Closing Case

Martin's Textiles
August 12, 2002, was a really bad
day for John Martin. That was the
day Canada, Mexico, and the
United
States
announced
the
planned
North
American
Free
Trade Agreement (NAFTA). Under
the plan, all tariffs between the
three countries would be eliminated within the next 10 to 15.
years, with most being cut in 5
years. Most disturbing for John
was the plan's provision that all"
tariffs on trade of textiles among
the three countries were to be removed within 10 years. Under the
agreement, Mexico and Canada
would also be allowed to ship a
specific amount of clothing and
textiles made from foreign materials to the United States each year,
and this quota would rise slightly
over the first five years of the
agreement.
"My
God!"
thought
John. "Now I'm going to have to
decide about moving my plants to
Mexico."
John is the CEO of a New Yorkbased textile company, Martins
Textiles. The company has been in
the Martin family for four generations; it was founded by his greatgrandfather in 1920. In 2002 the
company employed 1,500 people
in three New York plants that produced cotton-based clothes, primarily underwear. All production
employees were union members,
and the company had a long history of good labor relations. The
company had never had a labor
dispute, and John, like his father,
grandfather, and great-grandfather
before him, regarded the workers
as part of the "Martin family." John
prided himself not only on knowing
many
of
the
employees
by
name, but also on knowing about
the family circumstances of many
longtime employees.
During the 1980s and 90s, the
company
had
experienced
increasingly tough competition, both
from overseas and at home. The
mid-1990s were particularly difficult. The strength of the dollar on
the foreign exchange market during that period enabled Asian
producers to enter the US market with
very low prices. Since then, although the dollar had weakened
against many major currencies, the
Asian producers had not raised
their prices, in a low-skilled, laborintensive business such as clothing manufacture, costs are driven
by wage rates and labor productivity. Not surprisingly, most of
John's competitors in the north-

eastern United States responded

to the intense cost competition by
moving production south, first to
states such as South Carolina and
Mississippi, where nonunion labor
could be hired for significantly less
than in the unionized Northeast,
and then to Mexico, where labor
costs for textile workers were less
than $5 per hour. In contrast wage
rates were $15.00 per hour at
John's New York plant and $10 to
$12 per hour at nonunion textile
plants in the southeastern United
States.
The early 2000s had been particularly tough at Martin's Textiles.
The company had registered a
small loss each year, and John
knew the company could not go on
like this. His major customers,
while praising the quality of Martin's
products,
had
warned
him
that his prices were getting too
high and that they might not be
able to continue to do business
with Him. His longtime banker had
told him that he must get his labor
costs down. John agreed, but he
knew of only one surefire way to
do that- to move production south
to Mexico. He had always been reluctant to do that, but now he
seemed to have little choice. He
feared that in five years the US
market would be flooded with
cheap imports from Asian, US, and
Mexican companies, all producing
in Mexico. It looked like the only
way for Martin's Textiles to survive
was to close the New York plants
and move production to Mexico.
All that would be left in the United
States would be the sales force,
John's mind spun. How could
something that throws good honest people out of work be good for
the country? The politicians said it
would be good for trade, good for
economic growth, good for the three
countries. John could not see
it that way. What about Mary Morgan, who had worked for Martins
for 30 years. She was 54 years old.
How would she and others like her
find another job? What about his
moral obligation to his workers?
What about the loyalty his workers
had shown his family over the
years? Was this a good way to repay it? How would he break the
news to his employees, many of
whom had worked for the company
10 to 20 years? And what about
the Mexican workers? Could they
be as loyal and productive as his
present employees? From other
US textile companies that had set
up production in Mexico he had
heard stories of low productivity,
poor workmanship, high turnover,

and high absenteeism. If this was

true how could he cope with that?
John had always felt that the success of Martin's Textiles was partly
due to the family atmosphere,
which encouraged worker loyalty,
productivity, and attention to quality, an
atmosphere
that
had
been
built up over four generations. How
could he replicate that in Mexico
with foreign workers who spoke a
language he didn't even understand?
QUESTIONS FOR DISCUSSION
1.

What are the key-points of the

case?

2.

Why do they think to move to

Mexico?

3.

What are the positive aspects

of moving to Mexico?

4.

What are the negative aspects

of moving to Mexico?

5.

What advise would you give to

this company?