February 8, 2012 / 1:06 PM / 8 years ago

Analysis - Portugal textile firms weave way out of crisis

GUIMARAES, Portugal (Reuters) - For a symbol of Portugal’s economic ills, look no further than the broken windows, collapsed roofs and shut gates of a dozen textile mills in and around this northern town.

A woman crochets tablecloths to sell in Obidos June 1, 2011. REUTERS/Rafael Marchante

But, as so often in Europe’s two-year old debt crisis, it isn’t that simple. Nearby, the looms of a small band of survivors are working full tilt, exporting their way out of crisis. These firms have ridden an industry downturn and now point the way forward for Portugal.

Western Europe’s poorest country is in its deepest recession since the few turbulent years after the return of democracy in 1974. It was forced into an EU/IMF bailout last year, unable to service its debts and its firms starved of funding.

Even before the euro zone debt crisis, the textile sector, a mainstay of Portugal’s economy, had been hammered by cheaper competition from Asia, changes to the European Union’s customs regime and weak domestic demand. Over the past decade, it shed nearly a third of its output and 36 percent of jobs.

Now the tables seem to be turning for Portugal’s largest non-food manufacturing industry. Textiles, clothing and shoes represent just under 10 percent of industrial output - surpassed only by food and beverages production - and over 10 percent of all Portuguese exports.

Textile exports in the first 11 months of 2011 rose 9.3 percent, building on a 6.8 percent increase in 2010. The Portuguese Textile Association (ATP) expects exports to hit 4 billion euros $5.3 billion (3.3 billion pound) for 2011 as whole, close to the level before the 2008 financial crisis.

His words drowned out by the noise of the looms, Luis Rodrigues, head of sales at Lameirinho textile plant, spreads his arms like a conductor to show that all 130 machines, each the size of a large van, are working in two giant weaving rooms.

“I look at the Portuguese textile industry with some optimism,” Rodrigues said. “The companies that survived are still a reasonable group - not a very big one, but they are successful companies doing their work — innovating and going out there to the world to sell.”

Twelve miles (20 km) of own brand fabric per day comes off Lameirinho’s looms. Even more is handled on its equipment for other firms. The plant that makes fabric and bedclothes employs nearly 700 people, including crews of designers.

Innovation - from fashion design to materials and machinery - export diversification, high quality and climbing up the value chain are the mantra of the sector’s executives, who are travelling non-stop to maximise sales abroad.

Ninety percent of Lameirinho output is sold abroad, with 40 percent landing in the United States, where household brand names like L.L. Bean, or Sears Holdings’ SHLD.O Land’s End buy its much-lauded Portuguese flannel and other products.

In Europe, it sells bedclothes and bath accessories under the brandnames of reputed Spanish designers Purificacion Garcia or Agatha Ruiz de la Prada. It also owns a plant in Barcelona.

“Made in Portugal” labels can be found on the iconic laurel wreath-adorned Fred Perry polo shirts, on Paul Smith and Neil Barrett menswear creations. Portugal’s own fashion brand Vicri Porto has Hollywood actors, politicians, including ex-British premier Tony Blair, and the King of Spain among its customers.

STILL BLEEDING JOBS, RESTRUCTURING ONGOING

Not everything is rosy, however, as the sector continues to bleed jobs while unemployment is at record highs of 13 percent.

Three major players, including Lameirinho’s neighbour Coelima, a 90-year-old firm, found themselves on the verge of bankruptcy last year. A private equity fund, supported by banks and the state, took over the three last May, to restructure them and form a group, MoreTextile.

About a third of the companies’ combined workforce of 2,000 lost their jobs in the process to make the survival possible.

“The three companies were safeguarded,” said its CEO Artur Soutinho. The group, which specialises in home textiles, is now one of the largest textile conglomerates in the European Union.

“The restructuring is still going on, but there are very good signs, like a 10 percent increase in turnover to 112 million euros, cross-selling boosting total sales and raw material purchases becoming more competitive,” he added.

Competing with non-European countries in terms of labour costs is also out of the question as such costs in China are still 60-70 percent lower despite recent increases.

