South Africa’s President Thabo Mbeki gave some hope to the country’s beleaguered textile and clothing manufacturers on February 3 when he announced that a trade deal with China had been agreed upon, but the industry does not look to be out the woods just yet.
The textile and clothing industry represents just over 4% of South Africa’s manufacturing output, with textile sales’ turnover having grown five times in the last 20 years. However, the industry is now being strangled by Chinese competition, which has muscled South African manufacturers out of their traditional export markets and is now undercutting them on their home soil.
What’s more, it appears the President’s comments may have overstated the situation. When Trade and Industry Minister Mandici Mpahla was questioned about the exact details of the agreement in a press conference on February 6, he described the deal as more of an understanding. Any arrangement would have to be part of a wider agreement with the Southern African Customs Union (SACU), but neither side, although in the process of developing an agreement, has yet consulted the various stakeholders, he said.
At its peak in the 1980s, the industry employed nearly 120,000 workers. The figure is barely half that now, with most job losses occurring in the last two to three years. The reasons behind the job losses are clear, but solutions are harder to come by.
Fabric duties in South Africa have halved since the country joined the WTO 12 years ago, exposing what was a heavily regulated and protected industry to foreign competition. Nevertheless, the industry remained competitive for most of the last decade, thanks largely to an undervalued rand and free trade agreements with the United States and Europe. The European Free Trade Agreement was particularly kind, allowing South Africa to reduce tariffs gradually while granting open access for South African textiles in Europe.
Two trends seem now to be conspiring to crush the industry. Firstly, the rand has made huge gains over the last two years on the back of increasing world commodity prices and massive investment flows into the South African economy. This has served to pull the carpet out from under the export market. Secondly, the end of quotas guaranteed by the Agreement on Textiles and Clothing and the Multi-Fibre Agreement have meant South African textiles have to compete with Chinese imports flooding into the domestic market, leaving the industry with nowhere to turn.
South Africa is unlikely to enter into an agreement that could jeopardise cordial relations with the Chinese. Exports of commodities like coal and iron ore to China are currently worth nearly R90bn ($14.7bn) per annum to South Africa and this figure is expected to grow significantly in the coming years.
Meanwhile, an export incentive scheme called the Duty Credit Certification Scheme (DCCS) that provided local firms with duty credit certificates for exporting was terminated in March 2005. The scheme, like the Motor Industry Development Programme for the automotive sector, fell foul of the WTO, though it has been extended for two years in a slightly adjusted form.
The future could be bleak for clothing and textiles in South Africa. One industry representative told OBG that he believed the government would shortly be coming up with a new export incentive programme to replace DCCS, but this would likely just be a short term solution given the growing Chinese dominance of the clothing and textiles industry.
The domestic market should be fertile ground for South African textile and clothing manufacturers, with a growing economy and a burgeoning black middle class. However, South African labour laws are such that manufacturers cannot produce at the cost of Chinese textiles and many industry insiders believe the Chinese are dumping.
Some companies have proved that profitability can be achieved through marking up and competing for new customers. One of Levis’ four plants operates in South Africa, employing 450 people. The secret to their success, according to Mike Joubert, managing director of Levis South Africa, was in training, efficiency savings and capital investment. Levis produce a complete, high-quality product for the South African market and sales are booming. Joubert puts this down to the growth of an aspiring black middle class. In a recent interview with OBG, Joubert said he believes many of the larger producers have stumbled because they failed to invest in people and equipment.
It appears the only solutions for the industry’s woes in the current economic environment will be found through product innovation.