Hopefully it's the right place to post
Breaking a Taboo, High Fashion
Starts Making Goods Overseas
Euro's Rise, Low-Cost Rivals,
Labor Costs Spur Gamble;
Not Always 'Made in Italy'
Egyptians Suit Valentino
By ALESSANDRA GALLONI in Cairo, Egypt, CECILIE ROHWEDDER in London and TERI AGINS in New York
Staff Reporters of THE WALL STREET JOURNAL
September 27, 2005; Page A1
A desert wind blows through the open windows of a factory in Cairo that harbors one of the biggest secrets in Italian high fashion: Egyptian tailors.
Women in head-scarves stitch shoulder seams, press wrinkles out of silk-lined pockets and weave Italian fabric through digital sewing machines. They're making $1,300 men's suits for Valentino, one of the most storied names in Italian luxury. They learned the craft from videotapes on TV sets positioned around the factory floor.
For years, European luxury-goods firms manufactured T-shirts and jeans in Eastern Europe and North Africa, but drew the line at their fanciest collections, which commanded premium prices precisely because they were "Made in Italy." Now, pushed by rising labor costs, currency fluctuations and competition from low-price brands, Valentino and other firms in Italy and France are breaking one of the strictest taboos in high fashion: they're starting to produce some of their most exclusive lines in developing countries.
Celine, a unit of luxury goods giant LVMH Moët Hennessy Louis Vuitton SA, is manufacturing some handbags in China, including its denim-and-leather Macadam bags, which sell for $500, according to people familiar with the matter. Though it still makes its swankiest label in Italy, Giorgio Armani SpA says it produces 18% of its Armani Collezioni -- which pitches wool trousers for $450 and silk jackets for $1,500 -- in Eastern Europe.
Even "Made in Italy" stalwarts such as Prada, Gucci and Tod's say they are tiptoeing into foreign sourcing. Last year, Gucci Group NV began sewing some sneakers at a factory in Serbia while leather-goods company Tod's SpA produces a part of its Hogan sneaker line in Hungary and is considering moving that to China.
"What do you care where I make my shoes?" says Prada Group NV Chief Executive Patrizio Bertelli. Where local laws permit, Mr. Bertelli says he'd prefer to insert a "Made by Prada" tag in his products. In addition to sewing the upper part of some shoes in Slovenia, Prada makes pieces for some of its handbags in Turkey.
The move out of France and Italy is only just beginning. Fashion executives say some production won't ever move to low-cost countries because Italian craftsmanship is still unparalleled. Sophisticated items made in low volumes -- such as hand-woven leather handbags -- may always be "Made in Italy," for example. For the rest, the industry thinks it's only a matter of time.
"It will take another 15 years until luxury brands' main lines are completely delocalized, but it will happen," said Tonino Perna, chief executive of IT Holding SpA, which manufactures relatively affordable collections for labels such as Versace and Dolce & Gabbana. IT Holding makes about 30% of its clothes and accessories abroad. Executives say privately that more fashion brands are producing outside of Europe than the number who care to admit it.
This shift underscores how the developing world's manufacturing talent is improving to the point where even quintessential luxury products are starting to move offshore. It's also a sign of the extent to which high-end products are under pressure from low-cost alternatives.
Companies from sneaker makers to automotive giants have long outsourced to China and Mexico, but luxury-goods brands have always touted Italian and French production as essential to the luxury experience. The "Made in Italy" label, with its centuries-old history of artisanship, has justified exorbitant prices. If their clothes are stitched at low-cost factories, how will consumers react? Will luxury brands eventually have to bow to pressure and lower prices at the expense of their margins?
Many Italian fashion houses fear a backlash if they're seen hastening the decline of Italy's textile industry. For more than a century, that sector helped power the Italian economy, the fourth-largest in Europe. As companies outsourced production, sales of Italian textiles have fallen more than 10% in the past three years, with 24,000 textile manufacturing jobs lost last year, according to Italy's textile association. How to stop the trend, which is contributing to Italy's current economic malaise, is a hotly debated political issue.
"Our 'Made in Italy' has to be defended with force," Claudio Scajola, Italian Minister for Productive Activities, said at the Milan fashion shows, which started this week.
Alaa Arafa, the businessman who owns the Egyptian factory making Valentino suits, has little sympathy for such complaints. "Yes, some Italian jobs will be lost, but the writing is already on the wall," he says. "No Italian girl will sit at the sewing machine anymore, no matter how much you pay her."
