Title Egypt-Textile

Global Supply Chain in Apparel 1

Lead firms
final retailers having marketing & distribution channel
selling in developed economies
Engage suppliers generally on contract basis

Suppliers
located in low-cost developing economies
supply components, intermediate goods, and even final goods to the
lead firm

Lead firms work closely with suppliers

training, technology, even FDI
to improve suppliers capability
To meet stringent demand of consumers in developed countries

Role of the Supplier may be limited to a basic one, or more

advanced

Global Supply Chain in Apparel 2

Basic role in global supply chain
Only labour-intensive jobs (e.g., stitching)
Using imported materials
Often in export zones with tax exemptions/ duty drawback
No spill-over to the local economy
local firms improve labor skills and learn about price and
quality and delivery standards in international markets
No other capacity building (knowledge/technology,
management practices, brand-building, etc.)
Next stage is of OEM (Original Equipment Manufacturer)
Supplier is now a full sub-contractor
Sources inputs & supplies finished products based on design
& specification provided by lead firm
Lead firm sells the products under its own brand name

Global Supply Chain in Apparel 3

Higher value addition & retention
Some managerial capabilities develop/
More inputs sourced locally
Next stage is: Original Brand Manufacturing (OBM)
But very few companies reach that stage
Note: Success at one stage does not necessarily imply that
suppliers have acquired the knowledge and skill to move to the
next stage
Past experience of East Asian countries (supplying since 1960s)
indicate that moving to OBM is extremely difficult

Textiles & Apparel Industry in Egypt 1

Textile & apparel manufacturing accounted for
30% of manufacturing employment (in 1998)
8% of manufacturing output (value-added) (2002)
Textiles (8%) and clothing (11%) accounted for majority of
national exports (in 2003)
Annual growth rate in exports during 1999 and 2003
Clothing: 5%
Textiles: 8%
Much slower growth than in exports of chemicals & basic
manufactures
Consists of 40 public sector and 3500 private companies
Employing less than 10 to over 10,000 workers

Textiles & Apparel Industry in Egypt 2

Public sector dominates early stages of production, but not in the
higher stages
Share of public sector in Egypt:
Spinning: 90%
Weaving: 60%
Apparel: 30%
Public sector is saddled with aging equipments most of them
older than 15 years
Public sector in apparel with higher competition from private
sector has less older machinery
Even though Egypt has high quality cotton, cannot manufacture
high quality textiles

Egypt and Its Competitors in Global Supply Chain 1

Egypt has some strength in textile & apparel (high quality cotton,
good domestic demand, large manufacturing capability)
But how do Egyptian companies compare with their global
competitors
From the point of view of a lead firm in EU or USA
Competition from: China, Mexico, Bangladesh, Jordan,
Mauritius, Morocco, Tunisia
China & Mexico together account for 55% of global exports of
textiles & apparel
The sector accounts for 80% of total exports of Bangladesh
Jordan, Mauritius, Morocco and Tunisia are regional competitors
Jordan signed FTA with USA in 2000, and Morocco in 2004
Jordan achieved huge growth in apparel export to USA after FTA

Egypt and Its Competitors in Global Supply Chain 2

Tunisias export of apparel & textiles is 4 times that of Egypt,
with population that is 15% of Egypts
Morocco exports apparel that is 4 times that of Egypt, but has
workforce that is only half of that in Egypt
Mauritius is the largest exporter of apparel & textiles from AGOA
countries
The African Growth and Opportunity Act (AGOA) was created in
2000 and extended in 2004,
Gives trade preferences to countries in sub-Saharan Africa that
meet the US governments political and economic guidelines.
Among others, allows export of textiles and apparel to the US on
a duty-free basis if the products are cut and assembled from
fabrics or yarns from the United States, or
duty free but subject to quotas if they are from fabrics and
yarns from AGOA beneficiary nations.

