International Conference Manufacturing-led Growth for Employment Equality “The challenges to reversing the decline of the apparel sector in South Africa” Mike Morris, School of Economics, University of Cape Town and Justin Barnes, Development Studies, University of KwaZulu-Natal

Introduction Central focus - is there a labour intensive path for SA? Unpack apparel sector dynamics over the past 15 years Identify domestic industry key drivers Establish fit between these drivers and policy levers Examine previous policy faults Draw on Turkish experience lessons Suggest differentiated policy alternatives to build a sustainable SA apparel industry at both market ends

Apparel GVC dynamics Buyer dominated GVCs shaped by Northern Hemisphere retailer, own-brand, and technical market movements China supply dominance - bifurcation of industry: Long-lead time, highly price sensitive supply – China, India, Bangladesh, Vietnam, etc. (+ slide) Short-lead time, less price sensitive supply, driven by OTIF delivery, QA, small batch runs, technology rich supply chain linkages – Turkey, Morocco, Southern Europe, Mauritius (+slide) SSA marginal but apparel production NB to Mauritius, Madagascar, Lesotho, Swaziland, Kenya (++ slide) SSA benefits: EPZs, AGOA, EU GSP Important dynamic: SA market very meaningful (R30bn)

Top apparel exporting countries Country/ Region Value ($Mil) World Share (%) 2000 2009 2011 China 48,019 123,988 155,478 25 41 EU-15 33,980 51,405 61,069 18 17 16 Bangladesh 4,862 14,241 21,938 3 5 6 Turkey 6,711 13,160 16,289 4 India 5,131 11,931 14,346 Vietnam -- 9,410 14,077

SSA Exporters to US and EU Value ($US Mil) Share of SSA (%) 2000 2007 2012   Top SSA apparel exporters to US Lesotho 140 384 301 19 30 35 Kenya 44 248 254 6 29 Mauritius 245 115 163 33 9 Swaziland 32 135 60 4 11 7 Madagascar 110 290 43 15 22 5 SA 142 24 2 1 Top SSA apparel exporters to EU 626 654 347 63.0 62.0 48 240 337 321 24.2 31.9 Ethiopia -- 31 77 26 12 8 3

SA apparel : 1st Period ISI driven (+/- 2000 – 2009) AGOA – Local manufacturers renege domestic retailers Rand strengthens 2003 – local manufacturers renege US Retail big imports from China - $95m (2000) to $558 (2005) to $961m (2011) so 74% of imports in 2005 Exacerbated by illegal imports and crime syndicates Globalisation impacts – labour/production (+ slide) Policy response contradictory - ISI mindset dominates

South African apparel demand & production Year - 31/10 NATIONAL TOTAL* Employers Employees 2003 1 042 97 960 2004 1 161 97 954 2005 1 149 85 854 2006 1 051 75 929 2007 1 041 72 919 2008 1 048 67 737 2009 1 001 60 253 2010 933 56 699 2011 952 58 647 2012 936 54 737 2013 865 52 656

Policy Response of Industry and Government Manufacturers – ignored competitiveness issues Called for increased protection Union – retailers not globalisation are major cause Demanded 75% local and quota on Chinese imports Rigidify labour market: central bargaining, close metro/non metro wage gap, punish non compliant firms State – Contradictory but supported union Slashed tariffs/import controls Imposed Chinese quotas and raised tariff to 45% Supported union in CSP negotiations

South African apparel industry response Industry caught in contradictions between the strategic positions of the past and the requirements of the future Paralyzed its ability to respond: Lack of firm-level and broader supply chain competitiveness Misplaced government policy Unions as victims of their own ISI-era success All failed to take account of globalisation Look at own role and responsibilities in transition Instead marshalled resources & ideological frameworks from the past to deal with the challenges of the future Result: Substantial decline

SA apparel : 2nd Period (2009 – now) Regional market dynamics change fundamentally with PTA opportunities (SACU/SADC) Huge jump imports from Lesotho/Swaziland (low to middle market segment) (+ slide) Rising imports Mauritius/Madagascar (middle to top market segment) (++ slide) This is a new major threat to local firms and labour Cant solve with ISI policy agenda

Apparel Exports to South Africa Lesotho   2005 2008 2009 2011 2012 Rm 6 110 239 436 605 US$m 1 13 28 60 74 Swaziland 11 96 133 573 886 2 16 79 108

