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East Africa can become the world抯 new apparel sourcing centerFriday, October 16, 2015 > 10:46:27
East Africa – more specifically Kenya and Ethiopia – can become an important center for apparel sourcing. Based on a study among buyers and manufacturers, McKinsey’s Retail Practice finds that these countries have great potential to become the world’s manufacturing center for t-shirts, trousers and other basic textile products. But this scenario can only become reality if buyers, governments and manufacturers work together to improve business conditions in the region.
East Africa’s garment industry is attracting worldwide attention. Together, Ethiopia, Kenya, Tanzania, and Uganda recorded $337 million in apparel exports in 2013. McKinsey’s researchers point out that H&M, Primark and Tesco already sourced their garments in Kenya and Ethiopia two years ago. The region’s export opportunities have improved further by the renewal of the African Growth and Opportunity Act (AGOA), which gives certain countries in sub-Saharan Africa duty-free access to the US market.
African nations in the picture
McKinsey asked 40 of the world’s Chief Purchasing Officers – their total buying volume in apparel: €70 billion – their opinion about the future of the worldwide garment sourcing business. Bill Russo, director in McKinsey’s Nairobi office, one of the experts that worked on the report, points out: “For the first time in our survey, African nations appear on the list of countries expected to play more important roles in apparel manufacturing. Ethiopia, notably, is seventh on the list.”
Eye on Kenya and Ethiopia
The world’s largest purchasers are eyeing Kenya and Ethiopia for several reasons. Ethiopia’s wages for garment workers are among the lowest globally, at below $60 per month, and work-permit costs for foreign workers are less than one-tenth those in neighbouring Kenya. Additionally, Ethiopia has low electricity prices. The country has a strong supply of hydroelectric power, and while the power grid is not the most reliable, the Ethiopian government is building a separate grid for new industrial zones currently under development. Ethiopia also has the right climate for cotton, but the combination of low land-utilization rates, planning errors, low crop yields, and quality problems means Ethiopia has had to import cotton.
Foreign direct investments
What are the pros for Kenya? The capacity of Kenya’s garment factories has grown in recent years, thanks to foreign direct investments from Asia and the Middle East, as well as support from the Export Processing Zones developed by the Kenyan government. Factories have grown larger and more efficient; they now have around 1,500 employees on average compared with around 560 in the year 2000. However, as a result of the lack of a local upstream industry, manufacturers must import fabrics, which means considerably longer lead times. Kenya also has comparatively high labour and energy costs.
Club Africa asked Mr. Russo what he considers to be the biggest obstacles in the development of the East African garment industry. “Efficiency levels and speed are currently the biggest barriers. However, these are not related only to the core garment-making processes, within which current efficiency levels negatively impact price. But rather, they concern all levels of the value chain, infrastructure development, efficiency of business development, and customs procedures as well as joint local and foreign investment in sustainable capacity and capability development. Also, efficiency of governments, regional cooperation, and stability of the political situation all play into it on a broader level.”
Regional value chains
The researchers have created, tested and refined three scenarios for the future. The third and most optimistic is the one in which major apparel companies from around the world begin to open sourcing offices in East Africa. Russo believes that in this scenario, vertically integrated, indigenous players could only start a role if the countries cooperate to build regional value chains. “The East African countries have different sourcing profiles and offer different advantages to international buyers. Regional cooperation based upon the various strengths will benefit all of the countries involved. For example, while the garment-making sectors of Kenya and Ethiopia are more advanced, Tanzania is currently producing more cotton at higher yield levels.”
Who should take the lead in this process and what would be the first necessary steps?
Russo: “A solid strategic plan including investments by the respective governments will be key in order to provide a productive framework for garment makers, buyers, and investors to be able to develop the industry.” According to Russo, governments might consider investing in infrastructure, support local entrepreneurs, diversify free-trade agreements, and build market-oriented educational institutions.”
What can local businesses do to speed up development?
Russo: “Much of the recent investment in the industry has been driven by foreign investors. To enable achieving sustainable growth of the sector and to help ensure knowledge transfer, local entrepreneurship will play an important role. In a first step, this could mean that companies start producing for the local market in order to build up their capabilities so they can compete on a more global level.”