The President’s New Clothes

A shorter version of this article appeared in Business Day, South Africa on 05/09/19 ‘Shredding of the rag trade has lessons for the future’

https://www.businesslive.co.za/bd/opinion/2019-09-05-shredding-of-the-rag-trade-has-lessons-for-the-future/

‘We never realised it could be so dramatic!’ Aldo Agnelli, Managing Director of House of Monatic says smiling and throwing his arms open as a gesture of warm welcome and striding into his humble wood-panelled office.  He was referring to the President of South Africa’s recent State of The Union Address where Mr Ramaphosa proudly announced wearing a suit, shirt and tie made by the clothing manufacturer.  The President was actively encouraging consumers to buy locally made products to stimulate domestic production. 

The speech was certainly high on aspiration and made all the right noises toward business.  As well as promoting the ‘Buy Local’ campaign, Mr Ramaphosa spoke of creating two million new jobs for youth and consulting with key industries, the ultimate aim being to transform South Africa from a mainly raw material exporter to a manufacturing hub with attention to key value-adding industries. 

Scant on detail though, Mr Ramaphosa’s SONA might be too little too late in a country afflicted by chronic and stagnant economic growth that can hardly keep pace with population increase.  As if to prove the point, the recently-released figures from StatsSA are dire.  Unemployment is at its highest level since 2008 at 29%, a rate that almost doubles to over 56% when it comes to youth unemployment.  This is a dangerous level given the vast inequalities in South African society and something acknowledged by Mr Ramaphosa in SONA.  If the Government’s past record is anything to go by, the future does not bode well too.  A lack of an integrated approach to business has had a lacklustre effect on South Africa’s industries and has more often than not hampered growth rather than encouraged it.

No other industry is frustrated more by these government shortcomings than the textile and clothing industry. ‘The challenges of the last few years have been enormous,’ Mr Agnelli recounts suddenly becoming serious and shedding some of the SONA afterglow that is ever present while meeting with him.  Established in 1907, the House of Monatic that Mr Ramaphosa singled out, is a microcosm of the fate of the industry as a whole.  Once employing thousands of people in the 70’s it now accounts for a mere 535 employees.

 If Mr Ramaphosa is to have any hope of achieving his commendable aim of serious job creation then it is an industry such as this that he will have to revive.  The industry is a great source of low-skilled labour that can be achieved relatively fast and at low cost.  It can have a massive impact on rural development and, unlike most industries, is unique in that it is skewed towards female employment who make up 4 out of every 5 employees.  And yet its fall from grace has been spectacular.  Since 2002 employment in the industry has fallen from 200,000 to just over a paltry 19,000 today.  The sector witnessed a 40% fall in output since independence that increases to 60% if you consider the textile and fabric industry alone.  How could an industry arguably so vital to South Africa’s rudimentary health have been allowed to wither so spectacularly in the last two decades?

There are of course the well-trodden arguments that sometimes border on the fatalistic:  The natural consequences of the trade liberalisation policies following independence in the mid-90’s is often cited.  In an industry where margins are low, it is inevitable that jobs will be lost to countries with lower average wages.  Exposed to the full force of the global markets, cheaper Chinese and Bangladeshi imports came flooding in.  Logistically too South Africa is a long way from its main markets of Europe and the US and has to import all its raw materials.  This makes it harder to compete with the global demand for ‘fast fashion’  (where today’s hottest apparel is tomorrow’s bargain basement sale item or charity second-hand offering).  ‘You’re at such a massive disadvantage.  You’re six weeks away from the fabric and six weeks away from the raw material, freighted in at huge costs.  And because the margins are so miniscule how on earth are you going to be competitive?’ rues Mr Agnelli. 

But a closer look and these factors mask some deeper truths that lead to the uncomfortable conclusion that just maybe the industry could have been saved and could even have thrived.  The lack of a comprehensive approach has at times gone beyond having the consequence of simple neglect but has at times hindered the sector as well.  It is true labour costs in South Africa are higher than its lowest income competitors, but compared to China they are significantly lower and the level of skill is more than equal to their peers in Asia.  The true problem lies in the inflexibility of these working hours.  For the industry to be competitive internationally it requires shift employment, working far longer shifts than current South African labour laws allow.  ‘While China may pay more, its workers might work a 72 hour week compared to our 42.5-hour week, which makes their assets far more productive,’ says Jake Morris, a B&M Analysts, an industrial development consultancy that partners with government and industry.  Electricity supply and cost is another overriding issue for the industry with the well-established problems of load-shedding, especially in the first quarter of 2019 (a euphemism for out and out black-outs) and an increase in cost of 350% since 2009. 