Major apparel exporters to SA   Value (US$ Mil) Share of Total (%) 2000 2005 2009 2011 World 192 755 1,011 1,534 China 95 558 670 961 50 74 66 63 Mauritius 1 9 103 5 7 Swaziland - 2 16 79 Lesotho 28 60 3 4 Madagascar 13 40 SSA 42 129 290 6 19

South African apparel industry response Apparel manufacturers at lower market end response: Relocated to Lesotho and Swaziland - generally flourished Ignored bargaining council, paid a wage workers would accept Informalised – competing by being “below the radar” Demonstrated old ISI policy model restricts competitive & employment basis for this low market segment Their legal status excludes from DTI support So limits ability to define a competitive advantage, limits ability to upgrade, and create decent employment

Differential Response of Local Industry Mid to higher market abandoned ISI mindset to focus on firm and systemic competiveness Build firm capabilities - clusters (+ slide) Value chain cooperation - retailers joining clusters Industrial policy alliances - strategic industry alignment Supply chain alignment – created retail supplier clusters to build quick response systemic competitiveness

Operational performance - CCTC/KZNCTC   2006 2012 % Change: 2006-2012 Total Inventory (operating days) 37.56 30.58 18.58 Work in Progress (days) 6.90 4.98 27.74 Finished Goods (days) 11.76 7.76 34.07 Customer Return Rate (%) 2.68 1.39 48.04 Lost production time to Style Changeovers (%) 8.36 5.85 30.05

What is Quick response (QR)? Principle - use geographical nearness to provide retailers with speed & flexible supply (follow Turkish model to EU) QR pilots with retailers key suppliers supply - demonstrated the positive impact of model Retailers made 14% more relative to Asian long lead time orders WHY? Because local QR products, with point of sale information took 56 day delivery meeting requirements demanded by customers. Item sold at full price – retailers higher retained margin than from Asian imports, latter required discounts to be cleared

South African apparel industry response QR pilots demonstrated potential for a vibrant domestic industry that provides labour intensive employment. Industry could potentially sustain 110,697 formal sector jobs by 2022 on the basis of SA retailers shifting 40% of their total purchases to the QR model Key is developing the manufacturing performance attributes that align with QR retailing requirements: Product flexibility - requires product upgrading Production versatility - requires production upgrading Supply chain management capabilities - needs retailer upgrading

South African government response DTI 2010 incentives (PI and CTCIP) large number of firms upgrading (PI - R2.5bn, CTCIP R633m) Support initiated textiles re-capitalisation Support QR retail supply clusters – e.g. 1 retailer/7 firms, employment grew 12.6% Support clusters – marginal employment growth BUT Labour influenced institutions still ISI mindset – (Department, Bargaining Council, union)

General Conclusion SA apparel sector faces extreme competition: Asia to SSA Entire sector threatened Old ISI defensive mindset of protecting insiders & punishing non-compliant is recipe for continued competitive decline, shrinking employment, and industry contraction Policy must move from ‘one size fits all’, centralised, inflexible mode, and accept have different industry needs Policy supported compliant firms but narrow focus trapped non compliant firms in downward spiral

What can we learn from Turkey? National minimum wage (± $100 per 45 hour week) Metro firms pay 50-100% above this level - drives productivity and sweating overheads Flexible working environment - firms can extend to 54 hours at a 50% premium which allows for sweating overheads, and adjusting production output to variable market demand Entire industry competes on a differentiated QR model with seamless linkages between high value adding metro firms, design centres and less advanced, lower cost rural firms

South Africa Policy Conclusion Need a differentiated policy for the sector On one hand, support more advanced firms to meet the domestic retailer QR demands, (and perhaps export to EU QR retailers) On other hand, support rather than punish lower end market segment – small firms, non-metro, long lead time, unsophisticated, “commodity-type” producers

And manufacturing employment generally? Industrial policy needs to be “tied up” - upgrading support is required, but treating an ISI-based labour market as sacrosanct, which limits competitiveness, hamstrings resuscitating labour-intensive industries Manufacturing informalisation has to be reversed – but firms need incentivises to advance their operational capabilities. Competing on low labour productivity, and old capital, can only lead to a “race to the bottom” “Forcing” demand for SA-made products is short-term, but the underlying uncompetitive basis needs to be dealt with if employment is to be created

Thank you