As a result, executives are beginning to change their tune. "We can't be closed-minded. China will be part of the process for everybody," says Franco Pene, chairman of Gibo SpA, a high-end Italian manufacturer that produces clothes for fashion labels Marc Jacobs, Michael Kors and Paul Smith. Gibo says that for now, it produces only in Italy.
Mystique and Aura
The "Made in Italy" mystique dates back to the early 20th century when artisans throughout the Italian peninsula began exporting their products and know-how. Neapolitan shoemaker Salvatore Ferragamo was one of the first to venture abroad when he hand-stitched shoes for Jean Harlow, Douglas Fairbanks and other 1920s Hollywood stars. Florentine leather-goods maker Gucci soon followed suit.
After World War II, Italian craftsmen developed a second expertise. Using new ways to wash yarn, the key to high-quality knits, Italy soon surpassed Scotland as the world's best knitwear producer. By the mid-1950s, the "Made in Italy" label had developed unparalleled snob appeal around the world. Even French companies such as Louis Vuitton and Chanel transferred some production to Italy.
The first shift came during the 1990s luxury-goods boom. Some high-end fashion companies quietly began moving production of secondary, cheaper lines to Eastern Europe to help meet rising demand. Italian handbag maker Francesco Biasia, whose purses sell for between $350 and $500, started shifting production to China and Eastern Europe in the late 1990s. Creative Director Claudio Biasia says the company gambled on what it saw as shifting tastes. "Younger consumers don't care where a product is made," he says. "They care about creativity."
In the past two years, new problems intensified this overseas shift. Luxury-goods companies never fully recovered from the economic slump that hit their profits beginning in 2001. At the same time, rivals such as Inditex SA's Zara and Hennes & Mauritz AB's H&M flooded the market with inexpensive but fashionable copies of catwalk designs, putting further pressure on the luxury business.
Finally, the increasing strength of the euro is eating into the margins of luxury-goods companies, which buy raw materials and pay workers in euros, but sell their products mostly outside the euro zone, in particular in the U.S. and Japan. Saving on production costs to boost margins has become an appetizing prospect.
"The euro-dollar relationship has become such that it has made it necessary for us to look outside this country to find a cost that is more advantageous," says Prada's Mr. Bertelli.
With this sea change comes some ticklish challenges, including managing logistical headaches. Italian leather-goods company Furla SpA began making some wallets and handbags in China in 2002, hoping to cut production costs in half, says company Chairman Giovanna Furlanetto. But because Furla needs to get products in stores fast, it's spending more than it expected moving goods by plane instead of by boat, which is less expensive but takes longer. As a result, it has cut costs by only 30%.
Fashion trends change so quickly that companies get only one shot to produce collections for any one season, a problem that makes quality control a top priority. Gucci says it tried using a factory in China to sew some of its sneakers but wasn't satisfied with the quality. Others have gone to extraordinary efforts to maintain quality. When Prada handed partial production of some shoes to a Slovenian factory last year, it dispatched the plant's workers to Tuscany for training. Independent New York fashion house Lafayette 148, which makes knitwear, sent one of the world's top knitwear experts to China two years ago to teach factory workers Italian knitting techniques.
Some companies argue that they lose nothing by moving offshore because they can no longer find skills that were once a core part of Italian craftsmanship. A talent to sew shoe uppers, for example, hasn't been passed on to younger generations of Italians.
Even harder than sustaining quality, executives agree, is managing the perceptions of consumers. Valentino, a unit of fashion and textile maker Marzotto SpA, rips out the "Made in Egypt" tags in its suits before shipping them to boutiques in Europe, where companies don't have to divulge where they make their products. For the U.S. and Japanese markets, where labeling rules are stricter, Valentino produces suits in Italy, where it also still makes its priciest items.
In the U.S. and Japan, "perceived quality is more important than real quality," says Valentino CEO Michele Norsa.
It's a proposition that seems to divide consumers. "If I knew an expensive piece came from China, I'd have a problem with it," says Robert Ekblom, a London-based banker. "I'd rather buy something unbranded," he adds. Daniela Witte, a 38-year-old stay-at-home mother, also from London, doesn't have such qualms: "If I love the color, the cut and the design, I don't give a toss about where it's made," she says.
Some luxury brands are hoping to educate consumers. Stitched inside Celine's Macadam handbags is a brown leather tag telling customers that the product is designed in Paris and "handcrafted in China with the greatest attention to quality and detail."