But it is import tariffs that symbolise most poignantly that the South African government really doesn’t understand the textile and clothing industry and hampers it with makeshift policy initiatives.  Tariffs on imported fabrics meant to protect local textile manufacturers are questionably doing more harm than good by imposing extra costs on the other side of the industry, namely the clothing sector.  With the closure of the vast majority of the textile mills in South Africa, clothing manufacturers are forced to import their raw materials at unsustainable costs.  To ram home the point, Mr Agnelli points proudly to a photo of Prince Charles, Prince of Wales and himself, the only feature on one of the walls of his office.  The photo was taken in 2011 at a conference for the wool industry at the Mount Nelson Hotel in Cape Town.  ‘We had a function with him being the ambassador of mohair worldwide,’ a high quality silk-like fabric made from the hair of the Angora goat that is highly sought after for its fine sheen and resilience.  ‘We produce it here and all the internationals come and buy it here and then they weave it and spin it abroad and we bring it back here and have to pay 23% import tariffs!’  Mr Agnelli says with increasing frustration in his voice.

A 45% duty on imported clothing and apparel without proper comprehensive customs enforcement has also lead to the increase of customs fraud that has impacted on local clothing manufacturers rather than helped protect them as was the original aim.  This problem goes beyond straight up smuggling, but also involves the under-valuation or mis-specification of consignments of imported garments.  ‘This problem is real and has had a massive impact on finished garments and thus the protection it is meant to provide local manufacturing,’ says Mr Morris. ‘One of the most impactful interventions the government could initiate to develop the clothing and textile industry is to seek out innovative ways of addressing this challenge.’

Even the ‘Buy Local’ campaign, extolled by Mr Ramaphosa has caused unintended problems that betray a lack of forethought and could prove to be a source of disruption to the industry in the long run.  While raising awareness and encouraging local consumers to buy South African made products has been widely commended, tax incentives or penalties for local retailers to buy local garments could have an adverse effect and impact negatively on them instead.  ‘Forcing SA retailers to buy local without addressing competitiveness challenges, skirts around the core constraints and will likely lead to inefficient market outcomes,’ explains Mr Morris.  Ultimately it may only prove to restrict variety in shops and increase prices to consumers. 

Nowhere is the effect of disjointed policies that plague even the ‘Buy Local’ campaign more obvious than in the drive to put local procurement regulations in place that instruct all public bodies to buy South African made goods.  ‘It’s very difficult to get tenders, it’s a very sore point for us,’ sighs Mr Agenlli.  House of Monatic is unable to take advantage because it fails miserably on its BEE rating even though 99% of employees in the company are black.  They are ineligible because under BEE rules they do not source their own fabrics locally, even though it is impossible to do so.  On the one hand, House of Monatic is given a competitive advantage to tender for large government tenders but on the other it is cruelly taken away by a different set of regulations that betray a devastating lack of a coordination. 

Patchy government support leads to the ultimate question as to whether the industry decline could have been halted or reversed even if the global climate has been challenging in itself.  At the other end of Africa sits Ethiopia, where the difference in approach towards the industry is matched only by its geographical distance and can provide some answers to this vital question.  On the face of it, it seems hard to compare two countries at different stages of their development cycles.  Ethiopia after all being a low-income country and coming from a very low manufacturing base where agriculture continues to make up almost 70% of the country’s GDP.  But its recent export-driven expansion, especially in textile and clothing has caught everyone’s eye that has lead to the label of ‘Rising Star’ in African manufacturing.  The facts speak for themselves.  In 1991 there were just 20 medium to large-scale factories in the textile manufacturing industry in Ethiopia.  By 2018 there were almost 130.  It provides employment to almost 60,000 people and temporary employment for another 39,000, 75% of which are women and FDI (foreign direct investment) in the sector has soared from US$166.5 million in 2013 to US$36.8 billion in 2017 according to the Ethiopian Investment Commission (EIC), an autonomous government body aimed at promoting investment opportunities for both foreign and domestic companies in the country. 

