Tight weave: Surviving and thriving in troubled times

One of the most important industrial segments, Egypt’s textiles sector is a major employer and source of export revenue. Proving resilient to competition, economic downturns and social unrest in recent years, it thrives on a number of competitive advantages, like favourable trade relations and active government support.

INTEGRATED & IMPORTANT: Egypt has a fully integrated textiles industry, with businesses in every stage of the supply chain, from cotton farming to the manufacture of ready-to-wear clothes to fully upholstered furniture. Despite the difficulties since the January 2011 revolution and the shaky state of the global economy, the sector posted strong trade growth in 2011. Overall, exports of cotton, textiles and clothing rose 3.7% to $3.21bn from $3.1bn in 2010, and a significant increase from $652m in 2007, according to the Ministry of Trade and Industry (MTI).

According to Egypt’s General Authority for Investment (GAFI), the textiles sector contributed 3% to GDP in 2009, the last year for which data is available. Its importance to industry, trade and employment is even larger, employing 30% of the working population, and it accounted for 27% of industrial production and 14% of non-petroleum exports in 2008. The sector is also a magnet for foreign investment, attracting major international names like Turkey’s Globe and Italy’s Albini and Filmar. Some of the world’s best-known brands, including Gap, Pierre Cardin and Marks & Spencer, are made in Egypt.

COMPETITIVE ADVANTAGES: When the Multi-Fibre Arrangement (MFA), which had placed restrictions on textiles exports from emerging to developed markets, ended in 2004, competition in the sector, particularly from China, intensified. However, Egypt has managed to stay strong in the global industry, leveraging its competitive advantages: local supply of high-quality cotton, geographical positioning, low labour and overhead costs, and investment incentives. According to the International Textile Manufacturers Association, wages for skilled workers average around $0.80, a third of the level of China and $0.30 less than India, which are considered very price-competitive countries, and far below the $23.90 in Italy. Unskilled labour costs are even lower, though the gap is smaller – Egypt and China are matched at $0.50 per hour against $0.70 in India.

Alongside its EU agreements, Egypt has trade deals with the Latin American MERCOSUR, the Greater Arab Free Trade Area, and the Common Market for Eastern and Southern Africa. Many Egyptian textile firms take advantage of the Qualified Industrial Zones (QIZ) incentive scheme by basing in these zones. The QIZs give companies duty-free access to the US market, but require that at least 35% of the product’s value be added in the QIZ and 11.7% of inputs be of Israeli origin. QIZs are open to companies from all sectors, but they are dominated by textiles and apparel manufacturers. These zones have played a crucial role in enabling the industry to develop and maintain its competitiveness against China and other low-cost exporters.

Industry leaders express optimism about the sector’s outlook given its advantages, but note that they may have to be further strengthened if Egypt is to maintain its position and capitalise on potential. “I’m optimistic that the sector will see more investment in the future, within a year or so,” Hany El Habibi, chairman of Egyptian textile firm Sahara Group, told OBG. “Egypt has to position itself as a major supply chain centre between trading partners for the future.”

Alaa Arafa, chairman and CEO of Arafa Holdings, another textiles player, has a similar view. “Egypt should be the hub for European manufacturing and warehousing,” he told OBG. Arafa believes that promoting the labour-intensive garment industry is a way to tackle Egypt’s unemployment, particularly among women, as the sector’s workforce is predominantly female.

CHALLENGING TIMES: Supply chains were disrupted in 2011 in the wake of political uprisings, and investors held back, wary of future economic policy. Nevertheless, the year’s export growth is indicative of the industry’s robustness. Egyptian textiles companies have adopted various strategies to head off the political and economic difficulties. For example, Arafa lowered prices, accepting tighter margins to retain regular customers, while Sahara diversified into textile consultancy, trade fairs and an online portal promoting Egyptian cotton.

Business has proven resilient even as social conditions manifested within the industry, given its highly unionised workforce. Even under former President Hosni Mubarak, workers held strikes, and the climate of increased political freedom has emboldened workers. Twice in 2012 workers at state-owned Misr Spinning and Weaving, Egypt's biggest textiles firm, staged strikes to demand higher wages. In July 2012 strikers asked for an increase in monthly wages from LE700 ($117.16) to LE1000 ($167.37), and upon agreeing to an open-ended resolution one week later, indicated that they would resume action in the autumn if demands were not met by the new government.

VALUE & CONSOLIDATION: Price competition has led industry leaders to create a value-added layer to the sector, driving Egypt’s exports up the value chain so products compete more on quality than price. Egypt is known for its high-quality cotton and increasingly for raw materials for synthetic fibres, like acrylic. The aim now is to develop the manufacturing of end products in the country, keeping more of the added value within Egypt and creating better-paid, higher-skilled jobs for local workers. The Textile Export Council (TEC), a public-private partnership organisation under the MTI, aims to support this strategy by seeking investors to develop the knitted acrylic segment to complement output of the resource. TEC also aims enhance integration of supply chains, which are not always efficiently streamlined given the breadth of the industry.

Some Egyptian firms have picked up in the high-end segment: Arafa is developing a niche in luxury garments, making high-quality suits with Egyptian fabrics. In 2012 the firm announced a joint venture with Italian fashion house Ermenegildo Zegna, and claims that they now compete directly with Italian suit designers.

PUBLIC SECTOR: In addition to drafting policy to support the industry as a whole, the new government will need to invest significantly in the government-owned segment. The three public sector textile factories sell 90% of their output to the army and find it difficult to compete with private firms on the commercial market due to outdated equipment, high levels of debt and a top-heavy labour force. The Freedom and Justice Party, to which newly-elected President Mohamed Morsy belonged, has indicated that it is lining up policies to improve competiveness of the industry, though details had yet to emerge at the time of printing.

The public firms spend nearly LE60m ($10.04m) a year servicing debts and are hampered by administrative inefficiencies, according to Sabry Ereeda, head of the government-owned Cotton and Textile Industries Holding Company (CTIHC). Hiring and retaining workers is also a challenge, as wages are higher in the private sector. The pressures of debt, rising labour costs and fluctuating prices for imported inputs have limited these factories’ ability to make expensive capital investments needed to compete. Cash flow problems and other cost issues mean input supplies are inconsistent, and plants can lie idle for days awaiting raw materials.

As in every sector, industry leaders are looking to the new government to establish clear and forward-looking policies to support growth, including a continuation of current trade zone schemes. Investment from major foreign brands and the experience of growing Egyptian companies suggests that the sector can continue to capitalise upon its competitive strengths, boosting its presence in higher-value segments globally.

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The Report: Egypt 2012

Industry chapter from The Report: Egypt 2012

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