Ethar El-Katatney

Dress to Impress

Posted in Business Today by Ethar El-Katatney on June 14, 2008

Dress to Impress
Business Today
bt 100
June 2008

Available at: http://www.businesstodayegypt.com/article.aspx?ArticleID=8053
Photo Credit: Courtesy of Arafa Holding

Egypt has taken advantage of low operational costs, high-quality cotton and preferential trade agreements to turn its textile and ready-made garment sector into a booming industry.

By: Ethar El-Katatney

Once upon a time, clothing with the tag ‘Made in Egypt’ was not something to be proud of. Although Egyptian cotton was firmly enshrined as the king of all cottons, Egypt was a far cry from the first choice for companies looking for a high quality and cost-efficient textile manufacturing location.

Fast forward to the present though, and ready-made garments (RMG) — mass-produced clothes made of fabrics and yarns — are now part of a $1.8 billion (LE 9.9 billion) textile export industry in Egypt, according to the Ministry of Investment, and accounted for 18% of the country’s non-oil exports in 2007. Compared to industry figures from 25 years ago, this amount is staggering.

According to CAPMAS, a government-run statistics agency, the RMG sector is worth 75% of the Egyptian textile and garment industry, with home textiles constituting 12% and cotton yarn 8%. The remaining 5% is attributed to other cotton fabrics and textiles.

Although only six textile and RMG companies made this year’s bt100 list, the industry is growing rapidly and its export numbers are multiplying.

Egypt’s RMG sector was worth LE 5.75 billion in 2007. T-shirts and other tops constituted 42.3% of total sector exports, followed by women’s suits at 13.8% and men’s suits at 12.9%.
In 2007, industry exports as a whole — including building materials, minerals, metals and textiles, among others — amounted to 32% of the country’s GDP. Among Egypt’s exporting sectors, RMG now ranks sixth and was the second fastest growing sector last year according to the bt100X list. Although total sales of RMG outside Egypt grew by just 1.1% in 2007, the 11 RMG exporters that made the bt100X list grew by 63.74% to LE 3.80 billion (up from LE 2.3 billion in 2006), constituting 66% of 2007’s total RMG exports.

The Beginning

As recently as the 1990s, the RMG sector was not particularly promising; now, the sector is one of Egypt’s export powerhouses.

European companies, mainly British, German and Italian businesses, were the RMG sector’s dominant players in the 1960s and 1970s. Their model was based on integration, which gathers all stages of the operation — including spinning, weaving and dyeing — in the same place. In the 1980s and 1990s, the trend shifted toward the division of production among countries, with fabric produced in one country and the actual garments produced in another.

According to Karim Shafei, managing partner of Gherzi Consulting, a Swiss consultancy working in the Egyptian textile industry since the 1950s, the scene began to change with the advent of stock quotas.

“Now, lead times [have become] much more important than costs. Zara and Mango [high-end casualwear retailers] put in orders and want them in three to four weeks,” he says. “Compare this to someone like Marks & Spencer, who would want their order in six months and would keep it in-store for three. Now there is more concentration on where an industry is integrated, because if you want a short lead time, you can’t have your yarn produced in India, fabric in Italy and knitting in Morocco, because you lose a lot of time. Therefore, focus [moved] more towards integrated countries like China and Turkey.”

Two decades ago, Egypt was still not on the textile map due to government dominance of the industry: The public sector controlled all aspects of cotton production, spinning, weaving and dyeing. This started to change with the privatization of the industry — “and the collapse of the Soviet Union,” adds Shafei — when industry players began looking for business outside their borders and the world began looking to Egypt as a potentially competitive place from which to buy its RMGs.

Today, there are approximately 4,000 textile or RMG companies registered with the Federation of Egyptian Industries. About 400-500 of them currently export. The Egyptian textile and garment industry employed over one million people in FY06-07. The sector’s export growth rate is 17% per year, according to Gherzi Consulting.

Industry Advantages

In 2007, egypt’s labor force was 22.8 million strong. Sixty percent of the population is under the age of 25 and the population grows at 1.7% per year.

Egypt enjoys low labor cost — and it is expected to remain low for a relatively long time. In 2006, the Werner International Textile Industry Newsletter reported that the average labor cost in the textiles sector in Egypt was $0.6 (LE 3.3) per hour, compared to China’s $0.57 (LE 3.13) and India’s $0.62 (LE 3.41). This is significantly lower than comparable costs in Turkey and Europe. Despite the issues that come with largely unskilled labor, low labor cost is undoubtedly an advantage for a factory-based sector like RMG.

