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Www.bmanalysts.com NEDLAC clothing presentation – 29 July 2005 A Strategic Assessment of the South African Clothing Sector Dr. Justin Barnes Benchmarking.

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Presentation on theme: "Www.bmanalysts.com NEDLAC clothing presentation – 29 July 2005 A Strategic Assessment of the South African Clothing Sector Dr. Justin Barnes Benchmarking."— Presentation transcript:

1 NEDLAC clothing presentation – 29 July 2005 A Strategic Assessment of the South African Clothing Sector Dr. Justin Barnes Benchmarking & Manufacturing Analysts

2 NEDLAC clothing presentation – 29 July 2005 Presentation outline Sector trends & structure Domestic market/production trends Competitiveness trends Multilateral/national policy Policy framework – Regional & BEE Constraints & challenges Required interventions as identified through the dti’s Customised Sector Programme

3 NEDLAC clothing presentation – 29 July 2005 Sector has performed poorly - evident when comparing indicator averages for periods versus : –Deterioration: Real value added (10.4%), exports (4.4%), employment (0.6%), employee output (11.9%), employee remuneration (6.8%), gross mark-up (7.8%) –Improvement: GDFI output ratio, but off low base ( % of output), fixed capital stock output ratio ( % of output). For , labour productivity, fixed capital & MFP were all low, with less than zero units of output produced. For , productivity index for each indicator was positive, but still low. Labour productivity reached 0.67 units of output/employee, fixed capital productivity rose to 0.6 units & MFP improved to 0.58 units. Exports also increased from %, whilst imports as % local demand declined from 10.3% to 9.1% (?) Sector trends – TIPS data

4 NEDLAC clothing presentation – 29 July 2005 Overall trends (not absolute values) supported by additional statistics from SSA & the dti & B&M Analysts’ database: –Real value of clothing sales declined from R11.8b in 1998 to R10.4b in Employment followed same trend (125,181 in 1994 to 110,739 in mid-2004 – a loss of 14,442 jobs) –But official statistics underestimate total employment due to extent of informal activity. Based on % of formal vs. informal employment in the Sept LFS, total clothing employment is estimated at 158,879 –Clothing performs well in terms of capacity utilisation, with average utilisation rates of 85% over the period. But capital spend on new assets is low at average 1.4% of sales through 1990s & only slight improvement for (2.5%) –Although exports increased from early 1990s, levels are modest, reaching 1.4% of total manufactured exports in Recent Rand appreciation has also resulted in export volume reduction, whilst nominal clothing import values nearly tripled (to R3.9b) Sector trends – Other sources

5 NEDLAC clothing presentation – 29 July 2005 Clothing manufacture is concentrated in the Western Cape, KZN & Gauteng. Sector comprises large firms, SMMEs & home industries. Is also a large CMT industry ranging from large firms to small, informal home industries Diversity of fabrics are used (natural, synthetics, synthetic mixes). But, high value fabrics (e.g. wool) tend to be used mainly in the Western Cape Are major differences between the industries in KZN & the Western Cape: Sector structure (1) Western CapeKwaZulu-Natal Firms are concentrated in the Cape Town metropolitan area Firms are located in the metropolitan area of Durban & outlying non-metropolitan areas The industry consists of full-line manufacturers & a large number of CMTs The industry is mainly comprised of CMTs Firms are subject to a comparatively higher cost structure e.g. wages Firms are subject to a lower cost structure Firms produce mainly for the higher end of the market Firms produce mainly for the lower end of the market & wholesalers Most firms are South African ownedMany firms are foreign owned – Chinese, Taiwanese, Indonesian & Singaporean Firms focus on domestic markets due to their higher value position & retail head offices proximity The industry’s lower cost structure has meant that firms in this region have a greater export focus

6 NEDLAC clothing presentation – 29 July 2005 Fabric is most NB sector input: Can account for ½ the cost of a garment, thus tying SA clothing & textiles industries together (more so when trade agreements stipulate rules of origin requirements for exports) Shortage & limited variety of SA produced fabrics is constraint to firms, inhibiting their ability to meet rules of origin requirements for exports under PTAs. Also textiles sector weaknesses have impact on clothing success, e.g. long lead times, poor delivery reliability, deteriorating quality performance Clothing is labour-intensive, contributing 1.8% of overall SA employment, while employee output is low. Clothing also requires relatively unskilled labour, with 82.2% of employment semi/unskilled, 13.4% mid-level & 4.4% high-level. Clear need to develop mid-to-upper management skills Numerous institutions support the SA clothing sector, including SACTWU, CMA, CMT Employers’ Association, BCCI, CloTrade, IDC, Garment Manufacturers’ Association, CIEC, CTFL SETA & CSIR Sector structure (2)

7 NEDLAC clothing presentation – 29 July 2005 Triad economies are the world’s largest apparel consumers, but bulk of apparel production has moved to LDCs –Global clothing trade totalled $462 billion in 2003, with the US alone importing clothing worth $71.3 billion in 2003, up from $27.0 billion in 1990 –China/Hong Kong, which totaled 33% of global clothing exports in 2003, increased their clothing exporting levels from $25.1 billion in 1990 to $75.2 billion DC buyers are increasingly demanding (prices, lead times, deliveries, quantities): Linked to sophistication & segmentation of DC markets SA clothing industry developed under isolation supplying domestic demand. Result? It is inefficient, lacks capital, technology, innovation & has high labour & management costs Even explosion in domestic retail sales amongst major retail groups has had limited impact due to their importing of cheaper clothing to bolster margins & market share - thus clothing imports increased 58% 2003 to 2004 SA clothing exports are modest (EU/US) & largely commodity items produced due to PTAs, where competitors restricted. With end of the MFA, low-cost countries no longer constrained, intensifying competition Domestic market/production trends