Egypt and Its Competitors in Global Supply Chain 3

High tariff protection in Egypt (earlier import ban lifted in
1998/2002 tariff of 54% on textiles, $300/item in apparels)
Domestic sales more profitable
Making domestic producer unwilling to increase efficiency
Only 8.6% of Egyptian companies (textile & apparel) export
more than 25% of their production
It is only the larger firms that engage in exports
Two major ways to improve international competitiveness of
Egypt are
Attract FDI in the sector
Stimulate local entrepreneurs
For both of these, three aspects are important from the point of
view of an investor interested in sourcing from Egypt

Egypt and Its Competitors in Global Supply Chain 4

Ease in setting up a new business,
Factors affecting investors ability to operate efficiently, and
The ability to actually get product out of the country.
Ease of Setting Up New Business
Since 1997, Egypt allowed 100% foreign ownership with full
repatriation of profit
But highest no. of procedures (13), and second largest delays (43
days) in clearing these (Max. Mexico 58 days but transport
cost advantage to Mexico)
High cost of setting up business deters foreign & local
entrepreneurs
High initial capital requirement deters local entrepreneurs
Tunisia & Morocco are much better in the above issues

Egypt and Its Competitors in Global Supply Chain 5

Ability of entrepreneurs to access capital via loans or private and
public equity
Egypt is at mid-way
Tunisia & Mauritius better than Egypt
But not China
Ability to enforce commercial contracts
Poor in Egypt highest number of procedures (55) and second
highest delay (410 days), only Mexico above it (421 days)
Cost of enforcement is high in Egypt all regional
competitors have lower cost
Exit time & Costs
Egypt has highest delays (4.2 years) & costs (18% of estate
value - only Tunisia & Jordan are better at 8%), lowest
recovery rate (18.4% of original investment)

Egypt and Its Competitors in Global Supply Chain 6

Ability to Operate Efficiently
Companies running assembly operations must have local content
of 45% or more in order to enjoy lower customs tariffs
Knock of much of the attractiveness as a sourcing destination
There are seven export zones companies exporting more than
80% of their output from these zones enjoy benefits
No customs duty, no sales tax & tax on intermediate inputs,
free use of foreign currency
70 apparel & 23 textile companies in these zones account for
half the apparel exports and one-fourth textile exports of
Egypt
Wage costs are favourable in Egypt (5% of US costs), lower only
in China (coastal-5%, mainland-3%) and Bangladesh (2%)

Egypt and Its Competitors in Global Supply Chain 7

High corruption in Egypt
Ranked 77th in list of 183 countries
Tie with Morocco, all others are better, except Bangladesh
(145th)
Regional competitors are far better
Ability to Export from Egypt
Trucking charges are very high twice as in US
Leading to longer trucks & overloading
Causing high capital & maintenance costs, causing the charges
to be higher
Also damages roads, further increasing truck maintenance
costs
A vicious cycle

Egypt and Its Competitors in Global Supply Chain 8

Highly congested roads, increasing the turn-around time from
production point to port
Port facilities are congested, and inefficient, causing high turnaround time in ports as well
Air cargo has not developed as an independent business
appendage to passenger traffic
Cargo gets least priority perishable food gets higher priority
than apparels
Due to trade deficit of Egypt, containers come in full, but leave
empty
But poor logisitcs information system and coordination means
many containers leave empty,
while goods remain stranded in Egyptian ports

Egypt and Its Competitors in Global Supply Chain 9

Ocean freight cost-wise, Egypt is not far back from its
competitors
But above inefficiencies more than make up for that
Customs clearance take more time in Egypt (5.5 days) compared
with its competitors
Egypts overall infrastructure is better than Morocco only
Public sector monopoly in air cargo handling jacks up costs
enormously

Egypt: Competing with Others in Global Supply Chain 1

Taiwan, Hong Kong, South Korea has successfully developed by
participating in Global Supply Chain (GSC)
Many countries have started to copy such an export-led growth
strategy
Most advanced stage in this direction is China
Not just in apparel & textile, but in others as well
Main issue: How to compete with China and others
China has two advantages:
Low labour cost & low raw material costs
FDI from the OEM from neighbouring countries
With phase-out of quota, China has been most successful
Export growth of 290% since 2002 in 29 garment categories
Exports of all other countries fell by 14%

Egypt: Competing with Others in Global Supply Chain 2

Chinas share in US market increased from 31% to 59%
During 1995-2002, Chinas share in quota-free markets increased
From 54% to 70% in Australia
From 59% to 76% in Japan
From 29% to 56% in South Africa
While the first two destinations are geographically close to China,
third is not
Implies that Chinas strength extends well beyond geographical
advantages
Egypt has certain geo-political advantages
size and proximity to Europe

Egypt: Competing with Others in Global Supply Chain 3

its role and potential as a regional power,
both in relation to the IsraeliMiddle East issue and the
broader efforts for the West to build ties to the Middle East.
Both the US and the EU have self-interested reasons to foster
Egypts economic development,
including their desire to strengthen their allies in the
Muslim world, as well as
to improve economic conditions to help ensure political
stability and, particularly in the case of Europe, to preempt
migration.
Factors other than labour costs may be important in apparels &
textiles

