PORT LOUIS, Mauritius — Africa may be known for its world-class marathon runners, but officials and executives who are assessing the continent’s chance of creating a sustainable garment industry by 2005 — when quotas are to be dropped virtually worldwide on textiles and apparel — said they feel like they’re running a sprint to industrialization.
This story first appeared in the January 28, 2003 issue of WWD. Subscribe Today.
The nations of sub-Saharan Africa have seen clear economic growth since the African Growth & Opportunity Act took effect in the fall of 2000. For the first 11 months of 2002, the region’s apparel and textile shipments to the U.S. were up 15.4 percent to $1.03 billion, at a time when overall imports were up only 1.2 percent. African and U.S. officials estimate that 100,000 to 200,000 new apparel and textile jobs have been created in the 18 countries that have qualified for AGOA benefits. A total of 38 nations are eligible.
The greatest growth has come in the lesser-developed countries of the region, including Lesotho, Kenya and Swaziland, largely as a result of a provision in the law that allows those nations to import fabrics from elsewhere in the world — in practice, Asia —?and still enjoy the trade perks.
Surprisingly to many from the U.S., that so-called LDC provision, which is due to expire in September 2004, was the subject of fierce debate at the second AGOA Forum held Jan. 13-17 in Mauritius. U.S. Trade Representative Robert Zoellick said on the final day of the conference that the U.S. would consider extending the LDC provision.
President Bush has also said he will ask Congress to extend the rest of the AGOA program past its current deadline of 2008.
The LDC provision’s proponents, primarily but not solely from the least-developed nations, argue that Africa’s current supply of fabric is inadequate to meet demand. So far, about 84 percent of the region’s AGOA-qualified apparel exports have been made of fabric from third countries. About half of the region’s exports qualify for duty- and quota-free benefits.
“We are facing a very difficult period after 2004. We don’t have the capacity to produce our fabrics at the moment,” said Mpho Malie, the minister of trade for Lesotho, which has become the leading exporter of garments from the region and now has about 45,000 garment workers, up from 19,000 before AGOA took effect. “That puts us in a predicament.”
Similarly, Ulhas Kahmat, a principal of the Kenyan Apparel Manufacturers & Exporters Association, said, “I don’t know that we have enough fabric that will meet the requirements at a cost that is competitive.”
Kenyan officials estimated that 25,000 new apparel jobs have been created in their country as a result of AGOA and that the total economic impact of the program has been 150,000 jobs —?reasoning that people employed in the apparel industry help sustain businesses such as service providers and retailers.
Kahmat said allowing the third-party fabric provision to expire in 2004 “would be a human tragedy.” The provision’s opponents largely agree that the region’s supply of fabric needs to be strengthened if African apparel makers are to remain competitive in 2005, when the nations of the World Trade Organization will drop quotas. But they reasoned that the provision is discouraging investment in textiles.
“The LDC arrangement should not be extended because it will limit the growth of the textile industry,” said Salim Ismail, president and director general of Cotonniere di Antsirabe, an affiliate of Socota Group, a major textile producer with operations in Mauritius and Madagascar, both islands off the east African coast that are part of AGOA.
If Africa does not develop a strong textile industry by 2005, opponents of the measure said, AGOA’s effect will have been to offer African nations —?some of the poorest countries in the world — a brief taste of economic development that will be yanked cruelly away by market forces, making them feel all the hungrier.
“Time is running out for Africa,” said François Woo, managing director of the Compagnie Mauricienne de Textile Ltd., a garment producer with 5,000 employees in Phoenix, Mauritius, and $100 million in exports. He added that Africa needs to develop a strong textile industry to be competitive in 2005, adding, “if we don’t do it today, there will never be a textile industry in Africa.”
He said his company is in the midst of building a $53 million spinning plant that will have the capacity to produce 11 million pounds of yarn a year. It is scheduled to be complete by December.
Woo and others noted that the textile industry is the weak link in Africa’s value chain. The continent has plenty of agriculture and produces a significant amount of cotton, but exports much of it in its raw state. It’s also developing a skilled labor base in cutting and sewing using imported fabrics. By producing its own fabric from the cotton it grows, Africa could keep a lot more of the potential earnings of its cotton crop and labor than it does currently, sources reasoned.
Rod Birkins, director of sourcing at Plano, Tex.-based J.C. Penney Co. Inc., said building up a textile industry would allow greater economic development because “the number of jobs that are created are not just at the industry level,” but also in farming, transportation and other support areas.
“Africa has the capacity to produce all the cotton it needs, all the yarn it needs, hence all the fabric it needs,” said Woo of Compagnie Mauricienne de Textile. “We cannot make an industry in CMT [cut, make and trim, the labor component of a garment] Any person will tell you that CMT is all but dead. Vertical production is what is in demand.”
Ike Howard, director of sourcing with Atlanta-based Russell Athletic, bluntly said of the effect of the LDC provision: “It’s like turning the Africa Growth & Opportunity Act into the Asia Growth & Opportunity Act. You can’t have a justifiable sourcing model until you have raw materials present. The third-country fabric provision is the single-biggest obstacle to developing the [textile] industry.”
One reason the development of the region’s textile industry has lagged that of its apparel sector is the source of the investment into those businesses. In both Kenya and Lesotho, for instance, many of the apparel plants to have opened over the past two years were built by Asian investors.
Lesotho’s Malie said only two of his nation’s 50 garment plants are owned by local investors. He estimated that 95 percent of the capacity is owned by Taiwanese capital. Similarly, about $60 million in new investment has flowed into Kenya since AGOA passed, primarily from Sri Lanka, Hong Kong and Taiwan, according to Margaret Chemenigiela, Kenya’s permanent secretary at the Ministry of Trade & Industry.