Egypt also enjoys competitive utility and energy costs worldwide. In 2006, according to Gherzi Consulting, Egypt’s power costs were $0.04 (LE 0.22) per kilowatt hour compared to $0.085 (LE 0.46) in China and $0.1 (LE 0.55) in India. Water resources are also cheaper, and when overall wage and power costs are calculated, Egypt ends up being one of the cheapest nations in terms of operation costs, even compared to countries like China, India, Bangladesh and Vietnam — even the recent deregulation of energy prices hasn’t done much to dent Egypt’s advtantage.

Egypt’s abundant supply of the much sought after long-staple and extra-long-staple cotton (also known as pima cotton) still remains one of the country’s major textile advantages. According to the Alexandria Cotton Exporters’ Association, Egypt is the world leader in extra-long-staple cotton production, with 250,000 tons produced in 2007.

On a macro level, Egypt’s new political and economic landscapes — largely a result of recent reforms, including the reduction of corporate and government taxes to 20%, the creation of tax-exempt free zones, private textile industrial zones and support for modernization — have created an enabling business environment for the country’s exporters. Export incentive programs, such as providing companies with a tax rebate of between 4% and 7% of the ‘free on board’ (FOB) price of exports (prices including the cost of shipping) depending on the amounts of locally produced components used, have also helped persuade Egyptian companies to export.

“It was very much a timing issue. From the 1950s to the 1970s, the industry was very much a part of the public sector,” Shafei says. “In the 80s, the private sector began to increase its role, and in the 90s it solidified its position. By 2000 it was clear that the private sector was the one that was going to carry the industry. The impact of the new approach of the government of [Prime Minister Ahmed] Nazif began being felt in the end of 2005 and we [realized] the industry was going to boom.”

Key trade pacts with the United States and the European Union and duty free access to Turkey, Arab countries and East Africa are also a key asset for Egypt, giving the country much-needed inroads into lucrative markets abroad.

The Experts

Textile Companies in Egypt have another local advantage — experts on call. Gherzi Consulting, says Shafei, is the first consulting company worldwide to specialize in the global textile industry and, according to him, “the largest consulting firm in the world in terms of volume of business, number of people and existence worldwide.” Gherzi works on business consulting as well as building textile mills around the globe.

Although Gherzi has been present in the Egyptian market since the 1950s when it was building factories for the government, a branch office was only opened in 2006 when Shafei, then CEO of Context, a 10-year-old Egyptian-based textile consulting company, approached them to take part in a joint venture.

Although Egypt was not initially at the top of their list as a target market, Gherzi Consulting was ultimately persuaded by Shafei to enter the market. Now, two years after its opening, Gherzi’s Egypt office provides the same services as Gherzi International, with the exception of construction and logistics.

Gherzi Egypt functions, Shafei says, “from the operator level all the way to government strategy level. [We consult on] the technical shop floor and middle management levels — including all procedure processes — and also on the mezzo level with organizations, associations and chambers. On a macro level we are working with the government to set Vision 2020, which covers Egypt’s strategy [for the industry] from 2008 to 2020, and involves all stakeholders in the textile and RMG industry.”

The Industrial Modernization Center (IMC) is one of those stakeholders and a partner in the 2020 plan. The IMC was established in 2000 as the government’s agent for implementing a vision of a globally competitive industrial sector, and serves all industry sectors.

According to Iman Wahsh, deputy sector head of the IMC’s Textile Sector, the IMC serves 2,755 out of the 4,000 registered textile or RMG companies, and provides services for them including training, technical assistance, and export support. The IMC offers consulting in management and marketing, technical advice, and training for individual companies. It also offers companies that register with them a complete business development path plan along with an account manager to oversee its implementation.

Labor, Labor, Labor

There is no denying that Egypt’s textile industry benefits from a number of unique advantages, but that does not mean it is not suffering from several disadvantages.

According to industry players, while the country maintains both a considerable and cheap labor force, the biggest challenges facing the Egyptian textile sector are also related.