“The logic of selling cheaper man-hours is gone, it is via innovation, ability to deliver the needed quantities on time, hearing the client and integrating the production chain that one becomes competitive, regardless of your scale,” Rodrigues said.

Rose Campbell, Home Products Developer at L.L. Bean, which works with four Portuguese mills and markets their products as “the world’s finest yarn-dyed cotton flannel from the hill towns of northern Portugal,” said the crisis in Europe and Portugal was a concern, but did not affect the retailer’s imports.

“We know our partners have a financial milestone, as it costs them more to borrow than it used to. But we think they embraced what’s happening and are moving forward. We are very satisfied and definitely don’t plan moving away from there,” she said. “There is quality and craftsmanship there that you don’t find in Chinese or Turkish flannel.”

The crisis did take its toll on the sector’s overall output, which fell about 10 percent last year after a first modest rise in 2010 that capped five years of declines. Capacity expansion plans are on hold or non-existent due to constricted financing.

But the ATP association, which promotes Portuguese textiles abroad, says the industry now sells more products with higher added value, offsetting output drops.

“Portugal’s textile sector has shown remarkable resilience against the backdrop of the economic crisis in Portugal and most of Europe ... It has been competing on the world stage for years and all the necessary structural adjustments have already been made,” ATP General Director Paulo Vaz said.

The sector, comprised of some 7,000 mostly small family firms, employs 150,000 people, or about 3 percent of the workforce, down from 225,000 a decade earlier.

ATTACK AS BEST DEFENSE

The location of the textile cluster in and around the northern town of Guimaraes, known as the cradle of the nation and the starting point of the Portuguese Reconquest, could add a symbolic value to any successful exports offensive, setting the example for the rest of the economy.

For an industry that has always been export-heavy, any tangible further increase in foreign sales is a Herculean feat, and such strategies can yield good results for sectors that have until now worked mostly for the domestic economy.

Jose Armindo, executive director at Inarbel knitwear plant, spent the past 10 days travelling between Spain, Italy and Britain and brought back home a contract with a distributor in London and two deals to produce locally for other brands.

“Our response to the crisis has been to go through a strategy upgrade - to win smaller clients in more countries to distribute risks, to sell more products with added value,” a fast-talking Armindo said.

“We are very competitive, we are growing a lot and I think Europe and the world should believe in Portugal,” he said. Instead of raising the capacity of his plant, he subcontracts work to small local firms that don’t have ready made access to export markets, giving them much-needed orders.

His newest plan is to take on the Chinese market - still a major source of cheaper textile products, but with an appetite for high-quality European clothes that is growing along with the spending power of the country’s population.

“Attack is the best form of defence. I like attacking new markets, you have more probability of winning. I bet I’ll be selling in China in one or two years,” he said.

With annual sales of 6 million euros, only one-tenth of Lameirinho’s, Inarbel managed a 15 percent production increase last year. Lameirinho’s production was largely flat.

Lameirinho’s Rodrigues says all competition at home is welcome and it is vital to preserve the Guimaraes cluster.

“A client buys a plane ticket to Portugal to visit various companies in one place, not one. It is not in our interest to be standalone producers,” he said.

END OF ASIAN TEXTILE DOMINANCE NEAR?

The sector’s executives pin their hopes on a recent trend which saw some big European clients - for example Britain’s Selfridges department stores - returning to European suppliers and reducing their reliance on China and India.

“This is happening because of the higher quality here, easier logistics, the possibility of ordering smaller quantities, which requires less working capital — and that counts now in the debt crisis,” MoreTextile’s Soutinho said.

Still, even if the sector continues to strengthen, it will be some time before there is significant jobs growth.

Abilio Moreira, a 45-year-old former textile sector worker, who now runs a snack bar next to Inarbel’s premises, where workers go at lunchtime, says too many companies have closed in the area over the last decade.

“There’s only a handful of plants left here, which affects my clientele. Women are still mostly employed in the textile sector, but men are leaving — emigrating to Spain, France, or Brazil. Our textile sector will most likely endure, but this crisis has only brought more gloom.”

Reporting By Andrei Khalip; editing by Janet McBride

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