Title – Egypt-Textile

Global Supply Chain in Apparel – 1

Lead firms final retailers – having marketing & distribution channelselling in developed economiesEngage suppliers generally on contract basis

Suppliers located in low-cost developing economiessupply components, intermediate goods, and even final goods to the lead firm

Lead firms work closely with supplierstraining, technology, even FDIto improve supplier’s capabilityTo meet stringent demand of consumers in developed countries

Role of the Supplier may be limited to a basic one, or more advanced

Global Supply Chain in Apparel – 2

Basic role in global supply chainOnly labour-intensive jobs (e.g., stitching)Using imported materialsOften in export zones with tax exemptions/ duty drawbackNo spill-over to the local economy

local firms improve labor skills and learn about price and quality and delivery standards in international marketsNo other capacity building (knowledge/technology, management practices, brand-building, etc.)

Next stage is of OEM (Original Equipment Manufacturer)Supplier is now a full sub-contractorSources inputs & supplies finished products based on design & specification provided by lead firmLead firm sells the products under its own brand name

Global Supply Chain in Apparel – 3

Higher value addition & retentionSome managerial capabilities develop/More inputs sourced locally

Next stage is: Original Brand Manufacturing (OBM)But very few companies reach that stage

Note: Success at one stage does not necessarily imply that suppliers have acquired the knowledge and skill to move to the next stagePast experience of East Asian countries (supplying since 1960s) indicate that moving to OBM is extremely difficult

Textiles & Apparel Industry in Egypt – 1

Textile & apparel manufacturing accounted for 30% of manufacturing employment (in 1998)8% of manufacturing output (value-added) (2002)Textiles (8%) and clothing (11%) accounted for majority of national exports (in 2003)Annual growth rate in exports during 1999 and 2003

Clothing: 5%Textiles: 8%

Much slower growth than in exports of chemicals & basic manufactures

Consists of 40 public sector and 3500 private companiesEmploying less than 10 to over 10,000 workers

Textiles & Apparel Industry in Egypt – 2

Public sector dominates early stages of production, but not in the higher stages

Share of public sector in Egypt:Spinning: 90%Weaving: 60%Apparel: 30%

Public sector is saddled with aging equipments – most of them older than 15 yearsPublic sector in apparel – with higher competition from private sector – has less older machineryEven though Egypt has high quality cotton, cannot manufacture high quality textiles

Egypt and Its Competitors in Global Supply Chain – 1

Egypt has some strength in textile & apparel (high quality cotton, good domestic demand, large manufacturing capability)But how do Egyptian companies compare with their global competitors

From the point of view of a lead firm in EU or USACompetition from: China, Mexico, Bangladesh, Jordan, Mauritius, Morocco, TunisiaChina & Mexico together account for 55% of global exports of textiles & apparelThe sector accounts for 80% of total exports of BangladeshJordan, Mauritius, Morocco and Tunisia are regional competitorsJordan signed FTA with USA in 2000, and Morocco in 2004Jordan achieved huge growth in apparel export to USA after FTA

Egypt and Its Competitors in Global Supply Chain – 2

Tunisia’s export of apparel & textiles is 4 times that of Egypt, with population that is 15% of Egypt’sMorocco exports apparel that is 4 times that of Egypt, but has workforce that is only half of that in EgyptMauritius is the largest exporter of apparel & textiles from AGOA countriesThe African Growth and Opportunity Act (AGOA) was created in 2000 and extended in 2004, Gives trade preferences to countries in sub-Saharan Africa that meet the US government’s political and economic guidelines.Among others, allows export of textiles and apparel to the US on

a duty-free basis if the products are cut and assembled from fabrics or yarns from the United States, or duty free but subject to quotas if they are from fabrics and yarns from AGOA beneficiary nations.

Egypt and Its Competitors in Global Supply Chain – 3

High tariff protection in Egypt (earlier import ban –lifted in 1998/2002 – tariff of 54% on textiles, $300/item in apparels)

Domestic sales more profitableMaking domestic producer unwilling to increase efficiency

Only 8.6% of Egyptian companies (textile & apparel) export more than 25% of their productionIt is only the larger firms that engage in exportsTwo major ways to improve international competitiveness of Egypt are

Attract FDI in the sectorStimulate local entrepreneurs

For both of these, three aspects are important from the point of view of an investor interested in sourcing from Egypt

Egypt and Its Competitors in Global Supply Chain – 4

Ease in setting up a new business, Factors affecting investor’s ability to operate efficiently, and The ability to actually get product out of the country.

