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SASTAC Material Issues Report_26November2014

The Material Issues Facing the South African Textile and Apparel Industry

Executive Summary

South Africa faces a complex array of issues that are of major significance to how

businesses operate and people live. Companies as well as their investors need to be

cognisant of the risks associated with these issues and take proactive steps to mitigate

negative impacts and adapt their operations to those changes that are inevitable. This

applies to all players within the textile and apparel value chain. Identification of those issues

that are most material to the industry was thus crucial in terms of the broader objective to re-

establish the local industry to be competitive and sustainable.

The material issues facing the textile and apparel industry were identified through desktop

research and interviews with players across all sectors of the value chain. These interviews

provided important insights into the companies’ operations and existing sustainability-related

initiatives. Issues were also identified through enquiring about the greatest challenges for

the respective company, their sector and the overall industry. It also allowed for issues that

emerged through desktop research to be verified for applicability at a local level.

The industry raised numerous issues as material to their company, sector and / or the

industry as a whole. These issues could be categorised into over-arching challenges – the

so-called “Big Five” Challenges. These are:

Economics – “Money, money, money”

People – “Shaky human capital”

Legislation and policing – “The Wild West”

Power, fraud and corruption – “Dodgy Ethics”

Environmental – “The Poor Cousin”

The areas of concern are in most cases complex and interconnected, with far-reaching

consequences and impacts. There are however demonstrations of best practice within the

industry from which others can learn.

Apart from the material issues identified, it became clear through the research that there is

currently no comprehensive industry strategy which all stakeholders buy into and drive. As a

result, attempts to turn the industry around have failed and it is unlikely that without such a

strategy, any further attempts will succeed.

It is essential the findings from this research inform the industry strategy so that it addresses

all five material issues areas. It should also be used to guide the Sustainability Standards

developed for the industry. Finally, it should be used to provide investors and other

interested stakeholders insights into the industry and inform their future engagements with

players in the industry.

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Research objectives and outcomes

The objective of this research was to identify the key material issues affecting the

sustainability of the textile and apparel value chain in South Africa and assess their likely

impacts on the long-term success of value chain players. In addition, examples of best

practices and industry-specific solutions implemented by key players in this sector were

identified.

This report is intended to serve as a valuable resource for industry players across the value

chain, investors and other stakeholders.

Approach

The Material Issues facing the industry were identified using a two-pronged approach.

Desktop research included an analysis of local and international textile and apparel market

trends and a review of relevant government and industry initiatives. This research identified

a broad range of sustainability issues facing the South African textile and apparel industry.

In addition to this, comprehensive interviews with companies across the value chain were

conducted to collect primary data. Interviews focused on unpacking challenges and

opportunities at company, sector and entire industry level, exploring existing sustainability-

related initiatives within the companies to identify best practices and key lessons and

determining which aspects of the industry interviewees felt need to be changed. The

interviews also enabled the research team to verify and expand on the issues that emerged

through desktop research.

The report is structured according to the “Big Five Challenges” identified through the

research, with each section covering:

The South African context

Details around each material issue

The outcome of each material issue

The changes that are needed

The overall consequence of the “Big Challenge”

The report concludes with a summary of key insights. An appendix of case studies of

organisations and initiatives that have successfully addressed the “Big Challenges” is

included

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The “Big Five” Challenges

1. Economics – “Money, Money, Money”

The South African context:

South Africa is ranked as an upper middle income country and is looking to continue its

transformation into an upper income country. Obstacles to achieving this include a

commodity-based export profile, limited competitiveness, challenging exchange rates

and sluggish growth within sectors of the domestic industry. Coupled with this is the

significant competitive pressure from Indian and Chinese imports into the domestic

market.

Sustained economic growth will only be possible if the country’s unemployment crisis is

addressed. Labour market inflexibility and legislative complexity are key constraints to

growth and job creation. Significant energy cost increases place further strain on industrial

sector growth.

South Africa is the only country that mandates all listed companies to prepare forward-

looking integrated reports and is one of only two countries to formally encourage

institutional investors to integrate sustainability issues into their investment decisions.

Despite this, the main focus of the business and investor community remains on short-term

profits.

The retailers’ drive for profits at all costs

There was consensus among the industry players consulted that it is highly unlikely that

South African retailers would consistently utilise local production capacity to the extent that

would enable the revival of the industry. This stems from the perceived lack of support and

sustained commitment shown to local suppliers in the past. The industry feels that retailers

are solely profit driven and drive down prices in order to increase their margins. Three key

issues were identified as stumbling blocks to the effective partnerships between the supply

and demand sides of the value chain. These are discussed below.

Ownership structures – The misalignment between retailers and the enterprises making up

their supply chains is influenced by contrasting ownership structures. The suppliers are

typically owner-managed or family-run operations, while the majority of South African retail

companies are publicly-owned and therefore required to answer to shareholders and

investors. While this is, in itself, not an issue, the prevailing attitude among shareholders

and the investor community appears to be the pursuit of short term returns, rather than long-

term sustainable growth. This pressure trickles down through the retail structures and

manifests itself in the way employee performance is measured (i.e. key performance

indicators). The undue emphasis placed on price and profit means that sustainable

principles and practices tend to be neglected. There are however, some exceptions within

the investment community, such as the PIC, Element Investment Managers and Arisaig

Partners.

