Israel has succeeded in creating a thriving textile and apparel industry, overcoming the handicaps of a small domestic customer base, distant export markets and high costs. Much of the credit goes to the industry itself, which has adopted high tech manufacturing methods to produce quality and cost-competitive goods, made strategic acquisitions in overseas companies and focused on niche markets where medium-sized and small companies can be major players. Part of the credit also goes to the Middle East peace process, which has enabled companies to move production to lower-cost countries in the region, and to the free-trade agreements which Israel has with two of the biggest apparel markets in the world, the United States and the European Union.
A Stitch in Time
Israel's textile and apparel industry started well before the founding of the State in 1948. In the 1920s, Jewish pioneers from Europe set up factories in the Land, replicating the businesses they had run in the countries of emigration and adapting them to local conditions. The story of Lea and Armin Gottlieb, founders of the world-famous swimsuit manufacturers Gottex Models Ltd. illustrates this flexibility.
In its early years, the textile and apparel industry received substantial support and encouragement from the State. Grants and loans were provided to build and expand factories, which were then protected from competition by custom duties and quotas on imports. But over the last two decades, the State has shed its old philosophy of direct intervention in business and the economy, a process that was motivated by the growing realization of the benefits of free trade. Israel became a signatory to GATT (General Agreement on Tariffs and Trade) and later the World Trade Organization (WTO), which required it to conform to certain standards of open markets.
In 1975, the government signed a free trade area (FTA) agreement with Europe, and a decade later one with the U.S. followed. At the beginning of the 1990s, an import liberalization policy was unilaterally initiated that cancelled quotas and, over time, high duties on imports. Import duties on textile and apparel have also been cut to 12%. Companies now competing with low-cost Far Eastern products in both their domestic and export markets have responded in various ways: by shifting labor-intensive manufacturing to low-labor-cost countries; by finding and developing niche markets where they can have a relative advantage; and by employing the latest automated methods for design and manufacture.
Because of the small Israeli market, the most successful apparel companies are export-oriented. Israel is the only country in the world that has FTAs with both the U.S. and the EU, making it a bridge between the continents. By virtue of the North American Free Trade Area agreement (NAFTA), Israel also enjoys duty-free access to Canada and Mexico. This agreement, together with the Israel-Mexico FTA (which became effective in the summer of 2000), allows Israel duty-free access to practically all of North America. Israel also has FTAs with Jordan, Egypt, Turkey and the Palestinian Authority.
The FTA with the U.S. is particularly important and has had profound effects on Israel's textile and apparel industry. America is now the industry's biggest export market even though Europe's proximity had traditionally made it a natural outlet for Israeli products. Israel exported some $545 million of textiles and apparels to the U.S. in 1999, nearly tripling the level of 1990, while exports to the EU declined from $580 million in 1996 to $485 million in 1999. The FTA's role is so critical that it can open up entire markets; for example, since the U.S. increased its duties on imported bed linen from European and other countries, demand has grown for Israeli home textiles, which enter the U.S. duty free.
Israeli textile companies were among the first businesses to enjoy the dividends from the peace agreements signed between Israel and Egypt in 1979, and - more significantly for the industry - between Israel and Jordan in 1994. Proximity enables Israeli managers to make frequent trips to manufacturing plants in Jordan, where the cost of labor and most other inputs is lower than in Israel.
One of the major benefits of the FTA agreement with the U.S. is that it grants Israel preferential "rules of origin" benefits that allows a garment to be cut in Israel and assembled in a low-cost country and still enter the U.S. duty-free. In 1998, Israel and Jordan established the first Qualified Industrial Zone (QIZ) in Irbid, Jordan, to facilitate joint production of duty-free export goods to the U.S.
Today there are a number of manufacturing plants set up by Israeli textile companies in Jordan and Egypt, as well as joint ventures between Israeli and Turkish manufacturers. Delta Galil Industries (founded in 1975) is gradually shifting much of its labor-intensive manufacturing from factories in England and Scotland to low-cost countries like Jordan, Egypt, Turkey and Romania. Low-cost production rose to 35.9% of total sales in 1999, compared with 24.6% in 1998. At Tefron, a manufacturer of intimate and leisure apparel, some 10% percent of the company's production is now in Jordan, with management aiming to increase this figure to 50 percent.
Labor-intensive manufacturing is expected to continue moving to low-labor cost countries further afield, with Mexico joining the list.
Haute Tech Fashion
Israeli companies have invested heavily in the best machinery which technology can provide, have set up active research and development (R&D) units to be at the cutting edge of innovation, and have transformed themselves from a purely manufacturing-oriented sector into a more diverse, broad-based industry, offering customers complete packages including development of materials, design and full collections.
Tefron's use of computerized robotic manufacturing methods, for example, has resulted in international recognition as a leader in the implementation of new manufacturing technologies. The company designs, develops, manufactures and markets high-quality men's and women's lingerie and undergarments for export, mainly to the U.S. Complete apparel production - from thread to completed garment - is a one-step operation replacing traditional finishing and cutting methods, as well as conventional sewing processes. With its high tech edge, Tefron is a world market leader in the production of seamless items, and counts as its customers Victoria's Secret, Donna Karan, Gap and Banana Republic as well as European clients such as Cacharel and Dim.