In many cases, Africa’s new factories have been built by companies or investors with extensive textile investments in the Far East that are limited in how much they can ship to the U.S. market by quotas. Those companies have opened African operations to take advantage of the third-country fabric provision and sell more of the textiles they produce in Asia to the U.S.
The concern among many observers, both Africans and Americans, is what will happen to those investments in 2005. Once quota limits are removed, there will be no reason to ship Asian fabrics to African garment factories, then to the U.S.
The relatively high mobility of apparel factories — the sewing and cutting machines can be packed up and shipped to another country with relative ease — has some African officials worried about a flow of manufacturing jobs out of the region following the Dec. 31, 2004 end of quotas.
Alec Erwin, minister of trade and economy for South Africa, said that makes it more urgent that the region develop textile manufacturing and a sustainable industry.
“We as Africans must understand that. Our priority is to move our economy toward capacity and invest,” he said. “If we do not do that well, what will happen is that footloose investment that was here because of AGOA will go to the next place.”
Textile mills are generally regarded as much harder to move quickly, in part because of the amount of infrastructure needed to sustain one, and also due to the large size of the equipment.
One of the main topics of discussion among the African government officials attending the forum was the need for direct foreign investment. But Erwin and others noted that Africans should also invest more of their own money into the continent’s industry.
“It’s important for African business people to start to invest,” said Erwin, partly because they would be less inclined to pull factories out in 2005.
Justin Chenyata, chief executive officer of Loita Capital, a South African investment firm, noted that there is significant investment within Africa already. The capitalization of the Johannesburg stock exchange, he said, is around $650 billion.
One of the problems, he said, is that many Africans tend to invest their money abroad, particularly in the U.S. — that’s essentially the opposite direction of investment flow many African officials are seeking.
“The most challenging perspective is trying to focus people away from Treasury bills,” he said.
Lesotho’s Malie added that his country is also trying to encourage its business people to diversify their investments beyond the service sector and into industry.
Rep. Bill Thomas (R., Calif.), the chairman of the House Ways and Means Committee, said the purpose of AGOA was to develop a sustainable industry. “We didn’t want to see people use it to exploit the African labor base,” he said.
Still, it would be unfair to describe all the Asian investment in Africa as exploitative. For one thing, foreign investors typically bring much needed experience in running an apparel factory and training workers.
“It’s not a bad thing because they understand the world market,” said Mike Destombes, managing director of the textile mill Traclo International (Pty) Ltd., of South Africa. “They have a lot of knowledge and they bring value.”
Luigi Malvestio is a director of Lesotho Fancy Garments Group, a maker of knitted garments owned by investors from Hong Kong, Taiwan and China that employs about 2,400 Africans and about 100 expatriate Asian managers.
Malvestio said the foreign capital allows training and expansion — the company is in the midst of beefing up its fabric capacity with the goal of being vertical by 2004.
Still, he said, “I want to reduce the number of expats and increase locals” on staff. For one thing, he noted, foreign workers — common in Mauritius, but less so on the continent —?can be more expensive than locals, since the employers typically have to provide food and housing, in addition to wages.
Also, he added: “One of our concerns it to create jobs in this area, not more in China.”
Some Asian-owned factories are managed by people who regard themselves as in for the long haul. Hong Kong-based Esquel Enterprises Ltd. operates two factories in Mauritius: Textile Industries Ltd. and Leisure Garments Ltd. Cheung Long, director of strategic planning for Esquel, which has total sales of about $500 million and plants in 10 countries, including China, said his company has made the strategic decision to keep its production base broad.
Echoing a common view among sourcing managers, he said that 2005 “is still an uncertainty,” adding “it may be that it’s going to be quota free for China, but we’re presuming there is going to be quota on China.”
His company has been investing to upgrade the technology and efficiency of its Mauritius plants to keep up with the island’s rising costs. About 30 years ago, Mauritius began to shift its economic emphasis from sugar farming to textiles and clothing. Today, the island is developing into more of a tourist center and employment is high — so much so that about one-third of Esquel’s 6,450 workers on Mauritius come from China.
“The fact that we have to import workers says a lot about the changes in Mauritius’ economy,” said Alan Cheng, general manager of Leisure Garments.
The strong industrial bases in Mauritius and South Africa, combined with the developing pool of garment workers in the LDCs, leave many observers to think the best course for Africa will be for the more-developed nations to transition into textile manufacturing and allow their poorer neighbors to focus on garments.
That’s a strategy that makes sense to Jayem Cuttaree, Mauritius’ minister of trade and industry, who said: “When you look at textiles exports from Africa, you have to look at the region and not the country. One of the objectives of AGOA is regional cooperation…in some parts of Africa, we have been importing fabrics, cutting them here, sewing them and exporting them to the U.S. We think that the value-add on these products, as far as the region is concerned, is not good enough.
“We have to add more value to the products we export. This is why in Mauritius, for example, we are establishing a strategy to move very strongly into spinning mills because we believe there is so much cotton on the continent, good-quality cotton, which is being exported at very low prices. We believe, for the textile and apparel industry in Africa to be competitive, we have to work in partnership on a regional basis.”
Still, many industry executives said while the possibility of the third-country fabric provisions being extended remains, there’s little reason to invest in new textile capacity.
“Some people expect the mills to jump up in anticipation [of growing demand], but it doesn’t happen that way in business,” said Augustyn Meintes, financial director of Cape Town-based South Africa Fine Worsteds. “I’m sure as demand continues expanding, there will be more mills. But there are some that see the [possibility of extending the third-country fabric allowances to] LDCs as a threat and we are waiting to see what happens. That needs to be settled.”