Compañia Industrial de Parras, S.A. de C.V. (CIPSA)

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Compañia Industrial de Parras, S.A. de C.V. (CIPSA)

Avenida Dr. Gustavo Baz 4881
Tlalnepantla, México 54110
Mexico
Telephone: (52 55) 5321-2400
Fax: (52 55) 5311-9833
Web site: http://www.parras.com

Public Company
Incorporated: 1899 as La Compañia de Parras, S.A.
Employees: 2,538
Sales: MXN 1.84 billion ($168.5 million) (2005)
Stock Exchanges: Mexico City
Ticker Symbol: PARRAS
NAIC: 313210 Broadwoven Fabric Mills; 551120 Offices of Other Holding Companies

Compañia Industrial de Parras, S.A. de C.V., often called by the acronym CIPSA, is the holding company for the largest textile producer in Mexico. Through its subsidiaries it manufactures and sells a single product—denim—in four Mexican factories and has sales branches in New York, Los Angeles, and Medellín, Colombia. This cloth is produced in varying colors, construction, weight, textures, and finishes, monitored constantly for quality. Parras develops about 200 varieties of denim each year, of which about 60 are ordered by its customers. Its owners consider Parras to be the oldest business enterprise in Mexico still owned by the founding family.

TURNING OUT TEXTILES SINCE 1870

The region in which Parras de la Fuente, Coahuila, lies was known chiefly for its vineyards until the 19th century, when cotton growing eventually became of great importance. A textile factory was established on a hacienda near Parras in the 1830s (or possibly even earlier). The property, previously owned by a Spanish aristocrat, had passed after Mexican independence to James Grant, a Scot working for the London investment bankers Baring Brothers. After Grant died in an abortive movement for the independence of Texas (which was then part of Coahuila), it was purchased by Mexicans. The Aguirre family, in 1857, began the reconstruction necessary to install 100 hydraulically powered Danford looms. One of the cotton suppliers, Evaristo Madero, and his son-in-law Lorenzo González Treviño, bought this factory in 1870 and named it Fábrica la Estrella (the Star Factory). They remodeled and adapted the buildings and acquired, in 1890, new machinery to replace the previous equipment. La Estrella, the largest textile plant in northern Mexico, turned out cotton textiles such as khaki and gabardine. In 1899 they incorporated the business, which consisted of preparing, spinning, dyeing, weaving, and bleaching cotton and included 350 looms.

The Mexican revolution of 1910 brought Evaristo's grandson, Francisco Madero, to the presidency. He was murdered in 1913, however, and the factory was expropriated. When the Madero family regained the enterprise in 1917, it was virtually bankrupt. By 1925, however, the factory had 800 looms and was among the ten largest textile plants in Mexico. It introduced the Sanforized process for shrinkage control to Mexico in 1946. Parras began manufacturing warp yarn to produce denim in 1949. In so doing it shared in the growing boom of denim for jeans that marked the 1950s not only in the United States but the world. This was of little importance immediately, however. "The company was practically bankrupt until during that period my father contributed his own capital to save it," Rodolfo García Muriel, its president and a great-great-grandson of the founder, told Arantzatzú Rizo for the Mexican business magazine Expansión in 1999.

La Estrella's sales fell from 10.3 million meters of cloth in 1945 to only 7.4 million meters in 1950. The factory was reorganized in 1952 and was fitted with new machinery. This enabled the company to reduce its labor force from 1,590 in 1945 to 667 in 1967, when production at La Estrella reached 12.6 million meters. Parras was obtaining 90 to 95 percent of the cotton it needed from the immediate area.

The 1970s witnessed a boost in denim demand, characterized by the introduction of a great variety of jeans styles and the advent of designer jeans as a high fashion product. CIPSA, in 1973, established a joint venture with the Williamson Dickles Manufacturing Co. to make garments in Parras for the U.S. market. (Another such plant was built in Zacetecas in 1987 and relocated to Parras in 1994.) CIPSA became a public company in 1981, when it offered 20 percent of its shares on the stock exchange in Mexico City, using the funds raised to upgrade its operations. By 1992 its annual sales had risen to $73 million.

