San Diego — Mad Engine produces T-shirts for department stores, designer clothing lines, and specialty stores in the U.S. and 17 other countries. In 2000, they shipped $27 million of T-shirts worldwide. That number has dropped to about $15 million. Alby Amato, CEO of Mad Engine, tries to sound hopeful as he describes the mood of an industry that seems to face doom. "We've lost production to overseas importers. We manufacture T-shirts to all of our customers' specifications, whether they're screen-printed, embroidered, hand-painted, whatever they want. We don't actually make the shirts -- we subcontract the shirts out and work with suppliers who manufacture the garments for us. The other side of our business is selling to retailers like Miller's Outpost, JCPenney, Sears, Mervyn's, and some of the other major department stores. On our 'package' business, we work with Polo jeans, Calvin Klein, Lee, Wrangler, and Levi's. I'm one of the last American contractors for Levi's.

"It's sad to see how much of the business is leaving this country. I look around and say, 'What is actually going to happen to us manufacturers?' California's minimum wage has just gone up to $6.75, and we're competing with people across the border who work for about 45 cents an hour. We used to do a huge amount of contract printing. We used to do 85 percent of Reebok's T-shirts. There isn't that much contract printing left anymore because it's being done across the border."

When Amato started Mad Engine 15 years ago, he found that using high-tech machinery to design cutting-edge T-shirts could be profitable. His experience in the garment industry goes back to his native South Africa. "I actually owned the rights to the name Gap. I had no idea there was a Gap in the United States!" Overseas competitors and increasingly aggressive maneuvering by retailers has thinned out the profitability of his business and forced him to adapt to a changing market. "We've always been able to reinvent ourselves. All that these other people are interested in is price. It's pretty tough. If you're going to survive the recession, you have to start cutting back costs and see how you can run your operation on a lower budget."

Last summer's energy crisis made things worse. "It's been doubly tough for us in California because of the high utility bills. They went up from about $8000 to about $24,000 a month. We worked two ten-hour shifts seven days a week. We started one shift at 2:30 in the morning so we could beat the heat and avoid power outages -- and we actually got a bit of a price break for that as well. We had to cut back to one shift. And 9/11 didn't help the garment industry at all."

The slowdown resulted in a big layoff that has not recovered in what is normally the busiest season. "From our 2000 levels, we employed up to 220 people at our peak, during the busy season. Normally, we'll drop back down to 180. The first six months are the busy season. We normally slow down in July and August because we're in between seasons. We had to lay off half, maybe a few more. It was a good 120 people. We don't have a second shift anymore, and we're not working weekends anymore either. That's a reduction from an $80,000-a-week payroll to about $40,000. That was before 9/11. Now we've cut back even more, to about $30,000. We cut production people and in the front office."

While he feels terrible about laying off his employees, Amato says that most have managed to find work. "I have a really good manager here who trains people well, so we've always been like a training school for other screen printers. Our people get picked up pretty quickly. If we start to get a little busy, we'll try to get some of our people, and many of them have already found jobs. At this stage, I'm sure that our unemployment rate [payments] may have gone up, but I don't think that's really hit us. A lot of these people are really good printers, and they find jobs fairly easy.

"The results of winter weren't as bad as everybody thought they were going to be. The discounters did very nicely -- department stores like Federated and that. They were only 9 percent off where they had predicted to be -- I'm not sure of the exact numbers. A lot of places made their whole December the week after Christmas. Everybody just held out for the sales.

"We had an unbelievable 2000. This company just grew. But when we got into the fourth quarter of 2000, there was a change. The garment industry feels a recession before it hits everyone else, and we move out of it first and everyone sort of follows. The first quarter of 2001 was way off, and we knew we were in a deep recession, and we started to consolidate. Then we had the energy problems, which made it more expensive to produce, and retail started to slow down. The man in the street hadn't felt it yet, and we hadn't had the big layoffs. Those came in the second quarter. But when I looked around in July and August last year, I already had a sense of improvement. After 9/11, we didn't actually have cancellations, but everybody was put on hold. They basically froze their efforts to buy."