8 NEDLAC clothing presentation – 29 July 2005 Data on selected competitiveness indicators shows that SA clothing industry has number of competitive weaknesses, e.g. –Compared to international clothing firms, SA firms perform poorly i.t.o. output per employee, inventory holding, customer returns, delivery reliability & absenteeism rates –Compared to SA auto component firms, clothing firms lag all indicators, & often by a significant margin: Is therefore scope for firms to improve performance to bolster competitive position Competitiveness trends SA clothingInternational clothing SA textiles SA auto components Output per employee (Rand ‘000) Total inventory (days) Customer return rate (%) Customer delivery reliability (%) Absenteeism (%)

9 NEDLAC clothing presentation – 29 July 2005 If sector trajectory continues, 50,000 to 70,000 formal & informal jobs could be lost in next nine years. Also impact on textiles & retail: –Up to half the textiles industry could be lost (25,000 to 30,000 jobs) –Retailers become import dependent: Flexibility, costs? Despite concerning outlook, are opportunities for firms to explore: –Specialised niche export markets to combat high prices, long lead times –Exports to growing middle-income states –SA competitive in man-made fibres & woolen articles where US duties high & SA has advantage of PTAs –African export market could be more actively pursued –Development of ‘African’ brand could help boost exports/domestic sales –Increased local market supply (improving customer relations, providing retailers with better responses, follow-up services, shorter lead times) –Various existing/potential trade agreements provide export opportunities & potential for access to cheaper inputs/technology Summary of trends

10 NEDLAC clothing presentation – 29 July 2005 Multilateral agreements –MFA: End 2004 the MFA came to an end & with it the termination of all quotas on textiles & clothing trade between WTO member states. One of the major concerns is how China will behave with experts predicting that its share of world clothing exports may double in less than 5 years. Along with India, China is thus expected to dominate global production, with preliminary evidence from early 2005 confirming their threat –AGOA: US programme allowing non-reciprocal tariff preferences to 37 SSA countries covering 6,000 products to Clothing governed by separate conditions & rules of origin. While SA clothing exports require triple-stage transformation to qualify for AGOA, all other eligible countries only subject to single-stage transformation National government policy ( DCCS) –This export-incentive programme for textiles/clothing firms ostensibly ended 31/03/05, with DCCS-based Interim Clothing & Textiles Scheme apparently replacing it for 18 months, when fully WTO compliant programme to be introduced. But, no finality received from the dti in respect of Scheme thus far Multilateral/national policy

11 NEDLAC clothing presentation – 29 July 2005 Regional government –Clothing identified as key strategic sector in the Western Cape & KZN. Both provincial governments have thus set aside funding to support the industry. This has taken the form of clusters in both provinces: The Cape Clothing Cluster in the Western Cape & the KZN Clothing & Textiles Cluster in KZN –In addition, both provincial governments have funded smaller projects & research to understand sector dynamics & policy issues Black Economic Empowerment & EE –CloTrade research reveals 96% of members’ employees are PDIs, who with PDIs also occupying 80% of management positions, 94% of supervisory positions & 39% of directorships –Survey also revealed firms’ ownership breakdown: White owned private (59%), BEE (12%), foreign owned (3%), JSE listed (26%) –Lack of confidence in future appears to be preventing more progress Clothing policy framework – Regions & BEE

12 NEDLAC clothing presentation – 29 July 2005 Broad regulatory environment does not affect clothing (non- intrusive manufacturing process). But, labour market has marked impact: Wage rates & labour market ‘inflexibility’ Many clothing firms relocating to non-metro areas (in KZN) where they are able to pay lower wages & compete with cheaper imports SA has higher labour rates vs. competitor countries & higher social costs (e.g. overtime, shift pay, sick leave, pension contributions) Other challenges: –SA textiles industry’s lack of competitiveness –Indifference to local sourcing amongst major domestic retailers –Failure of clothing manufacturers to adhere to WCM standards –Failure of the industry to employ state of the art technologies –Skills deficiencies created by perception of professionals that clothing is a ‘sunset industry’ & hence to be avoided Constraints & challenges

13 NEDLAC clothing presentation – 29 July 2005 Opportunities (as identified through C&T CSP) Based on international & SA research findings, & building on a detailed SWOT analysis, seven Strategic themes have been identified through the the CSP process: –Recapturing domestic market share –Maintaining exports/facilitating exporting growth –Fostering capital upgrading –Upgrading firm-level competitiveness –Creating a sustainable skills base –Fostering industry transformation –Coordinating value chain opportunities In total, these seven strategic themes give rise to 26 KAPs Both strategic themes & KAPs have been prioritised –Themes: Critical, foundational & developmental –KAPs: 1-5 scale, where 5 is ‘critical’ & 1 ‘nice to have’

14 NEDLAC clothing presentation – 29 July 2005 Prioritising the strategic themes: Critical

15 NEDLAC clothing presentation – 29 July 2005 Prioritising the strategic themes: Foundational

16 NEDLAC clothing presentation – 29 July 2005 Prioritising the strategic themes: Developmental

17 NEDLAC clothing presentation – 29 July Strategic Vision By 2014 the South African clothing & textiles industries, in partnership with the government of South Africa, commit to increasing their competitiveness & outputs, attracting investments, promoting exports & creating & sustaining quality job opportunities & living standards for their employees. This will be achieved through a coordinated industry response to opportunities & threats, whilst also being inclusive of transformation & the South African government’s broader socio- economic objectives


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