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TEXTILE SECTOR FACES FRESH CHALLENGES
BY LOUIS WASSER AND RÉHAB EL-BAKRY
There was a time not too long ago when Egypt’s textile and garment sector appeared destined to fold. Vintage machines churned out poorly-made apparel for markets poorly understood. The country’s leading exporters were modernizing their equipment and improving quality control, but it seemed their products would never be able to compete with the flood of Asian clothing. At least not on price.
Egypt’s ailing textile industry was thrown several lifelines before it took hold of the Egypt-EU Association Agreement and Qualifying Industrial Zones (QIZ) Agreement, which came into effect in June 2004 and January 2005, respectively. The former drops all quotas and duties on Egyptian textiles and garments bound for European markets, while the latter provides quota- and duty-free access to the US market for manufactured goods produced in designated industrial zones, provided they contain a specified percentage of Israeli content.
The two agreements, which coincided with the Nazif government’s economic reforms, helped reshape the Egyptian textile and garment sector, according to industry experts. The sector’s exports to the EU grew a modest 12 percent between 2004 and 2006 to reach $929 million. More impressively, exports to the US climbed 41 percent during the same two-year period. “The agreements allowed us to access the US and EU markets a lot more competitively,” says Ahmed Ezz El Din, managing director of textile firm Egylin. “It’s not that we didn’t export to them before, but because of the customs our products were not as [competitively] priced as those of other countries.”
Previously, Egyptian textile and garments were charged tariffs as high as 20 percent to enter the US and EU markets. The tariffs made it difficult for Egyptian factories to compete with high-volume Asian producers, which were supplying higher-quality products at a lower price. But trade agreements with the US and Europe, as well as Turkey, China and other countries, have helped open doors to major markets. “Egypt has done a great job in placing or repositioning [Egyptian products] as far as the main markets [are concerned],” says Mohamed Kassem, chairman of textile firm World Trading Company. He says Egypt’s bilateral and multilateral trade agreements have created opportunities for exporters to compete in world markets.
But recent changes affecting the industry’s biggest consumer markets are giving Egyptian exporters the jitters. The US is entering a period of recession, which is expected to reduce the country’s imports and place high emphasis on competitive pricing. Meanwhile, January 2008 marked the end of the EU-China Quota Agreement, which restricted the volume of Chinese textile exports to the 27-member European Union. Without quotas, cheap Chinese products could edge out less-competitive Egyptian products.
“It is a bumpy road that we’re seeing,” says Adham Nadim, executive director of the Industrial Modernization Council (IMC), a government body that works to improve the competitiveness of Egyptian industry. “When there’s an abundance of production globally and people have options, [yet] people are cutting back in [consumption] globally, then you have a problem. Only the fittest can survive.”
To navigate the changes in the industry, Egyptian textile and garment producers are looking to streamline their factory lines and improve quality, while at the same time reducing unit cost. They are also trying to identify new markets for specialized products such as high-end Italian suits. “Those who [will] survive are those that have a higher added value in their production, and those who are going for the niche market,” says Nadim.
The contemporary globalized world leaves little room for inefficiency, warns Kassem. “[In] the new world that we live in right now, two factors matter the most: one is market access, and the other is speed to market. Those are the two factors... dominating the dynamics of the industry.”
While Egypt is well situated in terms of market access through its bilateral and multilateral trade agreements, its speed to market is hindered by the lack of integration of its supply chain. “Unfortunately, this is the part that we are missing,” says Kassem. “We really need to look into investing into spinning, weaving, dying and finishing to be able to create [an efficient] supply chain for the industry.”
Analysts say the sector has not had sufficient horizontal growth. “We have grown and we have managed to land good export contracts, but we still have big holes in certain areas of our production cycles that [make us] unable to compete, particularly for large export contracts,” says Ezz El Din. “This reduces our ability to lower our production costs sufficiently to be truly competitive internationally.”
Increasing speed to market and completing the supply chain are only the initial steps, says Kassem. “We cannot compete on the basis of market access only,” he says. “We have to compete also on the basis of price, and to be able to offer good prices, you have to be efficient. And efficiency has to do with workers, management and systems. So we have to improve those three areas.”
One bright spot for the industry, Ezz El Din points out, is a surge in foreign direct investment (FDI) from more developed markets such as Turkey and China. “We need to piggyback on these investors’ know-how,” he says. “We also need to use their understanding of other markets that we have not tapped into thus far, such as former Eastern Bloc countries.”
Identifying products that local producers can export at competitive prices will allow Egypt to hold on to its export numbers and grow them, says Rodrigo Romero van Cutsem, a trade expert with the Delegation of the European Commission in Egypt. “If Egypt has a specific product that [it produces and that] can be competitive to cheap Chinese material, then why not focus on that instead of trying to push the whole basket of textile products,” he says.
Nadim agrees. He argues that more effort must be exerted to secure a larger market share in smaller markets that might not consume large quantities, but where there is enormous opportunity for proportionate growth. “When we looked at the regional, European and alternative markets [in relation] to where most of our exports were going, we found that there are many places where we are minimally present with various products,” he says. “However, those countries are importing 1,000 times more of that same product than we are [exporting] to them. So, we should be looking there as well. These are smaller markets that are attractive to smaller producers.”
He says that these countries might not import as much as the US, for instance, “but for smaller producers, this is their America.”
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SEEKING A TAILOR-MADE SOLUTION
It seems ironic that Egypt’s strong economic growth on the back of increased textile and garment exports to the US and Europe could be the sector’s undoing. The appreciating Egyptian pound is making the country’s exports less competitive in world markets at a time when chief rival China has devalued its currency to make its products artificially cheaper. “Because our currency’s performance in relation to the dollar and the euro has improved, and because of increasing inflation in the market, our products have become a lot more expensive,” says Bassem Sultan, managing director of textile firm Dyetex.
The timing couldn’t be worse, as the looming recession in the US and a flood of cheap Asian products entering the EU have made the need for competitively priced products critical. Given the fierce competition, many in the sector are appealing for a little extra support from the government, including a call for the Ministry of Trade & Industry (MTI) to increase the tax rebate that textile companies receive on exports.
According to Sultan, textile exporters located in free zones receive a 4-percent tax rebate, while those located inside free zones receive 8 percent. “We have requested that, just for this year, the government increase the rebate incentive by 5 percent to make up for the effects of the changes in international markets as well as the improvements in our macroeconomic indicators and inflation.” If applied, exporters located inside free zones would receive a 9-percent rebate, while those inside would receive 13 percent.
Although the request is still under study by MTI, Adham Nadim, executive director of the Industrial Modernization Council (IMC), says that even if the government provides some assistance to exporters, the focus should still be on finding new edges in the export market. More attention on training, logistics and research and development will provide a better long-term outlook than any incentive plan, he adds.
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