Ease of Setting Up New BusinessSince 1997, Egypt allowed 100% foreign ownership with full repatriation of profitBut highest no. of procedures (13), and second largest delays (43 days) in clearing these (Max. Mexico – 58 days – but transport cost advantage to Mexico)High cost of setting up business deters foreign & local entrepreneursHigh initial capital requirement deters local entrepreneursTunisia & Morocco are much better in the above issues

Egypt and Its Competitors in Global Supply Chain – 5

Ability of entrepreneurs to access capital via loans or private and public equity

Egypt is at mid-wayTunisia & Mauritius better than EgyptBut not China

Ability to enforce commercial contractsPoor in Egypt – highest number of procedures (55) and second highest delay (410 days), only Mexico above it (421 days) Cost of enforcement is high in Egypt – all regional competitors have lower cost

Exit time & CostsEgypt has highest delays (4.2 years) & costs (18% of estate value - only Tunisia & Jordan are better at 8%), lowest recovery rate (18.4% of original investment)

Egypt and Its Competitors in Global Supply Chain – 6

Ability to Operate EfficientlyCompanies running assembly operations must have local content of 45% or more in order to enjoy lower customs tariffs

Knock of much of the attractiveness as a sourcing destination There are seven export zones – companies exporting more than 80% of their output from these zones enjoy benefits

No customs duty, no sales tax & tax on intermediate inputs, free use of foreign currency70 apparel & 23 textile companies in these zones account for half the apparel exports and one-fourth textile exports of Egypt

Wage costs are favourable in Egypt (5% of US costs), lower only in China (coastal-5%, mainland-3%) and Bangladesh (2%)

Egypt and Its Competitors in Global Supply Chain – 7

High corruption in EgyptRanked 77th in list of 183 countriesTie with Morocco, all others are better, except Bangladesh (145th)Regional competitors are far better

Ability to Export from EgyptTrucking charges are very high – twice as in US

Leading to longer trucks & overloadingCausing high capital & maintenance costs, causing the charges to be higherAlso damages roads, further increasing truck maintenance costsA vicious cycle

Egypt and Its Competitors in Global Supply Chain – 8

Highly congested roads, increasing the turn-around time from production point to portPort facilities are congested, and inefficient, causing high turn-around time in ports as wellAir cargo has not developed as an independent business – appendage to passenger trafficCargo gets least priority – perishable food gets higher priority than apparelsDue to trade deficit of Egypt, containers come in full, but leave empty

But poor logisitcs information system and coordination means many containers leave empty, while goods remain stranded in Egyptian ports

Egypt and Its Competitors in Global Supply Chain – 9

Ocean freight cost-wise, Egypt is not far back from its competitorsBut above inefficiencies more than make up for thatCustoms clearance take more time in Egypt (5.5 days) compared with its competitorsEgypt’s overall infrastructure is better than Morocco onlyPublic sector monopoly in air cargo handling jacks up costs enormously

Egypt: Competing with Others in Global Supply Chain – 1

Taiwan, Hong Kong, South Korea has successfully developed by participating in Global Supply Chain (GSC)Many countries have started to copy such an export-led growth strategyMost advanced stage in this direction is China

Not just in apparel & textile, but in others as wellMain issue: How to compete with China and othersChina has two advantages:

Low labour cost & low raw material costsFDI from the OEM from neighbouring countries

With phase-out of quota, China has been most successfulExport growth of 290% since 2002 in 29 garment categoriesExports of all other countries fell by 14%

Egypt: Competing with Others in Global Supply Chain – 2

China’s share in US market increased from 31% to 59%During 1995-2002, China’s share in quota-free markets increased

From 54% to 70% in AustraliaFrom 59% to 76% in JapanFrom 29% to 56% in South Africa

While the first two destinations are geographically close to China, third is notImplies that China’s strength extends well beyond geographical advantagesEgypt has certain geo-political advantages

size and proximity to Europe

Egypt: Competing with Others in Global Supply Chain – 3

its role and potential as a regional power, both in relation to the Israeli–Middle East issue and the broader efforts for the West to build ties to the Middle East. Both the US and the EU have self-interested reasons to foster Egypt’s economic development,

including their desire to strengthen their allies in the Muslim world, as well as to improve economic conditions to help ensure political stability and, particularly in the case of Europe, to preempt migration.