What is needed? A shift in mindset of and engagement approach by the investment

community with regard to the retail sector, with the focus shifting to long-term,

sustainable growth and increased understanding of supply chains.

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Detachment from supply chains – The textile and apparel industry value chain is currently

buyer-driven, which is ironic considering that retailers do not consider themselves part of the

industry. As a consequence the balance of power is skewed towards retailers, who are able

to exert significant control despite being largely disengaged from their suppliers. The

retailers are often oblivious to the far-reaching impacts their behaviour has throughout the

entire supply chain. The shift by retailers to quick response models that imply a significant

increase in near-sourcing will require retailers to build partnerships with local suppliers and

to gain a much deeper understanding of their impact on the full supply chain of retail. This

process is likely to be challenging given the current lack of trust by local suppliers of retail

and the prevailing ‘victim’ mindset of the industry.

What is needed? Retailers should aim to rebuild the trust of the industry and look to form

long-term partnerships with suppliers.

The profile of retail buyers – The age, lack of experience and maturity level of the retail

buyers was consistently raised as an issue. Many buyers are perceived to lack critical

knowledge relating to fabrication types and qualities, the complex processes involved in

garment manufacturing and the impact of changed or cancelled orders on suppliers. Buyers’

key performance indicators (KPIs) typically drive a focus on sourcing products at the lowest

possible price.

On the flip side, it was noted that local manufacturers tend not to be proactive in their

engagements with retailers. This seems to be driven by two key issues. Firstly, it appears

as if they are too afraid to raise concerns and challenges with retailers, for fear of having

existing orders cancelled. Secondly, they are often lack the capability to immediately

provide retailers with alternatives to proposed order changes that can meet the retailers’

needs while not having an impact on price or delivery times. This stems from a lack of

understanding of their own costings, detachment from their own supply chain partners and a

lack of internal capability to quickly conceptualise alternatives.

What is needed? Retail buyers need to have a deep understanding of the full supply

chain. Local suppliers need to become more proactive and grow their capability in

providing alternatives to retail.

Impacts of current challenges: The focus on low prices, a lack of commitment to the local

market and the subsequent lack of supply chain understanding by retail buyers makes it

challenging for suppliers and retailers to form long-term, strategic partnerships.

Local manufacturers are struggling to stay afloat

Operating on the supply side of the textile and apparel industry in South Africa has become

increasingly challenging. There are three major contributors to the decreased ability to

remain competitive, namely insufficient scale, increased operating costs and inconsistency in

payment terms across the value chain.

Insufficient local support / demand - During the apartheid era, the imposition of

economic sanctions on South Africa meant that the local industry was largely

protected through not having to operate in a globally competitive environment. This

extreme protection enabled the industry to be profitable during these times. This

situation changed dramatically when South Africa began trading on the open market.

Local manufacturers were no longer protected and were not able to compete with

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the low prices and extensive product range offered by international competitors. This

situation motivated local retailers to source and increase the proportion of their stock

from international producers. The reduction in volume and frequency of orders to local

manufacturers resulted in decreased efficiencies, further reducing their competitiveness

and discouraging further investment in the sector.

It should be noted however that other factors apart from economies of scale reduce South

Africa’s competiveness. Two such factors are the limited availability of accessories and

intermediate products, as well as significant levels of both direct and indirect subsidisation

in competitor countries.

What is needed? Increased production scale to improve efficiencies and drive

investment in technology, capability development and innovation.

Increasing operating costs – Both fixed and variable overheads are becoming more of an

issue for firms operating in South Africa. Almost all value chain players consulted identified

the high cost of electricity (and to a lesser extent water) as one of their biggest concerns.

The cost of electricity has increased dramatically over the past few years. The spinning and

textile manufacturing sectors, in particular, have been hard hit due to the energy intensive

nature of their operations.

In addition to utility costs, the increase in municipal rates was another concern noted by

industry players across the value chain. The impact of the Carbon Tax (implementation

delayed to 2016) and the implications of the Waste Amendment Act of 2014 for the industry

have not yet been quantified but are a concern for the industry.

Interestingly, while high shipping costs were raised as a concern for the industry, fuel and

transport costs were not. However, it became clear from the research that the decentralised

nature of the industry results in substantial logistical inefficiencies, which in turn add

additional cost.

Finally, the increasing cost of labour was raised as a concern. This was identified as one of

key reasons behind South Africa’s inability to compete with other, lower-wage-paying

nations. There is vigorous debate around the socio-economic impacts of following a low-

wage growth path, with SACTWU (South African Clothing and Textile Workers Union)

leading the fight against it. Many of those consulted found the biggest constraint to be the

fact that the current wage structure is inflexible, with limited scope for productivity-based

incentives. This is felt most acutely by those businesses operating in a low-margin

environment, supplying the value retail segment.

Labour rates are set by the two Bargaining Councils – the National Textile Bargaining

Council and the National Bargaining Council for the Clothing Manufacturing Industry (see

below for details on Bargaining Councils in South Africa). However it is possible that even in

the absence of bargaining council wage structures, South African labour costs may need to

be higher than many other competing nations due to the high cost of transport and food.

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Overview of South African Bargaining Councils

The Labour Relations Act (LRA) makes provision for the establishment of bargaining

councils for each of the major sectors in South Africa. The bargaining councils consist of

representatives from the major unions and employer groups within each of the sectors.