In fabrics, too, Israel has made use of the best technology available. Nilit, which makes nylon yarns for use in women's hosiery, intimate apparel and bodywear, competes successfully in the major markets in Italy and the U.S. because it is a fully integrated manufacturer, producing both the yarn and the polymer. The company invests heavily in new technology, buying the machinery but designing its own production lines.
Niche Markets and Fashion
Specializing in niche markets and fashion has also given Israeli apparel companies a competitive advantage over the flow of Far Eastern imports. Israel, for instance, has succeeded in making a mark in the area of home textiles, and its companies are recognized for their use of luxury fabrics, a wide array of printed percales, muslins and cotton fabrics. Kitan Consolidated has developed naturally colored and organic textiles for bed linens, towels, bath-rugs and curtains. Other major players in this field include Wardinon and Arad Towels.
On the fashion side, Israel has made a splash with top-of-the-line swimsuits like those produced by Gottex. The Israel Export Institute, a government-sponsored body that promotes Israeli industry abroad, is also grooming a whole new corps of young fashion designers, including Dorin Frankfurt, Gershon Bram and Hagara Fashion.
Few Israeli companies have established independent brand names, but they are frequently the manufacturers behind the prestige label. Research by the Israel Export Institute shows that in the clothing sector, more than 90% of exports are sold using the "private label method", meaning that their products are sold under a different company's brand name.
Delta Galil, which makes high-quality ladies' intimate apparel, men's underwear, socks, baby clothes, leisurewear and fabrics, sells its products to leading brands such as Polo, Ralph Lauren, Donna Karan, Calvin Klein, Victoria's Secret and Hugo Boss, as well as to retailers JC Penney, The Gap and Banana Republic in the U.S., Marks & Spencer in the UK, Hema in The Netherlands and Carrefour in France. Polgat Textiles, which creates worsted wool fabrics from the thread to the finished material, counts as its customers high-fashion designers Armani U.S., Calvin Klein and Liz Claiborne, and retailers Marks & Spencer. Bagir markets its private label products to Marks & Spencer and Brooks Bros, and its own label, Pierre Balmain, Paris, to Selfridges and John Lewis in the UK.
Many Israeli subcontractors to bigger companies like Delta Galil and Tefron are already eager to become private-label exporters in their own right.
With textile and apparel production now a global industry, many Israeli manufacturers have expanded operations by acquiring companies outside the Middle East. This year, Delta Galil acquired the Canadian sock marketer and manufacturer Dominion Hosiery Mills, and Wundies Industries (U.S.), a manufacturer of intimate apparel and girls' underwear. Tefron has also become an international company, having acquired in 1999 Alba Waldensian Inc, a leading American manufacturer of seamless clothing and unique knitted medical products.
Gottex is the swimsuit brand that has put Israel on the map of high fashion. The genius of Lea Gottlieb, who founded the company with her husband and became its chief designer, was to complement swimsuits with matching tops, pareos and skirts, creating fashionable beach outfits. Gottex is also as much a story of how important good management is to an apparel company as high fashion.
Lea and Armin Gottlieb arrived in Israel in 1949, and set up a raincoat factory similar to the one they owned in Hungary. However, because Israel is hot and dry for most of the year, they shifted production to swimwear in 1954.
Before long, Gottex became available worldwide, with bathing suits and accessories - characterized by bold cuts, colors and innovative textiles - sold in more than 80 countries. Gottex also blazed a trail for other Israeli swimwear companies some of which, like Gideon Oberson, sell under their own name but most, like Marlin, Klil Yofi Model and Diva Hirschthal, under other brand names. Exports of swimwear from Israel totaled $44 million in 1999.
At the end of 1997, after a series of poor production, planning and purchasing decisions, the Gottliebs sold 80% of their firm to a holding company, Africa Israel Investments; but 82-year-old Lea Gottlieb is still a member of the design team.
Since then, Africa Israel has reorganized the company. The strategy has paid off: in 1999, Gottex recorded a $2 million profit, turning around a $17 million loss from previous years. Sales exceeded $30 million in 2000 (resulting in a $3 million profit), 85% for export, mainly to major retail stores in the U.S. like Sacks Fifth Avenue and Bloomingdales. In the UK, Gottex is sold by prestigious retailers such as Harrods, where Gottex has its own shop. Other world markets include France, China, Japan, Australia and South America.
Recently, Gottex has launched two less pricey lines, "Free by Gottex" aimed at young working women, and the "Lady Gottex" brand for older clientele.
Significantly, Gottex spends about $3.5 million a year (about 10% of its turnover) on research and development, trying out new technology, prints and materials, and creating finished products that include three dimensionality and glittery foil for additional effect. Forty percent of cutting at Gottex is computerized (the rest of the garments are cut by hand). Currently, all production is done in Israel, but the company is studying the setting up of production facilities in the Karni Industrial Zone (an industrial area under the Palestinian Authority) or in Jordan.
Sources: Israeli Ministry of Foreign Affairs