Transcript No Slide Title

NEDLAC clothing presentation – 29 July 2005
www.bmanalysts.com
A Strategic Assessment of the South
African Clothing Sector
Dr. Justin Barnes
Benchmarking & Manufacturing Analysts
NEDLAC clothing presentation – 29 July 2005
www.bmanalysts.com
Presentation outline
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Sector trends & structure
Domestic market/production trends
Competitiveness trends
Multilateral/national policy
Policy framework – Regional & BEE
Constraints & challenges
Required interventions as identified through
the dti’s Customised Sector Programme
NEDLAC clothing presentation – 29 July 2005
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Sector trends – TIPS data
• Sector has performed poorly - evident when comparing
indicator averages for periods 1994-1998 versus 19992003:
– Deterioration: Real value added (10.4%), exports (4.4%),
employment (0.6%), employee output (11.9%), employee
remuneration (6.8%), gross mark-up (7.8%)
– Improvement: GDFI output ratio, but off low base (0.02-0.03% of
output), fixed capital stock output ratio ( 0.11-0.13% of output). For
1994-1998, labour productivity, fixed capital & MFP were all low,
with less than zero units of output produced. For 1999-2003,
productivity index for each indicator was positive, but still low.
Labour productivity reached 0.67 units of output/employee, fixed
capital productivity rose to 0.6 units & MFP improved to 0.58 units.
Exports also increased from 11.3-20.0%, whilst imports as % local
demand declined from 10.3% to 9.1% (?)
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Sector trends – Other sources
• Overall trends (not absolute values) supported by additional
statistics from SSA & the dti & B&M Analysts’ database:
– Real value of clothing sales declined from R11.8b in 1998 to R10.4b
in 2003. Employment followed same trend (125,181 in 1994 to
110,739 in mid-2004 – a loss of 14,442 jobs)
– But official statistics underestimate total employment due to extent of
informal activity. Based on % of formal vs. informal employment in the
Sept. 2003 LFS, total clothing employment is estimated at 158,879
– Clothing performs well in terms of capacity utilisation, with average
utilisation rates of 85% over the 1990-2003 period. But capital spend
on new assets is low at average 1.4% of sales through 1990s & only
slight improvement for 2003-4 (2.5%)
– Although exports increased from early 1990s, levels are modest,
reaching 1.4% of total manufactured exports in 2003. Recent Rand
appreciation has also resulted in export volume reduction, whilst
nominal clothing import values nearly tripled 2000-4 (to R3.9b)
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Sector structure (1)
• Clothing manufacture is concentrated in the Western Cape, KZN & Gauteng.
Sector comprises large firms, SMMEs & home industries. Is also a large
CMT industry ranging from large firms to small, informal home industries
• Diversity of fabrics are used (natural, synthetics, synthetic mixes). But, high
value fabrics (e.g. wool) tend to be used mainly in the Western Cape
• Are major differences between the industries in KZN & the Western Cape:
Western Cape
Firms are concentrated
metropolitan area
in
the
KwaZulu-Natal
Cape
Town
Firms are located in the metropolitan area of
Durban & outlying non-metropolitan areas
The industry consists of full-line manufacturers & a
large number of CMTs
The industry is mainly comprised of CMTs
Firms are subject to a comparatively higher cost
structure e.g. wages
Firms produce mainly for the higher end of the
market
Most firms are South African owned
Firms are subject to a lower cost structure
Firms focus on domestic markets due to their
higher value position & retail head offices proximity
The industry’s lower cost structure has meant that
firms in this region have a greater export focus
Firms produce mainly for the lower end of the
market & wholesalers
Many firms are foreign owned – Chinese,
Taiwanese, Indonesian & Singaporean
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Sector structure (2)
• Fabric is most NB sector input: Can account for ½ the cost of a garment,
thus tying SA clothing & textiles industries together (more so when trade
agreements stipulate rules of origin requirements for exports)
• Shortage & limited variety of SA produced fabrics is constraint to firms,
inhibiting their ability to meet rules of origin requirements for exports
under PTAs. Also textiles sector weaknesses have impact on clothing
success, e.g. long lead times, poor delivery reliability, deteriorating
quality performance
• Clothing is labour-intensive, contributing 1.8% of overall SA employment,
while employee output is low. Clothing also requires relatively unskilled
labour, with 82.2% of employment semi/unskilled, 13.4% mid-level &
4.4% high-level. Clear need to develop mid-to-upper management skills
• Numerous institutions support the SA clothing sector, including
SACTWU, CMA, CMT Employers’ Association, BCCI, CloTrade, IDC,
Garment Manufacturers’ Association, CIEC, CTFL SETA & CSIR
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Domestic market/production trends
• Triad economies are the world’s largest apparel consumers, but bulk of
apparel production has moved to LDCs
– Global clothing trade totalled $462 billion in 2003, with the US alone importing
clothing worth $71.3 billion in 2003, up from $27.0 billion in 1990
– China/Hong Kong, which totaled 33% of global clothing exports in 2003,
increased their clothing exporting levels from $25.1 billion in 1990 to $75.2 billion
• DC buyers are increasingly demanding (prices, lead times, deliveries,
quantities): Linked to sophistication & segmentation of DC markets
• SA clothing industry developed under isolation supplying domestic demand.