Atef Fahmy, an export manager with 17 years’ experience at Saba Apparel, the fifth largest Egyptian exporter and the fourth fastest growing exporter in Egypt with a 436.8% growth in 2007, say the company’s biggest problem is labor. “Turnover is high in a very short period of time, and the RMG industry is very labor intensive,” he explains. Saba Apparel, or Sheeba International Garments as they are more commonly known, was established in 1991 as a family-owned production facility and today has over 3,300 employees.

The IMC has estimated the turnover rate of between 40-60%. Because most employees in the industry are women aged 18-25, many stop working when they get married. There is a low availability of trained labor and a high cost for transportation to work sites. Most industrial cities like Tenth of Ramadan and Obour City are not accessible by public transport, nor are they attractive for labor settlement.

“A factory finds that to transport 1,000 employees they have to have 50 buses, but this is a business on its own. If you have 50 buses, you open a tourism business,” says Shafei.

“[Companies have] to have maintenance, scheduling, logistics and a number of other things that aren’t initially included in the business,” he says. “Then [they] waste time by having to drive the people for one and a half hours every day.” In addition, he points out, there is a stigma in Egyptian culture associated with women being out late, which often makes it difficult for them to work afternoon shifts. As for male employees, Shafei says, “men don’t want to work in [this industry] because they think they’re too good to iron.”

Possible options to deal with such challenges include building housing facilities close to factories or relocating factories near residential areas in Upper Egypt — both of which Al-Arafa Investment and Consulting (bt100 number 30) is already doing. (For more on Al-Arafa and their efforts to combat labor problems, see sidebar).

While the lack of trained labor is a large problem for the industry, most labor can be trained in-house. Deskilling the operation by using sophisticated machinery is also an option many firms are choosing in order to make training new staff easier. The Industrial Training Council (ITC), an offshoot of the IMC, recently launched a national industrial campaign to train workers to fill some 500,000 new jobs in manufacturing. The IMC is also providing funding for training, especially for those who have never worked.

Training for the future is a long-term goal, and even more important than teaching the necessary skills, Wahsh says, is breaking certain cultural and social values, such as the popular viewpoint that being a doctor or engineer are the only worthwhile jobs.

“How many textile engineers graduate in Cairo?” asks Wahsh. “One hundred? And how many mechanical and electrical engineers graduate that don’t find a job?” To this Shafei adds: “Labor is the impediment to this industry. When you create an advert for 1,000 operators in a newspaper you get only 60 applicants. Where are the unemployed people? I can repeat it until tomorrow morning: Our problem is labor, labor, labor.”

Other Challenges

As early as ten years ago, Egypt was not viewed as an industrial hub. Some of the first industry players like Al-Arafa were frustrated because, as Hashem says, “Egypt wasn’t on the map. Strategically, no one looked at it, which was the biggest problem for us since we were market driven, selling the capacity before producing and buying raw materials.”

Although this has changed, other challenges remain. One of the biggest obstacles to the growth of the sector, after labor, is supply chain integration. The Ministry of Investment lauded Egypt’s supply chain integration in a recent report, saying “Egypt is home to the only fully vertically integrated textiles industry in the Middle East, [with] the whole production process, from the cultivation of cotton to the production of yarns, fabrics and ready-made garments carried out domestically,” there is still much room for improvement.

Despite the positive outlook, not all companies are capable of fulfilling all the elements of the RMG supply chain. Integrated supply chains are vital, producing everything in one location and saving on lead times.

“Hugo Boss had a purchasing department of 4,000 [that obtained their fabric] from China and zippers from Morocco, etc,” says Shafei. “But now they want to go to one supplier.”

According to Shafei, Egypt is not properly utilizing its resources and suffers from limited integration. He attributes this to not converting its cotton production properly and the fact that imports of cotton for coarser counts are highly controlled. The supply chain integration, he says, is inconsistent, with some steps being non-existent or still in the embryonic stage.

In addition, public-sector companies still account for the majority of weaving companies and the vast majority of spinners — 60% and 90% respectively, according to the Egyptian Center for Economic Studies, a Cairo-based economic research institute — while the private sector dominates the knitting and garment sectors (40% and 30%). This does not help in the creation of a fully integrated supply chain.

Mohamad Shaalan, export manager of Alex Apparels (bt100X number 56), believes that integration is definitely a problem, as is quality. In his seven years at the company, he has noted that in Egypt, “fabric companies aren’t many, their quality isn’t great and they’re expensive.” He believes that if the primary parts of the supply chain — including spinning and weaving — improved, that it would “make a world of difference since [a lot of material still] comes from outside Egypt and that takes time.”