Factors other than labour costs may be important in apparels & textiles

Egypt: Competing with Others in Global Supply Chain – 4

Egypt’s proximity to Europe Lower transportation costsShorter lead time associated with ever-changing fashion in EU

China will remain important for items for which longer lead times does not make much difference Egypt can catch on the others – fashion & sports apparel, exotic textiles & apparels leveraging on African colours Cost disadvantage can to some extent be neutralized by investing in cutting edge information technology and manufacturing techniques

Lessons from Egypt – 1

Late starter advantage – new machineriesCompetition, especially from private sector, improves technology (new machines), and enhances international competitiveness

Greater thrust on private sector developmentWherever economic logic dictates small size of firm, let it be so, butRegulation and Policy should not actively promote small firms

High tariff protection causes domestic industry to be inefficientBut tariff reduction should be gradual, and domestic competition must be generated before tariff cutTune up domestic laws & regulations

Make them simpleInvest in courts & judiciary – and reform the laws if needed

Lessons from Egypt – 2

Remove public sector monopoly in infrastructureFull privatization, or PPP

Invest money in infrastructure (road, ports, airports, electricity, railways, etc.)

If govt. fund is deficient, invite private money –domestic or foreign – try PPP or full privatizationLevy user charges to recover costs – subsidy only limits the ability of govt. to increase infrastructureRemember, private money cannot substitute govt. moneyThey are complementaryGovt. investment in infrastructure brings in more private money – former improves profitability of latter

Lessons from Egypt – 3

Recognize that it is virtually impossible to beat China in labour costs

So also India, which this case study does not considerFocus on other factorsSelect categories where labour cost is less importantFoster investment in IT and in most high-tech machineriesReform the banking system and capital marketsMeanwhile allow companies to raise capital from abroadAs Jordan example shows, try to sign FTAs with EU & USA for selected items (where labour cost is not a major advantage)Exploit AGOA more effectively

AGOA & Rwanda – 1

Tanzania qualified for AGOA in 2002After that, the country tried to promote textile and apparel sectorBut with not much success

Could not outbid China & India, and other African suppliers from Morocco, Tunisia, Jordan & Egypt

Rwanda achieved considerable success by its own standardWeaving has become third biggest exported product after tea and coffeeIn spite of the poor infrastructure and internal problems

AGOA & Rwanda – 2

Lessons from Rwandan experience (Daily News, May 19, 2006)African countries face similar constraints

Quality, low quantity (size), lack of innovation, poor packaging, poor product literature

Address the problem of quantityFocus on just one itemDon’t try to export many itemsCapacity to handle is limited

Change designs every now and then – to meet changing demand of customer in EU

AGOA & Rwanda – 3

Make all-out effort to improve quality on continuous basis

If you focus on one item, you are in a better position to improve and maintain qualityImproving packaging is just a matter of investmentIf you have many different items to export, you need many different packaging equipmentsIf required, import packaging material from developed countryDevelop product literature in a manner that is understood and acceptable to European customers

If required, ask your EU partner to send a packaged item from another company/ supplier to learn how product literature is developed

African Emergence – 1

Non-China sourcing destinations coming up – in a small wayNot to put all eggs in China basket

Tension has risen between China and EU-US on rising exports of Chinese apparels & textilesBoth EU & US have put some restrictions on Chinese apparels and textiles till 2008Political tensions have caused certain manufacturer to cap the degree of sourcing from China (e.g., at 30%)Children’s Place specialize in children apparelAfrica has poor infrastructure, butHas “terrific fabrics and colours”Improving production of apparels

African Emergence – 2

Other negative points for African countries areRigid labour lawsExchange rate instabilityHigh rate of crimeHigh wages for white collar workers (managers, professionals, skilled workers)

because they are in short supply

Children’s Place is sourcing from Africa (SA)To exploit the opportunities thrown open by AGOATo achieve geographical, political and financial diversification

African Emergence – 3

Biggest obstacle is logisticsFar from dominant material sources of AsiaFar from US destination portsLocal transportation infrastructures are generally poorer than Asian economies, though vary from country to country

Other issues – local customs laws, labour laws, local financial institutionsBut duty-free entry into US market by virtue of AGOA outweighs the additional transport costs and lead time, and difficulties of doing business

Readings

Egypt after the Multi-Fiber Arrangement: Global Apparel and Textile Supply Chains as a Route for Industrial Upgrading – Don Magder – pp 1 – 20.The African Emergence – Lara L. Sowinski