US embassy cable - 05TEGUCIGALPA1535

UNCLAS SECTION 01 OF 05 TEGUCIGALPA 001535 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, EB/TPP/MTA/IPC 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, EIND, KTEX, HO 
SUBJECT: USITC CARRIBEAN BASIN INVESTMENT SURVEY 
 
REF: SECSTATE 087702 
 
1.  Post submits the following report in response to reftel 
request for the U.S. International Trade Commission (USITC) 
report on the Caribbean Basin Economic Recovery Act (CBERA), 
as required by section 215(a) of the CBERA. 
 
2.  Summary: The positive role that the Caribbean Basin 
Initiative (CBI/CBERA/CBTPA) has played in the growth of the 
maquila industry in Honduras cannot be overstated.  Under 
the CBI, Honduran suppliers using U.S. inputs receive 
preferential treatment to U.S. markets.  Honduras is now the 
third largest provider in the world of textile and apparel 
products to the United States.  This sector has grown into 
one of Honduras' most important industries, and last year 
accounted for greater earnings than the combined exports of 
Honduras' top eight export commodities (coffee, shrimp, 
bananas, gold, palm oil, melons, soap, and lobster).  The 
industry is now counting on CAFTA to make the benefits from 
CBI/CBERA/CBTPA permanent and bring increased investment in 
the industry, and the Container Security Initiative to 
foster speed-to-market advantages for Honduran 
manufacturers. 
 
3.  The Honduran Manufacturer's Association remains publicly 
and privately optimistic regarding the future of the maquila 
industry in Honduras. The AHM estimates employment in the 
industry reached almost 131,000 in December 2004, up from 
107,000 by the end of 2002.  Over the last fifteen years, 
the industry has grown from just over 9,000 workers in 1990, 
to 102,000 in 1998, and the Association estimates that the 
industry will employ 136,000 by the end of 2005.  However, 
in separate conversations, maquila owners and management 
expressed concerns over future growth prospects for the 
industry.  Their predictions are clouded by fears of being 
unable to compete with China and other Asian producers, and 
increased regional competition as well.  End Summary. 
 
--------------------------------------- 
Impact of CBERA on Honduras:  2003-2004 
--------------------------------------- 
 
4.  The Honduran Manufacturers Association is an active 
industry advocacy group based in the North Coast city of San 
Pedro Sula and representing 280 export-oriented 
manufacturers (the vast majority being textile or apparel- 
related).  According to AHM records, cumulative investment 
in the light manufacturing ("maquila") sector in 2004 
totaled over USD 1.904 billion, with almost USD 1076.92 
million in foreign investment.  U.S. companies own 37 
percent of the maquilas in Honduras. Honduran companies are 
the next largest owner with 30 percent of all operations, 
followed by companies from Korea (17 percent), Hong Kong (3 
percent) and Taiwan and Canada (2 percent each).  According 
to the AHM, new investment in the sector in 2003 and 2004 
totaled USD 90.78 million and USD 100 million, respectively. 
 
5.  The Honduran Central Bank reports total inflows of USD 
247.2 million into the country in 2003 and USD 293.0 million 
in 2004.  An industrial breakdown from the Central Bank of 
the FDI inflows was unavailable as of date of cable 
submission.  These figures represent FDI inflows, and do not 
account for any divestitures of foreign investment. 
 
-------------------------------------------- 
What companies make up the maquila industry? 
-------------------------------------------- 
 
6.  In the chart below, the Central Bank counts all 
"maquila businesses" as belonging to one of four categories: 
 
Category             # of Companies    Percent 
--------             --------------    ------- 
Textile Industry          162           59.3% 
Suppliers                  46           16.9% 
Services to 
  Other Businesses         17            6.2% 
Other Manufacturing 
  Activities               48           17.6% 
 
TOTAL                     273          100.0% 
 
7.  The majority of maquila sector activity in Honduras is 
related to textile and apparel production: nearly 60 percent 
of businesses are directly involved, and it is estimated a 
similar share of suppliers and service companies are as 
well. 
 
8.  To combat the increasing pressures from international 
competition within the textile industry, the AHM has focused 
on trying to diversify the maquila base out of textiles. 
The association notes that Honduras is the 4th largest 
producer in the world of wire harnesses for automobiles, and 
cites diversification successes such as computer parts 
manufacturers, tool manufacturers (for Sears) and automobile 
dashboard manufacturers. 
 