EXPANSION OF THE FIRM: 1993–99

With the imminent adoption of the North American Free Trade Agreement (NAFTA) in 1993, it became clear to Parras that it needed an American partner both to exploit opportunities to the north and to protect its domestic market from foreign competition. In that year it signed an agreement with Cone Mills Corp., the world's largest denim producer. Cone invested $22 million for a 20 percent stake in CIPSA, and the two companies agreed to form a joint venture, Parras Cone de México, S.A. de C.V., that would build and operate a new manufacturing plant in Parras. Furnished with the most modern equipment in the world, the plant, built at a cost of $130 million, opened in 1995 and began producing 1.8 million meters of cloth a month, using both U.S. and Mexican yarns. Among its first customers were Levi Strauss & Co. and the Wrangler division of VF Corp.

The main market for Parras Cone's denim was the Mexican maquiladoras (assembly plants) along the U.S. border that were cutting and sewing garments. These plants were using three-quarters of Parras Cone's annual output to make denim garments sent on to the United States. There were, at first, four basic styles of denim, with one warp count, one dyeing color, and two different weft counts. By 2003, however, the plant had the capacity to produce 33 different styles.

Parras was expanding in other ways as well. In 1994 it paid $70 million to acquire a plant in the state of Puebla that it renamed Hilaturas Parras, S.A. de C.V., which, after receiving new equipment, began producing 1.8 million meters of denim a month. (Grupo Iusacell, S.A. de C.V. subsequently assumed a 30 percent stake in this plant as well as a 4 percent share in CIPSA itself.) Also in 1994, Parras opened a plant to provide washing and ironing services for the garments it produced, but after two years it decided to focus exclusively on the production and marketing of denim fabric (with a small proportion of twill), which led to the sale or closure of all apparel manufacturing operations. The company was installing new electrical- and steam-generating facilities to meet all its power needs. In all, counting the joint venture with Cone, Parras had tripled its productive capacity and become the sixth largest denim producer in the world.

KEY DATES

1870:: Members of the Madero family purchase a textile plant near Parras, Coahuila.
1899:: The firm, which runs the largest textile factory in northern Mexico, is incorporated.
1946:: Parras introduces to Mexico the Sanforized process for controlling cotton shrinkage.
1981:: Parras becomes a public company, selling 20 percent of its shares.
1993:: Parras and Cone Mills Corporation, the world's leading denim producer, form a joint venture.
1999:: The purchase of a nearby plant makes Parras the world's fourth largest denim producer.
2002:: Parras is negotiating with lender banks to restructure its debts.
2005:: Plagued by Chinese competition, Parras sees its sales fall 31 percent.
2006:: Parras sells its share in the Cone Mills venture and restructures once again.

While Parras Cone was producing one type of denim alone, practically all of it for export, the La Estrella factory in Parras was turning out about 36 different products. Formerly limited by quotas and tariffs, the company was able to export its goods freely to the United States as well as exporting to France, Spain, Germany, Italy, the Netherlands, and Russia. It also was exporting to South American countries such as Venezuela, Ecuador, Colombia, and Chile; Central American countries such as El Salvador, Honduras, and Panama; and to the Caribbean, including Cuba. The Parras Cone venture was proving so successful that, in 1998, an expansion was under way to increase production by 10 percent. In addition, in 1999, CIPSA acquired still another textile plant, Lajat S.A., in Torreón, Coahuila, which it renamed Parras de la Laguna, S.A. de C.V., and which had the capacity to make 36 million meters of denim a year. This addition brought the company's denim ranking to fourth in the world, with 8 percent of the world market and 28 percent of the national market.

STRUGGLING TO SURVIVE IN THE 21ST CENTURY

All was not well for Parras, however. The company had accumulated about $80 million in debt to pay for its investments and acquisitions. Cotton growing had long given way to dairy farming in Coahuila, forcing CIPSA to purchase almost 60 percent of this essential raw material from the United States. By contrast, payment for indirect exports—involving cases in which the denim went to a Mexican garment maker before the end product was sent abroad—could be slow and cumbersome. These customers were beginning to suffer from Chinese competition and in some cases proved unable to pay at all. By 2001, and perhaps as early as 1999, Parras was operating in the red. In early 2001, it refinanced $218.1 million in debt, with payment over six years after an 18-month grace period. By the end of the year, the company owed $245.7 million to nine creditors. New restructuring negotiations began in October 2002 with a consortium of three Mexican banks that held most of this sum.

