Jordan's Garment Industry Hurting - High Production Costs

UNCLAS AMMAN 000226

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 Garment Industry Hurting - High Production Costs
and Low Sales Are to Blame

REFS: A) 08 AMMAN 3359
B) 08 AMMAN 3267
C) 07 AMMAN 4993
D) 07 AMMAN 4038

SENSITIVE BUT UNCLASSIFIED


1. (SBU) Summary: Jordanian exports from the Qualifying Industrial
Zones (QIZs),which are predominantly apparel, fell almost 17% to
$946 million in 2008. Since 2007, at least twenty garment factories
in the QIZs have closed down; four have downsized; and five decided
to expand operations in other countries instead of Jordan. While
this trend is in part attributed to the worldwide financial crisis
leading to decreased apparel orders, the private sector has
continued to cite high production costs in Jordan as a contributing
factor. Shipping and logistics industries have also been affected,
with Maersk seeing a 40% drop in its shipping business since
mid-2008 due to reduced apparel orders. End Summary.

QIZ Exports Decrease 16.97%
--------------


2. (SBU) According to Jordan's Ministry of Industry and Trade
(MOIT),QIZ exports, which are predominantly garments, totaled $946
million in 2008, representing a 16.97% decrease from $1.14 billion
in 2007. NOTE: While Jordan has 13 designated QIZs, only six QIZs
with about 90 garment companies actively export, including
Al-Dulayl, El-Zay, Al-Hassan, Al-Tajamouat, Cybercity, and Karak.
END NOTE. Of the total QIZ exports, MOIT reports that $665.86
million was shipped to the U.S. under the QIZ agreement; $237.97
million was shipped to the U.S. under the FTA agreement; $19.69
million went to Israel; $898,117 was exported to other Arab
countries; and $21.9 million went to other countries.

QIZ Factories Closing Down
--------------


3. (SBU) MOIT also informed Econoff on January 25 that at least nine
garment factories in the QIZs closed in 2007, including: Pacific,
Al-Safa, Expo, Al-Manar, Honorway, Asia Star, MB/Rolex, Cotton
Craft, and Sari International. Another 11 factories closed down in
2008, including United Garment, Diamond Needle, Irada, Al-Kamal
Embroidery, Caliber, Group Talent, New World, Jordan Dragon, Silver
Planet, Formosa Jordanian Garment Industry, and Jerash Manufacturing
Company.


4. (SBU) The CEO of Jordan Garment, Accessories, and Textile
Exporters' Association (JGATE),Dana Bayyat, noted on January 21
that at least four apparel companies have also downsized, including
Embee International Garment, Hi-Tech, Jordache, and Century Wear.
Another four which had planned to expand operations in Jordan ended
up going to Egypt instead, including Needlecraft, Hi-Tech, Classic
Fashion, and Jordache. Eam Maliban also expanded its operations in
Sri Lanka instead of Jordan, claiming that the high cost of
transporting and treating waste water for its denim business had
become prohibitive in Jordan. Bayyat lamented the lost investment
and employment opportunities due to the high cost of doing business
in Jordan. She believed the garment sector was in critical
condition.


5. (SBU) Over half of the closed factories were in the
privately-run Al-Tajamouat QIZ, where they employed over 6,200
workers and exported over $135 million annually. Bayyat noted that
the problem may have been that Tajamouat rented the land and
buildings, unlike Al-Dulayl QIZ which required investors to buy the
land and has thus seen fewer factories close. Halim Salfiti,
Chairman and CEO of Tajamouat Industrial City, regretfully admitted
that Tajamouat may have made a mistake in providing buildings and
land for rent, which had the initial benefit of attracting investors
but also made it easier for companies to pack up their machines and
leave when business took a downturn. Salfiti said Tajamouat has
tried to lower rent prices for current tenants in order to retain
them but rent only accounts for about 2% of factory costs. Although
some of Tajamouat tenants have suffered from the impact of the
global financial crisis, Salfiti noted that the closure trend
started in 2007 before the crisis fully hit and was more likely due
to labor problems and rising production costs in Jordan (refs C and
D).



6. (SBU) Salfiti said that he now has over 800,000 sq. ft. in empty
building space and is having a hard time finding new tenants,
although he did just sign on Palestinian garment factory Al-Bayareq.
Tajamouat has attracted some storage firms and local industry
manufacturers of office chairs and food stuff, but Salfiti said the
scale of operations is much smaller. For example, whereas a garment
company would use 107,000-161,000 sq. ft., local industries are
looking for 10,000-32,000 sq. ft. He noted it has been easier to
rent out the ground floor factory space than the upper levels, which
he is now thinking to market as a suitable outlet for call centers.


Transport Industries Feeling the Pain
--------------


7. (SBU) Maersk Logistics Jordan, whose clients are 90% apparel,
indicated to EconOff on January 19 that its shipping business had
decreased 40% since mid-2008 due to the closure of some garment
factories and decreased apparel orders. In September 2008, Maersk
began offering a direct shipping line from Aqaba to the U.S. east
coast to improve business. Although the service costs more than
shipping out of Haifa due to the direct vessel, it takes less time
(i.e., 14 days from Aqaba to N.Y.) and involves less risk of strikes
and political unrest than the Haifa route, according to Maersk.


Optimism and Calls for Government Support Remain
-------------- ---


8. (SBU) Despite the tough times, Bayyat expressed optimism for the
future, particularly with new designations of QIZ satellite
factories that could increase Jordanian employment (ref A). She
argued that the apparel industry was still young in Jordan and
needed some government support to survive (ref B). In particular,
she highlighted the desire to have the government waive worker
permit fees, cover the cost of transportation for Jordanian workers
to the factories, or pay for training of new Jordanian employees.
Salfiti also mentioned the desire to have the GOJ eliminate or
reduce the 25% income tax and heavy municipal taxes for private QIZ
operators, noting that the government-run QIZs are exempt from such
taxes.


9. (SBU) MOIT Secretary General Montaser Okla indicated to Econoff
on January 25 that 2009 would bring better export figures for the
garment sector. MOIT reported that five new garment companies (Beks
Textile, Central Clothing, M.F. Textile, Falcon, and Al-Falak
Textiles) opened in 2007, and two (Free Zone and Kadbi) opened in

2008. Cammy Wu, General Manager at the Richpine factory in
Cybercity, also noted that Ann Taylor recently indicated it would
begin working with Richpine, after initially planning to contract
outside Jordan. Such new orders tend to give a ray of hope to the
garment industry in Jordan, which is relying upon its good
reputation and high quality to maintain competitiveness during this
difficult period.

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Beecroft