Egypt: Competing with Others in Global Supply Chain 4

Egypts proximity to Europe
Lower transportation costs
Shorter lead time associated with ever-changing fashion in EU
China will remain important for items for which longer lead
times does not make much difference
Egypt can catch on the others fashion & sports apparel, exotic
textiles & apparels leveraging on African colours
Cost disadvantage can to some extent be neutralized by investing
in cutting edge information technology and manufacturing
techniques

Lessons from Egypt 1

Late starter advantage new machineries
Competition, especially from private sector, improves technology
(new machines), and enhances international competitiveness
Greater thrust on private sector development
Wherever economic logic dictates small size of firm, let it be
so, but
Regulation and Policy should not actively promote small firms
High tariff protection causes domestic industry to be inefficient
But tariff reduction should be gradual, and domestic competition
must be generated before tariff cut
Tune up domestic laws & regulations
Make them simple
Invest in courts & judiciary and reform the laws if needed

Lessons from Egypt 2

Remove public sector monopoly in infrastructure
Full privatization, or PPP
Invest money in infrastructure (road, ports, airports, electricity,
railways, etc.)
If govt. fund is deficient, invite private money domestic or
foreign try PPP or full privatization
Levy user charges to recover costs subsidy only limits the
ability of govt. to increase infrastructure
Remember, private money cannot substitute govt. money
They are complementary
Govt. investment in infrastructure brings in more private
money former improves profitability of latter

Lessons from Egypt 3

Recognize that it is virtually impossible to beat China in labour
costs
So also India, which this case study does not consider
Focus on other factors
Select categories where labour cost is less important
Foster investment in IT and in most high-tech machineries
Reform the banking system and capital markets
Meanwhile allow companies to raise capital from abroad
As Jordan example shows, try to sign FTAs with EU & USA for
selected items (where labour cost is not a major advantage)
Exploit AGOA more effectively

AGOA & Rwanda 1

Tanzania qualified for AGOA in 2002
After that, the country tried to promote textile and apparel sector
But with not much success
Could not outbid China & India, and other African suppliers
from Morocco, Tunisia, Jordan & Egypt
Rwanda achieved considerable success by its own standard
Weaving has become third biggest exported product after tea and
coffee
In spite of the poor infrastructure and internal problems

AGOA & Rwanda 2

Lessons from Rwandan experience (Daily News, May 19, 2006)
African countries face similar constraints
Quality,
low quantity (size),
lack of innovation,
poor packaging,
poor product literature
Address the problem of quantity
Focus on just one item
Dont try to export many items
Capacity to handle is limited
Change designs every now and then to meet changing demand
of customer in EU

AGOA & Rwanda 3

Make all-out effort to improve quality
on continuous basis
If you focus on one item, you are in a better position to improve
and maintain quality
Improving packaging is just a matter of investment
If you have many different items to export, you need many
different packaging equipments
If required, import packaging material from developed country
Develop product literature in a manner that is understood and
acceptable to European customers
If required, ask your EU partner to send a packaged item from
another company/ supplier to learn how product literature is
developed

African Emergence 1
Non-China sourcing destinations coming up in a small way
Not to put all eggs in China basket
Tension has risen between China and EU-US on rising
exports of Chinese apparels & textiles
Both EU & US have put some restrictions on Chinese
apparels and textiles till 2008
Political tensions have caused certain manufacturer to cap the
degree of sourcing from China (e.g., at 30%)
Childrens Place specialize in children apparel
Africa has poor infrastructure, but
Has terrific fabrics and colours
Improving production of apparels

African Emergence 2
Other negative points for African countries are
Rigid labour laws
Exchange rate instability
High rate of crime
High wages for white collar workers (managers,
professionals, skilled workers)
because they are in short supply
Childrens Place is sourcing from Africa (SA)
To exploit the opportunities thrown open by AGOA
To achieve geographical, political and financial
diversification

African Emergence 3
Biggest obstacle is logistics
Far from dominant material sources of Asia
Far from US destination ports
Local transportation infrastructures are generally poorer
than Asian economies, though vary from country to
country
Other issues local customs laws, labour laws, local financial
institutions
But duty-free entry into US market by virtue of AGOA
outweighs the additional transport costs and lead time, and
difficulties of doing business

Readings
Egypt after the Multi-Fiber Arrangement: Global Apparel and
Textile Supply Chains as a Route for Industrial Upgrading
Don Magder pp 1 20.
The African Emergence Lara L. Sowinski