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Cablegate: Small U.S. Firm Finds High-End Garment Niche in Rural

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PP RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHCHI #0035/01 0650419
ZNR UUUUU ZZH
P 050419Z MAR 08
FM AMCONSUL CHIANG MAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0692
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHCHI/AMCONSUL CHIANG MAI 0748

UNCLAS SECTION 01 OF 02 CHIANG MAI 000035

SIPDIS

SIPDIS

COMMERCE FOR EAP/MAC/OKSA
STATE PASS USTR

E.O. 12958: N/A
TAGS: ETRD EINV BTIO TH CH
SUBJECT: SMALL U.S. FIRM FINDS HIGH-END GARMENT NICHE IN RURAL
THAILAND

CHIANG MAI 00000035 001.2 OF 002


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Summary
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1. RICO International is a small, U.S.-owned garment-maker in a
remote corner of northern Thailand. It produces expensive
hand-knit sweaters for sale in the U.S. to high-end clothiers.
By staying in this high-end niche and keeping production volume
low, RICO turns a profit despite competing with Chinese textile
giants that produce machine-made knitwear. In a word, RICO
survives because it is small, and thus is not a model to be
emulated elsewhere in northern Thailand. On the other hand,
RICO demonstrates how Thailand, particularly the north, has a
comparative advantage when it comes to design, fashion, and
quality workmanship. End Summary.

--------------------------------------------- -----
Farmers' Wives Knitting in Shade of Stilt Houses
--------------------------------------------- -----

2. "Since 1990 RICO Hand Knits has been providing year-round
employment to nearly 2000 rice farmers' wives in northern
Thailand. Knitting together in the shade of their stilt houses,
RICO's hand-knit artisans provide decades of skill. RICO's
sales have greatly improved the quality of their lives,
preserving the native traditions of these remote villagers,
keeping the knitters' families together and their communities
flourishing." This marketing plug found on RICO International's
website and promotional brochures is largely accurate, ConGen
found during his February 26 visit to the production site.
Located in the Chiang Kham district of Phayao, one of northern
Thailand's poorest provinces, the American-owned RICO
International has found the unlikeliest of places to turn a
profit and position itself - during peak production a few years
back - as the province's second-largest employer.

3. RICO International was created and is run by Amcit Ric
Fowler, a life-long global nomad who now splits time between San
Diego and Phayao. In the 1980s he found himself in Southeast
Asia, buying traditionally made garments for sale at huge
mark-ups in the U.S. In 1990 he transitioned to production,
starting his hand-knit business in Phayao because of the skill
of the local women. Production peaked in 2000, when RICO
employed over 2,000 people. Today, with sales slowed due to
baht appreciation and growing competition from Chinese-made
machine-knitted garments, employment is about half that. RICO's
sales volume in 2007 was 29 million baht (USD 906,000).

-----------------------------------
Using U.S. Cotton and U.S. Freight Firms
-----------------------------------

4. RICO blends traditional hand knitting with modern designs
for sale in the U.S. to high-end specialty boutique shops. The
company succeeds by staying small and frequently changing its
designs. The smallest lines it produces are as few as 40
pieces; the largest are 2,000. Each garment is marketed as "a
piece of wearable art with no two exactly alike." Rico's
sweaters are made of 100% cotton string bought from Rama
Textiles in Bangkok, which imports its cotton from the U.S. and
dyes it locally. RICO does its own designing, employing a
Bangkokian designer who travels frequently to New York and
California. Samples of his designs are then knitted by RICO's
small design team. In the next step, the samples are put into
small bags with cotton yarn and other materials, and then
distributed for outsource production to a network of (now) about
1000 local women. The finished garments are returned to the
RICO "factory," where another 90 employees handle quality
control and packaging.

5. Upon completion, the garments are trucked one hour to Chiang
Rai, and then shipped to the U.S. by air (via Bangkok) by the
U.S. firms Federal Express and United Parcel Service. Fowler
noted that these firms have significantly improved their
logistics since he first started production, and that other
shipping firms such as DHL and Emery are also becoming more
active in the region.

----------------------------------
A Safe Niche Among Chinese Giants
----------------------------------

6. Fowler said business was great up until the end of the
1990s, while the U.S. economy was booming. Since then his
production and employment have declined, largely due to tough
competition from Chinese textile giants that produce
machine-made knitwear. These Chinese garments are of

CHIANG MAI 00000035 002.2 OF 002


increasingly good quality, and are getting harder to distinguish
from true hand-knit pieces. Only the most discerning shoppers
can tell (or care about) the difference, Fowler said, and are
willing to pay (for example) $60 for a hand-knit sweater instead
of $25 for a similar machine-knit piece. Thus Fowler limits his
production and sells only to high-end boutique stores (RICO also
has a retail website). Chinese producers, on the other hand,
dominate sales of garments to U.S. big-box retailers like
Wal-Mart and Target. Fowler noted that his labor costs are
about one-third higher than those of his Chinese competitors.

7. RICO is safe in this niche, Fowler said, and cannot
realistically venture outside it. "We need to keep
hand-knitting or we won't last long against the Chinese." As a
cautionary tale, he mentioned another small hand-knit company in
Chiang Rai province that ventured into machine-made garments and
then quickly folded. RICO does, however, produce about one
quarter of its garments using hand-operated loom machines,
though even in these cases the trim is hand-knit. This speeds
production considerably: a hand-loom machine can produce up to
eight garments per day, compared to one garment every
day-and-a-half to two days for a piece that is 100% hand-knit.
Fowler pointed out that RICO uses only ten of these machines,
whereas one large producer in Shanghai has 8,000 of them.

-----------------------------------------
Local Authorities More Hindrance Than Help
-----------------------------------------

8. Local Thai economic authorities have been more hindrance
than help, Fowler reported. The northern regional office of the
Board of Investment was not helpful in getting RICO started,
since the company's non-use of machinery meant it did not comply
with BOI support criteria. As a result, RICO had to find a Thai
partner and register as a Thai company, limiting U.S.
shareholding to 49%. Fowler also carped about hassles with
local tax authorities, though was vague about specifics. As he
described it, he and the tax authorities disagree about defining
RICO's profit margins. Fowler said he pays taxes in the U.S.
because that is where RICO's sales are. He wishes to avoid
double taxation, so every year he and his accountant end up
sitting down with Thai tax authorities to laboriously negotiate
RICO's tax liability. The stakes are high, he said, given
Thailand's 30% corporate tax rate. He claimed that many local
businesses in Phayao have relocated to Chiang Mai because the
tax and other administrative authorities there are more
business-friendly.

------------------------
Corporate Responsibility
------------------------

9. RICO markets itself as a "socially conscious business for
the 21st century," and backs this up with a modest scholarship
fund to support university-level education for financially
disadvantaged children in Chiang Kham. Every year the fund
solicits each of the town's three high schools to nominate four
candidates, from which one is selected to receive financial
support throughout his/her university studies. Currently RICO
is supporting six students in this manner.

-------
Comment
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10. RICO International's story is a nice one, albeit small in
scale. Although the nature of its niche business does not lend
itself as a model for other U.S. investors to emulate, RICO's
operation does demonstrate how Thailand, particularly the north,
has a comparative advantage when it comes to design, fashion,
and quality workmanship.
MORROW

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