--------------------------------------------- -------------- 
Probable future effects of the CBERA/CBTPA: Industry Trends 
--------------------------------------------- -------------- 
 
9.  Enactment of the CBI, and more recently, implementation 
of the Caribbean Basin Trade Partnership Act (CBTPA) in 
October 2000, have been welcomed by both the GOH and the 
Honduran maquila industry.  Many industry officials have 
commented that the added benefits for Honduran suppliers 
under the CBTPA have increased business opportunity for the 
sector, and they look forward to these benefits being made 
permanent under CAFTA.  No longer relegated to simple "cut 
and sew" operations, some maquilas have instituted "full 
package" regimes where they weave their own cloth, cut, and 
sew the fabric and then add value through printing or 
embroidering.  There is a general consensus, both within the 
AHM and among individual firms, that the textile 
manufacturers most diversified into "full package" regimes 
are the ones best poised to compete with increasing Asian 
competition.  Other "cut and sew" operations, producing t- 
shirts and other bulk, unspecialized products (and in 
particular local maquilas that depend on outsourcing orders 
from large, foreign-owned firms operating in Honduras), will 
have a difficult time competing. 
 
10.  In addition, the managers of two large maquilas told 
Post that while CAFTA will make Honduras more competitive 
vis a vis China, it could also create advantages for textile 
producers in Nicaragua, where rules of origin will be more 
flexible than for Honduras under CAFTA.  Both have 
considered Nicaragua as a possible investment location, but 
have no current plans to relocate. 
 
11. 
 
12.  In private conversations, various members of the 
maquila management community have been more pessimistic on 
employment trends and expressed concerns that in the longer 
term current growth is likely unsustainable.  One large 
maquila owner in Tegucigalpa estimates that while total 
exports will likely stay constant or grow marginally over 
the next five years, employment in the sector will 
eventually decrease to perhaps 100,000.  He estimates that 
he will be forced to lay off up to 50% of his workforce of 
5000 by the end of 2010, as his company transitions from 
apparel to fabric production, which is more capital 
intensive and requires less labor input. 
 
13.  While the AHM has publicly blamed high-profile recent 
maquila closings on high energy costs, privately they 
commented that April and August are typically slower months 
and it is not unusual to see workers laid off for up 90 
days, which is legal under the Labor Law.  In July, 2000 
workers laid off from a San Pedro Sula company, Hamlet 
Manufacturing, demonstrated outside a major industrial park 
and demanded payment of benefits due to them from the 
company.  The company has agreed to pay the unpaid benefits 
on August 19.  At least 5 maquilas have been unable to pay 
workers their `fourteenth month,' to which workers are 
legally entitled to under the Labor Law, and strikes have 
ensued.  Overall, however, the number of distressed plants 
is relatively few.  Minister of Labor German Leitzelar 
expressed frustration to Econoff recently with the public 
perception that the maquila sector is in decline.  In fact, 
he said, while a few factories have closed, overall 
employment in the sector continues to grow. 
 
14.  To date, at least ten maquilas have laid off workers 
for up to 90 days, and there is speculation that after that 
period, at least a few will be forced to close on a 
permanent basis.  Many of the firms that have had to resort 
to such layoffs, however, have fit the profile of "cut and 
sew" operations that depend heavily on orders from larger 
maquilas that need the additional capacity to meet orders. 
The local Chamber of Commerce and Industry of Cortes and 
other maquila owners have speculated that it is only a 
matter of time before these types of operations will be 
forced to diversify or close permanently.  At the same time, 
with the passage of CAFTA and implementation of the 
Container Security Initiative, "full package" manufacturers 
should be better positioned to compete internationally. 
 
--------------------------------------- 
2004 Investment in the Maquila Industry 
--------------------------------------- 
 
15.  According to the Honduran Manufacturer's Association 
(AHM), in 2004, 31 new maquilas opened and offered 5,761 new 
positions. Of those 31 companies, ten were U.S. companies. 
In that same year, 20 maquilas closed in Honduras, with a 
total loss of 8,800 jobs.  Of the 20 maquilas, 6 were U.S. 
companies. 
 
16.  The following is a list of foreign firms that have 
invested in Honduras based in whole or in part on advantages 
provided by CBI.  All new companies are located within Free 
Trade Zones.  On average, for every dollar's worth of 
apparel that Honduras exports to the United States, 57 cents 
represents U.S. inputs (mostly the cloth or thread used to 
make the item, but also the machinery used in the factories, 
most of which is made in the U.S.).  This investment is a 
direct result of the CBI benefits given to Honduras 
maquilas. 
 