Alex Apparels is a multinational company with offices in Singapore and Taiwan and factories in Dubai and Jordan. It was founded 12 years ago in Egypt by Lalou Masany, an Indian, and Ihab Mohyee, an Egyptian. With five factories, their sales totaled $30 million (LE 160 million) in 2007, and they export 99% of their RMG to the US. Their major clients include Wal-Mart, K-Mart, Kids ‘R Us and Landau Uniforms for doctors and nurses.

According to Shaalan, Alex Apparels was probably the top exporter in 2004 with sales of $65 million (LE 357 million), but their sales decreased from 2005 to 2007 because of new players on the market. He is nevertheless optimistic that they will soon be out of their slump.

Although Egypt is the tenth top textile supplier to the US, according to the US-based Office of Textiles and Apparels, in 2006 it still only accounted for 0.86% of the total supply. Many buyers come to Egypt and leave because of the limited capacity and, despite the fact that a lot of companies are expanding and adding production lines, “Egypt cannot yet compete on quantity internationally,” says Shalaan.

Demand is increasing and the industry is struggling to keep up. Shafei believes that the “growth of export has not matched the growth in number of exporters. Growth [today] is coming from the same companies increasing their capacity and sales but we don’t have new players in the market, which is definitely a concern. We need at least three times the exporters we have today to be able to reach our goals [and satisfy demand],” he says.

According to Wahsh, another challenge for Egypt is the fact that “a company isn’t just a subcontractor without added value anymore. He has to add to design. Before, companies sent their designs. Now, they ask factories to have a design department, [and a] buyer would prefer to work with a company that can help in design and knows [about] product functionality: what material is best for what product.”

Hashem concurs; “[buyers now] rely on the supply chain for the development of ideas. Not R&D per se, but you need to know what’s happening now. Buyers want to manage their figures, but get the product off their shoulders and drop it onto the shoulders of manufacturers.”

To help companies develop their design capabilities, the IMC founded the Fashion Design Center under the auspices of the Ministry of Trade and Industry (MTI), but more needs to be done, Shafei says. He suggests that the government create modeling schools in pattern making and design.

Nevertheless, these obstacles seem paltry to Hashem, who believes the main problem exporters are facing is logistics, which causes a loss in lead time advantage. “Logistics can turn the Mediterranean from a sea to a lake,” Hashem says. “If improved, the sky is the limit for Egypt. Everyone you ask, even customers, say the problem is logistics regardless of what field [they’re in]. Everyone wants speed, speed, speed. [Buyers] don’t ask about production anymore. They ask about lead times.”

Europe or the US?

The ratification of the General Agreement on Tariffs and Trade (GATT) means that Egypt’s goods have enjoyed preferential access to US markets since 2004, and the Qualifying Industrial Zones (QIZ) agreement with the US and Israel in 2005 extended this access tremendously. The QIZ agreement gives manufacturers both tariff and quota-free access to the US market on the condition that 35% of the commodity is manufactured in a qualifying zone, and a minimum of 11.7% of the product is from Israeli inputs.

To illustrate the massive impact the QIZ has had on the industry, one only has to look at the numbers: In 2006, RMG and textile exports to the US increased by 30% to $162.2 million (LE 866 million) from $119.9 million (LE 637 million) in 2005. This is significant when compared to the mere 1% increase in exports to the European Union in 2006, moving up to $88.3 million (LE 444 million) from $87.9 million (LE 466 million) the year before.

That’s not to say Europe is not a crucial market for Egyptian exports. For a number of reasons, Egypt has turned its focus toward the EU for much of its exports — including textile and ready-made garments. One is the ratification of the EU-Egypt Association Agreement, which liberalizes tariffs on both agricultural and industrial goods. Second, the fact that Egypt’s location on the Mediterranean — and corresponding proximity to European markets — gives it an advantage in transit time over other exporting powerhouses like India and China. Egypt’s transit time to get products to Europe is a mere three days, as opposed to India which takes 21 days and China which requires at least 28.

Although transit time to the US from Egypt is now as short as 10-12 days, down from 20-22 days as a result of the QIZ, focus has still shifted to Europe. This is due to a third reason: the US values price and volume more than quality, and Egypt has still not reached a stage where it is able to compete on either in the US market.