Others have dipped their toes in the water and withdrawn. Silvia Stein Bocchese, president of Miles SpA, a high-end Italian knitwear maker, says the company was happy with the crochet sweaters it manufactured in China for closely held Dolce & Gabbana. But the client asked her to stop because it wanted a "Made in Italy" label, both sides say. Ms. Bocchese says "many don't want their brand tied to China" for image reasons.
Stitch Like an Egyptian
Valentino didn't have such preconceptions when, at the end of 2002, it received a call from Cairo-based A-Arafa Group SAE. Italian textile giant Marzotto had just acquired the Valentino label and was looking to cut costs. Valentino already produced some menswear in Eastern Europe. In 2004, the hourly labor cost of a textile worker in Italy was $18.63 compared with 88 cents in Egypt, according to U.S. management consultant Werner International Inc.
The Egyptian company had recently signed a contract to buy technical know-how from a menswear producer, based in the northern Italian city of Vicenza. As part of the contract, A-Arafa received patterns and designs. The Italian company, Nervesa Uomo SpA, sent several technicians to A-Arafa's factory in Cairo and allowed 30 Egyptian staffers to spend five months at its facilities. A-Arafa commissioned an Egyptian television crew to film every step of the tailoring process from cutting fabric to stitching buttons. The crew made 140 videotapes.
In 2003, after A-Arafa successfully negotiated a trial run making two dozen suits, Valentino awarded it a contract. At the beginning of this year, the factory began making its first batch of Valentino suits. A second load of 12,000 suits -- which will retail at about $1,300 -- are now being shipped for the 2006 spring/summer season.
Valentino still designs its products in Italy and keeps strict control over the Egyptian assembly line. It makes some parts of the suit in Italy, such as the shoulder pad and the breastplate. Valentino executives say they are pleased with the quality, though they acknowledge that about 3% of suits have some faults and are sent back. Valentino says it doesn't have a comparative figure for suits made in Italy.
At the A-Arafa factory, managers hadn't been told that the "Made in Egypt" labels are pulled off after the suits are shipped to Italy.
"It makes me sad that they take off the tags," said the factory's 39-year-old product manager, Yaser Husien Nada, when informed of the procedure. "But I am very happy to be making products for Europeans."
Breaking a Taboo, High Fashion
Starts Making Goods Overseas
Euro's Rise, Low-Cost Rivals,
Labor Costs Spur Gamble;
Not Always 'Made in Italy'
Egyptians Suit Valentino
By ALESSANDRA GALLONI in Cairo, Egypt, CECILIE ROHWEDDER in London and TERI AGINS in New York
Staff Reporters of THE WALL STREET JOURNAL
September 27, 2005; Page A1
A desert wind blows through the open windows of a factory in Cairo that harbors one of the biggest secrets in Italian high fashion: Egyptian tailors.
Women in head-scarves stitch shoulder seams, press wrinkles out of silk-lined pockets and weave Italian fabric through digital sewing machines. They're making $1,300 men's suits for Valentino, one of the most storied names in Italian luxury. They learned the craft from videotapes on TV sets positioned around the factory floor.
For years, European luxury-goods firms manufactured T-shirts and jeans in Eastern Europe and North Africa, but drew the line at their fanciest collections, which commanded premium prices precisely because they were "Made in Italy." Now, pushed by rising labor costs, currency fluctuations and competition from low-price brands, Valentino and other firms in Italy and France are breaking one of the strictest taboos in high fashion: they're starting to produce some of their most exclusive lines in developing countries.
Celine, a unit of luxury goods giant LVMH Moët Hennessy Louis Vuitton SA, is manufacturing some handbags in China, including its denim-and-leather Macadam bags, which sell for $500, according to people familiar with the matter. Though it still makes its swankiest label in Italy, Giorgio Armani SpA says it produces 18% of its Armani Collezioni -- which pitches wool trousers for $450 and silk jackets for $1,500 -- in Eastern Europe.
Even "Made in Italy" stalwarts such as Prada, Gucci and Tod's say they are tiptoeing into foreign sourcing. Last year, Gucci Group NV began sewing some sneakers at a factory in Serbia while leather-goods company Tod's SpA produces a part of its Hogan sneaker line in Hungary and is considering moving that to China.
"What do you care where I make my shoes?" says Prada Group NV Chief Executive Patrizio Bertelli. Where local laws permit, Mr. Bertelli says he'd prefer to insert a "Made by Prada" tag in his products. In addition to sewing the upper part of some shoes in Slovenia, Prada makes pieces for some of its handbags in Turkey.