Ethiopia’s success has been in large part due to a comprehensive government initiative known as Vision 2025.  It aim is to achieve middle-income status and turn Ethiopia into one of Africa’s leading manufacturing hubs by the middle of the next decade.  ‘The textile and clothing industry in particular has made a massive contribution to Vision 2025,’ says Yared Mesin, Deputy General Director of the Ethiopian Textile Industry Development Institute (ETIDI). ‘This has been seen in terms of export earnings that have grown incrementally over the past few years, employment opportunity and the technological knowhow transfer to local employees.’  Just as Mr Ramaphosa emphasised the dire unemployment rates among youth in SONA, at the heart of the Ethiopian drive was a recognition of the dangers and instability that high levels of unemployment amongst one of the most youthful populations in the world could unleash.  At its peak though, youth unemployment in Ethiopia reached 12.4% in 1999, a mere fraction of that which South Africa has endured for decades. 

While cheap labour and extremely flexible labour practices are one of the leading attractions of the country, with the average wage being a measly US$26 per month (ZAR370), the government also implemented a series of business friendly policies including tax incentives, waiving duties on all capital equipment, construction equipment and raw materials, establishing reliable and cheap electricity that is half the price of South Africa’s and duty-free access to the largest worldwide markets in China, US and EU. 

But Ethiopia’s true source of success has been its massive investment in industrial parks.  Mr Ramaphosa made noises about encouraging special economic zones and reviving local industrial parks, but if the Ethiopian example is anything to go by, South Africa will have to gamble big if Ethiopia’s experience is anything to go by, something it is unlikely to do.  Financed by a combination of government bonds and World Bank concessional loans that has added approximately US$ 800 million to the fiscal burden of Ethiopia,  11 parks have been set up that provide one-stop facilities to companies in terms of customs, labour laws and visas.  So far, the gamble has paid off in spades.  Mainly Chinese, Indian and Turkish multinational textile and clothing companies swooped in and set up shop providing apparel for such well-known international brands as Calvin Klein, Speedo, JC Penny, Target, Next and Marks & Spencers. 

The textile and clothing industry in South Africa could be said to be disadvantaged by its relative success.  As a middle-income country it could never hope to compete on wages with a country like Ethiopia.  And even though it is included in the duty-free customs agreement with the US under AGOA (Africa Growth and Opportunity Act) like Ethiopia, its emerging country status and perceived relative wealth, excluded it from the all-important Third Country Fabric Waiver Provision.  This would have allowed the textile and clothing industry in South Africa to source raw materials from anywhere in the world and not incur import duties on their final products when exporting to the US, a vital prerequisite for any multinational setting up value chains in the sector.  Without inclusion in this provision, if the industry imports raw materials it cannot export to the US duty-free, something that Ethiopia can do.  As Mr Morris points out ‘exports can be a costly, lengthy and uncertain endeavour [and as such] are not as critical to growth prospects as would otherwise be the case.’

But even with these impediments, it is hard to get away from the fact that had the South African government properly supported the sector it would not have been in such dire straits today.  While labour for example is way cheaper in Ethiopia, the level of skill is far lower and this has an impact on the final quality of garments.  South Africa has the advantage in this respect and could have incentivised it to its benefit.  The logistical problems faced in South Africa are also in abundance in Ethiopia.  The country is landlocked and the journey up to the main port in Djibouti is long and expensive, taking up to 5 days.  The UN reckons that the price to get an Ethiopian garment to the international market completely offsets its labour advantage and means that unit costs of production in comparison with China rise from one third to almost equal once the final product makes it way onto the international market.  Ironically, just as in South Africa, the Ethiopian domestic market for clothing is dominated by cheap Chinese imports. 

One of the main attractions to multinational textile and clothing companies of Ethiopia has been its location close to its raw material supply with 18 million hectares available in the country for cotton production.  But even here there are serious impediments at attempts to integrate it into the value chains.  Most of the best cotton is exported, leaving textile manufacturers with the worst quality cotton and because of under-development, there are chronic supply problems that raise costs to the sector and means that cotton has to be in large part imported at present. 

