Jordan's QIZ Garment Factories Continue to Close or

UNCLAS AMMAN 001177 SENSITIVE SIPDIS STATE FOR EEB/TPP/ABT, NEA/ELA, NEA/RA STATE PASS TO USTR (SFRANCESKI) STATE PASS TO USAID COMMERCE FOR ITA/OTEXA MARIA D'ANDREA DHS FOR CBP E.O. 12958: N/A TAGS: ETRD ECON KTEX EAID JO SUBJECT: Jordan's QIZ Garment Factories Continue to Close or Downsize Due to Financial Hardships REFS: A) AMMAN 226 B) 08 AMMAN 1736 SENSITIVE BUT UNCLASSIFIED ¶1. (U) Summary: Jordan's apparel sector has been hard hit by the recession in the U.S., where most of its exports are destined, and competition with Egypt (ref A). The Ministry of Industry and Trade has reported that Jordanian garment exports produced in the Qualifying Industrial Zones (QIZs) peaked in 2006 at $1.18 billion and have since steadily declined. From January to March 2009, QIZ apparel exports decreased 15.4% to $191.8 million, compared to $226.8 million during the first quarter 2008. Suffering from reduced orders, 29 garment factories in the QIZs have closed since 2007, including five in 2009. Another is under liquidation, and seven others have downsized. At least four garment companies have relocated or expanded operations in Egypt. Public and private sector interlocutors have claimed that in addition to lower production costs, the Egyptian government provides exporters a cash subsidy of 10 cents for every dollar exported. Jordan's factory lay-offs and lack of new investments in the apparel sector since 2007 have caused a reduction in the QIZ workforce by almost a third to 36,724 employees as of April 30. Despite these negative indications for Jordan's garment business, the satellite factory initiative has continued to move forward with the recent opening of Sterling Apparel Manufacturing's satellite operation in Madaba which employs a 100% Jordanian workforce (ref B). End Summary. Garment Exports to the U.S. Continue to Decline -------------- -- ¶2. (U) According to the Ministry of Industry and Trade (MOIT), Jordanian garment exports produced in the QIZs peaked in 2006 at $1.18 billion; fell 3.5% in 2007 to $1.14 billion; and decreased 18.9% to $923 million in 2008. This trend continued during the first quarter of 2009 with a 15.4% decrease in total QIZ garment exports to $191.8 million, compared to $226.8 million for the same period in 2008. Of those exports, MOIT reported that $139.3 million was shipped to the U.S. under the QIZ agreement; $43.8 million was shipped to the U.S. under the Free Trade Agreement; $4.9 million was shipped to Israel; $36,301 was shipped to other Arab countries; and $3.7 million was shipped elsewhere in the world. ¶3. (SBU) All Jordanian interlocutors point to the recession in the U.S. as playing a significant role in reducing apparel orders for Jordan. The manager of one QIZ garment factory said that a U.S. buyer asked him to spread out the delivery of an order originally due in November 2008 over six months until May 2009. QIZ investors have felt increasing pressure from international buyers to reduce prices. They are finding it difficult to maintain competitiveness and profit margins in light of high production and labor costs in Jordan, especially compared to countries such as Egypt where water and energy are subsidized. The Jordan Garments, Accessories, and Textiles Exporters' Association (JGATE) reported that at least four companies employing over 6,900 workers in Jordan's QIZs have expanded their investments or completely relocated to Egypt. The Minister of Industry and Trade Amer Hadidi also told Econoffs on April 29 that the Egyptian government provides a cash subsidy to exporters of 10 cents for every dollar exported. His staff was looking into whether this was allowed under the World Trade Organization (WTO). 