Wall Street Journal
February 23, 1999
In the Wake of Nafta, Family Firm
By RICK WARTZMAN
Watches Its Business Head South
Staff Reporter of THE WALL STREET JOURNALTLAQUEPAQUE, Mexico -- As the owner of a struggling apparel company here, Berj Mehserjian is no stranger to unpleasant phone calls. Workers ring up to say they aren't going to make it to the factory that day. Or, as has been the case a lot lately, it's a customer screaming about late deliveries.
Some calls, though, are more jarring than others. "That was my wife," Mr. Mehserjian says, clamping down the receiver and fidgeting in his chair. She has phoned from their home near Los Angeles to tell him that their three-year-old daughter is crying for her daddy. There's not much Mr. Mehserjian can say about that. "Look," he remarks, "you have to do what you have to do."
With profits at his family's garment factory in California drying up, what Mr. Mehserjian and his brothers have to do is clear: They have to make a go of it here, in this industrial area on the outskirts of Guadalajara.
Yet the effort to transform their business, Jack Sr. & Sons Inc., into a mini-transnational isn't being done with any relish. Like other sewing contractors from Los Angeles -- the largest apparel and textile center in the U.S. -- the Mehserjians are not so much seizing an opportunity as they are being driven from the place where they would prefer to live and work.
The main impetus comes from the North American Free Trade Agreement, which took effect in 1994. Nafta removed quotas limiting how much clothing could come into the U.S. from Mexico. (The rest of the world, except for Canada, is still subject to quotas.) The accord also has lowered tariff rates more than 50%.
The result is that many designers have been shifting the bulk of their sewing to Mexico, where labor costs are about one-seventh of what they are in the U.S. But a growing number of the small-business owners who operate Southern California's 5,000 or so sewing shops aren't content to watch all that work just slip away to Mexican-run factories. Instead, they are chasing the business across the border.
"It's obvious: You either go to Mexico -- or you die," says Mr. Mehserjian's brother Harry.
When it comes to analyzing Nafta's impact, much of the attention has been focused on workers. Preliminary results from a new study, set to be released in March by researchers from the University of California at Los Angeles, show that about 200,000 jobs directly related to trade with Mexico have been created in the U.S. since Nafta was implemented. Labor Department data, meanwhile, show that up to 112,000 people in the U.S. may have seen their jobs disappear in the past five years as a result of Mexican trade and associated plant closures. Many of these displaced workers come from low-income, minority communities.
But the Mehserjians represent a different side of the equation -- a group that might well be dubbed "displaced entrepreneurs." The Mehserjians' business began to unravel in late 1997 as some of their biggest clients, such as Monarch Knits, were sending more of their sewing from Los Angeles to contractors in Mexico. As the family scrambled for business in Los Angeles, Harry Mehserjian says, they kept banging into the same question: "Do you have a factory in Mexico? We could give you work if you had a factory in Mexico."
Typical was Koral Industries, a Los Angeles maker of junior sportswear, which did virtually no sewing in Mexico before Nafta; now it does about 80% of its sewing there. At one point, Koral executives told Harry that they had plenty of business for the Mehserjians -- if it could match the rates of Koral's contractors down south. "We had priced that work for Mexico," explains Sam Abebe, Koral's general manager. Harry, knowing he couldn't earn a profit at those rates, turned the work down.
Some contractors, including the Mehserjians, now are trying to function in both Mexico and Los Angeles, where a booming market remains for higher-end fashion. Others have moved their businesses entirely to Mexico -- though some still maintain their residences in L.A.
In many instances, the contractors moving to Mexico are not only immigrants here, but were also immigrants to the U.S. -- an irony that hasn't been lost on the Mehserjians. Their family business endured 15 years of war in Lebanon before they sought refuge in California a decade ago. But rather than pursuing the American dream, "now it's become the Mexican dream," says Vatch, a third Mehserjian brother.
The Mehserjians have had their hands in apparel ever since the family's 65-year-old patriarch, Jack, became a custom tailor as a young man in Beirut. By the mid-1970s, the family had become one of the leading couturiers in Lebanon. The country's long civil war presented challenges -- the family's tailor shop was burned down and its factory bombed -- but the business managed to hang on. The Mehserjians eventually specialized in high-end women's jeans and sold them throughout the Middle East.
In the late 1980s, fighting suddenly intensified in their east Beirut neighborhood. For the very first time, Jack says, he really believed "our lives were in danger." One afternoon in June 1989, Jack packed his suitcase, locked his front door and headed to America. Berj came shortly thereafter. They left behind almost everything, save for about $150,000 in cash. (Harry had already found his way to Los Angeles in 1983.)
Soon after landing in L.A., Jack put up $30,000 to buy a 15-machine sewing factory in Hollywood. Although they had a lot of experience in apparel, the family didn't know much about sewing; in Beirut, they had always hired out such work. But thrust into a new country, they thought it was important to learn the industry from the ground up. Besides, it was the easiest part of the game to get into.
Jack Sr. & Sons began sewing T-shirts, and the Mehserjians stumbled their way to a small profit. In 1991, Harry left the family business and joined clothing manufacturer Guild Inc., which makes clothing for J.C. Penney Co. As a quality-control inspector, he became familiar with other sewing operations around town. By the time he returned to Jack Sr. & Sons about a year later, Harry felt as if he had gleaned "the secrets of the industry."
Armed with this new knowledge, the Mehserjians invested in top-of-the-line, computerized sewing machines. In a bid to increase productivity, they switched to paying piece-rate rather than hourly wages.