Their main purpose is to reach consensus on the employment terms and conditions for their

specific industries. The terms and conditions agreed by the councils are contained in a

collective or main agreement. Once a collective agreement has been finalised, it is gazetted

by the Minister of Labour. Its terms then extend to all of the workers and employers in the

sector, including those who are not members of the union/s or employer group/s represented

on the bargaining council.

What is needed? Ongoing cost reduction and business reengineering to ensure that

operating costs are minimised and efficiencies are optimised. Engagement with the

Bargaining Councils to explore mutually accpetable alternatives to the current wage

structures.

Payment terms across the value chain – There appears to be a mismatch of payment

terms across the value chain which places working capital pressure on certain sectors. The

prevailing silo mentality within the industry, from fibre producers through to retail, results in a

lack of transparency of payment terms and working capital constraints.

Traditional banking institutions seem reluctant to provide development finance to players in

the industry and as a result, companies seek alternatives, such as debt factoring, to help

relieve these pressures. These alternatives are often costly and therefore compound cost

management challenges. Furthermore, restricted working capital hampers investment and

growth.

Poor financial management and the failure to adopt world class manufacturing principles

further compound the issue.

What is needed? Creative solutions to address working capital constraints across the value

chain, including aligning payment terms and creating innovative, cost-effective financing

solutions.

Impacts of current challenges: Large numbers of industry players have been forced to

either down-size or close down operations due to financial pressures, resulting in over

100 000 jobs lost between 1996 and 2013. The pressures on remaining players

continue to mount.

The overall outcome: Money, Money, Money:

Industry players have become inwardly-focused and place attention on managing

short-term financial pressures. Partnerships, innovation and strategic thinking

are in short-supply and as a result, the industry’s competitiveness continues to

decline.

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2. People – “Shaky Human Capital”


South Africa is plagued by extreme poverty and inequality, indicated by one of the highest

(worst) GINI coefficients in the world (65). Some structural transformation has occurred as

witnessed by rapid urbanisation, the development of an industrial and service economy,

and declining birth and death rates. However, the current social context remains largely

reflective of the political reality during apartheid.

The apartheid era saw economic and trade sanctions imposed on South Africa, which

forced the nation to look internally for all its sourcing needs. Local industries were largely

protected through the elimination of external competition. This culture of complacency

persists amongst many industry leaders today, despite the operating landscape having

changed dramatically since the democratic transition and South Africa joining the open

market.

A cornerstone of apartheid was racial segregation. People of colour were disadvantaged

by legislation and policies, resulting in a large supply of cheap and deliberately unskilled

labour. There were also limited opportunities for children from disadvantaged groups to get

a quality education and become highly skilled, which prevented them from entering the job

market. Despite 20 years of democracy the quality of education available to the majority of

South Africans remains among the worst in the world. This has contributed to the 25%

unemployment rate and distorted skills base, representing an ongoing failure to transform

the economic landscape. Previously disadvantaged communities are today still associated

with high crime rates and poor health.

True leadership is hard to come by

Strong leadership skills are increasingly recognised as a crucial ingredient for successful

businesses. A lack of forward thinking leadership was highlighted as one of the material

issues facing the South African textile and apparel industry.

Absence of strategic thinking – Many stakeholders consulted during the research were

critical of leadership within the industry. Some examples of the way leaders were described

are presented below: “There is a lack of innovation and forward-thinking”, “Managers need

to wake up and stop being complacent”, “An ‘old mill mentality’ resides – where those in

management positions are living in the past – where not very much had to be done to make

large sums of money”, and “Our leaders are evolutionary, rather than revolutionary”.

Two other issues emerged during the engagement sessions with the companies and

industry associations. The first was the near absence of collaboration between leaders in

the industry. Challenges are perceived to be unique to individual companies and sharing

information or working collectively is considered to undermine individual competitive

advantage. This has resulted in a silo mentality within the industry, ineffectual impact and

increased costs from not sharing resources. Secondly, many leaders believe that they run a

‘world-class’ operation, although it is unclear whether they have benchmarked themselves

against firms in other manufacturing nations. This indicates a lack of critical reflection

among many industry leaders and stifles progress and improvement.

What is needed? Forward-thinking leaders with a passion to make a sustainable and

positive difference to the broader industry context.

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Limited demonstration of sound financial management – The lack of access to capital

and prospects for future growth were identified as challenges by many of those consulted.

This is evident from the large number of companies that have been forced to close or have

been ‘rescued’ by the IDC (Industrial Development Corporation).

The challenges in financial management relate primarily to areas such as financial planning,

activity-based costing, technology investment strategy development and people investment

strategies. The lack of financial skills and experience is particularly prevalent in smaller

CMT operations, where owners and managers often lack formal business training.

What is needed? Focus on developing the financial skills, both at an operational and

strategic level..

Insufficient efforts to create shared social value - Effective management and leadership,

within South Africa’s socio-political environment, requires consistent engagement with

multiple stakeholders, particularly supply chain partners and labour. There is often a direct

correlation between ineffectual management and labour-related problems. The

organisations where labour-related issues were not raised as a critical challenge all had

progressive leadership that were acutely aware of the social and economic reality of their

workforce.

Employees, particularly at the factory floor level, are a critical component of an efficient

operation. Labour issues often arise when managers ‘sweat their human assets’, rather than

engage with them as people.

