Sewing a niche: Despite security challenges, textiles continue to perform strongly

In addition to being one of the largest producers of textiles and garments in Africa, Egypt’s textile sector has seen exports grow in recent years, to the point that it accounts for over a quarter of non-oil exports. The industry is an important generator of employment, and benefits from low labour costs, proximity to developed export markets and a scheme that allows duty-free exports to the US. Taken together, these factors have helped it attract significant foreign investment.

The sector is, however, also facing significant challenges that have become more acute following the 2011 revolution; more fundamentally, the cotton-growing, textiles production and garment manufacture segments are not well integrated.

PRODUCTION & EMPLOYMENT: Total production of ready-made clothes stood at 340.6m pieces in 2011/12, according to figures from the Central Agency for Public Mobilisation and Statistics (CAPMAS), up from 324.4m in 2010/11. State-owned firms remain significant players; CAPMAS put the value of public sector textile production at LE3.09bn ($439.7m), versus private sector output of LE9.32bn ($1.33bn) in 2010. Some critics have complained that the state’s large role in the sector and effective subsidies for public firms that allow them to pay above the odds for raw materials distort the market, and that state-run spinning firms are poorly run and in need of major investment.

Unlike much of the country’s heavy industry, the textile and garments sector is labour-intensive, making it an important employer. Figures from 2009 from the Investment Development Agency put the number of people working in the sector (including the leather industry) at around 450,000, or roughly a quarter of the manufacturing workforce; in early 2013 the United Nations Economic Commission for Africa put the figure at approximately 500,000 people.

EXPORTS: As in other sectors, the government supports the industry with subsidies based on the value of exports; in the case of textiles, the subsidy is worth 10% of the export value, the highest of any sector. The value of sales abroad has risen strongly over the medium term; exports of textiles in 2011 were worth $1.5bn according to World Trade Organisation (WTO) data (ranking Egypt the 29th-largest exporter in the world), up from $1.29bn in 2010 and $759m in 2008. Exports of clothing stood at $1.38bn (ranking the country 39th in the world and 2nd in Africa, after Morocco), up from $1.27bn in 2010 and $773m in 2008.

GREATER POTENTIAL: Combined, the two segments accounted for around 22% of total exports of manufactured goods from the country in 2011, according to the WTO. While WTO data shows rises in exports in 2011, the latest available data from Egypt’s central bank shows the value of cotton textiles exports falling from $628m in 2010/11 to $576m in 2011/12, and from $771m to $739m for ready-made clothes, though both indicators were still up on pre-revolution figures. Despite the recent medium-term growth, some industry players believe there is potential for much higher exports.

“Turkey exports $18bn worth of textiles annually, a figure Egypt could be capable of matching if the right decisions were taken,” said Bassem Sultan, managing director of Dyetex, an Alexandria-based firm that produces garments for American and European brands, including Zara, Tesco and Nautica.

The launch of Egypt’s Qualified Industrial Zone (QIZ) scheme in 2005 is likely to have played an important role in the increase in exports in recent years. The scheme allows qualifying companies duty-free access to the US market, providing their products meet certain conditions, including containing 10.5% Israeli content (reduced from 11.7% previously). The QIZ scheme has benefitted textiles in particular; while Egypt has numerous other trade agreements in place and the system covers many other goods in addition to textiles and garments, it has been especially beneficial for the sector as US tariffs on garments are particularly high, giving firms in the industry a major incentives to participate. Textiles and garments therefore account for the bulk of goods exported under the scheme, at $924m in 2011, up from $855.7m the previous year, compared to $7.5m for total food exports.

DISCONNECT: The depreciation of the pound in early 2013 has further boosted the prospects for exports. However, this has been offset by the fact that linkages between local textiles and garment producers are poor, and most raw materials used for exported garments are imported, despite substantial cotton production in Egypt; Khaled El Behairy, executive director of the Egyptian Chamber of Textiles, put the proportion of exported clothes using materials purchased abroad at around 75%, compared to 25% using textiles produced in Egypt, though he said these figures are reversed in the domestic market. The problem has recently been exacerbated by a current shortage of foreign exchange.

The reliance on imported raw materials exists despite Egypt’s status as a significant cotton grower; the country was the world’s 16th-largest producer of cotton lint in 2011, according to the Food and Agriculture Organisation, with an output of 137,000 tonnes, as well as the 16th-largest exporter of the commodity. Egypt is also the world’s largest producer of high-end cotton, according to the US Cotton Council. Cotton yarn production reached 336,500 tonnes in 2011, up from 320,500 the previous year. One of the reasons for the disconnect between cotton production, on the one hand, and textiles and clothing manufacturing on the other is that Egyptian cotton, though of a very high quality, is too fine for the production of casual ready-made garments, which represent the bulk of exports from the sector. Another challenge with regard to raising the proportion of exports made out of domestically produced textiles is attaining uniform standards of quality.

“The US and European markets want a fixed standard of quality, which is hard to obtain from Egyptian textiles; for example, many dyers use cheap chemicals from China that don’t always match the requirements of the garments, while others are using old equipment,” El Behairy told OBG. “Only two to three dyeing houses are currently producing to high standards.” As a result, locally produced textiles tend to be exported as raw materials, for finishing in another location.

QUALITY CONTROL: Another issue is the quality of spinning. “The spinning companies in Egypt that produce cotton yarn are all publicly owned firms with old equipment, and the quality of the yarn that they produce is very poor given that they are using high-quality Egyptian cotton,” said Sultan. “There has been talk about modernising or liberalising the spinning companies since 1991, but nothing has changed.” Tariffs on imported raw materials for the sector are also low by the standards of textiles-producing nations and do not significantly discourage imports. Despite this, some firms take advantage of the availability of high-quality local ingredients. “Around 90% of our raw materials are from Egypt and the quality is good, especially the fabric and accessories,” said Bülent Aytaş, financial coordinator at Rubyed Garment, based in Borg El Arab.

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The Report: Egypt 2013

Industry & Retail chapter from The Report: Egypt 2013

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