Result? It is inefficient, lacks capital, technology, innovation & has high
labour & management costs
• Even explosion in domestic retail sales amongst major retail groups has had
limited impact due to their importing of cheaper clothing to bolster margins &
market share - thus clothing imports increased 58% 2003 to 2004
• SA clothing exports are modest (EU/US) & largely commodity items
produced due to PTAs, where competitors restricted. With end of the MFA,
low-cost countries no longer constrained, intensifying competition
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Competitiveness trends
• Data on selected competitiveness indicators shows that SA clothing
industry has number of competitive weaknesses, e.g.
– Compared to international clothing firms, SA firms perform poorly i.t.o.
output per employee, inventory holding, customer returns, delivery
reliability & absenteeism rates
– Compared to SA auto component firms, clothing firms lag all indicators, &
often by a significant margin: Is therefore scope for firms to improve
performance to bolster competitive position
SA clothing
International
clothing
SA
textiles
SA auto
components
Output per employee (Rand ‘000)
91.35
316.62
387.9
709.8
Total inventory (days)
45.83
37.22
66.90
40.40
Customer return rate (%)
0.49
0.09
1.90
0.07
Customer delivery reliability (%)
86.67
89.38
88.0
93.1
Absenteeism (%)
7.93
4.66
4.03
3.50
NEDLAC clothing presentation – 29 July 2005
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Summary of trends
• If sector trajectory continues, 50,000 to 70,000 formal & informal jobs
could be lost in next nine years. Also impact on textiles & retail:
– Up to half the textiles industry could be lost (25,000 to 30,000 jobs)
– Retailers become import dependent: Flexibility, costs?
• Despite concerning outlook, are opportunities for firms to explore:
– Specialised niche export markets to combat high prices, long lead times
– Exports to growing middle-income states
– SA competitive in man-made fibres & woolen articles where US duties
high & SA has advantage of PTAs
– African export market could be more actively pursued
– Development of ‘African’ brand could help boost exports/domestic sales
– Increased local market supply (improving customer relations, providing
retailers with better responses, follow-up services, shorter lead times)
– Various existing/potential trade agreements provide export opportunities
& potential for access to cheaper inputs/technology
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Multilateral/national policy
• Multilateral agreements
– MFA: End 2004 the MFA came to an end & with it the termination of all
quotas on textiles & clothing trade between WTO member states. One of the
major concerns is how China will behave with experts predicting that its
share of world clothing exports may double in less than 5 years. Along with
India, China is thus expected to dominate global production, with preliminary
evidence from early 2005 confirming their threat
– AGOA: US programme allowing non-reciprocal tariff preferences to 37 SSA
countries covering 6,000 products to 2015. Clothing governed by separate
conditions & rules of origin. While SA clothing exports require triple-stage
transformation to qualify for AGOA, all other eligible countries only subject to
single-stage transformation
• National government policy (DCCS)
– This export-incentive programme for textiles/clothing firms ostensibly ended
31/03/05, with DCCS-based Interim Clothing & Textiles Scheme apparently
replacing it for 18 months, when fully WTO compliant programme to be
introduced. But, no finality received from the dti in respect of Scheme thus
far
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Clothing policy framework – Regions & BEE
• Regional government
– Clothing identified as key strategic sector in the Western Cape &
KZN. Both provincial governments have thus set aside funding to
support the industry. This has taken the form of clusters in both
provinces: The Cape Clothing Cluster in the Western Cape & the
KZN Clothing & Textiles Cluster in KZN
– In addition, both provincial governments have funded smaller projects
& research to understand sector dynamics & policy issues
• Black Economic Empowerment & EE
– CloTrade research reveals 96% of members’ employees are PDIs,
who with PDIs also occupying 80% of management positions, 94%
of supervisory positions & 39% of directorships
– Survey also revealed firms’ ownership breakdown: White owned
private (59%), BEE (12%), foreign owned (3%), JSE listed (26%)