According to Fahmy, export manager at Sheeba, “the curve is going down in America this season in all industries. There aren’t many new orders to companies or those that are offered aren’t being accepted. Clients are all going elsewhere. The problem is price; we’re more expensive.”

Sheeba ships 15% of their products to the US (down from 55% just four years ago) and 85% to Europe. With a total plant area of 33,650 square meters, Sheeba has 26 production lines with a monthly production capacity of 480,000 pairs of pants and shorts and 25,000 jackets. Their main customers are Calvin Klein, Hugo Boss and Romano.

The numbers certainly seem to agree with Fahmy. According to the Central Bank of Egypt, in FY2006-07, RMG exports to the US rose by only 11% from $162.2 million (LE 866 million) in FY2005-06 to $180.8 million (LE 961 million). This was a minor increase in comparison to exports to the EU, which rose 82% from $88.3 million (LE 472 million) in FY2005-06 to $160.7 million (LE 855 million).

“The US is a very different market,” agrees Hala Hashem, the CEO of Al-Arafa Investment and Consulting, who has been with the company for 14 years. “[The US is] very competitive, fast, driven by prices and costs and moves in a drastic way. Because volume is so big, competition is so big […] It can kill you if one customer moves.”

Al-Arafa began as a family-owned export business in 1907. In 1970, its operations expanded to include all elements of apparel manufacture, including everything from spinning the yarn to finalizing the product. In 1989, Al-Arafa founded Swiss Garments, now Egypt’s twenty-third largest and fifth fastest growing exporter, with a 302.8% growth rate in 2007. In doing so, Al-Arafa secured its place as one of the Egyptian textile industry’s biggest players. With over 11,000 employees and eight manufacturing facilities, exports accounted for 86.3% of Al-Arafa’s sales in 2007, with 74% of exports going to the United Kingdom and 15% to the US for clients like Debenhams, Macy’s, Marks & Spencer, Bloomingdales and Valentino.

The US and European markets are different not only in their cost priorities, but also in their quality standards. According to Fahmy, “Europe demands four times the quality the US does.” This is why Swiss Garments began with the US and later shifted to Europe, though Europe was closer geographically, explains Hashem.

“Europe needed a very high level of quality and very flexible production lines with very short runs,” Hashem says. “They need very high catering.”

Looking Forward

Gherzi Consulting, the MTI and the IMC have set a strategy for the textile industry and RMG sector, aiming to create what Gherzi consulting calls “a large manufacturing base with value added products and services by securing the required resources for growth and further enabling the environment.” The plan, which is expected to increase exports to $10 billion (LE 55 billion) by 2020, details Egypt’s strengths and weaknesses and how they affect the industry, as well as sector priorities and an action plan to implement the strategy.

Both Gherzi Consulting and the IMC believe that by 2020 the Egyptian textile and garment industry could be transformed, although Shafei is “a little bit disappointed in how [slowly growth] is happening.” He cites Jordan, which jumped from being a $30 million-$40 million (LE 160 million to LE 214 million) industry to a $1.5 billion (LE 8 billion) industry in five years, and that “we should have jumped from $1 billion (LE 5.3 billion) to $4 billion (LE 21 billion) in the same [time period].” However, Shafei remains optimistic, saying Egypt can reach an industry figure of $10 billion (LE 55 billion) by 2020.

In the long term, the IMC and Gherzi Consulting see Egypt becoming a total solution provider, which encompasses the roles of process specialist, integrator and industry service bundler. Basically, Shafei says, Egypt’s textile industry should eventually consolidate “packaging and integrating processes, bundles, or both to deliver a complex turnkey solution meeting a specific market need.”

Attracting foreign direct investment (FDI) is also important for the industry. According to the Ministry of Investment, offshore investors today account for 37% of the more than LE 12.9 billion invested in the RMG sector since 1970. But even more FDI needs to flow into the country if the industry is to reach its ambitious goals by 2020. The government has already begun to attract both local and domestic investment through a broad-based campaign, and is hoping to nearly double textile exports to $3 billion (LE 16 billion) by 2011.

However, most industry challenges remain internal. Labor costs will most certainly increase in the future, if not just wages, then as a result of training, housing and transportation expenses. Coupled with poor logistical planning on the part of both the industry and its companies, this will harm the sector’s potential. To expand and improve, industry experts say labor needs to be better trained and educated, local and FDI must increase, manufacturers’ supply chains need to be integrated and the government needs to further develop industrial infrastructure. bt

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