Contracting of workers is common within the industry, particularly in the agricultural and

CMT sectors. These workers lack the security that is associated with permanent

employment, which can negatively affect performance and productivity. However, it was

noted that some workers were content with informal (cash-based) employment as this

enabled them to continue accessing social grants1.

Health and safety enforcement is another area that could be improved by most managers.

Common occupational health and safety issues include exposure to potentially harmful

chemicals, particularly in the dyeing and finishing space, inhalation of small particulates in

knitting, weaving and CMTs, and ambient temperature and pest control, particularly in the

CMT environment.

Skills development, by contrast, is one of the few areas that appears to have received

signficant attention from factory management. This has been driven by the shortage of skills

in the current workforce and the perception that interventions by government and related

organisations in the skills development arena have been inadequate. There are numerous

examples of highly effective in-house training schools, especially at a CMT level. However,

the focus of the skills development programmes has been on technical skills rather than soft

skills, such as communication and life orientation.

What is needed? Improved focus on proactive employee engagement within the factory

environment.

1 This practice was not observed in any of the factories visited during this research. However, it was noted by

some of those interviewed as an issue, particularly with non-Bargaining Council Compliant factories.

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Environmental management driven solely out of compliance and cost-saving – Very

few of the value chain players interviewed raised environmental management as an issue or

challenge currently facing the industry. More concerning was the fact that it was not

considered among the risks that the industry believe they will encounter in the medium term

(5 to 10 years). There seems to be a lack of awareness and understanding of environmental

sustainability among the decision-makers in the industry, which is concerning. If the

prevailing attitude persists, the industry is unlikely to benefit fully from potential efficiencies

related to inputs (e.g. doing more with less - electricity, fuel, water), selection of raw

materials with the smallest environmental impact (e.g. fibres, chemicals, dyes), the

installation of environmentally-friendly technology and infrastructure, the effective

management of waste (solid and effluent) and by-product opportunities (e.g. seed oil and

material off-cuts).

What is needed? Increased awareness of the medium- to long-term environmental risks

facing the sector, coupled with a more proactive approach to managing environmental

issues.

Impacts of current challenges: Lack of leadership, strategic thinking and business

management skills within the industry have contributed to the general low level of

competitiveness.

Labour force

Previously disadvantaged communities are affected in three main areas that impact the

industry, namely living conditions, health and skills levels. The communities in which the

majority of the labour force resides are ‘unsafe’ in terms of gangs and violence. There are

also high incidences of domestic violence, drug and substance-abuse within the

communities. While this may not always directly affect those employed by the industry,

concerns over the safety of children and family members does impact absenteeism and

productivity.

The high population density within low-income communities and informal settlements and

limited access to adequate health care mean that workers are more vulnerable to disease

and health issues. The prevalence of HIV/Aids and TB amongst staff and their families is

believed to be high and impacts business through time off work for clinic and hospital visits.

Overall, the lower ‘quality of life’ often translates into lower productivity in the work place.

There is a general perception of a low level of ambition amongst staff, based on an apparent

unwillingness to extend beyond the absolute minimum required by the job and the necessity

of a high level of supervision to maintain productivity. The situation is more complex and is

influenced by historical labour practices within the industry and a lack of progressive

leadership in some cases, making employment unattractive.

Thirdly, low levels of education, with many workers being functionally illiterate, is a major

challenge for the industry. Furthermore, the shortage of certain critical skills was raised by

almost all those interviewed. Critical skills gaps largely relate to management and

leadership-related issues as well as poor numeracy and literacy, while the industry’s scarce

technical skills were highlighted as pattern making, production operators (machinists) and

materials technologists.

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The merger of the technicons with universities, to create universities of technology and the

resulting shift from practical to more academic skills, along with the significant reduction in

formal apprenticeship programmes was cited as a reason for the shortage of practical skills.

The low number of young people entering the industry was identified as a serious challenge

for the industry. As a result, the shrinking skills pool is not being replenished. The industry

has suggested some reasons behind this phenomenon. Primarily, the textile and apparel

sector is seen as a ‘sunset industry’ with limited future prospects. The youth of today aspire

to more than what their parents had. They desire more glamorous, white-collar jobs, so

factory work is not seen as a legitimate career path. Coupled to this is a perceived sense of

entitlement and impatience amongst South African youth.

What is needed? Attempt to rectify previous disadvantages, understand the challenges

faced as well as encourage and attract the youth to the industry

Impacts of the current challenges: The socio-economic challenges facing the South

African textile and apparel sector’s labour force contribute significantly to high

absenteeism, poor productivity and a limited skills base.

The overall outcome: Shaky Human Capital:

Outdated management approaches, coupled with poor leadership and strategic

skills have hampered the industry’s ability to compete in a free trade environment.

Systemic social challenges place additional pressure on an already stressed

labour-intensive environment.

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3. Legislation and policing – “The Wild West”


The Constitution of the Republic of South Africa (Act 108 of 1996) is the supreme law

and makes provision for how the three branches of Government should operate. One

such branch is the Legislature Authority which includes Parliament, provincial

legislatures and municipal councils. Parliament has legislative authority (i.e. the

power to make laws) in the national sphere of government. The provincial legislatures

and municipal councils are able to introduce legislation at a provincial and local government

level, provided they are consistent with the provisions of the Constitution.