– Lack of confidence in future appears to be preventing more progress
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Constraints & challenges
• Broad regulatory environment does not affect clothing (nonintrusive manufacturing process). But, labour market has marked
impact: Wage rates & labour market ‘inflexibility’
• Many clothing firms relocating to non-metro areas (in KZN) where
they are able to pay lower wages & compete with cheaper imports
• SA has higher labour rates vs. competitor countries & higher social
costs (e.g. overtime, shift pay, sick leave, pension contributions)
• Other challenges:
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–
–
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SA textiles industry’s lack of competitiveness
Indifference to local sourcing amongst major domestic retailers
Failure of clothing manufacturers to adhere to WCM standards
Failure of the industry to employ state of the art technologies
Skills deficiencies created by perception of professionals that clothing
is a ‘sunset industry’ & hence to be avoided
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Opportunities (as identified through C&T CSP)
• Based on international & SA research findings, & building on a
detailed SWOT analysis, seven Strategic themes have been
identified through the the CSP process:
–
–
–
–
–
–
–
Recapturing domestic market share
Maintaining exports/facilitating exporting growth
Fostering capital upgrading
Upgrading firm-level competitiveness
Creating a sustainable skills base
Fostering industry transformation
Coordinating value chain opportunities
• In total, these seven strategic themes give rise to 26 KAPs
• Both strategic themes & KAPs have been prioritised
– Themes: Critical, foundational & developmental
– KAPs: 1-5 scale, where 5 is ‘critical’ & 1 ‘nice to have’
NEDLAC clothing presentation – 29 July 2005
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Prioritising the strategic themes: Critical
Strategic theme
KAPs
1.Government engagement with multilateral
forums
2. Implement regulations to eliminate underinvoiced & illegal imports
3. Support customs re illegal imports
1. Recapturing
domestic market 4. Partnership between SACU members to
share
ensure policy & monitoring consistency
5. Maintain tariffs
6. Country of origin labelling & buy SA
clothing & textiles campaign
7. Monitoring of DCCs
8. Confirmation & replacement of interim
2. Maintenance/ scheme replacing DCCS
growth of
9. Pursue PTAs with trading partners
exports
10. African textiles exports
11. EMIA support
Priority
level
5
Finances
required
None
5
None
5
5
R2m
R1m
5
2
None
R3m
2
5
None
R800,000
4
4
1
None
R5m
None (existing)
NEDLAC clothing presentation – 29 July 2005
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Prioritising the strategic themes: Foundational
Strategic theme
KAPs
12. Textiles & clothing investment support
programme
3. Capital
13. Preferential lending rates
upgrading
14. Labour market investment flexibility
15. Provincial/local government investment
support
16. Regional cluster support
4. Firm-level
17. Facilitation of access to technology
competitiveness
18. Adherence to global standards
19. Support for the CTFL SETA
5. Creating a
20. Support for COEs
sustainable skills
21. Higher skills development at a Tertiary
base
Education Institution
Priority
level
5
4
4
3
Finances
required
R1,325m
(R265m p.a).
Not available
None
Not available
5
3
3
5
4
4
R5m p.a.
R3m p.a.
R1m p.a.
Not available
Not available
R3m p.a.
NEDLAC clothing presentation – 29 July 2005
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Prioritising the strategic themes: Developmental
Strategic theme
6. Industry
transformation
7. Coordinating
value chain
opportunities
KAPs
22. Broad based BEE charter
23. BEE investment support
24. Entrenched support for TCDC
25. Globally competitive materials
26. Niche market value chain working groups
Priority
level
5
3
5
4
4
Finances
required
None
Not available
R2m p.a.
R500,000
R4m
NEDLAC clothing presentation – 29 July 2005
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2014 Strategic Vision
By 2014 the South African clothing & textiles industries,
in partnership with the government of South Africa,
commit to increasing their competitiveness & outputs,
attracting investments, promoting exports & creating &
sustaining quality job opportunities & living standards
for their employees. This will be achieved through a
coordinated industry response to opportunities &
threats, whilst also being inclusive of transformation &
the South African government’s broader socioeconomic objectives