The move out of France and Italy is only just beginning. Fashion executives say some production won't ever move to low-cost countries because Italian craftsmanship is still unparalleled. Sophisticated items made in low volumes -- such as hand-woven leather handbags -- may always be "Made in Italy," for example. For the rest, the industry thinks it's only a matter of time.
"It will take another 15 years until luxury brands' main lines are completely delocalized, but it will happen," said Tonino Perna, chief executive of IT Holding SpA, which manufactures relatively affordable collections for labels such as Versace and Dolce & Gabbana. IT Holding makes about 30% of its clothes and accessories abroad. Executives say privately that more fashion brands are producing outside of Europe than the number who care to admit it.
This shift underscores how the developing world's manufacturing talent is improving to the point where even quintessential luxury products are starting to move offshore. It's also a sign of the extent to which high-end products are under pressure from low-cost alternatives.
Companies from sneaker makers to automotive giants have long outsourced to China and Mexico, but luxury-goods brands have always touted Italian and French production as essential to the luxury experience. The "Made in Italy" label, with its centuries-old history of artisanship, has justified exorbitant prices. If their clothes are stitched at low-cost factories, how will consumers react? Will luxury brands eventually have to bow to pressure and lower prices at the expense of their margins?
Many Italian fashion houses fear a backlash if they're seen hastening the decline of Italy's textile industry. For more than a century, that sector helped power the Italian economy, the fourth-largest in Europe. As companies outsourced production, sales of Italian textiles have fallen more than 10% in the past three years, with 24,000 textile manufacturing jobs lost last year, according to Italy's textile association. How to stop the trend, which is contributing to Italy's current economic malaise, is a hotly debated political issue.
"Our 'Made in Italy' has to be defended with force," Claudio Scajola, Italian Minister for Productive Activities, said at the Milan fashion shows, which started this week.
Alaa Arafa, the businessman who owns the Egyptian factory making Valentino suits, has little sympathy for such complaints. "Yes, some Italian jobs will be lost, but the writing is already on the wall," he says. "No Italian girl will sit at the sewing machine anymore, no matter how much you pay her."
As a result, executives are beginning to change their tune. "We can't be closed-minded. China will be part of the process for everybody," says Franco Pene, chairman of Gibo SpA, a high-end Italian manufacturer that produces clothes for fashion labels Marc Jacobs, Michael Kors and Paul Smith. Gibo says that for now, it produces only in Italy.
Mystique and Aura
The "Made in Italy" mystique dates back to the early 20th century when artisans throughout the Italian peninsula began exporting their products and know-how. Neapolitan shoemaker Salvatore Ferragamo was one of the first to venture abroad when he hand-stitched shoes for Jean Harlow, Douglas Fairbanks and other 1920s Hollywood stars. Florentine leather-goods maker Gucci soon followed suit.
After World War II, Italian craftsmen developed a second expertise. Using new ways to wash yarn, the key to high-quality knits, Italy soon surpassed Scotland as the world's best knitwear producer. By the mid-1950s, the "Made in Italy" label had developed unparalleled snob appeal around the world. Even French companies such as Louis Vuitton and Chanel transferred some production to Italy.
The first shift came during the 1990s luxury-goods boom. Some high-end fashion companies quietly began moving production of secondary, cheaper lines to Eastern Europe to help meet rising demand. Italian handbag maker Francesco Biasia, whose purses sell for between $350 and $500, started shifting production to China and Eastern Europe in the late 1990s. Creative Director Claudio Biasia says the company gambled on what it saw as shifting tastes. "Younger consumers don't care where a product is made," he says. "They care about creativity."
In the past two years, new problems intensified this overseas shift. Luxury-goods companies never fully recovered from the economic slump that hit their profits beginning in 2001. At the same time, rivals such as Inditex SA's Zara and Hennes & Mauritz AB's H&M flooded the market with inexpensive but fashionable copies of catwalk designs, putting further pressure on the luxury business.
Finally, the increasing strength of the euro is eating into the margins of luxury-goods companies, which buy raw materials and pay workers in euros, but sell their products mostly outside the euro zone, in particular in the U.S. and Japan. Saving on production costs to boost margins has become an appetizing prospect.
"The euro-dollar relationship has become such that it has made it necessary for us to look outside this country to find a cost that is more advantageous," says Prada's Mr. Bertelli.