Although the principles behind much of South Africa’s legislation are good, the outcomes are

often misaligned with the objectives. Another deficiency is the lack of follow through in

implementation, as well as the insufficient policing.

Incoherent and misaligned policy frameworks and legislation

The two major issues emerged from the consultations with respect to the legislative

environment. Firstly, there appears to be a lack of coherence with regard to government

policy and legislation, which has undermined the industry’s ability to make strategic

decisions, particularly with respect to investment. While most of the principles upon which

individual policies and frameworks are based are sound, their impacts are often at odds with

one another. Secondly, there has been a lack of consideration of the often far-reaching

consequences, intended and unintended, of policy and changes in legislation. This restricts

effective decision making within the industry further.

The legislation that is especially pertinent to the industry is in the areas of trade, tax and

labour.

Trade – Since the transition to democracy, South Africa has adopted an open, non-

protectionist approach to trade policy, often at the expense of the local industry. This is most

obvious in the duties on imported goods. Due to this approach, there are now essential

materials that now cannot be produced locally. Import duties remain on some of these

materials, negatively impacting price competitiveness. There has not been a coherent lobby

by the industry to challenge the status quo, with the intent to enable an industry-wide

strategy. Where exemptions have been obtained, such as for wide-width fabrics, this has

been driven by select individuals within specific sectors.

The mechanism currently used to calculate the value of imported products, for the purpose

of determining duties, has been raised a concern by the local industry. Reference prices of

finished goods are currently based on the value of the raw materials used to produce the

product, rather than the total value-add. This results in often significant undervaluing of

imported goods, to the detriment of local producers.

Furthermore, certain large-scale textile producing nations (India and China) provide their

manufacturers with export incentives, effectively enabling them to sell their products to

foreign buyers at a significant discount without impacting on their profitability. It has been

noted that even accounting for shipping costs and import duties many of these products

remain cheaper than they can be produced locally.

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South Africa is party to the SADC free trade agreement, so finished items, manufactured in a

SADC country, may be imported into South Africa duty free. Individual SADC countries are

free to negotiate trade agreements with countries outside the SADC region and many of

these allow the import of fabric and raw materials with little or no duty. The net result is that

even with comparable production costs, the unit price of the finished product manufactured

in the SADC country is significantly lower than the local equivalent. As their products may

be imported duty free they represent more attractive options for South African buyers.

What is needed? Trade policy and trade agreements need to be reviewed and modified

to ensure that South African manufacturers are able to operate on a level playing field

with international players, particularly those in the SADC region.

Tax – The South African tax environment is stringently regulated and policed by the South

African Revenue Service (SARS), one of the most efficient arms of government. While the

corporate tax structure was not raised as a concern by those interviewed, many within the

industry suggested that revenue from customs and import duties could be ring-fenced and

used to fund initiatives that benefitted the industry, particularly in the area of skills

development.

In addition to existing taxes, two new taxes, the Carbon Tax and “Waste Tax” are in the

pipeline. While the magnitude of the impact of these taxes and the mechanisms of their

implementation are unclear, they will have a further negative impact on the competitiveness

of the local industry.

What is needed? A more consultative approach needs to be employed by government

when establishing new taxes. Industry players also need to be more proactive in

engaging with and lobbying government.

Labour – South African labour laws and regulations are ranked as the 7th most restrictive

out of 139 countries which has a direct impact on the country’s labour market

competitiveness. The World Economic Forum’s Labour Market Competitiveness ranking

placed South Africa at 133rd in the world in 2011. Firing practices, labour unrest and wage

inflexibility are highlighted as the three most critical challenges facing the country. The

power of the unions and central bargaining councils has a significant role to play in labour

unrest and wage inflexibility. These issues impact directly on the local industry and were

highlighted as one of the most fundamental challenges facing the industry.

Not only do the laws and regulations make it challenging to effectively operate a labour

intensive business in South Africa but they also hamper local suppliers’ competitiveness

relative to global producers. Traditional textile and apparel producing countries such as

China, India and Mauritius all score much higher in terms of labour market flexibility than

South Africa, particularly in the areas of co-operation in labour-employer relations, wage

flexibility, hiring and firing practices and pay and productivity. This has a direct impact on

their cost and efficiency of production and positions them well above South Africa in terms of

competitiveness.

What is needed? Strategic collaboration between the industry, the unions and

government to develop a labour framework for the industry that enables improved

competitiveness.

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Broad Based Black Economic Empowerment (B-BBEE) – While only one player

interviewed for this study noted B-BBEE as an issue for their business, the new B-BBEE

legislation, which comes into effect in early 2015, is likely to have an impact on the industry.

The emphasis of the new legislation will require more active focus on driving black

ownership, skills development and preferential procurement.

Under the new B-BBEE codes, the turnover threshold for exempt micro enterprises (EMEs)

has increased to R10 million from R5 million. Companies with a turnover below R10 million

will be exempt and will receive an automatic level 4 B-BBEE status. Companies with a

turnover of between R10 million and R50 million qualify as Qualifying Small Entities (QSEs).

However, QSEs will now be required to comply with all the elements of the B-BBEE

Scorecard. This will have a significant impact on QSEs, as they previously could choose

four of the seven elements with which to comply.