Since 9/11, Amato's company has been holding steady. "We work three to six months ahead for the seasons. We just finished holiday 2002 and we're looking at spring 2003 now. When you work with people like Levi's, you have to plan far ahead. That's the one asset that we have by manufacturing in this country: We can turn product fast. It's very difficult for them to do away with us completely, because we can give them a quick turn, and that's the way retailers are today. People don't want to have big inventories anymore. With that, they don't have to commit four or five months ahead of time. We work with Miller's Outpost and turn stuff for them in ten days. With the overseas places, they need five or six months.

"I had a customer in New York who told me that he had $7 million worth of merchandise on his floor that he was shipping to a customer that was canceled. Indirectly, people are just being more cautious."

If things are bad for the retailers, it's worse for the manufacturers. "The thing is, our whole industry is in trouble. I've talked with a lot of printers in L.A. and Orange County and pretty much everybody is hanging in. The T-shirt industry is taking a huge knock. People like Hanes and Fruit of the Loom have shut down their facilities in the United States. Now they're making all their stuff abroad. If you don't have these offshore 807 type of facilities, you can't make it.

"807 facilities" use fabric from the United States and finish it in other countries. "We'll send fabric to Mexico, and they'll sew it up, and it comes back as shirts. Look, on our basic T-shirts, you can save between two and three dollars a dozen. In the market that we're in, that makes a difference. When I started in this business 15 years ago, a blank white T-shirt cost $2.15. Now you can buy that same T-shirt anywhere for $1.15. Costs haven't come down since then, so you can see why some of the major mills have shut down, like Burlington. They were one of the biggest denim producers in the country. China is making denim, and you can get it for a fraction of the price it would cost from here."

Another pressure that is squeezing smaller clothing manufacturers like Amato's is the phenomenon of "markdown money" -- profit guarantees, which were once demanded only by upscale retailers but are now employed by virtually all department stores. If, for example, Macy's expected to make $26,000 profit on a line of clothing for the summer and only made $20,000, they would expect the manufacturer to pay $6000 to make up for the loss. The mere fact that Amato refused to discuss "markdown money" guarantees suggests the intimidating power of major retailers. "You want to have me thrown out of the industry?" he laughs.

One thing Amato will admit is that while retail profit margins are higher, the manufacturers' stay low. "We get pennies for each T-shirt. It's not a big margin. Retailers can go back to us to make up for losses, but we've got nobody to go back to get anything. That's just the business we're in. If you don't do it, somebody else will.

"Right now, everything is driven by price, not quality. The one thing that's kept American manufacturers going is that we've always been better, technology-wise and technique-wise. In today's world, everything travels pretty quick. We do a lot of printing processes that they couldn't do offshore. We end up doing all the difficult products, and all the easy stuff goes offshore. We had a case where Polo gave us some stuff that was really difficult and gave them the samples and goods and they came back and said, 'We want to pay you this price.' This was after we had made the samples and quoted them our price -- for 40 or 50,000 units. They were asking for a dollar off the price that we had quoted them. They told us they could have it made in Mexico for a dollar less per shirt than what we quoted them. My pre-production person asked them, 'Why did you give it to us then?' Their answer was, 'You're the only ones who can execute it.' When it comes down to the final thing, they weren't even looking at the thing you were putting on the product, they were just looking at 'All T-shirts are X, so that's what we're going to pay.' I think what's happening is that a lot of the stuff they get from offshore has to be ordered six months in advance. We work on a 10- to 12-week lead time building from the start, with the measurements and everything. When it comes down to actually doing the design we're going to put on the garment, they can give it to us four weeks before they need it."

For Amato, survival has meant adapting. "We have had to constantly reinvent ourselves. Right now, a lot of buyers aren't even traveling, so if you want to do business, you've got to go to them. We're now looking at licensing. At times like these, people want to buy something that they recognize. We're looking at some properties to license. We're looking at maybe getting into Marvel comics license, like Spider Man and other superheroes. We're probably going to take on the Gordon and Smith license. You have to be able to adapt or you won't survive in this industry. I'm glad I'm my age, because I don't know if we will be a manufacturing country in ten years' time."