Company:       Grand International Enterprise 
Employees:     7 
Origin:        USA 
Investment:    Not provided 
Product:       Machinery and Supply Distributor 
 
Company:       Uniwear Embroidery 
Employees:     141 
Origin:        Singapore 
Investment:    $686,500 
 
Company:       S&S de Honduras 
Employees:     61 
Origin:        USA 
Investment:    $51,702 
Products:      Underwire Hook and Eye, Rings and Slides 
 
Company:       Manufacturas Industriales y Servicios 
Employees:     64 
Origin:        Turkish 
Investment:    $593,557 
Product:       Industrial Laundry and Pressing 
 
Company:       Manufacturas Universales 
Employees:     20 
Origin:        Honduras 
Investment:    $500,000 
Product:       Embroidery 
 
Company:       Cottonwise Apparel 
Employees:     522 
Origin:        Korea 
Investment:    Not provided 
Product:       Fabric Producer 
 
Company:       Bollag International de Honduras 
Employees:     76 
Origin:        USA 
Investment:    $121,511 
Product:       Rags 
 
Company:       Novem Car Interior Design 
Employees:     432 
Origin:        German 
Investment:    Not provided 
Product:       Car Interior Design 
 
Company:       Metric Products de Honduras 
Employees:     75 
Origin:        USA 
Investment:    $450,000 
Product:       Underwires and molded cups for bras 
 
Company:       Delta Cortes, SA 
Employees:     735 
Origin:        USA 
Investment:    Not provided 
Product:       T-Shirts 
 
Company:       Diamante Apparel 
Employees:     221 
Origin:        Hong Kong 
Investment:    $150,000 
Product:       Pants, Sweatshirts, Shorts, T-shirts 
 
Company:       T.A. Apparel S.A. de C.V. 
Employees:     624 
Origin:        Honduras 
Investment:    $500,000 
Product:       Boxers, Sportswear, Casual wear (full 
package) 
 
Company:       Ceiba Industrial 
Employees:     542 
Origin:        USA 
Investment:    Not provided 
Product:       Thermal Underwear, Sheets 
 
Company:       Kelly Hosiery de Honduras 
Employees:     42 
Origin:        USA 
Investment:    $500,000 
Product:       Textile for Socks (full package) 
 
Company:       Fassi Equipment de Honduras 
Employees:     3 
Origin:        Honduras 
Investment:    Not provided 
Product:       Equipment and Accessories for Dyeing 
 
Company:       Garmax of Cortes 
Employees:     156 
Origin:        USA 
Investment:    Not provided 
Product:       Skirts, Pants, Jackets, Childrenswear 
 
Company:       Shing Sung Modas III 
Employees:     604 
Origin:        Korea 
Investment:    $436,500 
Product:       T-shirts, blouses, skirts, dresses, shorts 
 
Company:       Casa Diaz de Maquinas de Coser 
Employees:     9 
Origin:        Mexico 
Investment:    Not provided 
Product:       Industrial Sewing Equipment 
 
Company:       Consolidados 807 de Honduras 
Employees:     20 
Origin:        Honduras 
Investment:    Not provided 
Product:       Logistic services 
 
Company:       Reebok Central America 
Employees:     6 
Origin:        Honduras 
Investment:    Not provided 
Product:       Contractors 
 
Company:       Ontex, SA 
Employees:     300 
Origin:        Korea 
Investment:    Not provided 
Product:       Sweaters, Sweatpants, Shorts, T-shirts 
 
Company:       USA Knit Honduras 
Employees:     151 
Origin:        USA 
Investment:    $540,000 
Product:       Socks 
 
Company:       Sky Textile Honduras 
Employees:     22 
Origin:        Honduras 
Investment:    Not provided 
Product:       Fabric Producer 
 
Company:       You and I, SA 
Employees:     8 
Origin:        Honduras 
Investment:    Not provided 
Product:       Packaging 
 
Company:       Rex International Honduras 
Employees:     24 
Origin:        Costa Rica 
Investment:    Not Provided 
Product:       Air Cargo Services 
 
 
Company:       Villanueva Textil 
Employees:     492 
Origin:        Honduras 
Investment:    Not provided 
Product:       Brassieres, Panties 
Company:       Zona Libre America 
Employees:     16 
Origin:        Honduras 
Investment:    Not provided 
Company:       Dong - A Honduras 
Employees:     27 
Origin:        Korea 
Investment:    Not provided 
Product:       Screen Printing 
 
Company:       Xiong Tex S.A. de C.V. 
Employees:     45 
Origin:        Honduras 
Investment:    $250,000 
Products:      Jackets, Pants, T-Shirts, Shirts 
 
Company:       Cosmos 3 S de R.L. 
Employees:     306 
Origin:        Korea 
Investment:    Not provided 
Products:      Multiple styles 
 
 
Tuebner