The new codes will likely result in a number of companies that previously achieved an

acceptable level of B-BBEE accreditation (Level 4 or 5) either falling to Level 8 contributors

or becoming non-compliant. This will have a signficant impact on all industry players as

customers in all sectors (retail, industrial/commercial and government) increase their

demands on suppliers to meet minimum B-BBEE requirements.

What is needed? Increased awareness and understanding of the implications of the new

legislation on the industry.

Impacts of the current challenges: The incoherence, inflexibility and complexity of

legislation and policies hampers the industry’s ability to operate and plan effectively.

Limited enforcement

Government Procurement - The Preferential Procurement Policy Framework Act (PPPFA)

was legislated in 2011 as a means of addressing the high level of unemployment in South

Africa by stimulating local manufacturing. The vast majority of industry players consulted

held the view that the Act is not properly understood by government procurement officers

and is not being effectively enforced. More importantly, industry representatives believed

that with effective implementation, preferential procurement would transform the local

industry, as it would provide the necessary scale and consistency to enable the rebuilding of

the industry.

What is needed? A working model for government procurement that would enable all

government departments to meet the PPPFA requirements needs to be developed.

Lack of policing – Several players indicated that limited resources are dedicated to policing

the implementation of legislation and regulation. One area of particular concern is the

limited policing at customs borders, where containers are meant to be checked on arrival.

Industry players quoted statistics (not confirmed) of approximately only one in ten containers

being checked. Ineffective policing is well-known throughout the industry and is thus

exploited by those illegally importing products into South Africa.

Imports are considered ‘illegal’ when profits are made as a result of under-invoicing. Agents

and importers under-invoice to avoid or minimise duties on finished products (22% on

fabrics, 30% on home textiles and 45% on clothing). South African customs is bound by

World Trade Organisation (WTO) rulings, which state that customs control officers are

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obliged to accept products at the invoice price unless they have sufficient evidence to

believe that is under-valued.

What is needed? Increased resources dedicated to effective enforcement of legislation

and regulation.

Impacts of current challenges: An environment that enables fraud and corruption.

The overall outcome: “The Wild West”

Incoherent legislation, coupled with ineffective policing provides a breeding

ground for fraudulent activity due to both complexity and the low risk attached to

getting caught. Industry players’ ability to plan and invest is undermined by

constant changes to legislation

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4. Power, fraud and corruption – “Dodgy Ethics”


Crime, corruption and fraud are significant challenges facing South Africa as a whole. The

country was ranked 69th out of 176 countries in Transparency International's Corruption

Perceptions Index 2012.

Unethical behaviour appears relatively prevalent within the local textiles and apparel

industry. The lack of ethics and integrity is not confined to one particular stakeholder group,

but is evident across multiple areas, including government procurement, retailers, off-shore

manufacturers and local supply chain players.

Government – Government procurement practices and the way tenders are issued and

managed were highlighted as a concern. There are a limited number of government

departments that procure centrally and where this is not the case, effective tracking of the

tenders is difficult. A consequence of decentralised procurement is the large number of

procurement officers employed by national, provincial and municipal government. Assigning

accountability and providing transparency is therefore extremely challenging. This is

exacerbated by issues such as the bribing of customs officers.

The roles of Treasury, the Department of Trade and Industry and the South African Bureau

of Standards (SABS) are unclear with regard to monitoring of delivery against tenders

awarded. As a result, there appears to be little, if any, policing of suppliers delivering within

the required specifications of awarded tenders. The practical outcomes of this lack of

policing are that sub-standard products are being delivered, portions of tenders are procured

locally with the balance being imported despite the full tender being awarded to local

suppliers and finished products are ‘disappearing’ once procured.

It should be noted that, while there are significant challenges within government and its

agencies that enable fraud, corruption can only take place when both parties to a transaction

are operating illegally. Stamping out corruption is therefore dependent on addressing illegal

activity both within government and within those companies that are awarded government

tenders.

What is needed? Increased co-ordination and accountability around government

procurement and severe consequences meted out for illegal behaviour.

Retailers – Several organisations on the supply-side of the value chain were concerned by

the business practices employed by many local retailers, which they felt were prejudicial and

at times unethical. They also noted that retailers are often oblivious to the consequences of

their actions. Examples cited included the retailers’ perceived contribution to illegal imports,

the cancellation of orders at the last minute without effective consultation with suppliers and

the termination of partnerships after extensive product development had been completed.

The suppliers expressed resentment at the way retail buyers aggressively squeeze the

supply chain on price, particularly given the substantial mark-ups (up to several 100%) the

retailers impose on their products.

What is needed? An increase in retailer transparency and accountability.

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Off-shore manufacturers – Local manufacturers indicated that they were not adequately

protected again unethical behaviour and business practices perceived to be common among

off-shore manufacturers. Issues raised included the under-valuing of products exported to

South Africa, export incentives, price manipulation (e.g. cotton stock), dumping of products

and the use of false marketing claims (e.g. treated cotton marketed as ‘flame-retardant’

fabric). In addition, the disparity between wages paid by local and off-shore manufacturers

was raised, with many off-shore producers paying below what is classified as a ‘living wage’.

What is needed? Less tolerance by retailers of unethical behaviour within non-South

African suppliers, coupled with increased loyalty to local manufacturers.

