Africa’s potential as fertile ground for apparel manufacturing is starting to take seed.

This story first appeared in the April 23, 2015 issue of WWD. Subscribe Today.

In a new McKinsey & Co. study, “Sourcing in a Volatile World — the East Africa opportunity,” set to be released today, 40 percent of U.S. and European chief purchasing officers indicated that sub-Saharan Africa will become more important to the apparel industry in the next five years, jumping from 24 percent when last surveyed in 2013.

Asked to rank the most important future sourcing destinations, respondents identified Bangladesh, Vietnam, Myanmar and Ethiopia, the first time an African country was mentioned in this context. On average, CPOs plan to increase their current level of sourcing from sub-Saharan Africa to 2.8 percent from 0.3 percent by 2020. The study surveyed leading international apparel CPOs who together are responsible for a sourcing volume of around $70 billion.

The positive outlook on sub-Saharan Africa is spurred by anticipated long-term growth in the region’s employable population that will reach levels similar to those of China by 2035, the study notes.

“There is extensive potential in sub-Saharan Africa and it remains untapped,” said Achim Berg, a principal in McKinsey’s Frankfurt office and leader of the Apparel, Fashion & Luxury Group. “Nevertheless, it is essential to analyze the countries in this region at a granular level. At the moment, sub-Saharan Africa has only a 0.56 percent share of the entire global volume of clothing exports. That equates to $2.6 billion. The region has good opportunities to develop positively, and establish fair social and environmental protection standards. In order for all parties to achieve sustainable economic success, companies must work extensively with both governments and suppliers on social and compliance issues.”

Within the sub-Saharan region, CPOs are mainly looking to East Africa, said the report, particularly Ethiopia and Kenya. Of those surveyed, 28 percent expect to start sourcing in Ethiopia by 2020, while 8 percent are planning to increase their sourcing share in Ethiopia. For Kenya, 13 percent plan to start sourcing in the next five years and 5 percent plan to increase what they already do. About 25 percent of the companies surveyed said they have sourced from sub-Saharan Africa in the past 12 months.

McKinsey estimates that with expected incremental growth, exports would reach $500 million over the next five years, which roughly equals the growth rate of the region in the past few years, at around 5 percent annually, and could grow to $700 million in the next 10 years. But under a scenario that sees East Africa becoming a more viable alternative for selected large players in the basics categories, the level of investment will rise at a faster pace that sees a doubling in the region’s exports to $1 billion a year over the next five years and to $1.7 billion per annum over the next decade. In this scenario, East Africa could move beyond cut, make and trim facilities and find itself on the path to verticalization.

Discussing Kenya and Ethiopia, Berg said, “These two countries now have opportunities to boost their share of the global sourcing market. While Ethiopia has benefits on the cost side, such as labor and energy costs, Kenya offers higher levels of productivity. But there are still some hurdles that both countries need to overcome. They must work to ensure social standards and legal security, as well as fight corruption.”

These countries also reveal weaknesses that are typical for emerging industries. The CPOs identified the shortage of qualified technicians in Kenya and Ethiopia as the most significant business-related challenge. They also criticized the lack of well-trained middle management and the upstream industry in Kenya. Regarding Ethiopia, respondents recognized issues of inefficient production and insufficient logistics infrastructure.

In 2008, the Kenyan government added the garment industry to its list of focus industries it expects will drive the country’s industrialization, as part of its “Kenya Vision 2030” program, and implemented several measures to support the industry’s development.

The growth of the Kenyan apparel industry was driven almost exclusively by the duty-free access it enjoys from the U.S. through the African Growth and Opportunity Act, with 92 percent of garment exports in 2013 delivered to the U.S. Kenya’s industry currently specializes in supplying high-volume, good-quality bulk basics. However, due to the lack of a local upstream industry, fabrics have to be imported and are mainly sourced from China. Trousers account for 58 percent of the apparel exported from Kenya to the U.S.

Over the last two years there has been a lot of buzz about Ethiopia, with leading European buyers starting to source from the country and large U.S. players exploring the opportunity. At the same time, several integrated players and CMT manufacturers from Turkey and Asia have committed to investing and starting businesses there. But Ethiopia’s industry remains nascent, accounting for 0.01 percent of global apparel exports. An analysis of Ethiopia’s exports to Europe’s 15 largest economies shows that 46 percent were comprised of T-shirts and 31 percent were trousers.

With the potential shown by East Africa, China isn’t going away. About 39 percent of global apparel exports, with a value of $177 billion, currently come from China.

“China continues to dominate the sourcing market,” Berg said. “Bangladesh, Vietnam and Myanmar combined generate less than one-third of China’s export value,” yet the trend of seeking out new sourcing destinations continues.

Some 75 percent of the CPOs surveyed expressed a desire to shift at least a portion of their production from China. CPOs in Europe assume that exchange rates and labor costs will have the greatest impact on sourcing costs, while U.S. buyers see raw material costs as the most important factor.