In partnership with Coteminas, retailer will produce jeans and twill clothes in Rio Grande do Norte
07/19/2023
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Clothing factory in Cerro Corá, state of Rio Grande do Norte. — Foto: Marina Falcao/Valor
Retailer Shein arrives this month in the clothing hub of Seridó, state of Rio Grande do Norte. In partnership with Coteminas, the company will start producing jeans and twill pieces in a region that includes 24 municipalities and that currently operates with idle capacity that reaches 50% in some factories.
The clothing factories have a strong dependence on Guararapes – owner of Riachuelo fashion’s chain. “Shein can be our lifeline,” says Ronaldo Lacerda, owner of Cabugi clothing, in the municipality of Tangará. Since the beginning of the year, he has already cut 20% of employees, following the reduction in demand from Guararapes, his only customer. Now, almost half of the unit’s machinery is stopped.
The scenario is similar in other workshops of the Seridó hub. In the last three years, the region has lost clients such as Hering and Malwee, which migrated their production to other areas for logistical reasons.
The progress of the agreement between Shein and Coteminas, which has a unit in Macaíba, in the metropolitan region of Natal, has changed the outlook for the local business community. In June, the Cabugi clothing company in Tangará sent samples of its jeans production to China and the material was approved by Shein. Mr. Lacerda, owner of Cabugi, now waits for the formalization of the contract with the retailer.
The Seridó hub includes tha majority of the 122 workshops, which are part of a program called Pró Sertão. The sewing tradition dates back to the 1970s, but 10 years ago, with the arrival of Guararapes and under strong inspection by the Labor Prosecution Service (MPT), increased the level of formalization and compliance with labour requirements in the clothing factories.
The configuration of the Seridó hub differs from regions such as the hinterland of Pernambuco, where informality is still widespread. In addition to the 95% discount on sales tax ICMS, Pró Sertão program established legal certainty for commercial relations between anchor companies, such as Guararapes and Coteminas. The sewing workshops were prohibited from passing on production to third parties.
According to Sílvio Torquato, secretary of Economic Development of Rio Grande do Norte, because of the announcement of the partnership between Shein and Coteminas there are now several companies wanting to join the Pro Sertão. He estimates that, within 60 days, he will be able to register another 100 workshops in the program.
The plan is for the Coteminas unit in Macaíba to cut the pieces. The jeans will come mainly from Chinese suppliers and national companies such as Vicunha. The Seridó clothing factories will be left with the sewing part.
Businessman José Medeiros de Araújo, owner of clothing factory Zaja, will be one of the first local suppliers for Shein. Today he has 35% idleness in his clothing factory, which employs 131 seamstresses. “I’m not hiring again yet, I’ll feel the thermometer of (Shein) first,” he says. He explains that labor is the most sensitive variable in local businesses, accounting for 75% of workshop costs. Faced with a market downturn, business owners need to make cuts quickly or go out of business.
In a severe financial crisis, including layoffs and wage delays, Coteminas is to receive a working capital injection from Shein. On the day, the deal was announced, Coteminas shares on B3 doubled in value.
The company said it intends to produce, in partnership with the Asian retailer, 100,000 pieces per day in the first year, and reach 300,000, including all regions of the country. Coteminas did not say how long this is expected to take to be achieved.
Although the arrival of the Chinese retailer has given entrepreneurs in the Seridó region a boost, they are concerned about the weak demand for fashion retail, which shrank by 0.5% in 2022, according to statistics agency IBGE. In this scenario, Shein may take market share from other fashion retailers, including Riachuelo, which produces its collections in the Seridó hub.
According to BTG’s estimate, Shein had R$7 billion in revenues in Brazil last year, more than tripling what it registered in 2021, while local retailers had sales growth between 10% and 25% in the same period.
With high bargaining power, the Asian retailer is offering to the Seridó clothing companies the payment of R$0.58 per minute, the same value that is currently practiced by Guararapes in the region.
Shein says it intends to expand its business scale in Brazil to reach “as many partner factories as possible” by providing support and training to manufacturers, especially regarding on-demand business model digitalization. It aims to partner with 2,000 local manufacturers (there are currently 151) by the end of 2026. The plan is to create 100,000 direct and indirect jobs across Brazil.
In the interior of Rio Grande do Norte, Shein will begin production in the municipalities of Acarí, Cerro Corá and Tangará. The retailer says it has also signed an agreement with clothing manufacturers in Pernambuco, Bahia and Ceará. According to Shein, the clothes that will be part of the pilot project with Coteminas have already been inspected and have certification from the Brazilian Association of Textile Retailers (ABVTEX) up to date.
Adapting operations to meet the level of agility of the Asian retailer, which operates with very low inventories, is a challenge for local clothing manufacturers. Each model that arrives at the clothes factories has a “set up” deadline, which includes the learning phase of the seamstresses, until reaching an optimal level of efficiency.
If it gains momentum, complying with all labor and tax requirements in Brazil, Shein’s local production will be able to balance prices more in relation to national competitors. The company says that it will be able to maintain the same level of prices already practiced by the brand through the reduction of logistics costs. “With local production increasing, it is natural to reduce the products coming from cross-border, an expensive logistics for everyone operating in the sector,” says the company.
But importing is crucial. Starting in August, purchases up to $50 will be exempt from a 60% import tax, giving foreign platforms a big advantage. No wonder Brazilian competitors like Marisa, Renner, and Magazine Luiza, among others, are complaining to the Ministry of Finance, which published the new customs rules on June 30.
*Por Marina Falcão — Cerro Corá, Tangará
Source: Valor International