Local supply chain players – Examples of unethical behaviour on the part of local

suppliers emerged in three main areas, namely import practices, government tenders and

labour relations. Under-invoicing, the practice of declaring the value of imported goods at

significantly below their actual value to avoid high duties, emerged as the biggest issue with

respect to imports. Customs police are not in a position to dispute the value on the invoice,

so the practice is difficult to combat. The use of ‘B-BBEE fronting companies’, to circumvent

preferential procurement and the misuse of SABS certificates to win government tenders

was raised as a critical issue by several of the stakeholders interviewed. A number of

factories are not bargaining council compliant and concerns have been raised regarding the

treatment of workers in those operations. Non-compliance appears to be more prevalent

among foreign-owned businesses. Areas of concern centred on wages, working hours and

adherence to health and safety standards.

Business owners cited theft by employees as the unethical behaviour having the most

significant impact on their operations. This was particularly prevalent within the CMT sector.

What is needed? Industry players should realise the significance and damage caused by

unethical behaviour.

The overall outcome: Dodgy Ethics:

Unethical behaviour and an absence of integrity undermine the ability of the local

industry to compete freely and grow.

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5. The Environment – The “Poor Cousin”


Natural resources, such as water, coal, oil, land and air are used as raw material inputs

into many South African industries and are relied upon by all individuals for day to day

living. The necessity for sustainable management of natural resources and systems is

reflected in South Africa’s environmental legislative frameworks which are of an

international standard. However, accountability has not been embraced by most

stakeholder groups, with relatively few examples of environmental stewardship available.

In South Africa, the current level of consumption creates a significant amount of pollution

and is not sustainable, as the majority of energy (electricity and liquid fuel) is generated

from ‘fossil fuels’ in the form of coal and oil. The sustainable management of freshwater

resources is critical for economic development. South Africa is a naturally dry and water-

stressed country (98% of supply is utilised) with below-average annual rainfall

(< 464 mm). Based on current water usage, population growth, and climate change

predictions, a 1.7% water shortage is predicted by 2025 (Department of Water Affairs).

Pressure on these natural systems is increasing as a result of over-exploitation,

unsustainable practices, pollution and climate change.

The issues

Environmental issues did not feature among the primary concerns of those interviewed.

Only two of the industry players, across the value chain, identified current and future

environmental issues as a material issue facing the industry. Similarly, the opportunities

associated with integrating sustainability thinking into their strategies were not recognised.

When pressed to consider risks and opportunities associated with the environment,

compliance with legislated standards was raised as the greatest risk, specifically the

treatment of liquid effluent to meet municipal discharge specifications. There was limited

understanding or appreciation of the broader impacts of environmental neglect.

The most important current material issues to emerge from the desktop research and factory

visits related to energy, water, chemicals and waste (solid and effluent).

Energy - The textile and apparel industry is energy intensive across most of the value

chain. While most of those interviewed raised concerns related to the increasing cost of

electricity, the environmental impact of energy generation was not considered. The benefits

of greater energy efficiency were only considered from an economic perspective.

Many players noted that the Production Incentive was invaluable in providing the funds to

enable them to replace outdated manufacturing equipment with modern, energy-efficient

technologies. Some players indicated that they have installed solar panels at their facilities.

Companies are currently tackling energy efficiency and mix on an individual basis, with many

making use of the National Cleaner Production Centre’s energy offering. However, there is

an opportunity to upscale these efforts.

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What is needed? Sector-wide solutions to assist companies in both reducing their energy

consumption and incorporating renewable energy sources into their mix. Such solutions

will need to incorporate innovative funding mechanisms so as to make them

economically attractive to the industry

Water – The industry is a heavy user of water, particularly on irrigated commercial farms and

during dyeing and finishing. The laundering of products is also water-intensive. A number of

respondents cited increasing water costs as a concern but as with energy, the environmental

impacts of water use were not flagged as a concern.

Water needs to become a far greater concern for the industry going forward, particularly

given the fact that South Africa is water-scarce.

What is needed? Future industry development strategies will need to consider water

scarcity and water-related impacts of production, particularly in the agricultural and

dyeing and finishing parts of the value chain.

Chemicals – Chemicals are used extensively throughout the value chain, from fertiliser,

pesticides and herbicides at the farm-level to industrial chemicals at all stages of production.

Many of the chemicals, such as acids, alkalis and oxidising agents are very reactive, while

others, such as azo-dyes have limited biodegradability. The chemicals represent a

significant risk, both to human health and receiving ecosystems, but the potential impacts of

these risks were not recognised by any of those interviewed.

Globally, chemical use and management has been noted as one of the critical hotspots in

the textile and apparel industry. In 2011, a number of international apparel and footwear

brands established “ZDHC” and set a target of Zero Discharge of Hazardous Chemicals by

2020. They developed a joint roadmap that sets out specific commitments and timelines to

achieve the ZDHC target. A number of the signatories already have a presence in South

Africa, with others are planning their entrance to the market in the near future. The ZDHC

commitments will have a direct impact on local companies looking to supply these brands

going forward and may also have an indirect impact as those brands start to raise

awareness for the chemical issues amongst South African consumers.

What is needed? Increased focus on effective chemical management throughout the

value chain, including at retail level where supplier codes of conduct are developed and

managed.

Waste - The industry is synonymous with waste generation. Liquid effluent is the primary

concern through much of the value chain, from farming, through textiles manufacturing,

dyeing and finishing. At the CMT stage, the quantity of material offcuts going to landfill is

substantial. While opportunities to recover value from the waste do exist there is little

implementation at this stage. Recycling does not appear to be a common practice across

the industry, even for products such as cones which are simple to recycle. There appears to

be a complacency within the industry to deal with waste-related issues that do not have

either a direct cost or compliance implication.