With this sea change comes some ticklish challenges, including managing logistical headaches. Italian leather-goods company Furla SpA began making some wallets and handbags in China in 2002, hoping to cut production costs in half, says company Chairman Giovanna Furlanetto. But because Furla needs to get products in stores fast, it's spending more than it expected moving goods by plane instead of by boat, which is less expensive but takes longer. As a result, it has cut costs by only 30%.
Fashion trends change so quickly that companies get only one shot to produce collections for any one season, a problem that makes quality control a top priority. Gucci says it tried using a factory in China to sew some of its sneakers but wasn't satisfied with the quality. Others have gone to extraordinary efforts to maintain quality. When Prada handed partial production of some shoes to a Slovenian factory last year, it dispatched the plant's workers to Tuscany for training. Independent New York fashion house Lafayette 148, which makes knitwear, sent one of the world's top knitwear experts to China two years ago to teach factory workers Italian knitting techniques.
Some companies argue that they lose nothing by moving offshore because they can no longer find skills that were once a core part of Italian craftsmanship. A talent to sew shoe uppers, for example, hasn't been passed on to younger generations of Italians.
Even harder than sustaining quality, executives agree, is managing the perceptions of consumers. Valentino, a unit of fashion and textile maker Marzotto SpA, rips out the "Made in Egypt" tags in its suits before shipping them to boutiques in Europe, where companies don't have to divulge where they make their products. For the U.S. and Japanese markets, where labeling rules are stricter, Valentino produces suits in Italy, where it also still makes its priciest items.
In the U.S. and Japan, "perceived quality is more important than real quality," says Valentino CEO Michele Norsa.
It's a proposition that seems to divide consumers. "If I knew an expensive piece came from China, I'd have a problem with it," says Robert Ekblom, a London-based banker. "I'd rather buy something unbranded," he adds. Daniela Witte, a 38-year-old stay-at-home mother, also from London, doesn't have such qualms: "If I love the color, the cut and the design, I don't give a toss about where it's made," she says.
Some luxury brands are hoping to educate consumers. Stitched inside Celine's Macadam handbags is a brown leather tag telling customers that the product is designed in Paris and "handcrafted in China with the greatest attention to quality and detail."
Others have dipped their toes in the water and withdrawn. Silvia Stein Bocchese, president of Miles SpA, a high-end Italian knitwear maker, says the company was happy with the crochet sweaters it manufactured in China for closely held Dolce & Gabbana. But the client asked her to stop because it wanted a "Made in Italy" label, both sides say. Ms. Bocchese says "many don't want their brand tied to China" for image reasons.
Stitch Like an Egyptian
Valentino didn't have such preconceptions when, at the end of 2002, it received a call from Cairo-based A-Arafa Group SAE. Italian textile giant Marzotto had just acquired the Valentino label and was looking to cut costs. Valentino already produced some menswear in Eastern Europe. In 2004, the hourly labor cost of a textile worker in Italy was $18.63 compared with 88 cents in Egypt, according to U.S. management consultant Werner International Inc.
The Egyptian company had recently signed a contract to buy technical know-how from a menswear producer, based in the northern Italian city of Vicenza. As part of the contract, A-Arafa received patterns and designs. The Italian company, Nervesa Uomo SpA, sent several technicians to A-Arafa's factory in Cairo and allowed 30 Egyptian staffers to spend five months at its facilities. A-Arafa commissioned an Egyptian television crew to film every step of the tailoring process from cutting fabric to stitching buttons. The crew made 140 videotapes.
In 2003, after A-Arafa successfully negotiated a trial run making two dozen suits, Valentino awarded it a contract. At the beginning of this year, the factory began making its first batch of Valentino suits. A second load of 12,000 suits -- which will retail at about $1,300 -- are now being shipped for the 2006 spring/summer season.
Valentino still designs its products in Italy and keeps strict control over the Egyptian assembly line. It makes some parts of the suit in Italy, such as the shoulder pad and the breastplate. Valentino executives say they are pleased with the quality, though they acknowledge that about 3% of suits have some faults and are sent back. Valentino says it doesn't have a comparative figure for suits made in Italy.
At the A-Arafa factory, managers hadn't been told that the "Made in Egypt" labels are pulled off after the suits are shipped to Italy.
"It makes me sad that they take off the tags," said the factory's 39-year-old product manager, Yaser Husien Nada, when informed of the procedure. "But I am very happy to be making products for Europeans."