Things took off from there. In late 1993, Jack Sr. & Sons relocated to a 14,000-square-foot factory -- almost five times the size of their first plant. In 1997, the Mehserjians say, they had their best year, generating $2.9 million in sales and $400,000 in profits from 120 sewing machines.
Then, seemingly all at once, the family enterprise began to fray.
As a whole, the U.S. apparel sector has been shrinking since the early 1970s. But Los Angeles has stood as the industry's last redoubt, due in large part to a flood of Hispanic immigrants willing to sew for modest wages. As of last December, 123,200 people worked in the local apparel industry, a 5% jump over the previous year.
But the numbers belie a more complex reality: In the wake of Nafta, L.A.'s apparel market has fast become bifurcated.
Many of those who sew more fashionable clothing, particularly women's wear, are still thriving. The companies that these contractors work for are averse to having their garments stitched in a place as far away as Mexico, in part because they demand lightning-fast turnaround times.
But those sewing T-shirts and other budget items, such as the Mehserjians, have been clobbered. "People have been surprised at how quickly the lower-end stuff is moving south," says Raul Hinojosa-Ojeda, a UCLA professor who is spearheading a program to upgrade the technology of apparel contractors in Southern California and thereby keep them in business.
Several factors have contributed to the exodus -- the rise in the minimum wage in California, heightened regulatory pressure, an aggressive unionization campaign. But Nafta jump-started it, contractors and manufacturers alike say. Since the pact was put in place, Mexico has shot past China to become the top exporter of garments to the U.S. Prior to Nafta, Mexico was sixth.
These macroeconomic trends really hit home for the Mehserjians last year. With little to sew in Los Angeles, Jack Sr. & Sons lost $300,000 and slashed its work force to 60 from 150.
Since then, the Mehserjians have launched a two-pronged strategy for survival. Broadening beyond T-shirts and other knitwear, they have started sewing higher-fashion garments at their Los Angeles factory. Yet this is a costly transition, requiring the Mehserjians to invest in new equipment and their employees to master handling new types of fabric. The Mehserjians say they may not be able to keep the doors open in Los Angeles.
So they bank, uneasily, on Mexico. "I never wanted to go to Mexico," says 33-year-old Harry. Since starting up the factory here last summer, he and Berj have rotated through Tlaquepaque, each staying for as many as 15 days a month.
It is hardly a pleasant sojourn. Unable to find an apartment, the Mehserjians reside in a down-at-the-heel hotel. They have no car here. Making friends is tough since they're always shuttling back and forth to California. When they're not at work, they usually kill time by strolling the streets alone. "You walk around and get bored to death," says Harry.
Work, meantime, has unfolded into a nonstop series of challenges. For one thing, the Mehserjians have been struggling to find enough workers. Competition is keen from high-tech factories in the area -- Guadalajara calls itself "the Silicon Valley of Mexico" -- and so about half of the 100 sewing machines that the brothers have brought to Tlaquepaque sit idle.
"We underestimated how hard it was going to be," concedes Berj.
On a recent day, Berj walks through the breezy, well-lighted facility, teaching his workers a few tricks to boost their output. Hunched over a work table, a man is cutting trim one piece at a time. Berj demonstrates how to cut three pieces at once.
"The learning curve is very slow," he says. The Mehserjians' long-range goal is to double productivity here, bringing it up to the same level as their plant in L.A.
An even larger challenge, the Mehserjians say, is trying to change attitudes. Though the Mehserjians pay above the prevailing market rate, they have had a hard time getting workers to show up reliably. (The average weekly wage that the Mehserjians say they pay here is about $60, compared with $300 in L.A.) "If they come on Monday, they're out on Tuesday. If they come on Tuesday, they're out on Wednesday," says plant manager Alfredo Lopez, whom the Mehserjians brought down from Los Angeles.
Such headaches, experts say, are not uncommon in cities in the interior of Mexico, like Guadalajara. Here, workplace culture has traditionally been looser than in the U.S. or even northern Mexico. "It's true that these workers don't necessarily see their lives revolving around a job," says UCLA's Dr. Hinojosa-Ojeda. "There's a great deal of informality that they have come to expect from factory employment. You work hard during certain periods of time, and relax during others."
To overcome the problem, the Mehserjians have offered a 10% bonus to those who come to work faithfully for the entire week. Nonetheless, absenteeism and turnover still plague them.
In the afternoon, Berj gathers his employees to address the issue. They are so woefully late on filling orders, he explains, he will pay them double and triple the normal amount to come in over the weekend and catch up.
"How are you going to have a better life if you don't work hard?" he says in a soothing Spanish. "If you want a better life, make it happen. Show me you can."
On Saturday, about 50% of the crew actually does head in to work -- many more than Berj expected, and an encouraging sign that perhaps things are turning a corner.
Ultimately, the Mehserjians are confident that they will be able to flourish here. They note that many U.S. clothing companies prefer to work with American transplants because they already have a relationship with them from back home.
But the brothers also recognize that in a world where consumers are clamoring for high-quality garments at ever-lower prices, there's another possibility, too: One day, the clothing companies may transfer their sewing to even cheaper locales in Central America or the Caribbean.
Should that happen, Berj insists he'll chase the work anew. "I'd go to Africa" if that's where the business was, he says.
Harry, however, is less sure. If the work keeps moving, "I'm going to have to give up," he says. "I'm not a gypsy."
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