Parras's troubles, and those of Mexican textile and clothing manufacturers generally, were being exacerbated by the entry of China in the World Trade Organization and, with it, the fall of barriers to Chinese imports. By 2002 nearly half of all textile and clothing items or products on the Mexican market were believed to be imported, some of them entering illegally through practices such as altering the certificates of origin on clothing products. During the next four years Chinese competition drove the price of denim down 15 percent.

The four company factories were producing different types of denim, according to demand, with variations of weight, color, yarn or weft, elasticity, and mixtures with Lycra or rayon. In 2004 Parras added a higher-end denim line called Premium. It featured stretch and rigid denim in ring-ring constructions, where the warp and fill of the fabric used ring-spun cotton yarn, and in constructions with ring-spun in the warp and open-ended yarn in the fill. The Premium line was priced about 25 percent higher than standard denim and was expected to be used in jeans retailing for about $60 to $80.

CIPSA's large output was not resulting in profit; instead it remained in the red. To make matters worse, the price of cotton jumped 40 percent in 2004. The worst blow came at the beginning of 2005, when quotas on fabric and garment exports came to an end worldwide. China had displaced Mexico as the leading foreign source of textiles and apparel to the United States and was selling more denim to Mexican garment makers than Parras itself. During 2005 Parras's sales fell by almost 31 percent in value and more than 25 percent in volume. The company's assets fell by one-third. In its annual report for the year, management did not mince words, writing of "ferocious competition in the marketplace" from national and U.S. companies but principally from "a strong importation of Asiatic products in an unfair and illegal form, in Mexico as well as the United States, our main markets." This state of affairs, the company added, had "put in doubt its survival."

Of CIPSA's 2005 sales, 24 percent were within Mexico, by volume, and 22 percent by value. The rest of its output was exported, with 90 percent of its exports going to the United States. The company had about 200 customers, of which the most important was VF Jeanswear. VF Corp. accounted for 25 percent of Parras's sales in 2005.

CIPSA had reduced its debt since the 2002 restructuring but still owed more than $160 million at the close of 2004. It was unable to completely make payments on the principal and interest in February 2005. Members of the García Muriel family, the company's chief shareholders, established a new company, Inversiones Textiles del Norte, S.A. de C.V., in September 2005. ITN and Grupo Inmobiliario Serfimex S.A. de C.V. then acquired the portion of the debt held by Grupo Financiero BBVA Bancomer, S.A., CIPSA's second largest creditor. Toward the end of the year, the firm's largest creditor, Grupo Financiero Banamex, S.A., expressed its intention to follow Bancomer's lead, and in March 2006 this transaction was completed. When an agreement with HSBC Holdings PLC also was reached, the company had disposed of 93.6 percent of its bank debt. ITN and CIPSA merged a month later.

The restructuring left the García Muriel family with 46.6 percent of CIPSA's shares of stock. Other García relatives held 22.7 percent. Cone Mills held 7.5 percent. Public shareholders and others accounted for 7.4 percent.

CIPSA's difficulties in meeting Chinese competition also were experienced by U.S. firms, including Cone Mills, which had declared bankruptcy and was purchased by International Textile Group Inc. (ITG) in 2004. During the summer of 2006, ITG bought CIPSA's half share of Parras Cone for $27.3 million. The sale left Parras with three factories. The original one, La Estrella, had an installed capacity of 30 million meters a year and was responsible for the major share of specialty denim, including stretch, amsler, cross hatch, ring-spun, and remountings. Hilaturas Parras, with annual capacity of more than 24 million meters of cloth, was oriented toward basic denim. Parras de la Laguna, with annual capacity of 36 million meters of cloth, had the capacity to produce denim and/or gabardine.

Parras was investigating the possibility of closing one factory or moving Hilaturas Parras to Central America, where labor was less expensive. The company also was continuing to seek making its denim more sophisticated and hence worth more to customers, such as introducing stone washed denim or denim with properties such as antiflammable, antistain, and antiwrinkle. It was seeking to attract more business from high fashion U.S. denim makers by agreeing to fill smaller orders, since producing fashionable jeans required a rapid turnover of styles.

Robert Halasz

PRINCIPAL SUBSIDIARIES

Fábrica la Estrella, S.A. de C.V.; Hilaturas Parras, S.A. de C.V. (70%); Parras de la Laguna, S.A. de C.V.; Servicios Corporativos Cipsa, S.A. de C.V.; Telas Parras, S.A. de C.V.