garment exporters, down by 33 percent from the
previous year. The top 100 firms (9 percent of active exporters) contribute
51 percent of total exports in the industry. The industry is largely modern,
but has not yet upgraded to Lektra equipment.
• The industry is at a crossroads of uncertainty regarding the effects of global
trade liberalization. It is expected that the removal of quotas will cause
further erosion in the industry, with only larger, well-capitalized firms able
to survive.
• While the recent devaluation of the peso should be increasing export
opportunities for the domestic industry, it has been stymied by tight credit
policies and a shortage of working capital to purchase raw materials. This
has caused a structural transition to consignment branded manufacturing
and increased incentives for discount-market producers to source fabric
from lower-cost countries with shorter lead times.
• The US is the major export market for apparel. In 1996, it accounted for 62
percent of total apparel export value. Other important markets include
Germany, Japan, and the UK, with exports to Japan increasing the fastest.
• Philippine garment manufacturers have traditionally manufactured discount
apparel, but increasingly are manufacturing branded wearing apparel for
export using consigned fabrics. In 1996, the top four types of garments for
export, accounting for 58 percent of total exports by value, were made from
consigned goods.
• There is a minimal demand for imported apparel goods relative to the size
of the domestic market, which is largely supplied by domestic producers
and inexpensive products from Hong Kong, China, and India. A small market
exists for branded apparel, such as Lacoste, Polo, Guess, Dockers, and
Levis.
• The most popular garments imported are men's undershirts, blue jeans,
trousers, corduroy trousers and shorts and dress shirts and women's blue
jeans and brassieres.

Cotton Apparel

• The Philippine market for cotton apparel imports had been steadily growing
from 1991 to 1995, characterized by across-the-board increases from all
countries. In 1996 and the subsequent financial crisis, imports have
declined.
• US market share has been harmed by gains from Hong Kong and Indonesia,
which produce direct substitutes for US products. The US has moved from
2nd to 7th place in market share, while the UK moved up from 10th to 2nd in
1997. In 1994, the US had a market share of at least 10 percent in 13
cotton apparel categories. By 1997, the US had a 10 percent market share
in only three categories: men's underwear, women's skirts (not knitted) and
infants' wear. By 1998, the US had a market share of at least 10 percent
only in women's knit trousers.
• Filipinos are price conscious, but not particularly quality conscious. The
accepted quality standard is medium grade -- at a minimum CVC material,
color fastness, reasonable construction, and softness.
Philippine Home Furnishings Industry and Market

• There are approximately 220 firms in the Philippine home furnishings

sector; approximately 40 have 10 or more employees.
• Growth in home furnishings has fluctuated. Recently, the market
experienced a growth spurt during the first half of 1998. Between 1995 and
1998, the top three types of imports were bath towels, kitchen towels, and
accessories, and pillow cases/bed linen. Imports are mainly from the US,
China, and Hong Kong.
• The US accounts for around 50 percent of the total import value of home
furnishings, with bath towel imports comprising 52 percent of the US total.
US home furnishings are second to Hong Kong's. Imports from the US
reached a peak in 1993 at $1.4 million. They declined recently, but to a
lesser extent than other countries. During the l 990s, the US has had a
significant share in all types of home furnishings. During 1998, however,
only bath towels and bedspreads/quilts were imported from the US.

The Philippine Consumer

• Personal consumption expenditures in the Philippines have been fairly

resistant to adverse changes in the past and in the current Asian crisis as
well. The Philippines has significant revenues from overseas contract
workers. Unemployment has remained relatively low and inflation and
interest rates have held at manageable levels.
• The population, currently 72 million, is expected to grow to 99 million by
2015, or a yearly compounded rate of 1.8 percent. The labor force is
expected to grow faster at 2.5 percent, creating a matching demand for
clothing.
• The middle class is growing, but wide disparities in income exist. The
country is still predominantly poor with more than 75 percent of families
with incomes below 8,000 pesos; only four percent have incomes of 50,000
and higher pesos. However, the number of families with annual incomes
greater that 150,000 pesos has increased at a yearly growth rate of
approximately 20 percent.
• Although spending on clothes as a percentage of income has been
declining, percent total per capita expenditures on clothing have been
increasing, representing 47 billion pesos in 1997, a growth rate of nearly
12.6 percent from 1991 to 1997.

Market Entry Strategies

• Lead for US imports is 30-45 days, compared to three days for Asian
sources. US products are relatively high-priced, with a reputation for quality.
However, relatively high quality products are imported from Asian countries
at lower prices.
• Opportunities exist for US fabric exporters in the consignment sector and
within economic zones where apparel manufacturers are located. US
denims have a good reputation in the Philippine market.
Barriers to Entry

• The WHO Agreement on Textiles and Clothing (ATC) took effect on January
1, 1995. Under its provisions, the US negotiated market access with several
developing countries, including the Philippines, which are major exporters
to the US market. The Philippines agreed to improve access to its market.
Under this agreement the Philippines is obligated to reduce and bind tariffs,
and to reduce and eliminate non tariff barriers.
• In line with its commitments, the Philippines has bound its textile and
apparel tariffs at the following rates: 20 percent for yarn, 10-12.5 percent
for man-made fibers, 30 percent for sewing thread; 30-50 percent for floor
covering, and 30 percent for textile made-ups.
• Under its WHO obligations, the Philippine Government initiated a general
tariff reduction program to reduce tariffs on raw materials to 3 percent and
on finished goods to 10 percent by 2003. In January, 2004, the Government
plans to introduce a uniform 5 percent tariff rate.
• A VAT is applied to all imports, assessed at 10 percent of the value of goods,
plus duty.
• The Philippines is a member of ASEAN and a participant in the ASEAN Free
Trade Area (AFTA). AFTA contains a preferential tariff scheme (CEPT) which
requires intra-regional tariffs to be reduced to 0-5 percent by the year 2003.
Textiles are on a fast-track schedule for tariff reductions to 0-5 percent by
the year 2000. CEPT also requires intra-regional reduction in non-tariff
barriers and harmonization of customs procedures and product standards.
• The Philippine Government provides incentives to promote investment in
preferred activities and geographic areas and for export. Investment
incentives include: income tax holidays; tax deductions for labor expenses,
infrastructure, capital equipment and spare parts, and investment in less-
developed areas.
• Export incentives include: exemption from advance payment of customs
duties; tax credits for imported raw materials and spare parts, domestic
substitution of imports, export revenue; and various exemptions for duty on
imports. A variety of financing programs and guarantee schemes is
available through state-sponsored institutions.

This Executive Summary is taken from a report by the Emerging Markets Program
of the Foreign Agricultural Service at the United States Department of
Agriculture. To obtain a copy of the full report of this assessment, please fax a
request to the Marketing Operations Staff at (202) 720-9361 or email
emo@fas.usda.gov .