What is needed? Increased awareness of the cost of waste, both in terms of input costs

and removal costs, coupled with increased focus on finding opportunities to recover

value from waste.

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Impacts of the current challenges: Increasing costs and risks as a result of not

effectively managing environmental issues.

What about climate change?

The issue of climate change was raised by only two individuals interviewed, with only one

citing the potential impact it may have on the industry. It was noted that the effects of

climate change are already being experienced in the retail space through product ranging by

season. The winter season is becoming shorter and traditional summer-only garments such

as shorts are becoming standard stock items throughout the year, while other items such as

heavy-weight jerseys are required for a much shorter period. Retailers and design centres

need to be aware of and plan effectively for such shifts, as they have a significant impact on

range and product design, stock turn and mark-downs.

Climate change is also going to affect agricultural patterns for natural products such as

cotton, flax and even wool and mohair. Extreme weather events such as droughts, floods

and frosts can have a catastrophic impact on crops. Furthermore, climate change is already

putting pressure on food security in South Africa, which will impact textile-related agriculture

as land use becomes more of an issue.

What is needed? Industry-wide and sector-specific strategies need to consider the

impacts of climate change and factor in how the industry will contribute to mitigating

climate change.

The question of responsibility

The wide-spread avoidance of taking responsibility when it comes to matters of the

environment begs the question – whose problem is it anyway? Although some examples

exist, not enough is currently in place to entice or incentivise environmentally-sound

principles and practices. This includes the switch to green technology and alternate energy,

the developing of green skills and efforts to improve efficiency. Punitive measures as a

consequence of neglect or harmful impact on the environment and the ecosystem services it

provides are also perceived to be largely non-existent.

What is needed? A more effective ‘carrot and /or stick’ situation to ensure all

stakeholders take an appropriate degree of responsibility for their behaviour.

The overall outcome: ‘The Poor Cousin”:

Environmental risks and challenges are starting to impact the industry although

many players are unaware of this. It is therefore likely that, unless the industry

seeks external guidance, such issues will not be considered in the development of

future strategies. As a result, the sustainability of such strategies may be

questionable.

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Key insights

Economic sustainability emerged one of the greatest challenges facing the local industry

and as such, is the focus of most industry players. A silo mentality has developed within the

industry, with each player focusing on protecting their own business and not collaborating on

addressing systemic issues that affect everyone. An “us and them” situation exists within

and between supply chain players and buyers (retail, industrial and government). As a result,

there is a general lack of innovation, collaboration and efficiency across the industry. The

re-establishment of long-term, strategic partnerships between buyers and suppliers will be

crucial to changing this paradigm. It will take time and commitment from both sides to do

this.

People issues heavily impact South Africa’s global competitiveness. An inflexible labour

market, a general lack of leadership within the industry, challenging socio-economic issues

and skills shortages all play a role in reducing the country’s ability to compete with off-shore

suppliers. Collaboration between industry, the unions and government will be crucial in

developing strategies to combat these challenges.

There is a dire need for the legislative and policy frameworks across government

departments to be aligned in such a way that they create an enabling environment for the

industry to prosper. The consequences, both intended and unintended, of proposed

legislation needs to be thoroughly understood prior to implementation. Furthermore, the

legislative and policy environment needs to remain stable for a reasonable period of time in

order to allow for companies to plan and invest. Once legislation is put in place, it needs to

be effectively policed. This requires that sufficient resources, with the appropriate mandate

and authority, be put in place in crucial areas.

Unethical behaviour is prevalent across all sectors of the industry, although the most

obvious areas relate to corruption within customs and the government tender process.

Resolving some of the key government tender fraud and illegal imports issues would likely

play a key role in enabling the revival of the local industry.

Environmental issues, while critical to the long-term sustainability of the industry, do not

appear to be of concern to industry players. This further highlights that the industry is in

“survival” mode, generally operating with short-term time horizons. Going forward, it will be

essential that industry players have a greater degree of awareness and understanding of the

key environmental challenges and impacts on their businesses and the broader industry.

The research has indicated that, while a number of material issues impact the local industry,

one of the greatest challenges facing the industry is the lack of a comprehensive and holistic

long-term strategy which all stakeholders buy into. A significant amount of work has been

done to date to try to turn the industry around. However, much of this work has been

focused on the supply-side of the industry, with little attention having been given to the

demand-side. It also appears that work has been conducted in silos, without broad

consultation of affected stakeholders. Recommendations arising from the various analyses

are often conflicting and little implementation of recommendations has taken place. As a

result, industry players are pulling in different directions rather than working towards a

common goal, following a common strategy.

The turnaround of the local industry will be dependent on the development of a robust

strategy, supported by all stakeholders, including government and the union. It is also

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crucial that such a strategy be developed in such a way that it addresses all the material

issues and considers all aspects of sustainability (economic, social and environment).

Strategic options need to be informed and assessed based on customer demand

requirements, industry capability levels and sustainability impacts.

Documents

The Material Issues Facing the South African Textile and ...mossgroup.co.za/wp-content/uploads/2014/09/Material-Issues-Report... · Desktop research included an analysis of local