29 Factories Shut Down, Most Recently Century Tailoring -------------- -------------- ¶4. (SBU) Mostly as a result of decreased business, 29 garment factories in the QIZs have closed down since 2007, leaving 46 factories still operating in the QIZs, according to statistics maintained by JGATE and MOIT. NOTE: This does not include four factories which were having financial difficulties and were taken over by other companies or changed names. END NOTE. Of the 29 factories, five - DK Garments, Golden Fingers, Ocean Star, Shamila, and Century Tailoring - shut down in 2009. Another company, Mediterranean Resources Apparel Industry (MRAI),is currently under liquidation after downsizing earlier this year. Seven other garment companies have downsized their operations in Jordan since 2007. As a result, employee lay-offs have reduced the QIZ workforce to 36,724 (including 27,865 foreign workers and 8,859 Jordanians) as of April 30, 2009, compared to 52,058 total workers (including 36,883 foreign workers and 15,175 Jordanian workers) as of June 30, 2007. ¶5. (SBU) Century Tailoring's former plant manager Adnan Ismail told Econoff on May 3 that Century Tailoring, a joint venture between the Jordanian Century Investment Group and the Israeli company Bagir, also owned a factory named Medco in one of Egypt's QIZs. Since there were not enough orders to keep both factories running, Ismail said Century Tailoring closed down in Jordan in April 2009 because it was cheaper to produce in Egypt. He estimated that between 60-80 foreign workers returned home with paid salaries and benefits, while the rest were transferred to other factories with the help of the Ministry of Labor (MOL). About 350 local workers stopped working and agreed with MOL, the textile union, and factory management that their April salaries would be paid on May 20 and their final financial settlement packages would be paid on June 20, according to JGATE. Satellite Factories Still Employing Local Workers -------------- -------------- ¶6. (SBU) Despite these negative signs for the garment industry, Rob Rothbaum, the U.S. owner of Sterling Apparel Manufacturing in Jordan, told the Ambassador during a May 17 visit to Sterling's satellite factory in Madaba that Jordan still has a competitive edge. In addition to the duty-free access provided by the U.S.-Jordan Free Trade Agreement (FTA) and the QIZ agreement, he believes Jordan offers superior infrastructure over Egypt, ensuring deliveries arrive on time. When Sterling faced a 50% reduction in orders due to the recession, the company decided to change its strategy and move into more high-value garments, which resulted in more orders as of July. The key, Rothbaum said, is for companies to have a Jordan-specific strategy with customers and programs that can support longer lead times and adapt to changing conditions. He added that compliance with international labor standards is also a top priority for U.S. buyers when deciding where to do business. ¶7. (SBU) Rothbaum eventually hopes to migrate most of Sterling's production to the satellite factory which opened on February 14. The factory currently employs 170 Jordanian workers, with the capacity to hire 450 locals and expand even further. He commended the Jordanian government for its support of the satellite initiative by contributing to workers' salaries and social security benefits, subsidizing transport and food costs, and providing the company with the building rent-free for five years. Such a project has enabled his company to fulfill its initial intention of hiring a 100% Jordanian workforce, Rothbaum noted. Are the QIZs Dead? -------------- ¶8. (SBU) Comment: It is not uncommon to hear in Jordan that "the QIZs are dead." People see the relatively nascent garment sector, which makes up most of the businesses in the QIZs, struggling to survive during the global recession. On top of that, many argue that the benefits of the QIZ agreement will dissipate when the FTA comes into full effect in January 2010. Indeed, many garment companies will likely make the financial decision to shift to exporting under the FTA because unlike the QIZ, the FTA does not have the 8% Israeli content requirement which often entails higher costs. Other manufacturers, however, have indicated that the QIZ agreement has led them to develop strong relationships with Israeli suppliers whom they plan to continue using even after the FTA comes into full effect. The key message should be that as our bilateral trade relationship evolves, so do the options for Jordanian exporters to maintain competitiveness and conduct business with the U.S. Post continues to monitor the labor situation in the QIZs, including the Jordanian government's ongoing efforts to ensure workers receive entitled salaries and benefits if factories face financial troubles. Visit Amman's Classified Website at: http://www.state.sgov.gov/p/nea/amman Beecroft