Astonishingly, South Africa actually produces more cotton than Ethiopia, something that seems not to have been exploited in the country.  There are some initiatives as Mr Eustace Mashimbye, CEO of Proudly South African and the brainchild behind encouraging President Ramaphosa to include the ‘Buy Local’ campaign in SONA explains.  ‘The SA Cotton Cluster Initiative of which government and retailers are both part has been instrumental in leading the drive for a local cotton supply.  From field to shelf the entire process is undertaken within our borders.  This means they manage the quality of the cotton, do not pay import tariffs on fabrics and so these quality and price benefits are passed on to the consumer.’  Such schemes show that adding cotton production to the value chain in South Africa can work.  But they are at present few and far between and the uptake has been minimal so far.  Ethiopia on the other hand, is again attempting to remove the constraints that the cotton sector imposes through comprehensive government intervention.  ‘The government is carrying out a 15 years Cotton Development Plan and Strategy [that] will increase the production and quality so that it will satisfy the local textile demand,’ claims Mr Mesfin.  As Ethiopia has again shown, only a concerted government approach could promote cotton agricultural production as part of a wider value chain initiative and so far this seems wholly lacking in South Africa. 

With its superior infrastructure, South Africa should have been a far more attractive proposition for international textile and clothing chains.  ‘South Africa has got the best telecommunications, best financial structures.  Basically the best of everything.  So why on earth can we not uplift this Continent?’ laments Mr Agnelli.  If any South African clothing manufacturer can show that export-led growth can work it is House of Monatic.  For a period of twenty years it produced every single Yves Saint Lauren suit for the UK market.  It imported all the fabric from the UK by sea and turned it over in a single weekend ready for export on any given Monday.  Mr Agnelli estimates that the company made over a million suits in the period for the high-end brand. 

Even under AGOA, South Africa’s government made little to no attempt to push for inclusion in the Third Country Fabric Waiver Provision.  ‘What annoys me is that when AGOA came into place our ministries decided that Mauritius can qualify, Namibia can qualify but not us.  I cannot understand what bad negotiations it was’ says Mr Agnelli shaking his head in exasperation.  Astoundingly, under the Economic Partnership Agreement (EPA) that came into effect in October 2016, South African textiles enjoy the same benefits as Ethiopia does and can source its raw materials globally without incurring duties into the EU.  But because of South Africa’s import tariffs, it cannot take advantage of this lucrative opportunity.  While in Ethiopia there is an AGOA centre within the Ministry of Trade with a mandate to aid firms take advantage of the agreement, South Africa’s approach has been lacklustre and the industry remains misinformed and the facility, especially EPA under-exploited.

The main drive of South Africa export policy has been to re-focus on the African market.  In July this year the African Continental Free Trade Area agreement (ACFTA) came into effect with great fanfare.  Mr Ramaphosa made a point of talking it up in SONA.  The agreement commits to lifting up to 90% of all tariffs on intra-African trade.  But for the sector it is again doubtful whether the agreement will have much impact.  With no steady and readily available sources of raw materials on the Continent it is unlikely whether duty-free imports will help the textile and clothing industry.  Their final products may not even be included in the final list of duty-free goods to be finalised in January next year.  ACFTA could spectacularly backfire as Mr Morris explains. ‘Duty-free imports from low-cost countries such as Ethiopia may be permissible under the new regime and could pose a threat to local manufacturing.’ 

A lack of forethought and a fragmented approach on the part of the South African government has arguably done more damage to the textile and clothing sector than its middle-income, emerging country status ever could.  Trade liberalisation is too often blamed for its collapse without really taking into account a far more complex picture:  One where serious government efforts could have ultimately rescued the sector and even have helped it thrive.  It leads to the soul-destroying truth that just maybe, an industry that could have done so much to dent the devastating unemployment rate in the country, could have been saved.  As Ethiopia has shown, a concerted government effort, well-thought out and well-implemented can go a long way.  The daunting fact is that unless South Africa commits to the sort of approach and especially investment in industrial parks, then manufacturing jobs in sectors like clothing and textile will be gone forever.  And with it, will die any hope of bringing the country back from the brink of economic disaster.  As in the fable of the Emperor’s New Clothes, Mr Ramaphosa’s shiny new suit might come to represent all that is wrong when the government is held to account and the naked truth exposed.  That ultimately it is the government’s betrayal of this once great manufacturing staple that precipitated its decline in the first place. 

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